UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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 |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of November 9, 2023 there were
Table of Contents
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
KLDiscovery Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
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September 30, 2023 |
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December 31, 2022 |
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(unaudited) |
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Current assets |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net of allowance |
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for doubtful accounts of $ |
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Prepaid expenses |
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Other current assets |
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Total current assets |
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Property and equipment |
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Computer software and hardware |
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Leasehold improvements |
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Furniture, fixtures, and other equipment |
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Accumulated depreciation |
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( |
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Property and equipment, net |
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Operating lease right of use assets, net |
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Intangible assets, net |
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Goodwill |
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Other assets |
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Total assets |
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$ |
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$ |
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Current liabilities |
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Current portion of long-term debt, net |
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$ |
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$ |
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Accounts payable and accrued expense |
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Operating lease liabilities |
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Deferred revenue |
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Total current liabilities |
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Long-term debt, net |
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Deferred tax liabilities |
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Long term operating lease liabilities |
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Other liabilities |
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Total liabilities |
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Stockholders' equity |
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Common stock |
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$ |
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September 30, 2023 and December 31, 2022, respectively |
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Preferred Stock |
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$ |
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outstanding as of September 30, 2023 and December 31, 2022 |
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Additional paid-in capital |
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Accumulated deficit |
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( |
) |
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( |
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Accumulated other comprehensive income |
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( |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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See Notes to Condensed Consolidated Financial Statements.
1
KLDiscovery Inc.
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands, except share and per share amounts)
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Three Months Ended September 30, 2023 |
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Three Months Ended September 30, 2022 |
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Nine Months Ended September 30, 2023 |
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Nine Months Ended September 30, 2022 |
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Revenues |
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$ |
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$ |
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$ |
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$ |
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Cost of revenues |
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Gross profit |
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Operating expenses |
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General and administrative |
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Research and development |
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Sales and marketing |
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Depreciation and amortization |
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Total operating expenses |
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Income (loss) from operations |
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( |
) |
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Other expenses |
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Other (expense) income |
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( |
) |
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( |
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( |
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Change in fair value of Private Warrants |
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( |
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( |
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( |
) |
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( |
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Interest expense |
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Loss before income taxes |
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( |
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( |
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( |
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( |
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Income tax provision |
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Net loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Other comprehensive loss, net of tax |
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Foreign currency translation |
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( |
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( |
) |
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( |
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( |
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Total other comprehensive loss, net of tax |
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( |
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( |
) |
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( |
) |
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( |
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Comprehensive loss |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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$ |
( |
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Net loss per share - basic and diluted |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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$ |
( |
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Weighted average shares outstanding - basic and diluted |
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See Notes to Condensed Consolidated Financial Statements.
2
KLDiscovery Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(in thousands, except for share amounts)
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Common Stock Issued |
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Additional |
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Accumulated |
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Accumulated |
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Shares |
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Amount |
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capital |
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deficit |
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(loss) income |
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Total |
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Balance as of December 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Stock issued in exchange for vested units |
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— |
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— |
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— |
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— |
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— |
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Cumulative translation adjustment |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Balance as of March 31, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Stock issued in exchanges for vested units |
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— |
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— |
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— |
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— |
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Foreign exchange translation |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Balance as of June 30, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Foreign exchange translation |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Balance as of September 30, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Common Stock Issued |
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Additional |
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Accumulated |
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Accumulated |
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Shares |
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Amount |
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capital |
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deficit |
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(loss) income |
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Total |
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Balance as of December 31, 2021 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Stock issued in exchange for vested units |
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— |
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— |
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— |
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— |
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— |
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Foreign exchange translation |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Balance as of March 31, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Stock issued in exchanges for vested units |
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— |
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— |
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— |
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— |
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— |
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Foreign exchange translation |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Balance as of June 30, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Foreign exchange translation |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Balance as of September 30, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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See Notes to Condensed Consolidated Financial Statements.
3
KLDiscovery Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
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Nine Months Ended September 30, 2023 |
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Nine Months Ended September 30, 2022 |
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Operating activities |
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Net loss |
$ |
( |
) |
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$ |
( |
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Adjustments to reconcile net loss to net cash used in operating |
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Depreciation and amortization |
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Paid in kind and non-cash interest |
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Stock-based compensation |
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Provision for losses on accounts receivable |
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Deferred income taxes |
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Change in fair value of contingent consideration |
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— |
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Change in fair value of Private Warrants |
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( |
) |
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( |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
) |
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( |
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Prepaid expenses and other assets |
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( |
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( |
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Accounts payable and accrued expenses |
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( |
) |
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Deferred revenue |
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( |
) |
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( |
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Net cash provided by operating activities |
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Investing activities |
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Purchases of property and equipment |
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( |
) |
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( |
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Net cash used in investing activities |
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( |
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( |
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Financing activities |
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Payments for capital lease obligations |
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( |
) |
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( |
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Payments on long-term debt |
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( |
) |
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( |
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Net cash used in financing activities |
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( |
) |
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( |
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Effect of foreign exchange rates |
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( |
) |
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( |
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Net decrease in cash |
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( |
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( |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ |
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$ |
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Supplemental disclosure: |
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Cash paid for interest |
$ |
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$ |
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Net income taxes paid |
$ |
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$ |
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Significant noncash investing and financing activities |
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Purchases of property and equipment in accounts payable |
$ |
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$ |
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See Notes to Condensed Consolidated Financial Statements.
4
KLDiscovery Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the three and nine months ended September 30, 2023 and 2022
Note 1 – Organization, business and summary of significant accounting policies
Organization
KLDiscovery Inc. (the “Company,” “we” or “us”) is a leading global provider of eDiscovery, information governance and data recovery solutions to corporations, law firms, insurance companies and individuals in 16 countries around the world. We provide technology solutions to help our clients solve complex data challenges. The Company’s headquarters are located in Eden Prairie, Minnesota. The Company has
The Company was originally incorporated under the name Pivotal Acquisition Corp. (“Pivotal”) as a blank check company on
On December 19, 2019 (the “Closing Date”), Pivotal acquired the outstanding shares of LD Topco, Inc. via a reverse capitalization (the “Business Combination”) and was renamed KLDiscovery Inc.
Principles of consolidation
The accompanying condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The accompanying condensed consolidated financial statements include the accounts of KLDiscovery and all its subsidiaries. All significant intercompany accounts and transactions were eliminated upon consolidation. The accompanying condensed consolidated financial statements should be read in conjunction with the financial and risk factor information included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which we previously filed with the Securities and Exchange Commission (the “SEC”).
Liquidity and going concern evaluation
Under Accounting Standards Codification (“ASC”) 205-40, Going Concern, the Company is required to evaluate each reporting period, including interim periods, whether there is substantial doubt regarding its ability to meet its obligations when they come due within one year from the financial statement issuance date.
On February 8, 2021, certain subsidiaries of the Company (the “Loan Parties”), entered into a new secured credit agreement (the “2021 Credit Agreement”) and on March 3, 2023, the Loan Parties entered into the First Amendment to the 2021 Credit Agreement (as amended, the “Amended 2021 Credit Agreement”). In addition, on December 19, 2019, the Company issued Convertible Debentures, which mature in 2024, in an aggregate principal amount of $
The Amended 2021 Credit Agreement provides for (i) initial term loans in an aggregate principal amount of $
The Initial Term Loans and Revolving Credit Loans are each scheduled to mature on February 8, 2026, unless the Convertible Debentures are outstanding six months prior to the December 19, 2024 maturity date thereof, in which case the Amended 2021 Credit Agreement matures on June 19, 2024.
The Company has historically incurred losses and in certain years cash flows have been negative. As of September 30, 2023, the Company’s cash balance was $
The Company is reviewing potential alternatives, including renegotiating the terms of the Convertible Debentures and/or the Amended 2021 Credit Agreement and identifying alternative sources for cash or additional financing. The Company's current debt structure, however, raises substantial doubt regarding the Company’s ability to continue as a going concern because these or other alternatives may not be achievable on favorable terms and conditions or at all. The Company’s condensed financial statements do
5
not include any adjustments that may result from the outcome of this uncertainty and have been prepared assuming the Company will continue as a going concern.
Use of estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the condensed consolidated financial statements. Although actual results could differ from those estimates, management does not believe that such differences would be material.
Significant estimates include, but are not limited to, the allowance for doubtful accounts, determining the fair values of assets acquired and liabilities assumed, including the recoverability and useful lives of property and equipment, intangible assets, and other long-lived assets, the evaluation of goodwill for impairment, the valuation and realization of deferred income taxes, the fair value of the Company’s common stock, and stock option awards.
Segments, concentration of credit risk and major customers
The Company operates in
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.
Foreign currency
Results of operations for the Company’s non-U.S. subsidiaries are translated from the designated functional currency to the reporting currency of the U.S. dollar. Revenues and expenses are translated at average exchange rates for each month, while assets and liabilities are translated at balance sheet date exchange rates. Resulting net translation adjustments are recorded as a component of stockholders’ equity in “Accumulated other comprehensive income” in the Company’s Condensed Consolidated Balance Sheets.
Transaction gains and losses arising from currency exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in “Other (income) expense” in the Company’s Condensed Consolidated Statements of Comprehensive Loss. Such transaction gains and losses may be realized or unrealized depending upon whether the transaction settled during the period or remains outstanding at the balance sheet date.
Cash and cash equivalents
The Company considers all highly liquid financial instruments with an original maturity of three months or less when purchased to be cash equivalents.
Accounts receivable
Accounts receivable are recorded at the original invoice amount less an estimate for doubtful receivables based on a re