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 March 31, 2021

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.)
8201 Greensboro Drive Suite 300 McLean, VA	22102
(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 May 13, 2021, there were 42,550,148 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	17
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk	25
Item 4. Controls and Procedures	25
Part II. Other Information	26
Item 1. Legal Proceedings	26
Item 1A. Risk Factors	26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities	26
Item 6. Exhibits	27
Signatures	28

PART I – FINANCIAL INFORMATION

Item 1.     Financial Statements

KLDiscovery Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

	March 31, 2021			December 31, 2020
	(unaudited)
Current assets
Cash and cash equivalents	$	47,808		$	51,201
Accounts receivable, net of allowance
for doubtful accounts of $9,015 and $8,513, respectively		83,617			83,985
Prepaid expenses		12,090			7,175
Other current assets		690			709
Total current assets		144,205			143,070
Property and equipment
Computer software and hardware		72,689			72,211
Leasehold improvements		26,821			27,271
Furniture, fixtures and other equipment		3,316			3,365
Accumulated depreciation		(79,480	)		(77,697	)
Property and equipment, net		23,346			25,150
Intangible assets, net		104,458			109,733
Goodwill		397,292			399,085
Other assets		3,051			2,708
Total assets	$	672,352		$	679,746
Current liabilities
Current portion of long-term debt, net	$	3,000		$	10,948
Accounts payable and accrued expense		32,109			33,504
Current portion of contingent consideration		714			695
Deferred revenue		2,498			3,955
Total current liabilities		38,321			49,102
Long-term debt, net		494,335			472,600
Deferred tax liabilities		7,677			7,335
Other liabilities		9,889			8,488
Total liabilities		550,222			537,525
Commitments and contingencies
Stockholders' equity
Common stock
$0.0001 par value, shares authorized - 200,000,000 shares authorized as of March 31, 2021 and December 31, 2020; shares issued and outstanding - 42,550,148 and 42,529,017 as of March 31, 2021 and December 31, 2020, respectively		4			4
Preferred Stock
$0.0001 par value, 1,000,000 shares authorized, zero issued and outstanding as of March 31, 2021 and December 31, 2020		-			-
Additional paid-in capital		382,614			385,387
Accumulated deficit		(270,280	)		(255,424	)
Accumulated other comprehensive income		9,792			12,254
Total stockholders' equity		122,130			142,221
Total liabilities and stockholders' equity	$	672,352		$	679,746

See Notes to Consolidated Financial Statements.

1

KLDiscovery Inc.

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

(in thousands, except share and per share amounts)

	Three Months Ended March 31, 2021			Three Months Ended March 31, 2020
Revenues	$	75,450		$	78,271
Cost of revenues		37,422			39,520
Gross profit		38,028			38,751
Operating expenses
General and administrative		15,440			15,853
Research and development		2,171			1,667
Sales and marketing		9,457			11,645
Depreciation and amortization		7,641			8,916
Total operating expenses		34,709			38,081
Income from operations		3,319			670
Other (income) expenses
Other expense		14			28
Change in fair value of private warrants		(1,969	)		-
Interest expense		12,257			12,962
Loss on debt extinguishment		7,257			-
Loss before income taxes		(14,240	)		(12,320	)
Income tax provision		616			206
Net loss	$	(14,856	)	$	(12,526	)
Other comprehensive loss, net of tax
Foreign currency translation		(2,462	)		(4,428	)
Total other comprehensive loss, net of tax		(2,462	)		(4,428	)
Comprehensive loss	$	(17,318	)	$	(16,954	)
Net loss per share - basic and diluted	$	(0.35	)	$	(0.29	)
Weighted average shares outstanding - basic and diluted		42,532,915			42,529,017

See Notes to Consolidated Financial Statements.

2

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			income			Total
Balance as of December 31, 2020		42,529,017	$	4	$	385,387		$	(255,424	)	$	12,254		$	142,221
Share-based compensation		-		-		1,003			-			-			1,003
Exercise of stock options		4,465		-		34			-			-			34
Stock issued in exchange for vested units		16,666		-		-			-			-			-
Warrants (See Note 2)		-		-		(3,810	)		-			-			(3,810	)
Foreign exchange translation				-		-			-			(2,462	)		(2,462	)
Net loss		-		-		-			(14,856	)		-			(14,856	)
Balance as of March 31, 2021		42,550,148		4		382,614			(270,280	)		9,792			122,130

	Common Stock Issued				Additional paid-in		Accumulated			Accumulated other comprehensive
	Shares		Amount		capital		deficit			income			Total
Balance as of December 31, 2019		42,529,017	$	4	$	381,952	$	(205,498	)	$	7,307		$	183,765
Share-based compensation		-		-		825		-			-			825
Foreign exchange translation		-		-		-		-			(4,428	)		(4,428	)
Net loss		-		-		-		(12,526	)		-			(12,526	)
Balance as of March 31, 2020		42,529,017	$	4	$	382,777	$	(218,024	)	$	2,879		$	167,636

See Notes to Consolidated Financial Statements.

3

KLDiscovery Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Three Months Ended March 31, 2021			Three Months Ended March 31, 2020
Operating activities
Net loss	$	(14,856	)	$	(12,526	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization		9,816			11,837
Non-cash interest		4,815			4,507
Loss on extinguishment of debt		7,257			-
Stock-based compensation		978			825
Provision for losses on accounts receivable		972			784
Deferred income taxes		342			112
Change in fair value of contingent consideration		19			29
Change in fair value of private warrants		(1,969	)		-
Changes in operating assets and liabilities:
Accounts receivable		(680	)		(7,487	)
Prepaid expenses and other assets		(5,087	)		(8,151	)
Accounts payable and accrued expenses		(2,986	)		(588	)
Deferred revenue		(1,436	)		(1,298	)
Net cash used in operating activities		(2,815	)		(11,956	)
Investing activities
Acquisitions, net of cash acquired		-			(2,334	)
Purchases of property and equipment		(3,088	)		(2,767	)
Net cash used in investing activities		(3,088	)		(5,101	)
Financing activities
Issuance of common stock		34			-
Revolving credit facility - draws		-			29,000
Payments for capital lease obligations		(285	)		(224	)
Debt issuance costs		(2,031	)		-
Proceeds from long-term debt, net of original issue discount		294,000			-
Retirement of debt		(289,000	)		-
Payments on long-term debt		-			(4,250	)
Net cash provided by financing activities		2,718			24,526
Effect of foreign exchange rates		(208	)		(265	)
Net (decrease) increase in cash		(3,393	)		7,204
Cash at beginning of period		51,201			43,407
Cash at end of period	$	47,808		$	50,611
Supplemental disclosure:
Cash paid for interest	$	12,232		$	8,704
Income tax refunds	$	(591	)	$	(266	)
Significant non-cash investing and financing activities
Purchases of property and equipment in accounts payable      and accrued expenses on the consolidated balance sheets	$	682		$	931

See Notes to Consolidated Financial Statements.

4

KLDiscovery Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months ended March 31, 2021 and 2020

Note 1 – Organization, business and summary of significant accounting policies

Organization

KLDiscovery Inc. (the “Company”) provides technology-based litigation support solutions and services including computer e-discovery, data hosting, and managed review, predominantly to top law firms, corporations and government agencies. The majority of the Company’s current business is derived from these services. The Company’s headquarters is located in McLean, Virginia and has 33 locations in 18 countries, 9 data centers and 18 data recovery labs around the globe.

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, 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 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 consolidated financial statements include the accounts of KLDiscovery and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation.

The Business Combination was accounted for as a reverse recapitalization in accordance with Accounting Standard Codification (“ASC”) 805, Business Combinations. For accounting and financial reporting purposes, LD Topco, Inc. is considered the acquirer based on facts and circumstances, including the following:

• LD Topco, Inc.’s operations comprise the ongoing operations of the combined entity;

• The officers of the newly combined company consist of LD Topco, Inc.’s executives, including the Chief Executive Officer, Chief Financial Officer and General Counsel; and

• The former shareholders of LD Topco, Inc. own a majority voting interest in the combined entity.

As a result of LD Topco, Inc. being the accounting acquirer, the financial reports filed with the Securities and Exchange Commission by the Company subsequent to the Business Combination are prepared “as if” LD Topco, Inc. is the predecessor and legal successor to the Company. The historical operations of LD Topco, Inc. are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of LD Topco, Inc. prior to the Business Combination; (ii) the combined results of the Company and LD Topco, Inc. following the Business Combination on December 19, 2019 (the “Closing Date”); (iii) the assets and liabilities of LD Topco, Inc. at their historical cost; and (iv) KLDiscovery Inc.’s equity structure for all periods presented. The recapitalization of the number of shares of common stock attributable to the purchase of LD Topco, Inc. in connection with the Business Combination is reflected retroactively to January 1, 2018 and will be utilized for calculating earnings per share in all prior periods presented. No step-up basis of intangible assets or goodwill was recorded in the Business Combination transaction consistent with the treatment of the transaction as a reverse capitalization of LD Topco, Inc.

Use of estimates

The preparation of 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 consolidated financial statements. Although actual results could differ from those estimates, management does not believe that such differences would be material.

Significant estimates include, but are not limited to, the allowance for doubtful accounts, determining the fair values of assets acquired and liabilities assumed, including the fair value of private warrants, the recoverability and useful lives of property and equipment, intangible assets, and other long-lived assets, the impairment of goodwill, the valuation and realization of deferred income taxes, the fair value of the Company’s common stock and stock option awards, and acquisition-related contingent consideration.

5

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 months ended March 31, 2021 and 2020, the Company did not have a single customer that represented more than five percent (5%) 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.

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 expense” in the Company’s 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 original invoice amounts 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 and considering a customer’s financial condition and credit history. Accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded when received.

Computer software, property and equipment

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. Property under capital leases are depreciated using the straight-line method over the lease term.

Depreciation expense totaled $2.9 million and $4.3 million for the three months ended March 31, 2021 and 2020, respectively, and includes amortization of assets recorded under capital leases.

6

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 depreciated 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 depreciation 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 Consolidated Balance Sheets and totaled $19.5 million and $18.5 million, net of accumulated amortization, as of March 31, 2021 and December 31, 2020, respectively.

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 annually on October 1 each year, 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, 2020 testing date, the Company determined there is one reporting unit.

The Company considered COVID-19 as an indicator of impairment to the value of goodwill and intangible assets and performed a qualitative assessment. Management considered factors that could be affected by COVID-19 such as impact to stock price, consequences of “stay-at-home” orders, impacts to competitors due to COVID-19, changes in demand, and updates to the Company forecasts among other factors. Management concluded that there was no impairment of goodwill and intangible assets during the three months ended March 31, 2021.

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 is presented in the 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 the revolving credit facility are presented in “Other current assets” in the Company’s Consolidated Balance Sheets.

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 are provided to its customers.

The Company evaluates its revenue contracts with customers based on the five-step model under ASC 606: (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 following table summarizes revenue from contracts with customers for the three months ended March 31, 2021 and 2020 (in thousands):

	Three months ended March 31, 2021		Three months ended March 31, 2020
eDiscovery services	$	48,154	$	53,633
Managed review		15,580		13,126
Legal technology services		63,734		66,759
Data recovery		11,716		11,512
Total revenue	$	75,450	$	78,271

7

Performance Obligations and Timing of Revenue Recognition

We primarily sell 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) eDiscovery services, which provides end-to-end eDiscovery services support including collections, processing, analytics, hosting, production and professional services;

(2) Managed review services which provides the staffing necessary to review large complex data sets; and

(3) Data recovery, which offers data restoration, data erasure and data management.

We generate the majority of our revenues by providing Legal Technology services to our clients. All of our 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 utilizing a right-to-invoice practical expedient because we have a right to consideration for services completed to date.

Certain of our 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. We recognize revenues for these arrangements based on predetermined monthly fees as determined in our contractual agreements, utilizing a right-to-invoice practical expedient because we have a right to consideration for services completed to date.

Managed review services are time and materials types of arrangements. These agreements require the client to pay us based on the number of hours worked at contractually agreed-upon rates. We recognize revenues for these arrangements based on hours incurred and contracted rates utilizing a right-to-invoice practical expedient because we have a 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.

Ontrack PowerControls offers term license subscriptions for 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, support, as well as access to future software upgrades and fixes. 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.

Note 2 – Correction of an immaterial error

On April 12, 2021, staff of the SEC issued “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)”. The Company evaluated this statement and determined that its private warrants, which had historically been accounted for as a component of equity, should have been recorded as a liability at fair value during each reporting period, with changes in fair value recorded in the Statements of Comprehensive Loss.

8

In accordance with Financial Accounting Standards Board Accounting Standards Codification 250, Accounting Changes and Error Corrections, we evaluated the materiality of the errors from quantitative and qualitative perspectives and concluded that the errors were immaterial to the Company's prior period interim and annual consolidated financial statements. Since these revisions were not material to any prior period interim or annual financial statements, no amendments to previously filed interim or annual periodic reports are required.The Company recognized the cumulative effect of the error on prior periods by recording during the three months ended March 31, 2021, (i) $2.0 million of income in the Statements of Comprehensive Loss to reflect the cumulative decrease in the fair value of the private warrants liabilities, (ii) a warrant liability of $1.8 million and (iii) a decrease in additional paid-in capital of $3.8 million.

Note 3 – Fair value measurements

The Company accounts for recurring and non-recurring fair value measurements in accordance with ASC 820, Fair Value Measurements (“ASC 820”). 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 estimates the fair value of contingent purchase consideration based on the present value of the consideration expected to be paid during the remainder of the earn-out period, based on management’s assessment of the acquired operations’ forecasted earnings. This fair value measure is based on significant inputs not observed in the market and thus represents a Level 3 measurement. During 2019, the Company acquired three companies for total consideration of $5.5 million, of which $2.0 million was in cash, $1.5 million was in deferred payments which were subsequently paid, $1.2 million was in stock and contingent consideration, $1.0 million of which was recorded at its estimated fair value of $0.8 million. The fair value of future expected acquisition-related contingent consideration obligations was $0.9 million at March 31, 2021 and December 31, 2020, respectively.

The significant unobservable inputs used in the fair value measurements of the Company’s contingent purchase consideration include its measures of the future profitability and related cash flows of the acquired business or assets, impacted by appropriate discount rates. Significant increases (decreases) in any of these individual inputs would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumptions used for the discount rates is indirectly proportional to the fair value of contingent purchase consideration and a change in the assumptions used for the future cash flows is directly proportional to the fair value of contingent purchase consideration. The Company, using additional information as it becomes available, reassesses the fair value of the contingent purchase consideration on a quarterly basis.

The Company has determined that the 6,350,000 private warrants (the “Private Warrants”) issued in connection with the consummation of the Business Combination in December 2019 should be accounted for as liabilities in accordance withAccounting Standards Codification (“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 Consolidated Statement of Comprehensive Loss.

9

To estimate the fair value of the Private Warrants as of December 31, 2020, the Company used a Black Scholes closed form model, which is a Level 3 fair value measurement. Significant inputs into the Black Scholes model for the Private Warrants were as follows:

	December 31, 2020
Expected volatility		16.00	%
Expected term (in years)		3.97
Risk free interest rate		1.74	%
Dividend yield		0.00	%
Exercise Price	$	11.50
Fair value of common stock	$	8.05

The Company’s use of a Black Scholes model required the use of the following subjective assumptions:

• Expected volatility – as of the valuation date, the Public Warrants (as defined in Note 7) and the Company’s common stock were traded and their market prices were used to infer the expected annual volatility of the common stock. The expected volatility is used to value the Public Warrants.

• Expected term – the exercise period is based on the period beginning from 30 days after the consummation of the Business Combination in December 2019 and ending on December 19, 2024 (which is five years after the completion of the Business Combination).

• Risk-free interest rate – the risk-free interest rate is based on the U.S. Treasury Bill yields for the period commensurate with the time to exercise the Private Warrants.

• Dividend yield – the Company does not pay dividends and has no plans to do so. As a result, the expected dividend yield is zero.

• Exercise price – the exercise price is contractually set at $11.50.

• Fair value of stock – the stock price is the quoted market price as of the valuation date.

The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the periods ended March 31, 2021 and December 31, 2020 (in thousands):

Balance at December 31, 2019	$	822
Change in fair value of contingent consideration		98
Balance at December 31, 2020	$	920
Private warrants		1,841
Change in fair value of contingent consideration		19
Balance at March 31, 2021	$	2,780

Management estimates that 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 4 – Leasing arrangements

The Company leases office space and certain equipment under operating and capital lease agreements, expiring in various years through 2028. Certain leases contain annual rent escalation clauses.

Rent expense totaled $2.9 million and $3.8 million for the three months ended March 31, 2021 and 2020, respectively.  

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For periodssubsequent to March 31, 2021, future minimum payments for all operating and capital lease obligations that have initial non-cancelable lease terms exceeding one year, net of rental income from subleases are as follows (in thousands):

March 31,	Capital Leases			Operating Leases
2021 (9 months)	$	1,353		$	7,038
2022		1,346			8,835
2023		721			8,475
2024		-			7,377
2025		-			3,810
Thereafter		-			2,552
Total	$	3,420		$	38,087
Less interest on lease obligations		(316	)
		3,104
Less current portion		(1,343	)
Non-current portion	$	1,761

Note 5 – Long-term debt

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

	March 31, 2021			December 31, 2020
First lien facility due 2022	$	-		$	289,000
Convertible debenture notes due 2024		216,685			214,541
2021 Credit Agreement due 2026		300,000			-
Total debt		516,685			503,541
Less: unamortized original issue discount		(17,312	)		(16,126	)
Less: unamortized debt issuance costs		(2,038	)		(3,867	)
Total debt, net		497,335			483,548
Current portion of debt		3,000			17,000
Less: current portion of unamortized original issue discount		-			(4,312	)
Less: current portion of unamortized debt issuance costs		-			(1,740	)
Total current portion of debt, net		3,000			10,948
Total long-term debt, net	$	494,335		$	472,600

2021 Credit Agreement

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

The 2021 Credit Agreement provides for (i) initial term loans in an aggregate principal amount of $300 million (the “Initial Term Loans”), (ii) delayed draw term loans in an aggregate principal amount of $50 million (the “Delayed Draw Term Loans”), and (iii) revolving credit loans in an aggregate principal amount of $40 million, with a letter of credit sublimit of $10 million (the “Revolving Credit Loans”). The Delayed Draw Term Loans will be available to the Loan Parties at any time prior to February 8, 2023, subject to certain conditions.

The Initial Term Loans and Delayed Draw Term Loans will bear interest, at the Loan Parties’ option, at the rate of (x) with respect to Eurocurrency Rate Loans (as defined in the 2021 Credit Agreement), the Adjusted Eurocurrency Rate (as defined in the 2021 Credit Agreement) with a 1.0% floor, plus 6.50% per annum, or (y) with respect to Base Rate Loans (as defined in the 2021 Credit Agreement), the Base Rate (as defined in the 2021 Credit Agreement) plus 5.50% per annum. The Revolving Credit Loans will bear interest, at our option, at the rate of (x) with respect to Eurocurrency Rate Loans, the Adjusted Eurocurrency 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 and Delayed Draw Term Loans amortize at a rate of 1.00% of the aggregate principal amount of Initial Term Loans and Delayed Draw Term Loans outstanding, payable in consecutive quarterly installments of $0.8 million, beginning on June 30, 2021.

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The Initial Term Loans, Delayed Draw Term Loans and Revolving Credit Loans are each scheduled to mature on the earlier of February 16, 2026 or six months prior to maturity of our Debentures (as defined below) due in December 2024. The Initial Term Loans and Delayed Draw Term Loans may be voluntarily repaid at any time, but may be subject to a prepayment premium. The Initial Term Loans and Delayed Draw Term Loans are required to be repaid under certain circumstances, including with Excess Cash Flow (as defined in the 2021 Credit Agreement), the proceeds of an Asset Sale or Casualty Event (each as defined in the 2021 Credit Agreement) and the proceeds of certain refinancing indebtedness.

The obligations under the 2021 Credit Agreement are secured by substantially all of the Loan Parties’ assets. The 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 of less than or equal to 7.00 to 1.00, tested at the end of each fiscal quarter.

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

Revolving Credit Loans

The 2021 Credit Agreement also provides for an unfunded revolver commitment for borrowing up to $40.0 million (the “Revolving Credit Loans”). The Revolving Credit Loans will bear interest, at our option, at the rate of (x) with respect to Eurocurrency Rate Loans, the Adjusted Eurocurrency Rate plus 4.00% per annum, or (y) with respect to Base Rate Loans, the Base Rate plus 3.00% per annum.

As of March 31, 2021, 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 9 – Commitments and contingencies).

2016 Credit Agreement and Revolving Credit Facility

On December 9, 2016, certain subsidiaries of the Company entered into a credit agreement (the “2016 Credit Agreement”) with a group of lenders to establish term loan facilities and a revolving line of credit for borrowings by LD Intermediate, Inc. and LD Lower Holdings, Inc. (the “Initial Term Loans”). The Initial Term Loan borrowings of $340.0 million (“First Lien Facility”) and $125.0 million (“Second Lien Facility”) were to mature on December 9, 2022 and December 9, 2023, respectively. The 2016 Credit Agreement also provided for an unfunded revolver commitment for borrowing up to $30.0 million, maturing on June 9, 2022 (the “Revolving Credit Facility”). The First Lien Facility and the Revolving Credit Facility were repaid and retired on February 8, 2021 and the Second Lien Facility was repaid on December 19, 2019. The Company incurred a loss on debt extinguishment of $7.2 million in connection with the retirement of the 2016 Credit Agreement and Revolving Credit Facility.

Convertible Debentures

On December 19, 2019, the Company issued 8% convertible debentures (“Debentures”) due 2024 in an aggregate principal amount of $200 million. The proceeds of the Debentures were used in part to repay the Company’s outstanding Second Lien Facility and amounts outstanding under the Revolving Credit Facility. At March 31, 2021 and December 31, 2020, the balance due under the Convertible Debentures was $216.7 million and $214.5 million, respectively.

The Debentures 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 add to the principal amount (subject to reduction for any principal amount repaid) of the Debentures an amount equal to 3.00% of the original aggregate principal amount of the Debentures outstanding. 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 are 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.

Subject to approval to allow for the full conversion of the Debentures into common stock, the Debentures are convertible into shares of the Company’s 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 March 31, 2021, the Company was in compliance with all covenants.

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Note 6 – 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, 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 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”). Our Board determined that the number of shares available for issuance under the 2019 Plan would increase by 2,126,451 as of January 1, 2021. The Compensation Committee did not increase the share reserve under the 2019 Plan in 2020. As of March 31, 2021, 9,626,451 shares of common stock, $0.0001 par value per share (the “Common Stock”) were reserved under the 2019 Plan, of which 4,330,506 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, 2020		4,260,753		$	8.46		9.0	$	54
Granted		1,187,500			8.05
Exercised		(4,465	)		8.00
Forfeited		(146,366	)		8.19
Expired		(1,477	)		8.00
Options Outstanding, March 31, 2021		5,295,945		$	8.37		9.1	$	806
Options Vested and Exercisable, March 31, 2021		1,224,595		$	8.22		8.8	$	216
Options Vested and Expected to vest, March 31, 2021		5,295,945		$	8.37		9.1	$	806

(1) Aggregate intrinsic value represents the difference between the estimated fair value of the underlying Common Stock (as defined below) 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
	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Total fair value of stock options granted	$	2,125	$	7,970
Total fair value of options vested		18		-

Time-based vesting stock options

Under the 2019 Plan, time-based vesting stock options generally vest over a three-year period, are subject to graded vesting schedules, and expire 10 years from the date of grant or within 90 days of termination. The weighted-average fair value per share of time-based vesting stock options granted by us was $1.79, and $2.19 during the three months ended March 31, 2021 and 2020, respectively.

Under the 2019 Plan, for the three months ended March 31, 2021 and 2020, the Company recognized $1.0 million and $0.8 million of stock-based compensation expense, respectively, in connection with time-based stock options, respectively. As of March 31, 2021, there was $7.0 million of unrecognized stock-based compensation expense related to unvested time-based stock options that are expected to be recognized over a weighted-average period of 2.0 years.

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Award Valuation

The Company used valuation models to value both time and performance-based vesting stock options granted during the three months ended March 31, 2021 and 2020. The following table summarizes the assumptions used in the valuation models to determine the fair value of awards granted to employees and non-employees under the 2019 Plan:

	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Expected volatility	44.61%		37.63%
Expected term (in years)		6.00		6.00
Dividend yield	0.00%		0.00%
Risk-free interest rate	0.70%		1.43%

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 months ended March 31, 2021 and 2020, 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 has 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.

Stock-based award activity

During the three months ended March 31, 2020, the Company granted to certain non-employee directors 50,000 restricted stock units (“RSUs”) for their initial appointment to the Board and for continued service, which are subject to a three or one-year vesting period. Accordingly, the Company will recognize the grant-date fair value of the stock awards, ratably over the vesting period. During the three months ended March 31, 2021, the Company recognized $0.2 million as stock-based compensation expense related to these grants.

Stock-based compensation expense

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

	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Cost of revenues	$	342	$	355
General and administrative		396		230
Research and development		64		73
Sales and marketing		176		167
Total	$	978	$	825

Restricted stock units

The Company granted RSUs to certain employees and board members which are subject to certain vesting criteria. The 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 is dependent on the type and timing of the liquidity event as it relates to the Business Combination date of December 19, 2019. Generally, a portion of the RSUs will first vest upon the occurrence of the liquidity event and the remainder will vest in installments thereafter, provided that if the liquidity event occurs after the third anniversary of the Business Combination, all RSUs will vest immediately upon the liquidity event. The vesting of the RSUs is generally subject to continued employment.

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

Description	RSUs Outstanding
Balance at December 31, 2020		1,290,432
Granted		308,750
Vested		(16,666	)
Forfeited		(51,190	)
Expired		-
Balance at March 31, 2021		1,531,326

The Company determined that the achievement of the liquidity event was not probable and therefore no expense was recorded during the three months ended March 31, 2021.

Note 7 – 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 time and in the amounts as the Board 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.

Warrants

On December 19, 2019, in connection with the consummation of the Business Combination, the Company assumed (i) 23,000,000 warrants (the “Public Warrants”) 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 Public Warrants were measured at fair value at the time of issuance and classified as equity. As disclosed in Note 2, the Company has determined that the Private Warrants fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity and therefore these warrants are classified as liabilities and measured at fair value at each reporting period.

Each Warrant entitles the holder to purchase one share of Common Stock for $11.50 per share. If held 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 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 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 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 of Common Stock will be forfeited to the Company for no consideration. These shares are reported as outstanding in our financial statements.

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Note 8 – Income taxes

A valuation allowance has been established against our net U.S. federal and state deferred tax assets, including net operating loss (“NOL”) carryforwards. As a result, our income tax position 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 March 31, 2021 and 2020, the Company recorded an income tax provision of $0.6 million and $0.2 million, respectively, resulting in an effective tax rate of (4.2)% and (1.6)%, respectively. These effective tax rates differ from the U.S. federal statutory rate primarily due to the effects of foreign tax rate differences, state taxes and the valuation allowance against our domestic deferred tax assets.

Note 9 – Commitments and contingencies

The Company is involved in various legal proceedings, which may 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 March 31, 2021.

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

Risks and Uncertainties

Impacts of COVID-19 pandemic on KLDiscovery’s Business

The potential impacts of the ongoing COVID-19 pandemic on the Company’s business are currently not estimable or determinable. The Company has made modifications to employee travel, work locations, and cancellation of certain events, among other modifications. During 2020, the Company implemented a salary exchange program pursuant to which certain employees took a temporary reduction in salary through December 31, 2020 that ranged from 2% to 20% in exchange for receiving 417,673 stock options and 211,207 RSUs. In December 2020, the Company extended the salary exchange program through September 20, 2021 for the named executive officers and for management positions of Vice-President and higher. The Company also initiated limited furloughs for certain employees. The Company will continue to actively monitor the situation and may take further actions that alter its business operations as may be required by federal, state or local authorities or that it determines is in the best interests of its employees, customers, partners, suppliers and stockholders.

On March 27, 2020, the President signed into U.S. federal law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, NOL carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years beginning before 2021, NOL carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019 and 2020, the base for interest deductibility was increased from 30% to 50% of taxable income. As permitted under the CARES Act, the Company deferred payroll taxes due in 2020 to 2021 and 2022. The Company continues to analyze other aspects of the CARES Act as well as similar tax legislation in other countries it operates in but does not believe they will have a meaningful impact to its results.

Note 10 – Related parties

As of March 31, 2021 $108.3 million, including paid-in kind interest, of the Company’s Debentures, are owed to affiliates of MGG Investment Group, an affiliate of a director of the Company. For the three months ended March 31, 2021 and 2020, the Company recognized $3.1 million and $3.0 million in interest expense, respectively, related to the amounts owned by the MGG Investment Group.

Note 11 – Subsequent events

The Company has evaluated subsequent events through the dates on which this Quarterly Report on Form 10-Q was filed, the date on which these financial statements were issued, and identified no additional items for disclosure.

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

We believe that this Quarterly Report on Form 10-Q contains statements that are forward-looking and as such are not historical facts. This includes, without limitation, statements regarding the financial position, business strategy and the plans and objectives of management 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 Report, 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. The forward-looking statements contained in this Report are based on current expectations and beliefs 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 (some 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 the section titled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (our “Annual Report”). These risks and uncertainties may be amplified by the ongoing COVID-19 pandemic and its potential impact on our business and the global economy. 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.

Throughout this section, unless otherwise noted “we,” “us,” “our,” “Company,” “KLDiscovery,” “KLD,” “KLDiscovery Inc.” or “LD Topco, Inc.” refer to KLDiscovery Inc. and its consolidated subsidiaries. As a result of the Business Combination, (i) KLDiscovery Inc.’s consolidated financial results for periods prior to December 19, 2019 reflect the financial results of LD Topco, Inc. and its consolidated subsidiaries, as the accounting predecessor to KLDiscovery Inc., and (ii) for periods from and after this date, KLDiscovery Inc.’s financial results reflect those of KLDiscovery Inc. and its consolidated subsidiaries (including LD Topco, Inc. and its subsidiaries) as the successor following the Business Combination. The following overview provides a summary of the sections included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations:

• Executive Summary — a general description of our business and key highlights for the three months ended March 31, 2021.

• 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, commitments and contingencies and quantitative and qualitative disclosures about market risk.

• Critical Accounting Policies and Estimates — a discussion of critical accounting policies requiring judgments and estimates.

Overview

We are one of the leading eDiscovery providers and the leading data recovery services provider to corporations, law firms, government agencies and individual consumers. We provide technology-enabled services and software to help law firms, corporations, government agencies and consumers solve complex data challenges. We have broad geographical coverage in the eDiscovery and data recovery industries with 33 locations in 18 countries, 9 data centers and 18 data recovery labs around the globe. Our legal technology services cover both eDiscovery and information governance services to support the litigation, regulatory compliance, and internal investigation needs of our clients. We offer data collection and forensic investigation, early case assessment, electronic discovery and data processing, application software, data hosting, and managed review services. In addition, through our global Ontrack Data Recovery name, we deliver world-class data recovery, email extraction and restoration, data destruction and tape management services.

KEY COMPONENTS OF OUR RESULTS OF OPERATIONS

Data proliferation is contributing to growth in the eDiscovery and information governance market. Data is growing at an exponential rate due to several factors, including the adoption of mobile devices, accessibility of hosted systems and increased reliance on electronic data storage. We are well positioned to gain market share from the growth of electronically stored information given our prior and continued investment in our infrastructure and proprietary technologies that allows us to efficiently identify, preserve, collect, process, review and host complex data sets. We will continue to develop and enhance our technology which will position us to continue to evolve as the market changes.

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The eDiscovery and information governance market is highly fragmented and price competitive. While many of our competitors rely on third party software tools to provide their services, we offer our services utilizing our own end-to-end proprietary tools as well as third party platforms. Because we can provide service offerings utilizing proprietary technology, we have more flexibility in pricing, and we are not hindered by third party licensing software expenses. As such, our proprietary tools allow us to be less impacted by significant price compression than our competitors.

Historically, on-premise tools have been the dominant deployment solution. However, recently the market has shifted to cloud-based solutions and this shift could result in increased revenue for us as we offer our own proprietary cloud-based solutions.

We classify our legal technology revenue as follows:

• Collections and Processing Services: We have remote and onsite collection services. Our proprietary workflows and tools allow us to ingest, extract native file metadata and index in a normalized format. We have near duplication tools to quickly discard duplicative or irrelevant data, significantly minimizing the data that needs to be reviewed. Our analytics include predictive coding which allows us to automatically classify millions of documents in a matter of hours. We offer email threading that looks at relationships between email messages to identify the most content-inclusive messages to avoid redundant review and we have language identification that can automatically identify the primary language in all documents in the data set. The collection of data is billed either by the unit or hour and the data that is processed and produced is billed per gigabyte, page or per file.

• Forensics and Consulting Services: We provide the expertise and tools needed to extract and analyze digital evidence to support a client’s legal matter. Our forensics experts help extract critical evidence, recover any data that individuals may have sought to erase or hide, retrieve key data buried in documents and organize data contained in multiple information sources to give our clients the insight and knowledge they need. Our forensics and consulting services are billed either by hour or unit.

• Professional Services: We manage complex eDiscovery matters and partner with our clients to assist through the lifecycle of a case. Our professional services are billed on an hourly basis.

• Managed Review Services: We use our extensive eDiscovery project management experience, technological excellence and global presence to provide clients with a secure, seamless and cost-effective managed review solution. We assemble review teams of experienced legal professionals for any type of case. Each team member is a qualified attorney who has passed a selective screening process and has received training from KLDiscovery review manager to ensure the most efficient and defensible review of a client’s documents. Document review managers have extensive project managed experience to oversee the entire review process and work with the client’s legal team as an integrated partner. Our industry experts have developed advanced managed review processes and tools and deliver services in state of the art facilities, handle subject matter versatility, are platform agnostic, possess expert working knowledge of predictive coding and technology assisted review workflows, have multilingual capabilities and focus on quality. Our managed review services are billed on an hourly basis.

• Hosting: We have flexible technology options and platforms to host our client’s data for the life of the matter. We offer secure data centers around the globe to support data across jurisdictions and privacy laws. Hosting is billed per gigabyte.

• Subscription: We offer subscription pricing options to provide cost predictability over time. Subscriptions cover a range of our services and are typically a fixed fee billed monthly for contract terms averaging one to three years.

We classify our data recovery revenue as follows:

• Data Recovery Services: We recover lost data from devices that store digital information, including data centers, cloud, business servers, workstations, laptops and mobile devices. Pricing is per device.

• PowerControls and Data Recovery Software: We enable search and recovery of data from database files and physically sound devices. Pricing is typically an annual or multi-year agreement at a fixed price.

For the three months ended March 31, 2021 and 2020, our legal technology revenue was $63.7 million and $66.8 million, respectively, and our data recovery revenue was $11.7 million and $11.5 million, respectively. Additionally, we have longstanding relationships with our clients and for the three months ended March 31, 2021 and 2020, no single client accounted for more than 5% of our revenues.

Non-U.S. GAAP Financial Measures

We prepare audited 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. We believe that these measures are relevant and provide useful supplemental information to investors by providing a baseline for evaluation and comparing our operating performance against that of other companies in our industry.

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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. We believe these non-U.S. GAAP financial measures 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, management fees and equity compensation, acquisition and transaction costs, restructuring costs, systems establishment and costs associated with strategic initiatives which are incurred outside the ordinary course of our business, provides information about our cost structure and helps us to track our operating progress. We encourage investors and potential investors to carefully review the U.S. GAAP financial information and compare them with our EBITDA and adjusted EBITDA.

Adjusted EBITDA

We define EBITDA as net income (loss) plus interest (income) expense, income tax expense (benefit), depreciation and amortization. We view adjusted EBITDA as our 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 and 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 represented by non-ordinary course earn-out valuation changes, rating agency fees, letter of credit and revolving facility fees, as well as professional service fees and direct expenses related to acquisitions. Because we do not acquire businesses on a predictable cycle, we do not consider the amount of acquisition- and integration-related costs to be a representative component of the day-to-day operating performance of our business.

• Strategic initiatives expenses relate to costs resulting from pursuing strategic business opportunities. We do not consider the amounts to be representative of the day-to-day operating performance of our business.

• Management fees, stock compensation and other primarily represents consulting fees and 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. 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 (the “Private Warrants”). 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 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, adjusted EBITDA does 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.

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RESULTS OF OPERATIONS

Impacts of the COVID-19 pandemic on the Company’s Business

The potential impacts of the ongoing COVID-19 pandemic on the Company’s business are currently not estimable or determinable. The Company has made modifications to employee travel, work locations, and cancellation of certain events, among other modifications. During 2020, the Company implemented a salary exchange program pursuant to which certain employees took a temporary reduction in salary through December 31, 2020 that ranged from 2% to 20% in exchange for receiving 417,673 stock options and 211,207 RSUs. In December 2020, the Company extended the salary exchange program through September 20, 2021 for the named executive officers and for management positions of Vice-President and higher. The Company also initiated limited furloughs for certain employees. The Company will continue to actively monitor the situation and may take further actions that alter its business operations as may be required by federal, state or local authorities or that it determines is in the best interests of its employees, customers, partners, suppliers and stockholders.

On March 27, 2020, the President signed into U.S. federal law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, NOL carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years beginning before 2021, NOL carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019 and 2020, the base for interest deductibility was increased from 30% to 50% of taxable income. As permitted under the CARES Act, the Company deferred payroll taxes due in 2020 to 2021 and 2022. The Company continues to analyze other aspects of the CARES Act as well as similar tax legislation in other countries it operates in but does not believe they will have a meaningful impact to its results.

For the three months ended March 31, 2021 compared with the three months ended March 31, 2020

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

	For the Three Months Ended March 31,
(in millions)	2021			2020
Revenues	$	75.4		$	78.3
Cost of revenues		37.4			39.5
Gross profit		38.0			38.8
Operating expenses		34.7			38.1
Income from operations		3.3			0.7
Interest expense		12.3			13.0
Change in fair value of private warrants		(2.0	)		-
Loss on debt extinguishment		7.2			-
Loss before income taxes		(14.2	)		(12.3	)
Income tax provision		0.6			0.2
Net loss		(14.8	)		(12.5	)
Total other comprehensive (loss) income, net of tax		(2.5	)		(4.4	)
Comprehensive loss		(17.3	)		(16.9	)

Revenues

Revenues decreased by $2.9 million, or 3.7%, to $75.4 million for the three months ended March 31, 2021 as compared to $78.3 million for the three months ended March 31, 2020. This is primarily due to a decrease in eDiscovery services revenue of $5.4 million, partially offset by an increase in both managed review revenue of $2.5 million and in data recovery revenue of $0.6 million. The decrease in eDiscovery services revenue is primarily due to the impact of COVID-19, as many clients have delayed the start of new matters and court systems have been slow to reopen.

Cost of Revenues

Cost of revenues decreased by $2.1 million, or 5.3%, to $37.4 million for the three months ended March 31, 2021 as compared to $39.5 million for the three months ended March 31, 2020. This decrease is due to expense reduction measures implemented by management, which decreased occupancy expense by $0.9 million, outsourced costs of $0.7 million, and travel and entertainment expense by $0.3 million, as well as other smaller expense decreases. In addition, amortization expense decreased by $0.6 million and communications expenses decreased by $0.2 million. These decreases were partially offset by $0.7 million of increased wages expense due to increased managed review revenues. As a percentage of revenue, our cost of revenues for the three months ended March 31, 2021 decreased to 49.6% as compared to 50.4% for the three months ended March 31, 2020. This decrease was due to the factors noted above.

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Gross Profit

Gross profit decreased by $0.8 million, or 2.1%, to $34.7 million for the three months ended March 31, 2021 as compared to $38.8 million for the three months ended March 31, 2020. Gross profit decreased primarily due to the factors noted above. As a percentage of revenue, our gross profit for the three months ended March 31, 2021 was 50.4% as compared to 49.5% for the three months ended March 31, 2020.

Operating Expenses

Operating expenses decreased by $3.4 million, or 8.9%, to $34.7 million for the three months ended March 31, 2021 as compared to $38.1 million for the three months ended March 31, 2020. This decrease is due to a decrease in depreciation and amortization expense of $1.3 million, decrease in professional services of $1.0 million, decrease in personnel expenses of $0.4 million, decrease in travel and entertainment expenses of $0.4 million, and decrease in marketing expenses by $0.3 million. These decreases were partially offset by an increase in costs incurred related to lease terminations to optimize our real estate footprint of $0.6 million. As a percentage of revenue, our operating expenses for the three months ended March 31, 2021 increased to 47.7% as compared to 45.1% for three months ended March 31, 2020 due to the factors noted above.

Interest Expense

Interest expense decreased by $0.7 million, or 5.4%, to $12.3 million for the three months ended March 31, 2021 as compared to $13.0 million for the three months ended March 31, 2020. This decrease is primarily due to lower interest rates on the refinanced First Lien Facility partially offset by an increase in outstanding debt during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

Loss on Debt Extinguishment

For the three months ended March 31, 2021, the Company incurred a loss on debt extinguishment of $7.2 million in connection with the retirement of the 2016 Credit Agreement and Revolving Credit Facility.

Income Tax Provision

During the three months ended March 31, 2021 and 2020, we recorded an income tax provision of $0.6 million and $0.2 million, respectively, resulting in an effective tax rate of (4.2)% and (1.6)%, 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 March 31, 2021 increased from the three months ended March 31, 2020 primarily due to a change in the allocation of our pre-tax earnings and losses among countries with differing statutory tax rates.

Net Loss

Net loss for the three months ended March 31, 2021 was $14.8 million compared to $12.5 million for the three months ended March 31, 2020. Net loss increased for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 due to the factors noted above.

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Adjusted EBITDA

	For the Three Months Ended March 31,
(in millions)	2021			2020
Net loss	$	(14.8	)	$	(12.5	)
Interest expense		12.3			13.0
Income tax provision		0.6			0.2
Depreciation and amortization expense		9.8			11.8
Extinguishment of debt		7.2			-
EBITDA	$	15.1		$	12.5
Acquisition, financing and transaction costs		0.8			0.1
Strategic initiatives:
Sign-on bonus amortization		-			0.2
Non-recoverable draw		-			0.3
Total strategic initiatives		-			0.5
Management fees, stock compensation and other		1.0			0.9
Change in fair value of private warrants		(2.0	)		-
Restructuring costs		0.1			0.6
Systems establishment		0.4			0.5
Adjusted EBITDA	$	15.4		$	15.0

Liquidity and Capital Resources

Our primary cash needs 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 (our “Revolving Credit Facility”). 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 on the majority of our eDiscovery accounts receivables 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 on 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 go on 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 on our accounts receivable. As of March 31, 2021, we had $47.8 million in cash compared to $51.2 million as of December 31, 2020. As of March 31, 2021, we had $494.3 million of outstanding borrowings compared to $472.6 million as of December 31, 2020. We expect to finance our operations over the next 12 months primarily through existing cash balances and cash flow.

2021 Credit Agreement

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

The 2021 Credit Agreement provides for (i) initial term loans in an aggregate principal amount of $300 million (the “Initial Term Loans”), (ii) delayed draw term loans in an aggregate principal amount of $50 million (the “Delayed Draw Term Loans”), and (iii) revolving credit loans in an aggregate principal amount of $40 million, with a letter of credit sublimit of $10 million (the “Revolving Credit Loans”). The Delayed Draw Term Loans will be available to the Loan Parties at any time prior to February 8, 2023, subject to certain conditions.

The Initial Term Loans and Delayed Draw Term Loans will bear interest, at the Loan Parties’ option, at the rate of (x) with respect to Eurocurrency Rate Loans (as defined in the 2021 Credit Agreement), the Adjusted Eurocurrency Rate (as defined in the 2021 Credit Agreement) with a 1.0% floor, plus 6.50% per annum, or (y) with respect to Base Rate Loans (as defined in the 2021 Credit Agreement), the Base Rate (as defined in the 2021 Credit Agreement) plus 5.50% per annum. The Revolving Credit Loans will bear interest, at our option, at the rate of (x) with respect to Eurocurrency Rate Loans, the Adjusted Eurocurrency 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 and Delayed Draw Term Loans amortize at a rate of 1.00% of the aggregate principal amount of Initial Term Loans and Delayed Draw Term Loans outstanding, payable in consecutive quarterly installments, beginning on June 30, 2021.

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The Initial Term Loans, Delayed Draw Term Loans and Revolving Credit Loans are each scheduled to mature on the earlier of February 16, 2026 or six months prior to maturity of our Debentures due in December 2024. The Initial Term Loans and Delayed Draw Term Loans may be voluntarily repaid at any time, but may be subject to a prepayment premium. The Initial Term Loans and Delayed Draw Term Loans are required to be repaid under certain circumstances, including with Excess Cash Flow (as defined in the 2021 Credit Agreement), the proceeds of an Asset Sale or Casualty Event (each as defined in the 2021 Credit Agreement) and the proceeds of certain refinancing indebtedness.

The obligations under the 2021 Credit Agreement are secured by substantially all of the Loan Parties’ assets. The 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 of less than or equal to 7.00 to 1.00, tested at the end of each fiscal quarter.

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

As of March 31, 2021, 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 9 – Commitments and contingencies).

Convertible Debenture Notes

In connection with the Business Combination on December 19, 2019, we issued $200 million aggregate principal amount of convertible debentures due 2024 (the “Debentures”) in a private placement to certain “accredited investors” pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act. The equity structure as of the date of the Business Combination included 2,097,974 shares of common stock and 1,764,719 warrants for the issuance of common stock to the Debenture holders related to the Debenture issuance. The proceeds of the Debentures were used in part to repay our outstanding Second Lien Facility and amounts outstanding under the Revolving Credit Facility. At March 31, 2021, and December 31, 2020, the balance due under the Debentures was $216.7 million and $214.5 million, respectively.

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

At any time, upon notice as set forth in the Debentures, the Debentures are redeemable at our 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.

Subject to approval to allow for the full conversion of the Debentures into common stock, the Debentures are convertible into shares of our 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 we elect to redeem any Debentures, the holders have a right to purchase common stock from us in an amount equal to the amount redeemed at the conversion price.

The Debentures contain covenants that limit our ability to, among other things: (i) incur additional debt; (ii) create liens on assets; (iii) engage in certain transactions with affiliates; or (iv) designate our 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.

Our net cash flows from operating, investing and financing activities for the three months ended March 31, 2021 and 2020 were as follows:

	Three Months Ended March 31, 2021			Three Months Ended March 31, 2020
Net cash provided by (used in):
Operating activities	$	(2,815	)	$	(11,956	)
Investing activities	$	(3,088	)	$	(5,101	)
Financing activities	$	2,718		$	24,526
Effect of foreign exchange rates	$	(208	)	$	(265	)
Net increase (decrease) in cash	$	(3,393	)	$	7,204

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Cash Flows Used in Operating Activities

Net cash used in operating activities was $2.8 million for the three months ended March 31, 2021 as compared to net cash used in operating activities of $12.0 million for the three months ended March 31, 2020. The decrease in net cash used is due to a $2.3 million decrease in cash used in net loss plus decreased cash used by working capital of $7.3 million. The decrease in cash used in working capital for the period is primarily due to a $6.8 million decrease in accounts receivable and a $3.1 million decrease in prepaid expenses and other assets, partially offset by $2.4 million increase in accounts payable and accrued expenses. Trade accounts receivable fluctuate from period-to-period depending on the period-to-period change in revenue and the timing of collections. Accounts payable fluctuate from period-to-period depending on the timing of purchases and payments.

Cash Flows Used in Investing Activities

Net cash used in investing activities was $3.1 million for the three months ended March 31, 2021 as compared to net cash used in investing activities of $5.1 million for the three months ended March 31, 2020. The decrease in cash used is due to a $2.3 million decrease in cash payments related to acquisitions, partially offset by a $0.3 million decrease in purchases of property and equipment.

Cash Flows Provided by Financing Activities

For the three months ended March 31, 2021, net cash provided by financing activities was $2.7 million and related to the proceeds of long-term debt, net of original discount of $294.0 million, offset by the retirement of long-term debt of $289.0 million, debt acquisition costs of $2.0 million, and capital lease obligations of $0.3 million. For the three months ended March 31, 2020, net cash provided by financing activities was $24.5 million and related to the net borrowings under our Revolving Credit Facility of $29.0 million partially offset by payments of long-term debt of $4.3 million and payments on capital lease obligations of $0.2 million.

Contractual Obligations

Our operating lease obligations are disclosed in Note 4 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Rent expense for the three months ended March 31, 2021 and 2020 was $2.9 million and $3.8 million, respectively.

Off-Balance Sheet Financing Arrangements

We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities or purchased any nonfinancial assets.

Recent Accounting Pronouncements

There were no changes to our recent accounting pronouncements from those described in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission (the “SEC”) on March 18, 2021.

Critical Accounting Policies and Estimates

We prepare our 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 on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission (the “SEC”) on March 18, 2021.

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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 $300 million Initial Term Loans, the Revolving Credit Loans of $40 million and the Delayed Draw Term Loans of $50 million. Interest rate changes generally 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 March 31, 2021 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. Resulting net translation adjustments are recorded as a component of stockholders’ equity in “Accumulated other comprehensive (loss) income” in our 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 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 March 31, 2021 and 2020, we generated the equivalent of $15.0 million and $16.2 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 $0.2 million for each of the three months ended March 31, 2021 and 2020. We do not currently hedge our exchange rate exposure.

Item 4.     Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. 

The Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 31, 2021. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as a result of the material weakness in our internal control over financial reporting as described below, our disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2021.

Our internal control over financial reporting did not result in the proper classification of the Private Warrants we issued in December 2019, which we determined to be a material weakness. This error in classification was brought to our attention when the SEC issued a “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)” dated April 12, 2021 (the “SEC Staff Statement”). The SEC Staff Statement addresses certain accounting and reporting considerations related to warrants of a kind similar to those we issued at the time of our initial public offering in December 2019. In response to this material weakness, the Company’s management will expend a substantial amount of effort and resources for the remediation and improvement of our internal control over financial reporting. While we have processes to properly identify and evaluate the appropriate accounting technical pronouncements and other literature for all significant or unusual transactions, we are improving these processes to ensure that the nuances of such transactions are effectively evaluated in the context of the increasingly complex accounting standards.

We continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

(b)  Changes in internal control over financial reporting.

With respect to our financial reporting material weakness, Management has actively engaged to take steps to remediate such material weakness including acquiring enhanced access to accounting literature, research materials and documents and increased communication among our personnel. Our remediation plan is ongoing and will be continually reviewed to ensure that it is achieving its objectives. While we have made significant progress, this material weakness cannot be considered remediated until the enhanced controls have operated effectively for a sufficient period-of-time.

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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.

Except as noted below, there have been no material changes to the risk factors disclosed in “Risk Factors” in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 as filed with the SEC on March 18, 2021.

We have identified a material weakness in our internal control over financial reporting as of March 31, 2021. If we are unable to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and materially and adversely affect our business and operating results.

Following the April 12, 2021 issuance of the SEC “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)” (the “SEC Staff Statement”) and after consultation with our independent registered public accounting firm, our management and our audit committee concluded that, in light of the SEC Staff Statement, it was appropriate to correct the effect of the prior period error related to our accounting for the Private Warrants. As part of such process, we identified a material weakness in our internal controls over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We have developed and are implementing a plan to remediate the material weakness to improve the process and controls in the determination of the appropriate accounting and classification of our financial instruments and key agreements. The material weakness will not be remediated until all necessary internal controls have been implemented, tested and determined to be operating effectively. In addition, we may need to take additional measures to address the material weakness or modify the planned remediation steps, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weakness will not result in a material misstatement of our annual consolidated financial statements. Moreover, we cannot assure you that we will not identify additional material weaknesses in our internal controls over financial reporting in the future.

If we are unable to remediate the material weakness, our ability to record, process and report financial information accurately, and to prepare financial statements within the time periods specified by the rules and forms of the Securities and Exchange Commission, could be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties and generally materially and adversely impact our business and financial condition.

We may face litigation and other risks as a result of the material weakness in our internal control over financial reporting.

As a result of the material weakness identified with respect to the change in accounting for the Private Warrants, and other matters raised or that may in the future be raised by the SEC, we face potential for litigation or other disputes which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the material weakness in our internal control over financial reporting and the preparation of our financial statements. As of the date of this Quarterly Report, we have no knowledge of any such litigation or dispute. However, we can provide no assurance that such litigation or dispute will not arise in the future. Any such litigation or dispute, whether successful or not, could have a material adverse effect on our business, results of operations and financial condition.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

None.

26

Item 6.     Exhibits.

a) Exhibits

Exhibit Index

Exhibit Number	Description
10.1	Credit Agreement, dated as of February 8, 2021, by and among LD Lower Holdings, Inc., LD Topco, Inc., the other guarantors party thereto, the Lenders party thereto, each L/C Issuer party thereto and Wilmington Trust, National Association, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on February 8, 2021).
10.2	Second Amendment to Stockholders’ Agreement dated February 2, 2021, by and among KLDiscovery Inc. (formerly known as Pivotal Acquisition Corp.) and CEOF II DE IAIV. LP, a partnership, and Revolution Growth III LP and certain other signatories thereto (incorporated by reference to Exhibit 10.38 to the Annual Report on Form 10-K, filed on March 18, 2021).
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	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

27

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

Date: May 13, 2021

28

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.

May 13, 2021:	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.

May 13, 2021:	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 March 31, 2021 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.

May 13, 2021:	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 March 31, 2021 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.

May 13, 2021:	By:	/s/ Dawn Wilson
		Dawn Wilson
		Chief Financial Officer (Principal Financial Officer)

XML

Cover Page - shares	3 Months Ended
	Mar. 31, 2021	May 13, 2021
Cover [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2021
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2021
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		42,550,148
Entity File Number	001-38789
Entity Tax Identification Number	61-1898603
Entity Address, Address Line One	8201 Greensboro Drive
Entity Address, Address Line Two	Suite 300
Entity Address, City or Town	McLean
Entity Address, State or Province	VA
Entity Address, Postal Zip Code	22102
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	Mar. 31, 2021	Dec. 31, 2020
Current assets
Cash and cash equivalents	$ 47,808	$ 51,201
Accounts receivable, net of allowance for doubtful accounts of $7,805 and $7,486, respectively	83,617	83,985
Prepaid expenses	12,090	7,175
Other current assets	690	709
Total current assets	144,205	143,070
Property and equipment
Accumulated depreciation	(79,480)	(77,697)
Property and equipment, net	23,346	25,150
Intangible assets, net	104,458	109,733
Goodwill	397,292	399,085
Other assets	3,051	2,708
Total assets	672,352	679,746
Current liabilities
Current portion of long-term debt, net	3,000	10,948
Accounts payable and accrued expense	32,109	33,504
Current portion of contingent consideration	714	695
Deferred revenue	2,498	3,955
Total current liabilities	38,321	49,102
Long-term debt, net	494,335	472,600
Deferred tax liabilities	7,677	7,335
Other liabilities	9,889	8,488
Total liabilities	550,222	537,525
Commitments and contingencies
Stockholders' equity
Common stock $0.0001 par value, shares authorized - 200,000,000 shares authorized as of September 30, 2020 and December 31, 2019; shares issued and outstanding - 42,529,017 as of September 30, 2020 and December 31, 2019	4	4
Preferred Stock $0.0001 par value, 1,000,000 shares authorized, zero issued and outstanding as of September 30, 2020 and December 31, 2019
Additional paid-in capital	382,614	385,387
Accumulated deficit	(270,280)	(255,424)
Accumulated other comprehensive income	9,792	12,254
Total stockholders' equity	122,130	142,221
Total liabilities and stockholders' equity	672,352	679,746
Computer software and hardware
Property and equipment
Property and equipment, gross	72,689	72,211
Leasehold improvements
Property and equipment
Property and equipment, gross	26,821	27,271
Furniture, fixtures and other equipment
Property and equipment
Property and equipment, gross	$ 3,316	$ 3,365

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2021	Dec. 31, 2020
Statement Of Financial Position [Abstract]
Allowance for doubtful accounts	$ 9,015	$ 8,513
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	42,550,148	42,529,017
Common stock, shares outstanding	42,550,148	42,529,017
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

XML

Condensed Consolidated Statements of Comprehensive Loss - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2021	Mar. 31, 2020
Income Statement [Abstract]
Revenues	$ 75,450	$ 78,271
Cost of revenues	37,422	39,520
Gross profit	38,028	38,751
Operating expenses
General and administrative	15,440	15,853
Research and development	2,171	1,667
Sales and marketing	9,457	11,645
Depreciation and amortization	7,641	8,916
Total operating expenses	34,709	38,081
Income from operations	3,319	670
Other (income) expenses
Other expense	14	28
Change in fair value of private warrants	(1,969)
Interest expense	12,257	12,962
Loss on debt extinguishment	7,257
Loss before income taxes	(14,240)	(12,320)
Income tax provision	616	206
Net loss	(14,856)	(12,526)
Other comprehensive loss, net of tax
Foreign currency translation	(2,462)	(4,428)
Total other comprehensive loss, net of tax	(2,462)	(4,428)
Comprehensive loss	$ (17,318)	$ (16,954)
Net loss per share - basic and diluted	$ (0.35)	$ (0.29)
Weighted average shares outstanding - basic and diluted	42,532,915	42,529,017

XML

Condensed Consolidated Statements of Stockholders' Equity - USD ($) $ in Thousands	Total	Common stock	Additional Paid-In Capital	Accumulated Deficit	Accumulated Other Comprehensive Income
Balance at Dec. 31, 2019	$ 183,765	$ 4	$ 381,952	$ (205,498)	$ 7,307
Balance (in shares) at Dec. 31, 2019		42,529,017
Share-based compensation	825		825
Foreign exchange translation	(4,428)				(4,428)
Net loss	(12,526)			(12,526)
Balance at Mar. 31, 2020	167,636	$ 4	382,777	(218,024)	2,879
Balance (in shares) at Mar. 31, 2020		42,529,017
Balance at Dec. 31, 2020	142,221	$ 4	385,387	(255,424)	12,254
Balance (in shares) at Dec. 31, 2020		42,529,017
Share-based compensation	1,003		1,003
Exercise of stock options	34		34
Exercise of stock options (in Shares)		4,465
Stock issued in exchange for vested units (in Shares)		16,666
Warrants (See Note 2)	(3,810)		(3,810)
Foreign exchange translation	(2,462)				(2,462)
Net loss	(14,856)			(14,856)
Balance at Mar. 31, 2021	$ 122,130	$ 4	$ 382,614	$ (270,280)	$ 9,792
Balance (in shares) at Mar. 31, 2021		42,550,148

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2021	Mar. 31, 2020
Operating activities
Net loss	$ (14,856)	$ (12,526)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	9,816	11,837
Non-cash interest	4,815	4,507
Loss on debt extinguishment	7,257
Stock-based compensation	978	825
Provision for losses on accounts receivable	972	784
Deferred income taxes	342	112
Change in fair value of contingent consideration	19	29
Change in fair value of private warrants	(1,969)
Changes in operating assets and liabilities:
Accounts receivable	(680)	(7,487)
Prepaid expenses and other assets	(5,087)	(8,151)
Accounts payable and accrued expenses	(2,986)	(588)
Deferred revenue	(1,436)	(1,298)
Net cash used in operating activities	(2,815)	(11,956)
Investing activities
Acquisitions, net of cash acquired		(2,334)
Purchases of property and equipment	(3,088)	(2,767)
Net cash used in investing activities	(3,088)	(5,101)
Financing activities
Issuance of common stock	34
Revolving credit facility - draws		29,000
Payments for capital lease obligations	(285)	(224)
Debt issuance costs	(2,031)
Proceeds from long-term debt, net of original issue discount	294,000
Retirement of debt	(289,000)
Payments on long-term debt		(4,250)
Net cash provided by financing activities	2,718	24,526
Effect of foreign exchange rates	(208)	(265)
Net (decrease) increase in cash	(3,393)	7,204
Cash at beginning of period	51,201	43,407
Cash at end of period	47,808	50,611
Supplemental disclosure:
Cash paid for interest	12,232	8,704
Income tax refunds	(591)	(266)
Significant non-cash investing and financing activities
Purchases of property and equipment in accounts payable and accrued expenses on the consolidated balance sheets	$ 682	$ 931

XML

Organization, Business and Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2021

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”) provides technology-based litigation support solutions and services including computer e-discovery, data hosting, and managed review, predominantly to top law firms, corporations and government agencies. The majority of the Company’s current business is derived from these services. The Company’s headquarters is located in McLean, Virginia and has 33 locations in 18 countries, 9 data centers and 18 data recovery labs around the globe.

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, 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 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 consolidated financial statements include the accounts of KLDiscovery and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation.

The Business Combination was accounted for as a reverse recapitalization in accordance with Accounting Standard Codification (“ASC”) 805, Business Combinations. For accounting and financial reporting purposes, LD Topco, Inc. is considered the acquirer based on facts and circumstances, including the following:

• LD Topco, Inc.’s operations comprise the ongoing operations of the combined entity;

• The officers of the newly combined company consist of LD Topco, Inc.’s executives, including the Chief Executive Officer, Chief Financial Officer and General Counsel; and

• The former shareholders of LD Topco, Inc. own a majority voting interest in the combined entity.

As a result of LD Topco, Inc. being the accounting acquirer, the financial reports filed with the Securities and Exchange Commission by the Company subsequent to the Business Combination are prepared “as if” LD Topco, Inc. is the predecessor and legal successor to the Company. The historical operations of LD Topco, Inc. are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of LD Topco, Inc. prior to the Business Combination; (ii) the combined results of the Company and LD Topco, Inc. following the Business Combination on December 19, 2019 (the “Closing Date”); (iii) the assets and liabilities of LD Topco, Inc. at their historical cost; and (iv) KLDiscovery Inc.’s equity structure for all periods presented. The recapitalization of the number of shares of common stock attributable to the purchase of LD Topco, Inc. in connection with the Business Combination is reflected retroactively to January 1, 2018 and will be utilized for calculating earnings per share in all prior periods presented. No step-up basis of intangible assets or goodwill was recorded in the Business Combination transaction consistent with the treatment of the transaction as a reverse capitalization of LD Topco, Inc.

Use of estimates

The preparation of 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 consolidated financial statements. Although actual results could differ from those estimates, management does not believe that such differences would be material.

Significant estimates include, but are not limited to, the allowance for doubtful accounts, determining the fair values of assets acquired and liabilities assumed, including the fair value of private warrants, the recoverability and useful lives of property and equipment, intangible assets, and other long-lived assets, the impairment of goodwill, the valuation and realization of deferred income taxes, the fair value of the Company’s common stock and stock option awards, and acquisition-related contingent consideration.

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 months ended March 31, 2021 and 2020, the Company did not have a single customer that represented more than five percent (5%) 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.

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 expense” in the Company’s 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 original invoice amounts 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 and considering a customer’s financial condition and credit history. Accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded when received.

Computer software, property and equipment

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. Property under capital leases are depreciated using the straight-line method over the lease term.

Depreciation expense totaled $2.9 million and $4.3 million for the three months ended March 31, 2021 and 2020, respectively, and includes amortization of assets recorded under capital 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 depreciated 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 depreciation 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 Consolidated Balance Sheets and totaled $19.5 million and $18.5 million, net of accumulated amortization, as of March 31, 2021 and December 31, 2020, respectively.

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 annually on October 1 each year, 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, 2020 testing date, the Company determined there is one reporting unit.

The Company considered COVID-19 as an indicator of impairment to the value of goodwill and intangible assets and performed a qualitative assessment. Management considered factors that could be affected by COVID-19 such as impact to stock price, consequences of “stay-at-home” orders, impacts to competitors due to COVID-19, changes in demand, and updates to the Company forecasts among other factors. Management concluded that there was no impairment of goodwill and intangible assets during the three months ended March 31, 2021.

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 is presented in the 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 the revolving credit facility are presented in “Other current assets” in the Company’s Consolidated Balance Sheets.

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 are provided to its customers.

The Company evaluates its revenue contracts with customers based on the five-step model under ASC 606: (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 following table summarizes revenue from contracts with customers for the three months ended March 31, 2021 and 2020 (in thousands):

	Three months ended March 31, 2021		Three months ended March 31, 2020
eDiscovery services	$	48,154	$	53,633
Managed review		15,580		13,126
Legal technology services		63,734		66,759
Data recovery		11,716		11,512
Total revenue	$	75,450	$	78,271

Performance Obligations and Timing of Revenue Recognition

We primarily sell 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) eDiscovery services, which provides end-to-end eDiscovery services support including collections, processing, analytics, hosting, production and professional services;

(2) Managed review services which provides the staffing necessary to review large complex data sets; and

(3) Data recovery, which offers data restoration, data erasure and data management.

We generate the majority of our revenues by providing Legal Technology services to our clients. All of our 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 utilizing a right-to-invoice practical expedient because we have a right to consideration for services completed to date.

Certain of our 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. We recognize revenues for these arrangements based on predetermined monthly fees as determined in our contractual agreements, utilizing a right-to-invoice practical expedient because we have a right to consideration for services completed to date.

Managed review services are time and materials types of arrangements. These agreements require the client to pay us based on the number of hours worked at contractually agreed-upon rates. We recognize revenues for these arrangements based on hours incurred and contracted rates utilizing a right-to-invoice practical expedient because we have a 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.

Ontrack PowerControls offers term license subscriptions for 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, support, as well as access to future software upgrades and fixes. 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.

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Correction of an Immaterial Error

3 Months Ended

Mar. 31, 2021

Accounting Changes And Error Corrections [Abstract]

Correction of an immaterial error

Note 2 – Correction of an immaterial error

On April 12, 2021, staff of the SEC issued “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)”. The Company evaluated this statement and determined that its private warrants, which had historically been accounted for as a component of equity, should have been recorded as a liability at fair value during each reporting period, with changes in fair value recorded in the Statements of Comprehensive Loss.

In accordance with Financial Accounting Standards Board Accounting Standards Codification 250, Accounting Changes and Error Corrections, we evaluated the materiality of the errors from quantitative and qualitative perspectives and concluded that the errors were immaterial to the Company's prior period interim and annual consolidated financial statements. Since these revisions were not material to any prior period interim or annual financial statements, no amendments to previously filed interim or annual periodic reports are required.The Company recognized the cumulative effect of the error on prior periods by recording during the three months ended March 31, 2021, (i) $2.0 million of income in the Statements of Comprehensive Loss to reflect the cumulative decrease in the fair value of the private warrants liabilities, (ii) a warrant liability of $1.8 million and (iii) a decrease in additional paid-in capital of $3.8 million.

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Fair Value Measurements

3 Months Ended

Mar. 31, 2021

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 3 – Fair value measurements

The Company accounts for recurring and non-recurring fair value measurements in accordance with ASC 820, Fair Value Measurements (“ASC 820”). 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 estimates the fair value of contingent purchase consideration based on the present value of the consideration expected to be paid during the remainder of the earn-out period, based on management’s assessment of the acquired operations’ forecasted earnings. This fair value measure is based on significant inputs not observed in the market and thus represents a Level 3 measurement. During 2019, the Company acquired three companies for total consideration of $5.5 million, of which $2.0 million was in cash, $1.5 million was in deferred payments which were subsequently paid, $1.2 million was in stock and contingent consideration, $1.0 million of which was recorded at its estimated fair value of $0.8 million. The fair value of future expected acquisition-related contingent consideration obligations was $0.9 million at March 31, 2021 and December 31, 2020, respectively.

The significant unobservable inputs used in the fair value measurements of the Company’s contingent purchase consideration include its measures of the future profitability and related cash flows of the acquired business or assets, impacted by appropriate discount rates. Significant increases (decreases) in any of these individual inputs would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumptions used for the discount rates is indirectly proportional to the fair value of contingent purchase consideration and a change in the assumptions used for the future cash flows is directly proportional to the fair value of contingent purchase consideration. The Company, using additional information as it becomes available, reassesses the fair value of the contingent purchase consideration on a quarterly basis.

The Company has determined that the 6,350,000 private warrants (the “Private Warrants”) issued in connection with the consummation of the Business Combination in December 2019 should be accounted for as liabilities in accordance withAccounting Standards Codification (“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 Consolidated Statement of Comprehensive Loss.

To estimate the fair value of the Private Warrants as of December 31, 2020, the Company used a Black Scholes closed form model, which is a Level 3 fair value measurement. Significant inputs into the Black Scholes model for the Private Warrants were as follows:

	December 31, 2020
Expected volatility		16.00	%
Expected term (in years)		3.97
Risk free interest rate		1.74	%
Dividend yield		0.00	%
Exercise Price	$	11.50
Fair value of common stock	$	8.05

The Company’s use of a Black Scholes model required the use of the following subjective assumptions:

• Expected volatility – as of the valuation date, the Public Warrants (as defined in Note 7) and the Company’s common stock were traded and their market prices were used to infer the expected annual volatility of the common stock. The expected volatility is used to value the Public Warrants.

• Expected term – the exercise period is based on the period beginning from 30 days after the consummation of the Business Combination in December 2019 and ending on December 19, 2024 (which is five years after the completion of the Business Combination).

• Risk-free interest rate – the risk-free interest rate is based on the U.S. Treasury Bill yields for the period commensurate with the time to exercise the Private Warrants.

• Dividend yield – the Company does not pay dividends and has no plans to do so. As a result, the expected dividend yield is zero.

• Exercise price – the exercise price is contractually set at $11.50.

• Fair value of stock – the stock price is the quoted market price as of the valuation date.

The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the periods ended March 31, 2021 and December 31, 2020 (in thousands):

Balance at December 31, 2019	$	822
Change in fair value of contingent consideration		98
Balance at December 31, 2020	$	920
Private warrants		1,841
Change in fair value of contingent consideration		19
Balance at March 31, 2021	$	2,780

Management estimates that 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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Leasing Arrangements

3 Months Ended

Mar. 31, 2021

Leases [Abstract]

Leasing Arrangements

Note 4 – Leasing arrangements

The Company leases office space and certain equipment under operating and capital lease agreements, expiring in various years through 2028. Certain leases contain annual rent escalation clauses.

Rent expense totaled $2.9 million and $3.8 million for the three months ended March 31, 2021 and 2020, respectively.  

For periods subsequent to March 31, 2021, future minimum payments for all operating and capital lease obligations that have initial non-cancelable lease terms exceeding one year, net of rental income from subleases are as follows (in thousands):

March 31,	Capital Leases			Operating Leases
2021 (9 months)	$	1,353		$	7,038
2022		1,346			8,835
2023		721			8,475
2024		-			7,377
2025		-			3,810
Thereafter		-			2,552
Total	$	3,420		$	38,087
Less interest on lease obligations		(316	)
		3,104
Less current portion		(1,343	)
Non-current portion	$	1,761

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Long Term Debt

3 Months Ended

Mar. 31, 2021

Long Term Debt [Abstract]

Long Term Debt

Note 5 – Long-term debt

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

	March 31, 2021			December 31, 2020
First lien facility due 2022	$	-		$	289,000
Convertible debenture notes due 2024		216,685			214,541
2021 Credit Agreement due 2026		300,000			-
Total debt		516,685			503,541
Less: unamortized original issue discount		(17,312	)		(16,126	)
Less: unamortized debt issuance costs		(2,038	)		(3,867	)
Total debt, net		497,335			483,548
Current portion of debt		3,000			17,000
Less: current portion of unamortized original issue discount		-			(4,312	)
Less: current portion of unamortized debt issuance costs		-			(1,740	)
Total current portion of debt, net		3,000			10,948
Total long-term debt, net	$	494,335		$	472,600

2021 Credit Agreement

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

The 2021 Credit Agreement provides for (i) initial term loans in an aggregate principal amount of $300 million (the “Initial Term Loans”), (ii) delayed draw term loans in an aggregate principal amount of $50 million (the “Delayed Draw Term Loans”), and (iii) revolving credit loans in an aggregate principal amount of $40 million, with a letter of credit sublimit of $10 million (the “Revolving Credit Loans”). The Delayed Draw Term Loans will be available to the Loan Parties at any time prior to February 8, 2023, subject to certain conditions.

The Initial Term Loans and Delayed Draw Term Loans will bear interest, at the Loan Parties’ option, at the rate of (x) with respect to Eurocurrency Rate Loans (as defined in the 2021 Credit Agreement), the Adjusted Eurocurrency Rate (as defined in the 2021 Credit Agreement) with a 1.0% floor, plus 6.50% per annum, or (y) with respect to Base Rate Loans (as defined in the 2021 Credit Agreement), the Base Rate (as defined in the 2021 Credit Agreement) plus 5.50% per annum. The Revolving Credit Loans will bear interest, at our option, at the rate of (x) with respect to Eurocurrency Rate Loans, the Adjusted Eurocurrency 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 and Delayed Draw Term Loans amortize at a rate of 1.00% of the aggregate principal amount of Initial Term Loans and Delayed Draw Term Loans outstanding, payable in consecutive quarterly installments of $0.8 million, beginning on June 30, 2021.

The Initial Term Loans, Delayed Draw Term Loans and Revolving Credit Loans are each scheduled to mature on the earlier of February 16, 2026 or six months prior to maturity of our Debentures (as defined below) due in December 2024. The Initial Term Loans and Delayed Draw Term Loans may be voluntarily repaid at any time, but may be subject to a prepayment premium. The Initial Term Loans and Delayed Draw Term Loans are required to be repaid under certain circumstances, including with Excess Cash Flow (as defined in the 2021 Credit Agreement), the proceeds of an Asset Sale or Casualty Event (each as defined in the 2021 Credit Agreement) and the proceeds of certain refinancing indebtedness.

The obligations under the 2021 Credit Agreement are secured by substantially all of the Loan Parties’ assets. The 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 of less than or equal to 7.00 to 1.00, tested at the end of each fiscal quarter.

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

Revolving Credit Loans

The 2021 Credit Agreement also provides for an unfunded revolver commitment for borrowing up to $40.0 million (the “Revolving Credit Loans”). The Revolving Credit Loans will bear interest, at our option, at the rate of (x) with respect to Eurocurrency Rate Loans, the Adjusted Eurocurrency Rate plus 4.00% per annum, or (y) with respect to Base Rate Loans, the Base Rate plus 3.00% per annum.

As of March 31, 2021, 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 9 – Commitments and contingencies).

2016 Credit Agreement and Revolving Credit Facility

On December 9, 2016, certain subsidiaries of the Company entered into a credit agreement (the “2016 Credit Agreement”) with a group of lenders to establish term loan facilities and a revolving line of credit for borrowings by LD Intermediate, Inc. and LD Lower Holdings, Inc. (the “Initial Term Loans”). The Initial Term Loan borrowings of $340.0 million (“First Lien Facility”) and $125.0 million (“Second Lien Facility”) were to mature on December 9, 2022 and December 9, 2023, respectively. The 2016 Credit Agreement also provided for an unfunded revolver commitment for borrowing up to $30.0 million, maturing on June 9, 2022 (the “Revolving Credit Facility”). The First Lien Facility and the Revolving Credit Facility were repaid and retired on February 8, 2021 and the Second Lien Facility was repaid on December 19, 2019. The Company incurred a loss on debt extinguishment of $7.2 million in connection with the retirement of the 2016 Credit Agreement and Revolving Credit Facility.

Convertible Debentures

On December 19, 2019, the Company issued 8% convertible debentures (“Debentures”) due 2024 in an aggregate principal amount of $200 million. The proceeds of the Debentures were used in part to repay the Company’s outstanding Second Lien Facility and amounts outstanding under the Revolving Credit Facility. At March 31, 2021 and December 31, 2020, the balance due under the Convertible Debentures was $216.7 million and $214.5 million, respectively.

The Debentures 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 add to the principal amount (subject to reduction for any principal amount repaid) of the Debentures an amount equal to 3.00% of the original aggregate principal amount of the Debentures outstanding. 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 are 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.

Subject to approval to allow for the full conversion of the Debentures into common stock, the Debentures are convertible into shares of the Company’s 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 March 31, 2021, the Company was in compliance with all covenants.

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Equity Incentive Plan

3 Months Ended

Mar. 31, 2021

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Equity Incentive Plan

Note 6 – 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, 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 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”). Our Board determined that the number of shares available for issuance under the 2019 Plan would increase by 2,126,451 as of January 1, 2021. The Compensation Committee did not increase the share reserve under the 2019 Plan in 2020. As of March 31, 2021, 9,626,451 shares of common stock, $0.0001 par value per share (the “Common Stock”) were reserved under the 2019 Plan, of which 4,330,506 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, 2020		4,260,753		$	8.46		9.0	$	54
Granted		1,187,500			8.05
Exercised		(4,465	)		8.00
Forfeited		(146,366	)		8.19
Expired		(1,477	)		8.00
Options Outstanding, March 31, 2021		5,295,945		$	8.37		9.1	$	806
Options Vested and Exercisable, March 31, 2021		1,224,595		$	8.22		8.8	$	216
Options Vested and Expected to vest, March 31, 2021		5,295,945		$	8.37		9.1	$	806

(1) Aggregate intrinsic value represents the difference between the estimated fair value of the underlying Common Stock (as defined below) 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
	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Total fair value of stock options granted	$	2,125	$	7,970
Total fair value of options vested		18		-

Time-based vesting stock options

Under the 2019 Plan, time-based vesting stock options generally vest over a three-year period, are subject to graded vesting schedules, and expire 10 years from the date of grant or within 90 days of termination. The weighted-average fair value per share of time-based vesting stock options granted by us was $1.79, and $2.19 during the three months ended March 31, 2021 and 2020, respectively.

Under the 2019 Plan, for the three months ended March 31, 2021 and 2020, the Company recognized $1.0 million and $0.8 million of stock-based compensation expense, respectively, in connection with time-based stock options, respectively. As of March 31, 2021, there was $7.0 million of unrecognized stock-based compensation expense related to unvested time-based stock options that are expected to be recognized over a weighted-average period of 2.0 years.

Award Valuation

The Company used valuation models to value both time and performance-based vesting stock options granted during the three months ended March 31, 2021 and 2020. The following table summarizes the assumptions used in the valuation models to determine the fair value of awards granted to employees and non-employees under the 2019 Plan:

	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Expected volatility	44.61%		37.63%
Expected term (in years)		6.00		6.00
Dividend yield	0.00%		0.00%
Risk-free interest rate	0.70%		1.43%

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 months ended March 31, 2021 and 2020, 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 has 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.

Stock-based award activity

During the three months ended March 31, 2020, the Company granted to certain non-employee directors 50,000 restricted stock units (“RSUs”) for their initial appointment to the Board and for continued service, which are subject to a three or one-year vesting period. Accordingly, the Company will recognize the grant-date fair value of the stock awards, ratably over the vesting period. During the three months ended March 31, 2021, the Company recognized $0.2 million as stock-based compensation expense related to these grants.

Stock-based compensation expense

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

	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Cost of revenues	$	342	$	355
General and administrative		396		230
Research and development		64		73
Sales and marketing		176		167
Total	$	978	$	825

Restricted stock units

The Company granted RSUs to certain employees and board members which are subject to certain vesting criteria. The 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 is dependent on the type and timing of the liquidity event as it relates to the Business Combination date of December 19, 2019. Generally, a portion of the RSUs will first vest upon the occurrence of the liquidity event and the remainder will vest in installments thereafter, provided that if the liquidity event occurs after the third anniversary of the Business Combination, all RSUs will vest immediately upon the liquidity event. The vesting of the RSUs is generally subject to continued employment.

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

Description	RSUs Outstanding
Balance at December 31, 2020		1,290,432
Granted		308,750
Vested		(16,666	)
Forfeited		(51,190	)
Expired		-
Balance at March 31, 2021		1,531,326

The Company determined that the achievement of the liquidity event was not probable and therefore no expense was recorded during the three months ended March 31, 2021.

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Equity

3 Months Ended

Mar. 31, 2021

Equity [Abstract]

Equity

Note 7 – 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 time and in the amounts as the Board 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.

Warrants

On December 19, 2019, in connection with the consummation of the Business Combination, the Company assumed (i) 23,000,000 warrants (the “Public Warrants”) 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 Public Warrants were measured at fair value at the time of issuance and classified as equity. As disclosed in Note 2, the Company has determined that the Private Warrants fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity and therefore these warrants are classified as liabilities and measured at fair value at each reporting period.

Each Warrant entitles the holder to purchase one share of Common Stock for $11.50 per share. If held 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 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 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 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 of Common Stock will be forfeited to the Company for no consideration. These shares are reported as outstanding in our financial statements.

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Income Taxes

3 Months Ended

Mar. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Note 8 – Income taxes

A valuation allowance has been established against our net U.S. federal and state deferred tax assets, including net operating loss (“NOL”) carryforwards. As a result, our income tax position 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 March 31, 2021 and 2020, the Company recorded an income tax provision of $0.6 million and $0.2 million, respectively, resulting in an effective tax rate of (4.2)% and (1.6)%, respectively. These effective tax rates differ from the U.S. federal statutory rate primarily due to the effects of foreign tax rate differences, state taxes and the valuation allowance against our domestic deferred tax assets.

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2021

Commitments And Contingencies Disclosure [Abstract]

Commitments and Contingencies

Note 9 – Commitments and contingencies

The Company is involved in various legal proceedings, which may 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 March 31, 2021.

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

Risks and Uncertainties

Impacts of COVID-19 pandemic on KLDiscovery’s Business

The potential impacts of the ongoing COVID-19 pandemic on the Company’s business are currently not estimable or determinable. The Company has made modifications to employee travel, work locations, and cancellation of certain events, among other modifications. During 2020, the Company implemented a salary exchange program pursuant to which certain employees took a temporary reduction in salary through December 31, 2020 that ranged from 2% to 20% in exchange for receiving 417,673 stock options and 211,207 RSUs. In December 2020, the Company extended the salary exchange program through September 20, 2021 for the named executive officers and for management positions of Vice-President and higher. The Company also initiated limited furloughs for certain employees. The Company will continue to actively monitor the situation and may take further actions that alter its business operations as may be required by federal, state or local authorities or that it determines is in the best interests of its employees, customers, partners, suppliers and stockholders.

On March 27, 2020, the President signed into U.S. federal law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, NOL carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years beginning before 2021, NOL carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019 and 2020, the base for interest deductibility was increased from 30% to 50% of taxable income. As permitted under the CARES Act, the Company deferred payroll taxes due in 2020 to 2021 and 2022. The Company continues to analyze other aspects of the CARES Act as well as similar tax legislation in other countries it operates in but does not believe they will have a meaningful impact to its results.

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Related Parties

3 Months Ended

Mar. 31, 2021

Related Party Transactions [Abstract]

Related Parties

Note 10 – Related parties

As of March 31, 2021 $108.3 million, including paid-in kind interest, of the Company’s Debentures, are owed to affiliates of MGG Investment Group, an affiliate of a director of the Company. For the three months ended March 31, 2021 and 2020, the Company recognized $3.1 million and $3.0 million in interest expense, respectively, related to the amounts owned by the MGG Investment Group.

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Subsequent Events

3 Months Ended

Mar. 31, 2021

Subsequent Events [Abstract]

Subsequent Events

Note 11 – Subsequent events

The Company has evaluated subsequent events through the dates on which this Quarterly Report on Form 10-Q was filed, the date on which these financial statements were issued, and identified no additional items for disclosure.

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

3 Months Ended

Mar. 31, 2021

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Organization

Organization

KLDiscovery Inc. (the “Company”) provides technology-based litigation support solutions and services including computer e-discovery, data hosting, and managed review, predominantly to top law firms, corporations and government agencies. The majority of the Company’s current business is derived from these services. The Company’s headquarters is located in McLean, Virginia and has 33 locations in 18 countries, 9 data centers and 18 data recovery labs around the globe.

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, 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 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 consolidated financial statements include the accounts of KLDiscovery and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation.

The Business Combination was accounted for as a reverse recapitalization in accordance with Accounting Standard Codification (“ASC”) 805, Business Combinations. For accounting and financial reporting purposes, LD Topco, Inc. is considered the acquirer based on facts and circumstances, including the following:

• LD Topco, Inc.’s operations comprise the ongoing operations of the combined entity;

• The officers of the newly combined company consist of LD Topco, Inc.’s executives, including the Chief Executive Officer, Chief Financial Officer and General Counsel; and

• The former shareholders of LD Topco, Inc. own a majority voting interest in the combined entity.

As a result of LD Topco, Inc. being the accounting acquirer, the financial reports filed with the Securities and Exchange Commission by the Company subsequent to the Business Combination are prepared “as if” LD Topco, Inc. is the predecessor and legal successor to the Company. The historical operations of LD Topco, Inc. are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of LD Topco, Inc. prior to the Business Combination; (ii) the combined results of the Company and LD Topco, Inc. following the Business Combination on December 19, 2019 (the “Closing Date”); (iii) the assets and liabilities of LD Topco, Inc. at their historical cost; and (iv) KLDiscovery Inc.’s equity structure for all periods presented. The recapitalization of the number of shares of common stock attributable to the purchase of LD Topco, Inc. in connection with the Business Combination is reflected retroactively to January 1, 2018 and will be utilized for calculating earnings per share in all prior periods presented. No step-up basis of intangible assets or goodwill was recorded in the Business Combination transaction consistent with the treatment of the transaction as a reverse capitalization of LD Topco, Inc.

Use of estimates

Use of estimates

The preparation of 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 consolidated financial statements. Although actual results could differ from those estimates, management does not believe that such differences would be material.

Significant estimates include, but are not limited to, the allowance for doubtful accounts, determining the fair values of assets acquired and liabilities assumed, including the fair value of private warrants, the recoverability and useful lives of property and equipment, intangible assets, and other long-lived assets, the impairment of goodwill, the valuation and realization of deferred income taxes, the fair value of the Company’s common stock and stock option awards, and acquisition-related contingent consideration.

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 months ended March 31, 2021 and 2020, the Company did not have a single customer that represented more than five percent (5%) 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.

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 expense” in the Company’s 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 original invoice amounts 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 and considering a customer’s financial condition and credit history. Accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded when received.

Computer software, property and equipment

Computer software, property and equipment

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. Property under capital leases are depreciated using the straight-line method over the lease term.

Depreciation expense totaled $2.9 million and $4.3 million for the three months ended March 31, 2021 and 2020, respectively, and includes amortization of assets recorded under capital 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 depreciated 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 depreciation 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 Consolidated Balance Sheets and totaled $19.5 million and $18.5 million, net of accumulated amortization, as of March 31, 2021 and December 31, 2020, respectively.

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 annually on October 1 each year, 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, 2020 testing date, the Company determined there is one reporting unit.

The Company considered COVID-19 as an indicator of impairment to the value of goodwill and intangible assets and performed a qualitative assessment. Management considered factors that could be affected by COVID-19 such as impact to stock price, consequences of “stay-at-home” orders, impacts to competitors due to COVID-19, changes in demand, and updates to the Company forecasts among other factors. Management concluded that there was no impairment of goodwill and intangible assets during the three months ended March 31, 2021.

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 is presented in the 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 the revolving credit facility are presented in “Other current assets” in the Company’s Consolidated Balance Sheets.

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 are provided to its customers.

The Company evaluates its revenue contracts with customers based on the five-step model under ASC 606: (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 following table summarizes revenue from contracts with customers for the three months ended March 31, 2021 and 2020 (in thousands):

	Three months ended March 31, 2021		Three months ended March 31, 2020
eDiscovery services	$	48,154	$	53,633
Managed review		15,580		13,126
Legal technology services		63,734		66,759
Data recovery		11,716		11,512
Total revenue	$	75,450	$	78,271

Performance Obligations and Timing of Revenue Recognition

We primarily sell 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) eDiscovery services, which provides end-to-end eDiscovery services support including collections, processing, analytics, hosting, production and professional services;

(2) Managed review services which provides the staffing necessary to review large complex data sets; and

(3) Data recovery, which offers data restoration, data erasure and data management.

We generate the majority of our revenues by providing Legal Technology services to our clients. All of our 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 utilizing a right-to-invoice practical expedient because we have a right to consideration for services completed to date.

Certain of our 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. We recognize revenues for these arrangements based on predetermined monthly fees as determined in our contractual agreements, utilizing a right-to-invoice practical expedient because we have a right to consideration for services completed to date.

Managed review services are time and materials types of arrangements. These agreements require the client to pay us based on the number of hours worked at contractually agreed-upon rates. We recognize revenues for these arrangements based on hours incurred and contracted rates utilizing a right-to-invoice practical expedient because we have a 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.

Ontrack PowerControls offers term license subscriptions for 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, support, as well as access to future software upgrades and fixes. 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.

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

3 Months Ended

Mar. 31, 2021

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 table summarizes revenue from contracts with customers for the three months ended March 31, 2021 and 2020 (in thousands):

	Three months ended March 31, 2021		Three months ended March 31, 2020
eDiscovery services	$	48,154	$	53,633
Managed review		15,580		13,126
Legal technology services		63,734		66,759
Data recovery		11,716		11,512
Total revenue	$	75,450	$	78,271

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Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2021

Fair Value Disclosures [Abstract]

Schedule of Black Scholes model for the Private Warrants

To estimate the fair value of the Private Warrants as of December 31, 2020, the Company used a Black Scholes closed form model, which is a Level 3 fair value measurement. Significant inputs into the Black Scholes model for the Private Warrants were as follows:

	December 31, 2020
Expected volatility		16.00	%
Expected term (in years)		3.97
Risk free interest rate		1.74	%
Dividend yield		0.00	%
Exercise Price	$	11.50
Fair value of common stock	$	8.05

Summary of Reconciliation of Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)

The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the periods ended March 31, 2021 and December 31, 2020 (in thousands):

Balance at December 31, 2019	$	822
Change in fair value of contingent consideration		98
Balance at December 31, 2020	$	920
Private warrants		1,841
Change in fair value of contingent consideration		19
Balance at March 31, 2021	$	2,780

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Leasing Arrangements (Tables)

3 Months Ended

Mar. 31, 2021

Leases [Abstract]

Schedule of Future Minimum Payments for Operating and Capital Lease Obligations

For periods subsequent to March 31, 2021, future minimum payments for all operating and capital lease obligations that have initial non-cancelable lease terms exceeding one year, net of rental income from subleases are as follows (in thousands):

March 31,	Capital Leases			Operating Leases
2021 (9 months)	$	1,353		$	7,038
2022		1,346			8,835
2023		721			8,475
2024		-			7,377
2025		-			3,810
Thereafter		-			2,552
Total	$	3,420		$	38,087
Less interest on lease obligations		(316	)
		3,104
Less current portion		(1,343	)
Non-current portion	$	1,761

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Long Term Debt (Tables)

3 Months Ended

Mar. 31, 2021

Long Term Debt [Abstract]

Summary of Components of Long-term Debt

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

	March 31, 2021			December 31, 2020
First lien facility due 2022	$	-		$	289,000
Convertible debenture notes due 2024		216,685			214,541
2021 Credit Agreement due 2026		300,000			-
Total debt		516,685			503,541
Less: unamortized original issue discount		(17,312	)		(16,126	)
Less: unamortized debt issuance costs		(2,038	)		(3,867	)
Total debt, net		497,335			483,548
Current portion of debt		3,000			17,000
Less: current portion of unamortized original issue discount		-			(4,312	)
Less: current portion of unamortized debt issuance costs		-			(1,740	)
Total current portion of debt, net		3,000			10,948
Total long-term debt, net	$	494,335		$	472,600

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Equity Incentive Plan (Tables)

3 Months Ended

Mar. 31, 2021

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
	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Total fair value of stock options granted	$	2,125	$	7,970
Total fair value of options vested		18		-

Schedule of Black Scholes model for the Private Warrants

To estimate the fair value of the Private Warrants as of December 31, 2020, the Company used a Black Scholes closed form model, which is a Level 3 fair value measurement. Significant inputs into the Black Scholes model for the Private Warrants were as follows:

	December 31, 2020
Expected volatility		16.00	%
Expected term (in years)		3.97
Risk free interest rate		1.74	%
Dividend yield		0.00	%
Exercise Price	$	11.50
Fair value of common stock	$	8.05

Stock Based Compensation Expense Included In Consolidated Statements of Comprehensive Loss

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

	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Cost of revenues	$	342	$	355
General and administrative		396		230
Research and development		64		73
Sales and marketing		176		167
Total	$	978	$	825

Restricted Stock Units [Member]

Schedule of RSUs Activity Under 2019 Plan

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

Description	RSUs Outstanding
Balance at December 31, 2020		1,290,432
Granted		308,750
Vested		(16,666	)
Forfeited		(51,190	)
Expired		-
Balance at March 31, 2021		1,531,326

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, 2020		4,260,753		$	8.46		9.0	$	54
Granted		1,187,500			8.05
Exercised		(4,465	)		8.00
Forfeited		(146,366	)		8.19
Expired		(1,477	)		8.00
Options Outstanding, March 31, 2021		5,295,945		$	8.37		9.1	$	806
Options Vested and Exercisable, March 31, 2021		1,224,595		$	8.22		8.8	$	216
Options Vested and Expected to vest, March 31, 2021		5,295,945		$	8.37		9.1	$	806

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

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-employees under the 2019 Plan:

	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Expected volatility	44.61%		37.63%
Expected term (in years)		6.00		6.00
Dividend yield	0.00%		0.00%
Risk-free interest rate	0.70%		1.43%

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Organization, Business and Summary of Significant Accounting Policies - Additional Information (Detail) $ in Millions	3 Months Ended
	Mar. 31, 2021 USD ($) Location Country Datacenter Lab Segment Customer	Mar. 31, 2020 USD ($) Customer	Dec. 31, 2020 USD ($)
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Number of countries | Country	18
Number of data centers | Datacenter	9
Number of data recovery labs | Lab	18
Date of incorporation	Aug. 02, 2018
Number of business segment | Segment	1
Depreciation expense | $	$ 2.9	$ 4.3
Number of reporting unit | Segment	1
Internal-Use Software Development [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Capitalized software costs | $	$ 19.5		$ 18.5
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
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
Minimum [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Number of locations | Location	33
Minimum [Member] | Internal-Use Software Development [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Estimated useful life	3 years
Maximum [Member] | Internal-Use Software Development [Member]
Organization Business And Summary Of Significant Accounting Policies [Line Items]
Estimated useful life	5 years

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Organization, Business and Summary of Significant Accounting Policies - Estimated Useful Lives of Assets (Detail)	3 Months Ended
	Mar. 31, 2021
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
Leasehold improvements
Property Plant And Equipment [Line Items]
Estimated useful lives of assets	Shorter of lease term or useful life
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
	Mar. 31, 2021	Mar. 31, 2020
Disaggregation Of Revenue [Line Items]
Revenues	$ 75,450	$ 78,271
eDiscovery Services [Member]
Disaggregation Of Revenue [Line Items]
Revenues	48,154	53,633
Managed Review [Member]
Disaggregation Of Revenue [Line Items]
Revenues	15,580	13,126
Legal Technology Services [Member]
Disaggregation Of Revenue [Line Items]
Revenues	63,734	66,759
Data Recovery [Member]
Disaggregation Of Revenue [Line Items]
Revenues	$ 11,716	$ 11,512

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Correction of an Immaterial Error - Additional Information (Detail) $ in Thousands	3 Months Ended
	Mar. 31, 2021 USD ($)
Reclassification [Line Items]
Expense (Income) related to fair value adjustment of warrants liabilities	$ (1,969)
Warrants (See Note 2)	(3,810)
Cumulative Effect, Period of Adoption, Adjustment [Member]
Reclassification [Line Items]
Increase in warrant liabilities	1,800
Warrants (See Note 2)	3,800
Private Warrants [Member]
Reclassification [Line Items]
Increase in warrant liabilities	1,841
Private Warrants [Member] | Cumulative Effect, Period of Adoption, Adjustment [Member]
Reclassification [Line Items]
Expense (Income) related to fair value adjustment of warrants liabilities	$ (2,000)

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Fair Value Measurements - Additional Information (Detail) $ / shares in Units, $ in Millions	12 Months Ended
	Dec. 31, 2019 USD ($) Company shares	Mar. 31, 2021 USD ($)	Dec. 31, 2020 USD ($) $ / shares
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair value of future expected acquisition-related contingent consideration obligations		$ 0.9	$ 0.9
Estimated fair value	$ 0.8
Number of companies acquired | Company	3
Business acquisition, total consideration	$ 5.5
Business acquisition, consideration in cash	2.0
Business acquisition, deferred payments	1.5
Business acquisition, stock	1.2
Business acquisition, future earn outs	$ 1.0
Warrants, expected term			5 years
Exercise price | $ / shares			$ 11.50
Liability [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Warrants outstanding | shares	6,350,000

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Fair Value Measurements - Schedule of Black Scholes model for the Private Warrants (Details)	12 Months Ended
	Dec. 31, 2020 $ / shares
Fair Value Disclosures [Abstract]
Expected volatility	16.00%
Expected term (in years)	3 years 11 months 19 days
Risk free interest rate	1.74%
Dividend yield	0.00%
Exercise Price	$ 11.50
Fair value of common stock	$ 8.05

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Fair Value Measurements - Summary of Reconciliation of Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3) (Detail) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2021	Dec. 31, 2020
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Balance at beginning	$ 920	$ 822
Change in fair value of warrants	1,969
Change in fair value of contingent consideration	19	98
Balance at ending	2,780	$ 920
Private Warrants [Member]
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Increase in warrant liabilities	$ 1,841

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Leasing Arrangements - Additional Information (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2021	Mar. 31, 2020
Leases [Abstract]
Operating and capital lease agreements lease expiring year	2028
Rent expense	$ 2.9	$ 3.8

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Leasing Arrangements - Schedule of Future Minimum Payments for Operating and Capital Lease Obligations (Detail) $ in Thousands	Mar. 31, 2021 USD ($)
Capital Leases
2021 (9 months)	$ 1,353
2022	1,346
2023	721
Total	3,420
Less interest on lease obligations	(316)
Net amount	3,104
Less current portion	(1,343)
Non-current portion	1,761
Operating Leases
2021 (9 months)	7,038
2022	8,835
2023	8,475
2024	7,377
2025	3,810
Thereafter	2,552
Total	$ 38,087

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Long Term Debt - Summary of Components of Long-term Debt (Detail) - USD ($) $ in Thousands	Mar. 31, 2021	Dec. 31, 2020
Debt Instrument [Line Items]
Total debt	$ 516,685	$ 503,541
Less: unamortized original issue discount	(17,312)	(16,126)
Less: unamortized debt issuance costs	(2,038)	(3,867)
Total debt, net	497,335	483,548
Current portion of debt	3,000	17,000
Less: current portion of unamortized original issue discount		(4,312)
Less: current portion of unamortized debt issuance costs		(1,740)
Total current portion of debt, net	3,000	10,948
Long-term debt, net	494,335	472,600
First Lien Facility Due 2022
Debt Instrument [Line Items]
Total debt		289,000
Convertible Debenture Notes Due 2024
Debt Instrument [Line Items]
Total debt	216,685	$ 214,541
2021 Credit Agreement Due 2026
Debt Instrument [Line Items]
Total debt	$ 300,000

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Long Term Debt - Additional Information (Detail) - USD ($)			3 Months Ended
	Feb. 08, 2021	Dec. 19, 2019	Mar. 31, 2021	Dec. 31, 2020	Dec. 09, 2016
Debt Instrument [Line Items]
Debt instrument, closing fees			$ 2,031,000
Loss on debt extinguishment			(7,257,000)
Total debt			$ 516,685,000	$ 503,541,000
First Lien Facility
Debt Instrument [Line Items]
Initial term loan borrowing					$ 340,000,000
Term loan maturity date			Dec. 09, 2022
Second Lien Facility
Debt Instrument [Line Items]
Initial term loan borrowing					$ 125,000,000
Term loan maturity date			Dec. 09, 2023
Convertible Debentures Due 2024 [Member]
Debt Instrument [Line Items]
Debt principal amount		$ 200,000,000
Term loan maturity date		Dec. 19, 2024
Debt interest rate		8.00%
Total debt			$ 216,685,000	$ 214,541,000
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%
Revolving Credit Facility [Member] | 2016 Credit Agreement [Member]
Debt Instrument [Line Items]
Maximum borrowing capacity			$ 30,000,000
Loan maturing date			Jun. 09, 2022
Loss on debt extinguishment			$ (7,200,000)
Letter of Credit [Member] | 2021 Credit Agreement [Member]
Debt Instrument [Line Items]
Revolving credit loans			600,000
Revolving Credit Loans [Member] | 2021 Credit Agreement [Member]
Debt Instrument [Line Items]
Available borrowing capacity			$ 39,400,000
2021 Credit Agreement [Member]
Debt Instrument [Line Items]
Debt principal amount	$ 300,000,000
Delayed draw term loans	$ 50,000,000
Debt instrument, maturity description	The Initial Term Loans, Delayed Draw Term Loans and Revolving Credit Loans are each scheduled to mature on the earlier of February 16, 2026 or six months prior to maturity of our Debentures (as defined below) due in December 2024. The Initial Term Loans and Delayed Draw Term Loans may be voluntarily repaid at any time, but may be subject to a prepayment premium. The Initial Term Loans and Delayed Draw Term Loans are required to be repaid under certain circumstances, including with Excess Cash Flow (as defined in the 2021 Credit Agreement), the proceeds of an Asset Sale or Casualty Event (each as defined in the 2021 Credit Agreement) and the proceeds of certain refinancing indebtedness
Debt instrument, closing fees	$ 8,000,000
2021 Credit Agreement [Member] | Maximum [Member]
Debt Instrument [Line Items]
Debt instrument, net leverage ratio	7.00
2021 Credit Agreement [Member] | Minimum [Member]
Debt Instrument [Line Items]
Debt instrument, net leverage ratio	1.00
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
2021 Credit Agreement [Member] | Adjusted Eurocurrency Rate [Member] | Term Loans and Delayed Draw Term Loans [Member]
Debt Instrument [Line Items]
Loan variable interest rate	6.50%
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%
2021 Credit Agreement [Member] | Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Revolving credit loans	$ 40,000,000
2021 Credit Agreement [Member] | Revolving Credit Facility [Member] | Adjusted Eurocurrency Rate [Member]
Debt Instrument [Line Items]
Loan variable interest rate	4.00%
2021 Credit Agreement [Member] | Revolving Credit Facility [Member] | Base Rate [Member]
Debt Instrument [Line Items]
Loan variable interest rate	3.00%
2021 Credit Agreement [Member] | Letter of Credit [Member]
Debt Instrument [Line Items]
Revolving credit loans	$ 10,000,000
2021 Credit Agreement [Member] | Revolving Credit Loans [Member]
Debt Instrument [Line Items]
Revolving credit loans	$ 40,000,000
2021 Credit Agreement [Member] | Revolving Credit Loans [Member] | Adjusted Eurocurrency Rate [Member]
Debt Instrument [Line Items]
Loan variable interest rate	4.00%
2021 Credit Agreement [Member] | Revolving Credit Loans [Member] | Base Rate [Member]
Debt Instrument [Line Items]
Loan variable interest rate	3.00%

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Equity Incentive Plan - Additional Information (Detail) - USD ($)	3 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Dec. 31, 2020
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Common stock, par value	$ 0.0001		$ 0.0001
Stock-based compensation	$ 978,000	$ 825,000
Restricted Stock Units [Member] | Non Employee Director [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation	$ 200,000
Options granted		50,000
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
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	2,126,451
Common stock options authorized under plan	9,626,451
Common stock, par value	$ 0.0001
Common stock options available for issuance	4,330,506
Options granted	1,187,500
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	$ 1.79	$ 2.19
Stock-based compensation	$ 1,000,000	$ 800,000
Unrecognized stock-based compensation expense	$ 7,000,000
Unrecognized stock-based compensation expense, period	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
2019 Plan [Member] | Restricted Stock Units [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation	$ 0

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Equity Incentive Plan - Schedule of Stock Option Activity Under 2019 Plan (Detail) - 2019 Plan [Member] - USD ($) $ / shares in Units, $ in Thousands		3 Months Ended	12 Months Ended
		Mar. 31, 2021	Dec. 31, 2020
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options outstanding, beginning balance		4,260,753
Options granted		1,187,500
Exercised		(4,465)
Options forfeited		(146,366)
Options expired		(1,477)
Options outstanding, ending balance		5,295,945	4,260,753
Options Vested and Exercisable, March 31, 2021		1,224,595
Options Vested and Expected to vest, March 31, 2021		5,295,945
Weighted average exercise price, beginning balance		$ 8.46
Weighted average exercise price, granted		8.05
Exercised		8.00
Weighted average exercise price, forfeited		8.19
Weighted average exercise price, expired		8.00
Weighted average exercise price, ending balance		8.37	$ 8.46
Options Vested and Exercisable, March 31, 2021		8.22
Options Vested and Expected to vest, March 31, 2021		$ 8.37
Weighted average remaining contractual term, balance		9 years 1 month 6 days	9 years
Options Vested and Exercisable, March 31, 2021		8 years 9 months 18 days
Options Vested and Expected to vest, March 31, 2021		9 years 1 month 6 days
Aggregate intrinsic value, beginning balance	[1]	$ 806	$ 54
Options Vested and Exercisable, March 31, 2021	[1]	216
Options Vested and Expected to vest, March 31, 2021	[1]	$ 806

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

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Equity Incentive Plan - Schedule of Additional Information on Stock Option Grants And Vesting (Detail) - 2019 Plan [Member] - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2021	Mar. 31, 2020
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Total fair value of stock options granted	$ 2,125	$ 7,970
Total fair value of options vested	$ 18

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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)	3 Months Ended		12 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Dec. 31, 2020
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Expected volatility			16.00%
Expected term (in years)			3 years 11 months 19 days
Dividend yield			0.00%
Risk free interest rate			1.74%
2019 Plan [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Expected volatility	44.61%	37.63%
Expected term (in years)	6 years	6 years
Dividend yield	0.00%	0.00%
Risk free interest rate	0.70%	1.43%

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Equity Incentive Plan - Stock Based Compensation Expense Included In Consolidated Statements of Comprehensive Loss (Detail) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2021	Mar. 31, 2020
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	$ 978	$ 825
Cost of Revenues [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	342	355
General and administrative [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	396	230
Research and development [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	64	73
Sales and Marketing [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	$ 176	$ 167

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Equity Incentive Plan - Schedule of RSUs Activity Under 2019 Plan (Detail) - 2019 Plan [Member] - Restricted Stock Units [Member]	3 Months Ended
	Mar. 31, 2021 shares
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Beginning balance	1,290,432
Granted	308,750
Vested	16,666
Forfeited	(51,190)
Ending balance	1,531,326

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Equity - Additional Information (Detail) - USD ($)		3 Months Ended
	Dec. 19, 2019	Mar. 31, 2021	Dec. 31, 2020
Class Of Stock [Line Items]
Common stock, shares authorized		200,000,000	200,000,000
Common stock, par value		$ 0.0001	$ 0.0001
Preferred stock, shares authorized		1,000,000	1,000,000
Preferred Stock, per share		$ 0.0001	$ 0.0001
Common stock, voting rights		one vote for each share
Exercise price			$ 11.50
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 held 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
Warrants expiration date	Dec. 19, 2024
Sale price of common stock	$ 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
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 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 of Common Stock will be forfeited to the Company for no consideration. These shares are reported as outstanding in our financial statements.
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
Pivotal Acquisition Holdings LLC [Member] | Maximum [Member]
Class Of Stock [Line Items]
Closing sale price of company's common stock	$ 15.00
Public Warrants [Member] | Pivotal Acquisition Corp. [Member]
Class Of Stock [Line Items]
Warrants outstanding	23,000,000
Exercise price	$ 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

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Income Taxes - Additional Information (Detail) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2021	Mar. 31, 2020
Income Tax Disclosure [Abstract]
Income tax provision	$ 616	$ 206
Effective tax rate	(4.20%)	(1.60%)

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Commitments and Contingencies - Additional Information (Detail) $ in Millions	3 Months Ended	12 Months Ended
	Mar. 31, 2021 USD ($) LetterofCredit	Dec. 31, 2020 shares	Dec. 31, 2019	Dec. 31, 2018
Loss Contingencies [Line Items]
Number of letters of credit | LetterofCredit	2
Letters of credit as additional security for lease guarantees | $	$ 0.6
Percentage of taxable income offset by NOL carryforwards and carrybacks	100.00%
Net operating loss carrybacks, period	5 years
Tax-deductible interest, base percentage		50.00%	50.00%	30.00%
Salary Exchange Program [Member] | Minimum [Member]
Loss Contingencies [Line Items]
Percentage of salary exchange program for award		2.00%
Salary Exchange Program [Member] | Maximum [Member]
Loss Contingencies [Line Items]
Percentage of salary exchange program for award		20.00%
Salary Exchange Program [Member] | Employee Stock Options [Member]
Loss Contingencies [Line Items]
Options granted		417,673
Salary Exchange Program [Member] | Restricted Stock Units [Member]
Loss Contingencies [Line Items]
Granted		211,207

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Related Parties -Additional Information (Detail) - MGG Investment Group [Member] - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2021	Mar. 31, 2020
Related Party Transaction [Line Items]
Interest expense, related party	$ 3.1	$ 3.0
Debentures [Member]
Related Party Transaction [Line Items]
Debt instrument outstanding	$ 108.3