10-Q 1 kldi-20230930.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2023

OR

 

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

For the transition period from to

Commission File Number 001-38789

KLDiscovery Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

61-1898603

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

9023 Columbine Road

Eden Prairie, MN

55347

(Address of Principal Executive Offices)

(Zip Code)

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

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

N/A

 

N/A

 

N/A

 

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

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

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

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

 

 


 

Table of Contents

 

 

 

Page

Part I. Financial Information

 

1

Item 1. Financial Statements

1

Condensed Consolidated Balance Sheets

1

Condensed Consolidated Statements of Comprehensive Loss

2

Condensed Consolidated Statements of Changes in Stockholders’ Equity

3

Condensed Consolidated Statements of Cash Flows

4

Notes to Unaudited Condensed Consolidated Financial Statements

5

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

16

Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk

28

Item 4. Controls and Procedures

28

Part II. Other Information

 

29

Item 1. Legal Proceedings

 

29

Item 1A. Risk Factors

 

29

Item 6. Exhibits

29

Signatures

31

 

 

 

 


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

KLDiscovery Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(unaudited)

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,435

 

 

$

32,629

 

Accounts receivable, net of allowance

 

 

 

 

 

 

for doubtful accounts of $2,875 and $5,403, respectively

 

 

98,114

 

 

 

95,727

 

Prepaid expenses

 

 

17,781

 

 

 

10,726

 

Other current assets

 

 

1,341

 

 

 

1,175

 

Total current assets

 

 

142,671

 

 

 

140,257

 

Property and equipment

 

 

 

 

 

 

Computer software and hardware

 

 

74,904

 

 

 

71,720

 

Leasehold improvements

 

 

25,842

 

 

 

25,869

 

Furniture, fixtures, and other equipment

 

 

2,204

 

 

 

2,209

 

Accumulated depreciation

 

 

(86,028

)

 

 

(79,958

)

Property and equipment, net

 

 

16,922

 

 

 

19,840

 

Operating lease right of use assets, net

 

 

9,646

 

 

 

12,412

 

Intangible assets, net

 

 

41,479

 

 

 

46,862

 

Goodwill

 

 

389,559

 

 

 

391,114

 

Other assets

 

 

8,910

 

 

 

8,957

 

Total assets

 

$

609,187

 

 

$

619,442

 

Current liabilities

 

 

 

 

 

 

Current portion of long-term debt, net

 

$

289,715

 

 

$

3,000

 

Accounts payable and accrued expense

 

 

32,249

 

 

 

25,009

 

Operating lease liabilities

 

 

6,185

 

 

 

7,850

 

Deferred revenue

 

 

2,682

 

 

 

4,536

 

Total current liabilities

 

 

330,831

 

 

 

40,395

 

Long-term debt, net

 

 

247,388

 

 

 

524,529

 

Deferred tax liabilities

 

 

8,414

 

 

 

7,793

 

Long term operating lease liabilities

 

 

7,015

 

 

 

10,340

 

Other liabilities

 

 

1,511

 

 

 

2,694

 

Total liabilities

 

 

595,159

 

 

 

585,751

 

Commitments and contingencies

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

$0.0001 par value, shares authorized - 200,000,000 shares authorized;

 

 

 

 

 

 

43,086,267 and 42,920,136 issued and outstanding as of

 

 

 

 

 

 

September 30, 2023 and December 31, 2022, respectively

 

 

4

 

 

 

4

 

Preferred Stock

 

 

 

 

 

 

$0.0001 par value, 1,000,000 shares authorized, zero issued and

 

 

 

 

 

 

outstanding as of September 30, 2023 and December 31, 2022

 

 

 

 

 

 

Additional paid-in capital

 

 

394,615

 

 

 

391,977

 

Accumulated deficit

 

 

(379,687

)

 

 

(359,141

)

Accumulated other comprehensive income

 

 

(904

)

 

 

851

 

Total stockholders' equity

 

 

14,028

 

 

 

33,691

 

Total liabilities and stockholders' equity

 

$

609,187

 

 

$

619,442

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

1


 

KLDiscovery Inc.

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

(in thousands, except share and per share amounts)

 

 

 

Three Months Ended September 30, 2023

 

 

Three Months Ended September 30, 2022

 

 

Nine Months Ended September 30, 2023

 

 

Nine Months Ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

79,336

 

 

$

74,544

 

 

$

260,002

 

 

$

231,633

 

Cost of revenues

 

 

39,643

 

 

 

40,830

 

 

 

128,225

 

 

 

123,728

 

Gross profit

 

 

39,693

 

 

 

33,714

 

 

 

131,777

 

 

 

107,905

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

14,932

 

 

 

16,768

 

 

 

46,832

 

 

 

48,703

 

Research and development

 

 

3,294

 

 

 

3,597

 

 

 

9,751

 

 

 

10,303

 

Sales and marketing

 

 

9,518

 

 

 

11,333

 

 

 

30,765

 

 

 

32,486

 

Depreciation and amortization

 

 

5,068

 

 

 

4,944

 

 

 

14,807

 

 

 

14,749

 

Total operating expenses

 

 

32,812

 

 

 

36,642

 

 

 

102,155

 

 

 

106,241

 

Income (loss) from operations

 

 

6,881

 

 

 

(2,928

)

 

 

29,622

 

 

 

1,664

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income

 

 

(6

)

 

 

7

 

 

 

(8

)

 

 

(7

)

Change in fair value of Private Warrants

 

 

(51

)

 

 

(140

)

 

 

(559

)

 

 

(826

)

Interest expense

 

 

17,235

 

 

 

13,960

 

 

 

49,197

 

 

 

39,527

 

Loss before income taxes

 

 

(10,297

)

 

 

(16,755

)

 

 

(19,008

)

 

 

(37,030

)

Income tax provision

 

 

1,061

 

 

 

644

 

 

 

1,538

 

 

 

1,161

 

Net loss

 

$

(11,358

)

 

$

(17,399

)

 

$

(20,546

)

 

$

(38,191

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(2,403

)

 

 

(4,715

)

 

 

(1,755

)

 

 

(12,537

)

Total other comprehensive loss, net of tax

 

 

(2,403

)

 

 

(4,715

)

 

 

(1,755

)

 

 

(12,537

)

Comprehensive loss

 

$

(13,761

)

 

$

(22,114

)

 

$

(22,301

)

 

$

(50,728

)

Net loss per share - basic and diluted

 

$

(0.26

)

 

$

(0.41

)

 

$

(0.48

)

 

$

(0.89

)

Weighted average shares outstanding - basic and diluted

 

 

43,086,267

 

 

 

42,791,540

 

 

 

42,989,413

 

 

 

42,732,003

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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

 

 

(loss) income

 

 

Total

 

Balance as of December 31, 2022

 

 

42,920,136

 

 

$

4

 

 

$

391,977

 

 

$

(359,141

)

 

$

851

 

 

$

33,691

 

Share-based compensation

 

 

 

 

 

 

 

 

877

 

 

 

 

 

 

 

 

 

877

 

Stock issued in exchange for vested units

 

 

16,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

825

 

 

 

825

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(4,508

)

 

 

 

 

 

(4,508

)

Balance as of March 31, 2023

 

 

42,936,803

 

 

$

4

 

 

$

392,854

 

 

$

(363,649

)

 

$

1,676

 

 

$

30,885

 

Share-based compensation

 

 

 

 

 

 

 

 

893

 

 

 

 

 

 

 

 

 

893

 

Stock issued in exchanges for vested units

 

 

149,464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(177

)

 

 

(177

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(4,680

)

 

 

 

 

 

(4,680

)

Balance as of June 30, 2023

 

 

43,086,267

 

 

$

4

 

 

$

393,747

 

 

$

(368,329

)

 

$

1,499

 

 

$

26,921

 

Share-based compensation

 

 

 

 

 

 

 

 

868

 

 

 

 

 

 

 

 

 

868

 

Foreign exchange translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,403

)

 

 

(2,403

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(11,358

)

 

 

 

 

 

(11,358

)

Balance as of September 30, 2023

 

 

43,086,267

 

 

$

4

 

 

$

394,615

 

 

$

(379,687

)

 

$

(904

)

 

$

14,028

 

 

 

 

Common Stock Issued

 

 

Additional
paid-in

 

 

Accumulated

 

 

Accumulated
other
comprehensive

 

 

 

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

(loss) income

 

 

Total

 

Balance as of December 31, 2021

 

 

42,684,549

 

 

$

4

 

 

$

386,028

 

 

$

(315,967

)

 

$

7,789

 

 

$

77,854

 

Share-based compensation

 

 

 

 

 

 

 

 

1,098

 

 

 

 

 

 

 

 

 

1,098

 

Stock issued in exchange for vested units

 

 

16,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,140

)

 

 

(2,140

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(9,580

)

 

 

 

 

 

(9,580

)

Balance as of March 31, 2022

 

 

42,701,216

 

 

$

4

 

 

$

387,126

 

 

$

(325,547

)

 

$

5,649

 

 

$

67,232

 

Share-based compensation

 

 

 

 

 

 

 

 

1,347

 

 

 

 

 

 

 

 

 

1,347

 

Stock issued in exchanges for vested units

 

 

90,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,683

)

 

 

(5,683

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(11,212

)

 

 

 

 

 

(11,212

)

Balance as of June 30, 2022

 

 

42,791,540

 

 

$

4

 

 

$

388,473

 

 

$

(336,759

)

 

$

(34

)

 

$

51,684

 

Share-based compensation

 

 

 

 

 

 

 

 

1,320

 

 

 

 

 

 

 

 

 

1,320

 

Foreign exchange translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,715

)

 

 

(4,715

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(17,399

)

 

 

 

 

 

(17,399

)

Balance as of September 30, 2022

 

 

42,791,540

 

 

$

4

 

 

$

389,793

 

 

$

(354,158

)

 

$

(4,749

)

 

$

30,890

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3


 

KLDiscovery Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

Nine Months Ended September 30, 2023

 

 

Nine Months Ended September 30, 2022

 

Operating activities

 

 

 

 

 

Net loss

$

(20,546

)

 

$

(38,191

)

Adjustments to reconcile net loss to net cash used in operating
   activities:

 

 

 

 

 

Depreciation and amortization

 

20,372

 

 

 

23,585

 

Paid in kind and non-cash interest

 

16,390

 

 

 

14,874

 

Stock-based compensation

 

2,550

 

 

 

3,656

 

Provision for losses on accounts receivable

 

2,167

 

 

 

1,736

 

Deferred income taxes

 

629

 

 

 

728

 

Change in fair value of contingent consideration

 

 

 

 

21

 

Change in fair value of Private Warrants

 

(559

)

 

 

(826

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(4,622

)

 

 

(3,828

)

Prepaid expenses and other assets

 

(8,277

)

 

 

(5,464

)

Accounts payable and accrued expenses

 

(691

)

 

 

6,791

 

Deferred revenue

 

(1,847

)

 

 

(1,033

)

Net cash provided by operating activities

 

5,566

 

 

 

2,049

 

Investing activities

 

 

 

 

 

Purchases of property and equipment

 

(8,534

)

 

 

(10,498

)

Net cash used in investing activities

 

(8,534

)

 

 

(10,498

)

Financing activities

 

 

 

 

 

Payments for capital lease obligations

 

(1,874

)

 

 

(1,592

)

Payments on long-term debt

 

(2,250

)

 

 

(2,250

)

Net cash used in financing activities

 

(4,124

)

 

 

(3,842

)

Effect of foreign exchange rates

 

(102

)

 

 

(1,304

)

Net decrease in cash

 

(7,194

)

 

 

(13,595

)

Cash and cash equivalents at beginning of period

 

32,629

 

 

 

46,468

 

Cash and cash equivalents at end of period

$

25,435

 

 

$

32,873

 

Supplemental disclosure:

 

 

 

 

 

Cash paid for interest

$

33,216

 

 

$

24,871

 

Net income taxes paid

$

788

 

 

$

486

 

Significant noncash investing and financing activities

 

 

 

 

 

Purchases of property and equipment in accounts payable
   and accrued expenses on the condensed consolidated balance sheets

$

133

 

 

$

115

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

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 25 locations in 16 countries, as well as 9 data centers and 13 data recovery labs globally.

 

The Company was originally incorporated under the name Pivotal Acquisition Corp. (“Pivotal”) as a blank check company on August 2, 2018 under the laws of the State of Delaware for the purpose of entering into a merger, capital stock exchange, stock purchase, reorganization or similar business combination with one or more businesses or entities.

 

On December 19, 2019 (the “Closing Date”), Pivotal acquired the outstanding shares of LD Topco, Inc. via a reverse capitalization (the “Business Combination”) and was renamed KLDiscovery Inc.

Principles of consolidation

The accompanying condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The accompanying condensed consolidated financial statements include the accounts of KLDiscovery and all its subsidiaries. All significant intercompany accounts and transactions were eliminated upon consolidation. The accompanying condensed consolidated financial statements should be read in conjunction with the financial and risk factor information included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which we previously filed with the Securities and Exchange Commission (the “SEC”).

Liquidity and going concern evaluation

Under Accounting Standards Codification (“ASC”) 205-40, Going Concern, the Company is required to evaluate each reporting period, including interim periods, whether there is substantial doubt regarding its ability to meet its obligations when they come due within one year from the financial statement issuance date.

 

On February 8, 2021, certain subsidiaries of the Company (the “Loan Parties”), entered into a new secured credit agreement (the “2021 Credit Agreement”) and on March 3, 2023, the Loan Parties entered into the First Amendment to the 2021 Credit Agreement (as amended, the “Amended 2021 Credit Agreement”). In addition, on December 19, 2019, the Company issued Convertible Debentures, which mature in 2024, in an aggregate principal amount of $200 million (the “Debentures” or the “Convertible Debentures”).

 

The Amended 2021 Credit Agreement provides for (i) initial term loans in an aggregate principal amount of $300 million (the “Initial Term Loans”), (ii) delayed draw term loans in an aggregate principal amount of $50 million (the “Delayed Draw Term Loans”), and (iii) revolving credit loans in an aggregate principal amount of $40 million, with a letter of credit sublimit of $10 million (the Revolving Credit Loans”).

 

The Initial Term Loans and Revolving Credit Loans are each scheduled to mature on February 8, 2026, unless the Convertible Debentures are outstanding six months prior to the December 19, 2024 maturity date thereof, in which case the Amended 2021 Credit Agreement matures on June 19, 2024.

 

The Company has historically incurred losses and in certain years cash flows have been negative. As of September 30, 2023, the Company’s cash balance was $25.4 million and the Company’s debt balance was $544.8 million, including a balance of $252.3 million under the Convertible Debentures and a balance of $292.5 million in Initial Term Loans under the Amended 2021 Credit Agreement (no amounts were outstanding under the Delayed Draw Term Loans or Revolving Credit Loans). As of September 30, 2023, the Company does not anticipate repaying the Convertible Debentures by June 19, 2024 and as such, the Initial Term Loans debt of $292.5 million is included in the current portion of long-term debt in the Condensed Consolidated Balance Sheet at September 30, 2023. As of September 30, 2023, the Company does not have sufficient cash on hand, and does not expect to generate sufficient liquidity from forecasted future cash flows to repay its current obligations including the Initial Term Loans, at the accelerated maturity date.

 

The Company is reviewing potential alternatives, including renegotiating the terms of the Convertible Debentures and/or the Amended 2021 Credit Agreement and identifying alternative sources for cash or additional financing. The Company's current debt structure, however, raises substantial doubt regarding the Company’s ability to continue as a going concern because these or other alternatives may not be achievable on favorable terms and conditions or at all. The Company’s condensed financial statements do

 

5


 

not include any adjustments that may result from the outcome of this uncertainty and have been prepared assuming the Company will continue as a going concern.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the condensed consolidated financial statements. Although actual results could differ from those estimates, management does not believe that such differences would be material.

 

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

Segments, concentration of credit risk and major customers

The Company operates in one business segment, providing technology-based litigation support solutions and services.

 

Financial instruments, which potentially expose the Company to concentrations of credit risk, consist principally of cash and accounts receivable. The Company places its cash with a banking institution where the balances, at times, exceed federally insured limits. Management believes the risks associated with these deposits are limited.

 

With respect to accounts receivable, the Company performs ongoing evaluations of its customers, generally grants uncollateralized credit terms to its customers, and maintains an allowance for doubtful accounts based on historical experience and management’s expectations of future losses. As of and for the three and nine months ended September 30, 2023 and 2022, the Company did not have any single customer that represented five percent (5%) or more of its consolidated revenues or accounts receivable. The Company believes that the geographic and industry diversity of the Company’s customer base throughout the U.S. and internationally minimizes the risk of incurring material losses due to concentrations of credit risk. The Company’s foreign revenues, principally from businesses in the UK and Germany, totaled approximately $11.5 million and $10.5 million for the three months ended September 30, 2023 and 2022, respectively; and $40.6 million and $36.7 million for the nine months ended September 30, 2023, and 2022, respectively. The Company’s long-lived assets in foreign countries, principally in the UK and Germany, totaled approximately $25.8 million and $25.9 million as of September 30, 2023, and December 31, 2022, respectively.

Foreign currency

Results of operations for the Company’s non-U.S. subsidiaries are translated from the designated functional currency to the reporting currency of the U.S. dollar. Revenues and expenses are translated at average exchange rates for each month, while assets and liabilities are translated at balance sheet date exchange rates. Resulting net translation adjustments are recorded as a component of stockholders’ equity in “Accumulated other comprehensive income” in the Company’s Condensed Consolidated Balance Sheets.

 

Transaction gains and losses arising from currency exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in “Other (income) expense” in the Company’s Condensed Consolidated Statements of Comprehensive Loss. Such transaction gains and losses may be realized or unrealized depending upon whether the transaction settled during the period or remains outstanding at the balance sheet date.

Cash and cash equivalents

The Company considers all highly liquid financial instruments with an original maturity of three months or less when purchased to be cash equivalents.

Accounts receivable

Accounts receivable are recorded at the original invoice amount less an estimate for doubtful receivables based on a r