UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~FORM 10-Q~~

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, ~~2022~~2023


☐	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~~9023 Columbine Road ~~Suite 300~~ ~~McLean, VA~~Eden Prairie, MN	~~22102~~55347
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: ~~(703)~~ (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~~Large accelerated filer

☐

~~Smaller reporting company~~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 ~~12, 2022,~~11, 2023 there were ~~42,701,216~~42,936,803 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		1716
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk		2826
Item 4. Controls and Procedures		2927
Part II. Other Information		3028
Item 1. Legal Proceedings		3028
Item 1A. Risk Factors		3028
Item 6. Exhibits		3028
Signatures		3230

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

KLDiscovery Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)


	March 31, 2022			December 31, 2021			March 31, 2023			December 31, 2022
	(unaudited)						(unaudited)
Current assets
Cash and cash equivalents	$	38,403		$	46,468		$	26,345		$	32,629
Accounts receivable, net of allowance
for doubtful accounts of $8,573 and $9,774, respectively		98,950			93,273
for doubtful accounts of $4,247 and $5,403, respectively								102,289			95,727
Prepaid expenses		15,678			9,669			16,911			10,726
Other current assets		1,070			1,133			1,271			1,175
Total current assets		154,101			150,543			146,816			140,257
Property and equipment
Computer software and hardware		72,719			73,677			75,035			71,720
Leasehold improvements		26,564			26,796			25,293			25,869
Furniture, fixtures and other equipment		2,819			3,064			2,244			2,209
Accumulated depreciation		(82,066	)		(81,261	)		(82,184	)		(79,958	)
Property and equipment, net		20,036			22,276			20,388			19,840
Operating lease right of use assets, net								10,657			12,412
Intangible assets, net		56,245			59,291			45,122			46,862
Goodwill		394,226			395,759			391,537			391,114
Other assets		8,395			8,535			8,963			8,957
Total assets	$	633,003		$	636,404		$	623,483		$	619,442
Current liabilities
Current portion of long-term debt, net	$	3,000		$	3,000		$	3,000		$	3,000
Accounts payable and accrued expense		32,828			27,067			32,333			25,009
Current portion of contingent consideration		655			646
Operating lease liabilities								6,730			7,850
Deferred revenue		3,497			4,800			3,577			4,536
Total current liabilities		39,980			35,513			45,640			40,395
Long-term debt, net		510,301			507,706			527,447			524,529
Deferred tax liabilities		6,957			6,772			7,910			7,793
Long term operating lease liabilities								8,946			10,340
Other liabilities		8,533			8,559			2,655			2,694
Total liabilities		565,771			558,550			592,598			585,751
Commitments and contingencies
Stockholders' equity
Common stock
$0.0001 par value, 200,000,000 shares authorized, 42,701,216 and 42,684,549 issued and outstanding as of March 31, 2022 and December 31, 2021, respectively		4			4
$0.0001 par value, 200,000,000 shares authorized, 42,936,803 and 42,920,136 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively								4			4
Preferred Stock
$0.0001 par value, 1,000,000 shares authorized, 0 issued and outstanding as of March 31, 2022 and December 31, 2021, respectively		—			—
$0.0001 par value, 1,000,000 shares authorized, zero issued and outstanding as of March 31, 2023 and December 31, 2022, respectively								—			—
Additional paid-in capital		387,126			386,028			392,854			391,977
Accumulated deficit		(325,547	)		(315,967	)		(363,649	)		(359,141	)
Accumulated other comprehensive income		5,649			7,789			1,676			851
Total stockholders' equity		67,232			77,854			30,885			33,691
Total liabilities and stockholders' equity	$	633,003		$	636,404		$	623,483		$	619,442

See Notes to Condensed Consolidated Financial Statements.

KLDiscovery Inc.

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

(in thousands, except share and per share amounts)


	Three Months Ended March 31, 2022			Three Months Ended March 31, 2021			Three Months Ended March 31, 2023			Three Months Ended March 31, 2022

Revenues	$	81,898		$	75,450		$	90,659		$	81,898
Cost of revenues		43,272			37,422			43,587			43,272
Gross profit		38,626			38,028			47,072			38,626
Operating expenses
General and administrative		16,525			15,440			17,301			16,525
Research and development		3,068			2,171			3,200			3,068
Sales and marketing		10,844			9,457			10,391			10,844
Depreciation and amortization		4,914			7,641			4,813			4,914
Total operating expenses		35,351			34,709			35,705			35,351
Income from operations		3,275			3,319			11,367			3,275
Other expenses
Other expense		—			14
Change in fair value of Private Warrants		(191	)		(1,969	)		(191	)		(191	)
Interest expense		12,691			12,257			15,771			12,691
Loss on debt extinguishment		—			7,257
Loss before income taxes		(9,225	)		(14,240	)		(4,213	)		(9,225	)
Income tax provision		355			616			295			355
Net loss	$	(9,580	)	$	(14,856	)	$	(4,508	)	$	(9,580	)
Other comprehensive loss, net of tax
Other comprehensive income (loss), net of tax
Foreign currency translation		(2,140	)		(2,462	)		825			(2,140	)
Total other comprehensive loss, net of tax		(2,140	)		(2,462	)
Total other comprehensive income (loss), net of tax								825			(2,140	)
Comprehensive loss	$	(11,720	)	$	(17,318	)	$	(3,683	)	$	(11,720	)
Net loss per share - basic and diluted	$	(0.22	)	$	(0.35	)	$	(0.11	)	$	(0.22	)
Weighted average shares outstanding - basic and diluted		42,686,216			42,532,915			42,920,321			42,686,216

See Notes to Condensed Consolidated Financial Statements.

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 (loss)

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 exchanges 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


	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

	Common Stock Issued				Additional paid-in			Accumulated			Accumulated other comprehensive
	Shares		Amount		capital			deficit			income (loss)			Total			Common Stock Issued				Additional paid-in		Accumulated			Accumulated other comprehensive
Balance as of December 31, 2020		42,529,017	$	4	$	385,387		$	(255,424	)	$	12,254		$	142,221
																	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		—		—		1,003			—			—			1,003			—		—		1,098		—			—			1,098
Exercise of stock options		4,465		—		34			—			—			34
Stock issued in exchange for vested units		16,666		—		—			—			—			—			16,667		—		—		—			—			—
Private warrants		—		—		(3,810	)		—			—			(3,810	)
Foreign exchange translation		—		—		—			—			(2,462	)		(2,462	)		—		—		—		—			(2,140	)		(2,140	)
Net loss		—		—		—			(14,856	)		—			(14,856	)		—		—		—		(9,580	)		—			(9,580	)
Balance as of March 31, 2021		42,550,148	$	4	$	382,614		$	(270,280	)	$	9,792		$	122,130
Balance as of March 31, 2022																		42,701,216	$	4	$	387,126	$	(325,547	)	$	5,649		$	67,232

See Notes to Condensed Consolidated Financial Statements.

KLDiscovery Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Three Months Ended March 31, 2022			Three Months Ended March 31, 2021			Three Months Ended March 31, 2023			Three Months Ended March 31, 2022
Operating activities
Net loss	$	(9,580	)	$	(14,856	)	$	(4,508	)	$	(9,580	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		7,850			9,816			6,610			7,850
Non-cash interest		4,860			4,815
Loss on extinguishment of debt		—			7,257
Paid in kind interest								5,156			4,860
Stock-based compensation		1,062			978			833			1,062
Provision for losses on accounts receivable		827			972			797			827
Deferred income taxes		185			342			118			185
Change in fair value of contingent consideration		9			19			—			9
Change in fair value of Private Warrants		(191	)		(1,969	)		(191	)		(191	)
Changes in operating assets and liabilities:
Accounts receivable		(6,822	)		(680	)		(7,186	)		(6,822	)
Prepaid expenses and other assets		(6,190	)		(5,087	)		(7,018	)		(6,190	)
Accounts payable and accrued expenses		5,631			(2,986	)		3,318			5,631
Deferred revenue		(1,287	)		(1,436	)		(975	)		(1,287	)
Net cash used in operating activities		(3,646	)		(2,815	)		(3,046	)		(3,646	)
Investing activities
Purchases of property and equipment		(2,968	)		(3,088	)		(2,072	)		(2,968	)
Net cash used in investing activities		(2,968	)		(3,088	)		(2,072	)		(2,968	)
Financing activities
Proceeds for exercise of stock options		—			34
Payments for capital lease obligations		(531	)		(285	)		(533	)		(531	)
Debt acquisition costs		—			(2,031	)
Proceeds long-term debt, net of original issue discount		—			294,000
Retirement of debt		—			(289,000	)
Payments on long-term debt		(750	)		—			(750	)		(750	)
Net cash (used in) provided by financing activities		(1,281	)		2,718
Net cash used in by financing activities								(1,283	)		(1,281	)
Effect of foreign exchange rates		(170	)		(208	)		117			(170	)
Net decrease in cash		(8,065	)		(3,393	)		(6,284	)		(8,065	)
Cash at beginning of period		46,468			51,201			32,629			46,468
Cash at end of period	$	38,403		$	47,808		$	26,345		$	38,403
Supplemental disclosure:
Cash paid for interest	$	7,876		$	12,232		$	10,842		$	7,876
Net income taxes paid (refunded)	$	60		$	(591	)
Significant non-cash investing and financing activities
Net income taxes paid							$	263		$	60
Significant noncash investing and financing activities
Purchases of property and equipment in accounts payable and accrued expenses on the condensed consolidated balance sheets	$	1		$	682		$	751		$	1

See Notes to Condensed Consolidated Financial Statements.

KLDiscovery Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the three months ended March 31, ~~2022~~2023 and ~~2021~~2022

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

Organization

~~Organization~~

KLDiscovery Inc. (the “Company,” “we” or “us”) is a leading global provider of eDiscovery, information governance and data recovery solutions to corporations, law firms, insurance companies and individuals in 1916 countries around the world. We provide technology solutionsto helpour clientssolvecomplexdatachallenges. The Company’s headquarters are located in Eden Prairie, Minnesota. ~~headquartersarelocatedin McLean,Virginia.~~The Company has 3125 locations in 1916 countries, as well as 9 data centers and 1713 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 ~~have been~~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, ~~2021,~~2022, which we previously filed with the Securities and Exchange Commission (the “SEC”).

Use of estimates

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

Significant estimates include, but are not limited to, the allowance for doubtful accounts, determining the fair values of assets acquired and liabilities assumed, including ~~the fair value of Private Warrants (as defined in Note 3),~~ 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, ~~$0.0001 par value per share (the “Common Stock”),~~and stock option ~~awards, and acquisition-related contingent consideration.~~awards.

Segments, concentration of credit risk and major customers

The Company operates in 1one 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, ~~2022~~2023 and ~~2021,~~2022, the Company did 0tnot have aany single customer that ~~represents~~represented ten percent (10%) 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 ~~$14.1~~$12.6 million and ~~$14.9~~$14.1 million for the three months ended March 31, ~~2022~~2023, and ~~2021~~,2022, respectively. The Company’s long-lived assets in foreign countries, principally in the UK and Germany, totaled approximately ~~$25.4~~$26.2 million and ~~$25.6~~$25.9 million ~~for the~~ ~~three months ended~~as of March 31, 2023, and December 31, 2022, ~~and 2021~~respectively.~~, respectively.~~

Foreign currency

~~Foreign currency~~

Results of operations for the Company’s non-U.S. subsidiaries are translated from the designated functional currency to the reporting currency of the U.S. dollar. Revenues and expenses are translated at average exchange rates for each month, while assets and

liabilities are translated at balance sheet date exchange rates. Resulting net translation adjustments are recorded as a component of stockholders’ equity in “Accumulated other comprehensive income” in the Company’s Condensed Consolidated Balance Sheets.

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

Cash and cash equivalents

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

Accounts receivable

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

Fixed Assets

Computer software, property and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the following estimated useful lives of the assets:


Computer software and hardware		3 to 5 years
Leasehold improvements		Shorter of lease term or useful life
Furniture, fixtures and other equipment		3 to 5 years

Gains or losses on disposals are included in results of operations at amounts equal to the difference between the net book value of the disposed assets and the proceeds received upon disposal. Costs for replacements and betterments are capitalized, while the costs of maintenance and repairs are expensed as incurred. Finance leases right of use assets are included in Property ~~under capital leases is depreciated~~and equipment and are stated at the present value of minimum lease payments and subsequently amortized using the straight-line method over the earlier of the end of the asset's useful life or the end of the lease term.

Depreciation expense totaled ~~$2.4~~$2.3 million and ~~$2.9~~$2.4 million for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively, and includes amortization of assets recorded under ~~capital~~finance leases. For additional information on leases, refer to Note 3 – Leases.

Internal-use software development costs

The Company capitalizes certain internal computer software costs incurred during the application development stage. The application development stage generally includes software design and configuration, coding, testing and installation activities. Training and maintenance costs are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditure will result in additional functionality. Capitalized software costs are amortized over the estimated useful life of the underlying project on a straight-line basis. The Company’s estimated useful life of capitalized software costs varies between three and five years, depending on management’s expectation of the economic life of various software. Capitalized software amortization costs are recorded as a component of cost of revenue.

Capitalized software costs are reflected as part of “Intangible assets, net” in the Company’s Condensed Consolidated Balance Sheets and totaled ~~$15.6~~$18.1 million and ~~$14.7~~$17.5 million, net of accumulated amortization, as of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

Upon the adoption of Accounting Standards Update No. 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, (“ASU 2018-15”) during the fourth quarter of 2021, capitalized implementation costs of cloud computing arrangements are included in both Prepaid expense and Other assets in the Company’s Consolidated Balance Sheet and totaled $1.5 million and $4.9 million as of March 31, 2022 and $1.5 million and $5.1 million as of December 31, 2021, respectively. In addition, the amortization costs for the capitalized implementation cost related to cloud computing arrangements are now included in General and administrative expense in the Company’s Condensed Consolidated Statement of Comprehensive Loss and total

$0.4 million for the three months ended March 31, 2022. Cash flows associated with the capitalized implementation cost related to cloud computing arrangements, previously recorded as part of Cash from investing activities, are now included in cash flows used by operating activities in the Company’s Condensed Consolidated Statement of Cash Flows and total $~~0.3~~ ~~million for the three months ended March 31, 2022.~~

Intangible assets and other long-lived assets

The Company evaluates the recoverability of its long-lived assets, including finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of any asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the difference between the fair value of the asset compared to its carrying amount.

Amortization expense totaled ~~$5.0~~$3.9 million and ~~$6.9~~$5.0 million for the three months ended March 31, 2023 and 2022, ~~and 2021,~~ respectively; ~~$2.5~~$1.4 million and ~~$2.2~~$2.5 million of which, respectively, was classified as part of the “Cost of revenues” line in the Company’s Condensed Consolidated Statements of Comprehensive Loss.

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

Goodwill

Goodwill represents the excess of the total consideration paid over identified intangible and tangible assets of the Company and its acquisitions. The Company tests its goodwill for impairment at the reporting unit level on an annual basis on October 1, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. As of the October 1, ~~2021~~2022 testing date, the Company determined there is 1one reporting unit.

Management concluded that there was no impairment of goodwill and intangible assets during the three months ended March 31, ~~2022.~~2023. Our goodwill balance is subject to fluctuations in foreign exchange rates.

Debt issuance costs

Debt issuance costs are stated at cost, net of accumulated amortization, and are amortized over the term of the debt using both the straight-line and the effective yield methods. U.S. GAAP requires that the effective yield method be used to amortize debt acquisition costs; however, if the effect of using the straight-line method is not materially different from the results that would have been obtained under the effective yield method, the straight-line method may be used. The amortization for funded term debt is calculated according to the effective yield method and revolving and unfunded term debt is calculated according to the straight-line method. Debt issuance costs related to funded term debt are presented in the Condensed Consolidated Balance Sheets as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts or premiums. Debt issuance costs related to revolving and unfunded term debt are presented in the Condensed Consolidated Balance Sheets within “Other assets.”

Revenue recognition

Revenues are recognized when the Company satisfies a performance obligation by transferring goods or services promised in a contract to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those services. Performance obligations in ~~our~~the Company's contracts represent distinct or separate service streams that ~~we provide~~the Company provides to ~~our~~its customers.

The Company evaluates its revenue contracts with customers based on the five-step model under Accounting ~~Standard~~Standards Codification (“ASC”) 606, Revenue Recognition: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; and (5) recognize revenues when (or as) each performance obligation is satisfied.

~~We provide~~The Company provides Legal Technology services to ~~our~~its clients through several technology solutions including Nebula Ecosystem (“Nebula”) ~~our~~its internally developed end-to-end fully integrated proprietary solution. WeThe Company also ~~provide~~provides Data Recovery solutions.

The following table summarizes revenue from contracts with customers for the three months ended March 31, 2023 and 2022 (in thousands):


	2022 Q1						2021 Q1						2023 Q1						2022 Q1
	Technology Solutions		Nebula		Consolidated		Technology Solutions		Nebula		Consolidated		Technology Solutions		Nebula		Consolidated		Technology Solutions		Nebula		Consolidated
Legal Technology	$	66,240	$	6,117	$	72,357	$	58,329	$	5,405	$	63,734	$	73,834	$	8,172	$	82,006	$	66,240	$	6,117	$	72,357
Data Recovery		9,541		—		9,541		11,716		—		11,716		8,653		—		8,653		9,541		—		9,541
Total revenue	$	75,781	$	6,117	$	81,898	$	70,045	$	5,405	$	75,450	$	82,487	$	8,172	$	90,659	$	75,781	$	6,117	$	81,898

Performance Obligations and Timing of Revenue Recognition

The Company primarily sells services and products that fall into the categories discussed below. Each category contains one or more performance obligations that are either (1) capable of being distinct (i.e., the customer can benefit from the product or service on its own or together with readily available resources, including those purchased separately from us) and distinct within the context of the contract (i.e., separately identified from other promises in the contract) or (2) a series of distinct products or services that are substantially the same and have the same pattern of transfer to the customer.

(1)

Legal Technology, including Nebula and the Company's expansive suite of technology solutions, such as its end-to-end eDiscovery technology solutions, managed review solutions, collections, processing, analytics, hosting, production and professional services, and

(2)

Data Recovery solutions, which provides data restoration, data erasure and data management services.

~~(1)~~

Legal Technology, including Nebula and our expansive suite of technology solutions, such as our end-to-end eDiscovery technology solutions, managed review solutions, collections, processing, analytics, hosting, production and professional services, and

~~(2)~~

~~Data Recovery solutions, which provides data restoration, data erasure and data management services.~~

The Company generates the majority of its revenues by providing Legal Technology services to ~~our~~its clients. Most of the Company’s eDiscovery service contracts are time and materials types of arrangements.

Time and materials arrangements are based on units of data stored or processed. Unit-based revenues are recognized as services are provided, based on either the amount of data stored or processed, the number of concurrent users accessing the information, or the number of pages or images processed for a client, at agreed upon per unit rates. We recognize revenues for these arrangements at a point in time utilizing a right-to-invoice practical expedient because we have a right to consideration for services completed to date.

Certain other eDiscovery contracts are subscription-based, fixed-fee arrangements, which have tiered pricing based on the quantity of data hosted. For a fixed monthly fee, our clients receive a variety of optional eDiscovery services, which are included in addition to the data hosting. The Company recognizes revenues for these arrangements at a point in time based on predetermined monthly fees as determined in our contractual agreements, utilizing a right-to-invoice practical expedient because the Company has a right to consideration for services completed to date.

Other eDiscovery agreements are time and material arrangements that require the client to pay us based on the number of hours worked at contractually agreed-upon rates. The Company recognizes revenues for these arrangements at a point in time based on hours incurred and contracted rates utilizing a right-to-invoice practical expedient because it has a contractual right to consideration for services completed to date.

Data recovery services are mainly fixed fee arrangements requiring the client to pay a pre-established fee in exchange for the successful completion of a data recovery on a predetermined device. For the recovery services performed by the Company’s technicians, the revenue is recognized at a point in time, when the recovered data is sent to the customer.

Data erasure services are fixed fee arrangements for which revenue is recognized at a point in time, when the certificate of erasure is sent to the customer.

The Company offers term license subscriptions to Ontrack PowerControls software to customers with on-premises installations of the software pursuant to contracts that are historically one to four years in length. The term license subscriptions include maintenance and support, as well as access to future software upgrades and patches. The license and the additional support services are deemed to be one performance obligation, and thus revenue for these arrangements is recognized ratably over the term of the agreement.

Net loss per common share

Basic net loss per common share is determined by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is determined by dividing net loss by the weighted average number of common shares outstanding during the period, plus the dilutive effect of common stock equivalents, including stock options and restricted shares. Common ~~Stock~~stock and common stock equivalents included in the computation represent shares issuable

upon assumed exercise of outstanding stock options and release of restricted shares, except when the effect of their inclusion would be antidilutive.

Recently Adopted Accounting Standards ~~Not Yet Adopted~~

The Company is an Emerging Growth Company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act and has elected to take advantage of the extended transition period of delaying the adoption of new or revised accounting standards until such time as those standards apply to private companies. This ~~means~~may make the comparison of the Company’s consolidated financial statements ~~may not be comparable~~ to other public companies not meaningful due to the differences in accounting standards being applied. ~~The effective dates shown below reflect the election to use the extended transition period.~~

In ~~February~~June 2016, the FASB issued Accounting Standards Update (“ASU”) ~~No. 2016-02,~~ ~~Leases (Topic 842)~~, which requires lessees to recognize on the balance sheet a right-of-use asset, representing their right to use the underlying asset for the lease term, and a lease liability for all leases. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. This standard is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, and the Company is currently evaluating the impact that Topic 842 will have on its consolidated financial statements.

~~In June 2016, the FASB issued ASU~~ No. 2016-13, Financial Instruments - Credit Losses (“ASC 326”): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This guidance is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. ~~The Company is required to adopt ASC 326 effective for fiscal years beginning after December 15,~~On January 1, 2023, ~~including interim periods within those fiscal years, and~~ the Company ~~is currently evaluating~~adopted ASU 2016-13 using a modified retrospective approach. The adoption did not have a material impact on the ~~impact that Topic 326 will have on its~~Company's consolidated financial statements.

~~Note 2 – Correction of an immaterial error~~

On April 12, 2021, the SEC Staff issued a “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies” (“SPACs”) (the “SEC Staff Statement”). The Company evaluated the SEC Staff Statement and determined that its Private Warrants (as defined in Note 3), which had historically been accounted for as a component of equity, should be reclassified and recorded as a liability at fair value during each reporting period, with changes in fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss.

In accordance with Financial Accounting Standards Board ASC 250, Accounting Changes and Error Corrections, the Company 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. Because these errors 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 and as of, March 31, 2021, (i) $2.0 million of income in the Condensed Consolidated 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 in the Condensed Consolidated Balance Sheet and (iii) a decrease in additional paid-in capital of $3.8 million in the Condensed Consolidated Balance Sheet.

Note 32 – 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~~measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement. The fair value of future expected acquisition-related contingent purchase consideration obligations was ~~$0.7 million and $0.6 million~~zero at March 31, ~~2022 and December 31, 2021, respectively.~~2023, since the Company issued 128,596 shares of common stock in settlement of an earn-out obligation in 2022.

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~~adjusted by appropriate discount rates. Significant increases (decreases) in any of these individual inputs ~~would~~could 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 warrants to purchase Common Stock (the “Private Warrants”) issued in connection with the consummation of the Business Combination in December 2019 should be accounted for as liabilities in accordance withASC 815-40, Derivatives and Hedging — Contracts in Entity’s Own Equity. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of Private Warrants in the Condensed Consolidated Statements of Comprehensive Loss. The fair value of the Private Warrants was ~~$1.7~~$0.4 million and ~~$1.8~~$0.6 million as of March 31, ~~2022~~ ~~and 2021, respectively~~.

To estimate the fair value of the Private Warrants as of December 31, 2021 and March 31, 2022, the Company used a Black Scholes closed form model, which is a Level 3 fair value measurement. Significant inputs used in the Black Scholes model for the Private Warrants were as follows:

December 31, 2021
&
March 31, 2022

Expected volatility

27.00
%
Expected term (in years)

2.94

Risk free interest rate

0.96
%
Dividend yield

0.00
%
Exercise Price

$
11.50

Fair value of Common Stock

$
6.80

T~~he Company’s use of a Black Scholes model required the use of the following inputs, including assumptions:~~

•

Expected volatility – as of the valuation date, the Public Warrants (as defined in Note 7) and the 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 Private Warrants.

•

Expected term – the expected term is based on the exercise period, which began 30 days after the consummation of the Business Combination in December 2019 and ends 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, 2022~~2023 and December 31, ~~2021 (in thousands):~~2022, respectively.

Balance at December 31, 2020

$
920

Private Warrants

3,810

Change in fair value of Private Warrants

(1,969
)
Change in fair value of contingent consideration

(275
)
Balance at December 31, 2021

2,486

Change in fair value of Private Warrants

(191
)
Change in fair value of contingent consideration

9

Balance at March 31, 2022

$
2,304

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 43 – ~~Leasing arrangements~~Leases

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

~~Rent expense totaled $2.8 million and $2.9 million for the three months ended~~

Maturities of lease liabilities as of March 31, ~~2022 and 2021, respectively.~~2023 were as follows:

For periods subsequent to March 31, 2022, 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):


	Finance Leases			Operating Leases
Remainder of 2023	$	1,686		$	5,877
2024		164			6,149
2025		—			3,170
2026		—			1,508
2027		—			361
Thereafter		—			293
Total undiscounted lease payments	$	1,850		$	17,357
Less: Interest		(57	)		(1,681	)
Present value of lease liabilities	$	1,793		$	15,676

Capital Leases

Operating Leases

2022 (9 months)

$
1,350

$
6,417

2023

1,057

8,032

2024

—

6,880

2025

—

3,457

2026

—

1,860

Thereafter

—

692

Total

$
2,407

$
27,338

Less interest on lease obligations

(138
)

2,269

Less current portion

(1,452
)

Non-current portion

$
817

Note 54 – Long term debt

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


	March 31, 2023			December 31, 2022
Convertible Debenture notes due 2024		247,283			244,808
Amended 2021 Credit Agreement due 2026 (1) (2)		294,000			294,750
Total debt		541,283			539,558
Less: unamortized original issue discount		(9,676	)		(10,751	)
Less: unamortized debt issuance costs		(1,160	)		(1,278	)
Total debt, net		530,447			527,529
Current portion of debt		3,000			3,000
Total current portion of debt, net		3,000			3,000
Total long-term debt, net	$	527,447		$	524,529

_______________________________

March 31, 2022

December 31, 2021

Convertible Debenture notes

231,676

229,382

2021 Credit Agreement

297,000

297,750

Total debt

528,676

527,132

Less: unamortized original issue discount

(13,760
)

(14,700
)
Less: unamortized debt issuance costs

(1,615
)

(1,726
)
Total debt, net

513,301

510,706

Current portion of debt

3,000

3,000

Less: current portion of unamortized original
issue discount

—

—

Less: current portion of unamortized debt
issuance costs

—

—

Total current portion of debt, net

3,000

3,000

Total long-term debt, net

$
510,301

$
507,706

(1)

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

(2)

The Amended 2021 Credit Agreement matures on February 8, 2026, unless the Debentures are outstanding six months prior to the December 19, 2024 maturity date thereof, in which case the Amended 2021 Credit Agreement matures on June 19, 2024.

Amended 2021 Credit Agreement

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

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

The Amended 2021 Credit Agreement provides for (i) initial term loans in an aggregate principal amount of ~~$300~~$300 million, or the Initial Term Loans, (ii) delayed draw term loans in an aggregate principal amount of ~~$50~~$50 million, or the Delayed Draw Term Loans, and (iii) revolving credit loans in an aggregate principal amount of ~~$40~~$40 million, with a letter of credit sublimit of ~~$10~~$10 million, or the Revolving Credit Loans. The Delayed Draw Term Loans ~~are~~were available to the Loan Parties at any time prior to February 8, 2023, subject to certain conditions. As of March 31, 2023, there were no outstanding Delayed Draw Term Loans.

The Initial Term Loans bear, and while they were available, the Delayed Draw Term Loans ~~bear~~bore, interest, at the Loan Parties’ option, at the rate of (x) with respect to ~~Eurocurrency~~SOFR Rate Loans, ~~(as defined in the 2021 Credit Agreement),~~ the Adjusted ~~Eurocurrency~~SOFR Rate ~~(as defined in the 2021 Credit Agreement)~~ with a ~~1.0%~~1.00% floor, plus ~~6.50%~~6.50% per annum, plus the Term SOFR Adjustment of 0.10% or (y) with respect to Base Rate Loans, ~~(as defined in the 2021 Credit Agreement),~~ the Base Rate ~~(as defined in~~plus 5.50% per annum, plus the ~~2021 Credit Agreement) plus 5.50% per annum.~~ Term SOFR Adjustment of 0.10%.

The Revolving Credit Loans bear interest, at our option, at the rate of (x) with respect to ~~Eurocurrency~~SOFR Rate Loans, the Adjusted ~~Eurocurrency~~SOFR Rate plus ~~4.00%~~4.00% per annum, or (y) with respect to Base Rate Loans, the Base Rate plus ~~3.00%~~3.00% per annum. The Initial ~~Term Loans and Delayed Draw~~ Term Loans amortize at a rate of ~~1.00%~~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~~$0.8 million, beginning on June 30, 2021. On March 31, 2023, the balance due was $294.0 million with an interest rate of 4.89833% plus an Adjusted Term SOFR Rate of 6.60%.

The Initial ~~Term Loans, Delayed Draw~~ Term Loans and Revolving Credit Loans are each scheduled to mature on ~~the earlier of~~ February 8, 2026, orunless the Debentures are outstanding six months prior to the December 19, 2024 maturity ~~of our Debentures due~~date thereof, in ~~December~~which case the Amended 2021 Credit Agreement matures on June 19, 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 Amended 2021 Credit Agreement), the proceeds of an Asset Sale or Casualty Event (each as defined in the Amended 2021 Credit Agreement) and the proceeds of certain refinancing indebtedness.

The obligations under the Amended 2021 Credit Agreement are secured by substantially all of the Loan Parties’ assets. The Amended 2021 Credit Agreement contains customary affirmative and negative covenants as well as a financial maintenance covenant that requires the Loan Parties to maintain a First Lien Net Leverage Ratio (as defined in the Amended 2021 Credit Agreement) of less than or equal to 7.00 to 1.00, tested at the end of each fiscal quarter. The Company was in compliance with all Amended 2021 Credit Agreement covenants as of March 31, ~~2022.~~2023.

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

Revolving Credit Loans

The Amended 2021 Credit Agreement also provides for an unfunded revolver commitment for borrowing up to ~~$40.0~~$40.0 million (the “Revolving Credit Loans”). As of March 31, ~~2022,~~2023, there was ~~$39.4~~$39.4 million available capacity for borrowing under the revolving loan commitment due to the ~~$0.6~~$0.6 million of letters of credit outstanding (See Note 98 – Commitments and ~~contingencies)~~Contingencies).

~~2016 Credit Agreement and Revolving Credit Facility~~

On December 9, 2016, certain subsidiaries of the Company entered into a credit agreement, or 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 loan borrowings of $340.0 million under the first lien facility and $125.0 million under the 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 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 $7.3 million during the three months ended March 31, 2021 in connection with the retirement of the first lien facility and the revolving credit facility.

Convertible Debentures

On December 19, 2019, the Company issued Convertible Debentures, which mature in 2024, in an aggregate principal amount of ~~$200~~$200 million (the “Debentures” or the “Convertible Debentures”). At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, the balance due under the Convertible Debentures was ~~$231.7~~$247.3 million and ~~$229.4~~$244.8 million, respectively.

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

At any time, upon notice as set forth in the Debentures, the Debentures will be redeemable at the Company’s option, in whole or in part, at a price equal to ~~100%~~100% of the principal amount of the Debentures redeemed, plus accrued and unpaid interest thereon.

The Debentures are convertible into shares of ~~Common Stock~~common stock at the option of the Debenture holders at any time and from time to time at a price of ~~$18~~$18 per share, subject to certain adjustments. ~~We are seeking stockholder approval of the conversion of the Debentures into common stock at our 2022 Annual Meeting of Stockholders.~~ 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%~~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, ~~2022,~~ 2023, the Company was in compliance with all Debenture covenants.

N~~ote 6~~11

Note 5 – Equity incentive plan

On December 19, 2019, the Company adopted the 2019 Incentive Award Plan (the “2019 Plan”) under which eligible employees, officers, directors and consultants of the Company may be granted incentive or non-qualified stock options, restricted stock, restricted stock units ("RSUs"), or other stock-based awards, including shares of Common Stock. Pursuant to the 2019 Plan, the number of shares of Common Stock available for issuance under the 2019 Plan automatically increases on each January 1 (commencing with January 1, 2021) until and including January 1, 2029, by an amount equal to the lesser of: (a) 5%5% of the shares of Common Stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by our Board of Directors (the “Board”). The Compensation Committee of the Board approved an increase to the share reserve as set out in the 2019 Plan in ~~2021.~~the amount of 2,134,227 shares in February 2022. As of March 31, ~~2022,~~ 2023, 11,760,678 shares of Common Stock were reserved under the 2019 Plan, of which ~~2,713,118~~1,993,603 shares of Common Stock remained available for issuance.

Stock option activity

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


Description	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (1)
Options outstanding, December 31, 2022		5,757,779		$	7.92		7.6	$	—
Granted		—			—
Exercised		—			—
Forfeited		(9,451	)		7.34
Expired		(75,714	)		8.12
Options outstanding, March 31, 2023		5,672,614		$	7.91		7.4	$	—
Options vested and exercisable, March 31, 2023		4,428,571		$	8.16		7.1	$	—
Options vested and expected to vest, March 31, 2023		5,672,614		$	7.91		7.4	$	—

_______________________________

Description

Options
Outstanding

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic
Value (1)

Options outstanding, December 31, 2021

5,093,682

$
8.34

8.4

$
24

Granted

1,130,850

6.00

Exercised

—

—

Forfeited

(27,829
)

8.29

Expired

(24,633
)

8.48

Options outstanding, March 31, 2022

6,172,070

$
7.91

8.4

$
5

Options vested and exercisable, March 31, 2022

2,777,689

$
8.32

7.9

$
5

Options vested and expected to vest, March 31, 2022

6,172,070

$
7.91

8.4

$
5

(1)

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

~~(1)~~

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

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


	2019 Plan				2019 Plan
	Three Months Ended March 31, 2022		Three Months Ended March 31, 2021		Three Months Ended March 31, 2023		Three Months Ended March 31, 2022
Total fair value of stock options granted	$	2,884	$	2,125	$	—	$	2,884
Total fair value of options vested		609		18		1,465		609

Time-based vesting stock options

Time-based vesting stock options generally vest over a three-year period, are subject to graded vesting schedules, and expire 10ten years from the date of grant or within 90 days of ~~termination.~~termination of employment. The weighted-average fair value per share of time-based vesting stock options granted by usthe Company was ~~$2.55,~~$0, and ~~$1.79,~~$2.55, during the three months ended March 31, 2023 and 2022, ~~and 2021,~~ respectively.

ForFor the three months ended March 31, ~~2022,~~2023 and ~~2021~~2022, the Company recognized ~~$1.1~~$0.8 million and ~~$1.0~~$1.1 million of stock-based compensation expense, respectively, in connection with time-based vesting stock options. As of March 31, 2023 and 2022, there was ~~$6.2~~$2.4 million and $6.2 million of unrecognized stock-based compensation expense, respectively, related to unvested time-based vesting stock options that is expected to be recognized over a weighted-average period of ~~two years.~~1.7 and 2.0 years, respectively.

Stock Option Valuation

The Company used valuation models to value both time and performance-based vesting stock options granted during the three months ended March 31, ~~2022 and 2021.~~2022. The Company did not grant any time or performance-based vesting stock options during the three

months ended March 31, 2023. The following table summarizes the assumptions used in the valuation models to determine the fair value of awards granted to employees and non-employee directors under the 2019 Plan:

Three Months Ended March 31, 2022

Three Months Ended March 31, 2021

Expected volatility

42.90%

44.61%

Expected term (in years)

6.00

6.00

Dividend yield

0.00%

0.00%

Risk-free interest rate

1.62%

0.70%


	Three Months Ended March 31, 2022
Expected volatility		42.90	%
Expected term (in years)	6.00
Dividend yield		0.00	%
Risk-free interest rate		1.62	%

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, 2022, the Company derived the expected life of the option based on the average midpoint between vesting and the contractual term as there is little exercise history.

•

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

•

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

•

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

•

~~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 share prices 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, 2022 and 2021, 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 does not have any 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 resemble the expected life of the option.~~

Stock-based compensation expense

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


	Three Months Ended March 31, 2022		Three Months Ended March 31, 2021		Three Months Ended March 31, 2023		Three Months Ended March 31, 2022
Cost of revenues	$	351	$	342	$	227	$	351
General and administrative		408		396		443		408
Research and development		103		64		76		103
Sales and marketing		200		176		87		200
Total	$	1,062	$	978	$	833	$	1,062

~~Performance –based~~Performance-based restricted stock units

~~The~~Periodically, the Company granted RSUs to certain employees ~~and non-employee directors~~ which are subject to certain vesting criteria. ~~The~~These RSUs ~~granted to employees~~ become eligible to begin vesting upon a liquidity event (as defined in the award agreements governing the RSUs). The amount and timing of the vesting of the RSUs depends on the type and timing of the liquidity event as it relates to the Closing Date. Generally, a portion of the RSUs ~~will~~were scheduled to first vest upon the occurrence of the liquidity event and the remainder ~~will~~were scheduled to vest in up to 3three annual installments ~~thereafter, provided that if the~~thereafter. Because no liquidity event ~~occurs after~~occurred before the third anniversary of the Closing Date, all RSUs ~~will~~are scheduled to vest immediately upon ~~the~~a future liquidity event.

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

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

The Company determined the three-year achievement of the overall Company revenue and Nebula revenue targets was probable and incurred $0.2 million of stock-based compensation expense for the three months ended March 31, 2023 with respect to the performance-based RSUs granted in the second quarter of 2022.

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

Time-based restricted stock units

The Company grants certain non-employee directors time-based ~~restricted stock units~~RSUs in satisfaction of their annual retainer payments. These ~~units~~RSUs vest over a one-year or three-year period. During the three months ended March 31, 2023, the Company granted to certain non-employee directors 151,515 RSUs. During the three months ended March 31, 2022, the Company did not grant any time-based RSUs to its non-employee directors. During the three months ended March 31, 2023 and ~~2021,~~2022, the Company recognized the grant-date fair value of the ~~restricted stock units~~RSUs granted to non-employee directors of ~~$0.2~~$0.2 million and ~~$0.2~~$0.2 million as stock-based compensation expense, respectively. ~~During the three months ended March 31, 2022 and 2021, the Company made 0 new grants of time-based restricted stock units to its non-employee directors.~~

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


Description	RSUs Outstanding
~~Balance~~Outstanding at December 31, ~~2021~~2022		~~1,513,892~~1,876,669
Granted		~~13,889~~151,515
Vested - non-employee director awards		(16,667	)
Forfeited		(~~12,986~~19,289	)
Expired		—
~~Balance~~Outstanding at March 31, ~~2022~~2023		~~1,498,128~~1,992,228

The Company determined the achievement of the liquidity event was not probable and therefore 0 expense related to the performance based awards was recorded during the three months ended March 31, 2022 and 2021.

Note 76 – Equity

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

There were 0no stock issuances during the three months ended March 31, 2023 and 2022, ~~and 2021,~~respectively, other than pursuant to stock option exercises and vesting of non-employee director RSUs.

Warrants

On the Closing Date, in connection with the consummation of the Business Combination, the Company assumed (i) 23,000,000 warrants (the “Public Warrants”) to purchase shares of Common Stock and (ii) 6,350,000 Private Warrants (together with the Public Warrants, the “Warrants”). The Public Warrants qualify for equity accounting as these warrants do not fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity.~~The 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~~warrant entitles the holder to purchase 1one share of Common Stock for ~~$11.50~~$11.50 per share. If ~~Private Warrants are held~~exercised by the initial purchaser of the Private Warrant or certain permitted transferees, the purchase can occur on a cashless basis. The Warrants will expire on December 19, 2024 or earlier upon redemption or liquidation.

If the reported last sale price of ~~Common Stock~~the Company's common stock equals or exceeds ~~$18.00~~$18.00 per share for any 20 trading days within a ~~30-trading~~30-trading day period ending three business days before the Company sends the notice of redemption to the ~~Warrant~~warrant holders, the Company may redeem all the Public Warrants at a price of ~~$0.01~~$0.01 per ~~Warrant~~warrant upon not less than 30 ~~days’~~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~~common stock issuable upon exercise of the ~~Warrants~~warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. The ~~Warrants~~warrants will not be adjusted for the issuance of ~~Common Stock~~common stock at a price below ~~the~~its exercise price. The Company will not be required to net cash settle the ~~Warrants.~~warrants.

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

Shares Subject to Forfeiture

On December 19, 2019, in connection with the consummation of the Business Combination, 550,000 shares of ~~Common Stock~~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~~common stock equals or exceeds ~~$15.00~~$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~~common stock does not equal or exceed ~~$15.00~~$15.00 within five years from the Closing Date, such shares will be forfeited to the Company for 0no consideration. These shares are reported as outstanding in the Company’s financial statements and continue to be subject to the additional lockup as of March 31, ~~2022.~~2023.

Note 87 – Income taxes

A valuation allowance has been established against the Company’s net U.S. federal and state deferred tax assets, including net operating loss (“NOL”) carryforwards. As a result, the Company’s income tax ~~position~~provision is primarily related to foreign tax activity and U.S. deferred taxes for tax deductible goodwill and other indefinite-lived liabilities. During the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, the Company recorded an income tax provision of ~~$0.4~~$0.3 million and ~~$0.6~~$0.4 million, respectively, resulting in an effective tax rate of ~~(4.3)~~(7.1)% and ~~(4.2)~~(4.3)%, respectively. These effective tax rates differ from the U.S. federal statutory rate primarily due to the effects of foreign tax rate differences, U.S. state and local income taxes and the valuation allowance against our domestic deferred tax assets.

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

Note 98 – Commitments and contingencies

The Company is involved in various legal proceedings, which arise occasionally in the normal course of business. While the ultimate results of such matters generally cannot be predicted with certainty, management does not expect such matters to have a material effect on the financial position and results of operations as of March 31, ~~2022.~~2023.

The Company has 2two letters of credit totaling ~~$0.6~~$0.6 million as of March 31, ~~2022~~2023 as additional security for lease guarantees related to leased properties.

Note 109 – Related parties

As of March 31, ~~2022, $115.8~~2023, $123.6 million including paid-in kind interest of the Company's Debentures ~~are~~was owed to affiliates of MGG Investment Group, which is an affiliate of a director of the Company. For the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, the Company recognized ~~$3.4~~$3.6 million and ~~$3.1~~$3.4 million in interest expense, respectively, related to the Debentures owned by affiliates of the MGG Investment Group.

Note 1110 – Subsequent events

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

~~On April 7, 2022 the Company issued an additional 463,000 performance based restricted stock units to its employees under the 2019 Plan. The units will vest over a~~ ~~three-year~~15 ~~time period based on the achievement of certain revenue targets and continued service with the Company.~~

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

All forward-lookingstatementsaresubjectto risksand uncertaintiesthatmaycauseactualresultsto differ materiallyfromthosethatwe expect, including:

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

difficulties resulting from our implementation of new consolidated business systems;

•

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

•

the outbreak of disease or similar public health threat, such as COVID-19;

•

potential unauthorized use of our products and technology by third parties and/or data security breaches and other incidents;

•

potential intellectual property infringement claims;

•

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

•

consequences of our substantial levels of indebtedness, including the pending maturity and potential acceleration thereof in June 2024;

•

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

•

impacts of laws and regulations on our business;

•

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

•

potential litigation and regulatory proceedings involving us;

•

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

•

the potential liquidity and trading of our public securities; and

•

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

•

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

•

~~the outbreak of disease or similar public health threat, such as COVID-19;~~

•

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

•

~~risk of decreased revenues if we do not adapt our pricing models;~~

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

~~potential unauthorized use of our products and technology by third parties and/or data security breaches and other incidents;~~

•

~~potential intellectual property infringement claims;~~

•

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

•

~~consequences of our substantial levels of indebtedness;~~

•

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

•

~~impacts of laws and regulations on our business;~~

•

~~potential litigation and regulatory proceedings involving us;~~

•

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

•

~~the potential liquidity and trading of our public securities; and~~

•

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

The forward-looking statements contained in this Quarterly Report on Form 10-Q and in any document incorporated by reference are based on current expectations and beliefs, which we believe to be reasonable, concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have

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

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

Throughout this section, unless otherwise ~~noted~~specified or where the context requires otherwise, references to “we,” “us,” “our,” “Company,” “KLDiscovery,” “KLD,” ~~“KLDiscovery Inc.”~~ or ~~“LD Topco,~~“KLDiscovery Inc.” refer to KLDiscovery Inc. and its consolidated subsidiaries. As a result of Pivotal Acquisition Corp.’s acquisition of the outstanding shares of LD Topco, Inc. via a reverse capitalization (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, 2023.

•

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

•

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

Overview

•

~~Executive Summary —~~ ~~a general description of our business and key highlights for the three months ended March 31, 2022.~~

•

~~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~~

KLD is a leading global provider of eDiscovery, information governance and data recovery solutions to corporations, law firms, insurance agencies and individuals. We provide technology solutions to help our clients solve complex legal, regulatory and data challenges. We have broad geographical coverage in the eDiscovery and data recovery industries with 3125 locations in 1916 countries, as well as 9 data centers and 1713 data recovery labs globally. Our integrated proprietary technology solutions enable the efficient and accurate collection, processing, transmission, review and/or recovery of complex and large-scale enterprise data. In conjunction with proprietary technology, we provide immediate expert consultation and 24/7/365 support wherever a customer is located worldwide, which empowers us to become a “first-call” partner for mission-critical, time-sensitive, or nuanced eDiscovery and data recovery challenges. We are continuously innovating to provide a more reliable, secure and seamless experience when tackling various “big data” volume, velocity, and veracity challenges. A key example of our purpose-built innovation is Nebula, our flagship, end-to-end artificial intelligence/machine learning, or AI/ML, powered solution that serves as a singular platform of engagement for legal data.

Key factors affecting our performance

Our operating results, financial performance and future growth will depend on a variety of factors, including, among others, maintaining our history of product innovation, increasing adoption of Nebula, maintaining and growing our client base while driving greater penetration, growth in the number of our matters, particularly large matters and establishing our partner channel for Nebula. Some of the more important factors are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021~~2022 as filed with the SEC on March ~~17, 2022~~16, 2023 (our “Annual Report”), as supplemented by the additional discussion below. ~~In addition, as discussed below,~~

Key business metrics

The following are among the ~~COVID-19 pandemic has impacted our operating results.~~

~~Keybusinessmetrics~~

~~The followingareamongthe~~key operationaland financialmetricswe use to measure and evaluate our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.

~~and evaluate~~

~~our performance,identifytrendsaffectingour business,formulatebusinessplans,and makestrategicdecisions.~~

Clients

We have a strongtrackrecordof growing our clientbase,and we believethatour abilityto increasethenumber of clientsutilizingour LegalTechnologysolutions,includingNebula, isan importantindicatorof our market penetration,our businessgrowth, and our future opportunities.

~~opportunities.~~

We defineLegalTechnologyclientsas eachprimarylaw firmand corporationto which we providedservicesin a litigationmatterthatwe billedduringthepasttwo years.We defineNebula clients,eachof which isincludedin thenumberof LegalTechnologyclients,as thetotalnumberof primarylaw firm,corporation,insurance companyand serviceprovider clients to which we providedlegaltechnologysolutionsfora matterthatwe billedforuse of our Nebula solution during the two years prior to the applicable date.

~~duringthetwo yearspriorto theapplicabledate.~~

The followingtablesetsforththenumberof LegalTechnologyclientsand Nebula clientsas of the dates shown:

~~dates~~


	March 31,
	2023		2022
Legal Technology clients		6,091		5,563
Nebula clients		1,718		1,293

~~shown:~~

March 31,

2022

2021

Legal Technology clients

5,563

5,294

Nebula clients

1,293

988

Number and sizeof matters

We believeour abilityto continuouslygrow thenumberof matterson our platformovertimeisan important measureof scaleforour businessand isindicativeof our future growth prospects.

~~growth prospects.~~

We defineLegalTechnologymattersas thetotalnumberof matterson which our LegalTechnologysolutions were used in thetwelvemonthsprecedingtheapplicabledate.Mattersreferto a rangeof activitiesthatinclude collecting,tracking,analyzing,and exchangingrelevantdata.LegalTechnologysolutionscurrentlydrivethe majorityof our revenue,and providethefoundationforadditionaladoptionof our proprietarytechnology solutionsand otherofferings. We defineNebula matters,which areincludedin thenumberof LegalTechnologymatters,as thetotalnumberof matterson which our Nebula solutionwas used in thetwelvemonthsprecedingtheapplicabledate.Nebula isour ecosystemof proprietarytechnologysolutionsthatenablesclientsto collect,process,store,analyze,and govern theirdataon a singleplatform.Nebula comprisesa steadilygrowing componentof our revenueand we expect Nebula adoptionto increaseand thenumberof Nebula mattersto grow in thelong termas we continueto introducenew productcapabilitiesand cross-sellNebula to our existing clients.

~~clients.~~

The followingtablesetsforththenumberof LegalTechnologymattersand Nebula mattersas of the dates shown:

~~dates shown:~~


	March 31,
	2023		2022
Legal Technology matters		8,078		7,877
Nebula matters		1,231		1,009

March 31,

2022

2021

Legal Technology matters

7,877

7,660

Nebula matters

1,009

817

Our comprehensiveproductofferings,technology-enabledserviceofferingsand reputationas a trustedpartnerto our clientsenableus to capturemattersof largesizeand complexity.~~During~~ For thethree months ended March 31, 2023 and 2022, 48% and ~~2021, respectively,~~ 48%~~, and 40%~~ of Legal Technologyrevenue, respectively, was producedby mattersthatgeneratedrevenuesof greaterthan~~$500,000,~~ $500,000, and ~~79%~~78% and ~~74%~~79% of our Legal Technology revenue, respectively, was produced by matters that generated revenues of greater than $100,000 duringthe relevant period.~~period.~~

Legal Technology net revenue retention~~retention~~

We calculateour LegalTechnologynetrevenueretentionrateby dividing(1)totalLegalTechnologyrevenuein the~~twelve-month~~ twelve-month periodfromaccountsthatgeneratedLegalTechnologyrevenueduringthecorresponding immediatelyprecedingtwelvemonthperiodby (2)totalLegalTechnologyrevenuein theimmediatelypreceding twelvemonthperiodgeneratedfromthosesameaccounts.Our LegalTechnologynetrevenueretentionrate includesrevenuefromuse of Nebula.

Twelve Months Ended March 31,

2022

2021

Legal Technology net revenue retention

109%

84%


	Twelve Months Ended March 31,
	2023	2022
Legal Technology net revenue retention	95%	109%

For thethree months ended March 31, ~~2022~~2023 and ~~2021,~~2022, our LegalTechnologyrevenuewas $82.0 million and $72.4 million, ~~and 63.7 million,~~respectively,and our datarecoveryrevenuewas $8.7 million and $9.5 million, ~~and $11.7 million,~~ respectively.

Our LegalTechnologynetrevenueretentionrateisimpactedby our usage-basedpricingmodel,and revenue couldfluctuatein any givenperioddue to frequencyof matters,clientupsell,cross-sell,and churn.~~During 2020~~ We believe global macroeconomic challenges, including inflation and ~~2021,~~ the~~COVID-19pandemicimpactedour LegalTechnologynet~~ war in Ukraine, had a significant adverse impact on the Company and the overall market in 2022. Large jobs were delayed and significant revenue~~retentionrate,~~ opportunities that we typically rely on were not as it~~impacted~~abundant as we expected. Our revenues increased during the~~rest~~ first quarter of ~~our business,~~this year as ~~certainaccountsexperienceda slowdown~~we saw an uptick in ~~thenumberand frequencyof matters.~~large jobs. In thelong-term, we planto increaseour netrevenueretentionrateby increasingthenumberof solutionsthatwe sellon a subscription-basis,as wellas broadeningthescopeof our Nebula offerings,to promotestrongproductadoption. As we expand our productsbeyond eDiscoveryto otherinformationgovernancesolutionssuch as big data hostingand processing,includingthroughNebula, we expectclientsto leverageour technologyearlierin thedata lifecycle,providingfurtheropportunityforus to increaseour productand servicepenetrationand clientretention. Furthermore,we planto establishand broadenour channelpartnershipsovertimeand leveragethesestrong relationshipsto furtherour awarenessof our productsand overall usage within the industry.~~usagewithintheindustry.~~

KEY COMPONENTS OF OUR RESULTS OF OPERATIONS

Revenue

~~Revenue~~

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

(1)

(2)

Data recovery solutions, which provides data restoration, data erasure and data management services.

The Company generates the majority of its revenues by providing Legal Technology solutions to our clients. Most of the Company’s eDiscovery contracts are time and materials types of arrangements, while others are subscription-based, fixed-fee arrangements.

Time and materials arrangements are based on units of data stored or processed. Unit-based revenues are recognized as services are provided, based on either the amount of data stored or processed, the number of concurrent users accessing the information or the number of pages or images processed for a client, at agreed upon per unit rates. The Company recognizes revenues for these arrangements utilizing a right-to-invoice practical expedient because it has a contractual right to consideration for services completed to date.

Certain of the Company’s eDiscovery contracts are subscription-based, fixed fee arrangements, which have tiered pricing based on the quantity of data hosted. For a fixed monthly fee, the Company’s clients receive a variety of optional eDiscovery solutions, which are included in addition to the data hosting. The Company recognizes revenues for these arrangements based on predetermined monthly fees as determined in its contractual agreements, utilizing a right-to-invoice practical expedient because the Company has a contractual right to consideration for services completed to date.

Other eDiscovery agreements are time and material arrangements that require the client to pay us based on the number of hours worked at contractually agreed-upon rates. The Company recognizes revenues for these arrangements based on hours incurred and contracted rates utilizing a right-to-invoice practical expedient because it has a contractual right to consideration for services completed to date.

Data recovery engagements are mainly fixed fee arrangements requiring the client to pay a pre-established fee in exchange for the successful completion of such engagement on a predetermined device. For the recovery performed by the Company’s technicians, the revenue is recognized at a point in time, when the recovered data is sent to the customer.

Data erasure engagements are also fixed fee arrangements for which revenue is recognized at a point in time when the certificate of erasure is sent to the customer.

For the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, our Legal Technology revenue was ~~$72.4~~$82.0 million and ~~63.7~~$72.4 million, respectively, and our data recovery revenue was ~~$9.5~~$8.7 million and ~~$11.7~~$9.5 million, respectively. For the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, Legal Technology revenue from our technology solutions other than Nebula was ~~$66.2~~$73.8 million and ~~$58.3~~$66.2 million respectively, and revenue from ~~for~~ Nebula was $8.2 million and $6.1 million, ~~and $5.4 million,~~ respectively. Additionally, we generally have longstanding relationships with our clients and for the three months ended March 31, 2022 and 2021, no single client accounted for more than ten percent of our revenues.

We currently expect non-Nebula Legal Technology revenues to remain relatively consistent over time and that Nebula revenue will continue to accelerate, with Nebula growing as a larger percentage of the mix of total revenue over time.

Cost of Revenues

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

Operating expenses

Our operating expenses consist of research and development, sales and marketing, general and administrative and amortization and depreciation expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, share-based compensation and sales commissions. Operating expenses also include occupancy, software expense and professional services. We intend to continue to increase our investment in research and development to further develop our proprietary technology and support further penetration and adoption of our ~~offering,~~offerings, including our end-to-end Nebula platform, including through hiring additional personnel. We expect these investments to cause research and development expense to slightly increase ~~in 2022 versus 2021, and thereafter anticipate research and development expense normalizing~~over the prior year, while staying fairly consistent as a percentage of ~~revenues.~~ revenue in 2023 and thereafter. We ~~also intend to significantly increase our investment in~~expect sales and marketing ~~through~~expense to decline in the ~~end~~next year as we realize the full year benefits of ~~2022~~the optimization of data recovery personnel as we unified our inbound and business development teams. The optimization of personnel combined with anticipated increased revenue will result in ~~connection with an expected increase in headcount. The anticipated long-term benefits from these investments are expected to increase revenues, which is also expected to~~ slightly ~~decrease~~decreasing sales and marketing expense as a percentage of revenue ~~over time.~~in the next year and normalizing as a percentage of revenues thereafter. We also expect general and administrative expense to decrease ~~slightly~~in the next year due to savings associated with the consolidation of our real estate footprint, as well as vacated lease costs and public offering costs that are not expected to recur in 2023. General and administrative expense as a percentage of revenue is expected to decline over time due to our ability to scale as revenues increase and as a result of historical cost-cutting measures.

Interest Expense

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

Income Tax ~~(Benefit)~~ Provision

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

Non-U.S. GAAP Financial Measures

We prepare financial statements in accordance with U.S. GAAP. We also disclose and discuss other non-U.S. GAAP financial measures such as EBITDA and adjusted EBITDA. Our management believes that these measures are relevant and provide useful supplemental information to investors by providing a baseline for evaluating and comparing our operating performance against that of other companies in our industry.

Our management believes EBITDA and Adjusted EBITDA reflect our ongoing operating performance because the isolation of non-cash charges, such as amortization and depreciation, and other items, such as interest, income taxes, equity compensation, acquisition and transaction costs, restructuring costs, ~~and~~ systems establishment costs and costs associated with strategic initiatives which are incurred outside the ordinary course of our business, provides information about our cost structure and helps us to track our operating progress. We encourage investors and potential investors to carefully review our U.S. GAAP financial measures and compare them with our EBITDA and

adjusted EBITDA. The non-U.S. GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies and in the future, we may disclose different non-U.S. GAAP financial measures in order to help our investors meaningfully evaluate and compare our results of operations to our previously reported results of operations or to those of other companies in our industry.

EBITDA and Adjusted EBITDA

We define EBITDA as net income (loss) plus interest (income) expense, income tax expense (benefit), extinguishment of debt, impairment losses, and depreciation and amortization. We view adjusted EBITDA as an operating performance measure and as such, we believe that the most directly comparable U.S. GAAP financial measure is net loss. In calculating adjusted EBITDA, we exclude from net loss certain items that we believe are not reflective of our ongoing business as the exclusion of these items allows

us to provide additional analysis of the financial components of the day-to-day operation of our business. We have outlined below the type and scope of these exclusions:

•

Acquisition, financing and transaction costs generally represent earn-out payments, rating agency fees and letter of credit and revolving facility fees, as well as professional service fees and direct expenses related to acquisitions and public offerings. Because we do not acquire businesses or effect financings on a regular or predictable cycle, we do not consider the amount of these costs to be a representative component of the day-to-day operating performance of our business.

•

Stock compensation and other primarily represent portions of compensation paid to our employees and executives through stock-based instruments. Determining the fair value of the stock-based instruments involves a high degree of judgment and estimation and the expenses recorded may not align with the actual value realized upon the future exercise or termination of the related stock-based awards. Additionally, stock compensation is a non-cash expense. Therefore, we believe it is useful to exclude stock-based compensation to better understand the long-term performance of our core business.

•

Change in fair value of Private Warrants relates to changes in the fair market value of the Private Warrants issued in conjunction with the Business Combination. We do not consider the amount to be representative of a component of the day-to-day operating performance of our business.

•

Restructuring costs generally represent non-ordinary course costs incurred in connection with a change in a contract or a change in the makeup of our personnel often related to an acquisition, such as severance payments, recruiting fees and retention charges. We do not consider the amount of restructuring costs to be a representative component of the day-to-day operating performance of our business.

•

Systems establishment costs relate to non-ordinary course expenses incurred to develop our IT infrastructure, including system automation and enterprise resource planning system implementation. We do not consider the amount to be representative of a component of the day-to-day operating performance of our business.

•

Acquisition, financing and transaction costs generally represent earn-out payments, rating agency fees and letter of credit and revolving facility fees, as well as professional service fees and direct expenses related to acquisitions. 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.

•

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

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

•

our cash expenditures or future requirements for capital expenditures;

•

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

•

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

•

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

•

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

•

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

•

~~our cash expenditures or future requirements for capital expenditures;~~

•

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

•

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

•

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

•

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

•

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

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

RESULTS OF OPERATIONS

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

The COVID-19 pandemic continues to impact the global economy and cause significant macroeconomic uncertainty. The future impacts of the pandemic on the Company’s business are currently not estimable or determinable. As new variants of the virus emerge, infection rates vary across the countries in which we operate, and governmental authorities have continued to implement numerous and evolving measures to try to contain the spread of the virus, including travel bans and restrictions, masking recommendations and mandates, vaccine recommendations and mandates, limits on gatherings, quarantines, shelter-in-place orders and business shutdowns. We have taken proactive measures to protect the health and safety of our employees, customers, partners and suppliers, consistent with governmental guidelines.

~~The Company modified employee travel and work locations, and cancelled certain events, among other actions taken in response to the COVID-19 pandemic. During 2020,~~ the Company implemented a salary exchange program pursuant to which certain employees took a temporary reduction in salary through December 31, 2020 ranging from 2% to 20% in exchange for grants of an aggregate of 417,673 stock options and 211,207 RSUs. In December 2020, the Company extended the salary exchange program for the Company’s named executive officers and for the position of Vice-President and higher but did not issue any additional stock options or RSUs in connection with the salary exchange program. As of June 2021, the Company ended the salary exchange program. The Company will continue to actively monitor the situation and may reinstate certain of the measures described above or take further actions that alter its business operations, including actions as required by federal, state or local authorities or that it determines are in the best interests of its employees, customers, partners, suppliers and stockholders. Due to the evolving situation and the uncertainties as to the scope and duration of the COVID-19 pandemic, our business may be impacted in ways that we cannot predict.

On March 27, 2020, the President signed into U.S. federal law the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, to provide emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally support 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 $4.0 million of payroll taxes due in 2020, of which $2.0 million was paid in December 2021 and $2.0 is expected to be paid in December 2022.~~

For the three months ended March 31, ~~2022~~2023 compared with the three months ended March 31, ~~2021~~2022

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

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


	For the Three Months Ended March 31,						For the Three Months Ended March 31,
(in millions)	2022			2021			2023			2022

Revenues	$	81.9		$	75.4		$	90.7		$	81.9
Cost of revenues		43.3			37.4			43.6			43.3
Gross profit		38.6			38.0			47.1			38.6
Operating expenses		35.4			34.7			35.7			35.4
Income from operations		3.2			3.3			11.4			3.2
Interest expense		12.7			12.3			15.8			12.7
Change in fair value of Private Warrants		(0.2	)		(2.0	)		(0.2	)		(0.2	)
Loss on debt extinguishment		—			7.2
Loss before income taxes		(9.2	)		(14.2	)		(4.2	)		(9.2	)
Income tax provision		0.4			0.6			0.3			0.4
Net loss		(9.6	)		(14.8	)		(4.5	)		(9.6	)
Total other comprehensive income, net of tax		(2.1	)		(2.5	)
Total other comprehensive income (loss), net of tax								0.8			(2.1	)
Comprehensive loss		(11.7	)		(17.3	)		(3.7	)		(11.7	)

Adjusted EBITDA


	For the Three Months Ended March 31,
(in millions)	2023			2022
Net Loss	$	(4.5	)	$	(9.6	)
Interest expense		15.8			12.7
Income tax provision		0.3			0.4
Depreciation and amortization expense		6.6			7.8
EBITDA (1)	$	18.2		$	11.3
Acquisition, financing and transaction costs		1.8			1.4
Stock compensation and other		0.8			1.1
Change in fair value of Private Warrants		(0.2	)		(0.2	)
Restructuring costs		0.1			0.1
Systems establishment costs		0.2			0.4
Adjusted EBITDA (1)	$	20.9		$	14.1

_______________________________

For the Three Months Ended March 31,

(in millions)

2022

2021

Net Loss

$
(9.6
)

$
(14.8
)
Interest expense

12.7

12.3

Income tax provision

0.4

0.6

Extinguishment of debt

-

7.2

Depreciation and amortization expense

7.8

9.8

EBITDA (1)

$
11.3

$
15.1

Acquisition, financing and transaction costs

1.4

0.8

Stock compensation and other

1.1

1.0

Change in fair value of Private Warrants

(0.2
)

(2.0
)
Restructuring costs

0.1

0.1

Systems establishment

0.4

0.4

Adjusted EBITDA (1)

$
14.1

$
15.4

(1)

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

~~Revenues~~22

Revenues

Revenues increased by ~~$6.5~~$8.8 million, or ~~8.6%~~10.7%, to $90.7 million for the three months ended March 31, 2023 as compared to $81.9 million for the three months ended March 31, ~~2022 as compared to $75.5 million for the three months ended March 31, 2021.~~2022. This ~~increase~~ is due to an increase in Legal Technology revenue of ~~$8.6~~$9.6 million resulting from an increase of ~~$7.9~~$7.6 million from our technology solutions other than Nebula and an increase of ~~$0.7~~$2.0 million from Nebula due to higher volume, partially offset by a decrease in data recovery revenue of ~~$2.2 million. The increase in Legal Technology revenue is due to~~$0.9 million as a ~~higher~~result of a lower volume of ~~litigation.~~large jobs.

Cost of Revenues

Cost of revenues increased by ~~$5.9~~$0.3 million, or ~~15.8%~~0.7%, to $43.6 million for the three months ended March 31, 2023 as compared to $43.3 million for the three months ended March 31, ~~2022 as compared to $37.4 million for the three months ended March 31, 2021.~~2022. This increase is primarily due to increased ~~wages~~software expense of approximately ~~$4.1~~$0.8 million ~~for document reviewers~~and increased personnel expenses of $0.6 million due to increased bonuses and managed review ~~revenue, increased software costs~~wages, partially offset by decreased amortization of ~~$0.5~~$1.2 million ~~and increased payroll taxes of $0.3 million. In addition, amortization expense increased by $0.4 million as internally developed software intangible assets were placed into service.~~associated with acquired intangibles that have fully amortized. As a percentage of revenue, our cost of revenues for the three months ended March 31, ~~2022 increased~~2023 decreased to ~~52.9%~~48.1% as compared to ~~49.6%~~52.9% for the three months ended March 31, ~~2021,~~2022, and was primarily due to the ~~factors noted above.~~higher revenue combined with the decrease in amortization expense.

Gross Profit

Gross profit increased by ~~$0.6~~$8.5 million, or ~~1.6%~~22.0%, to $47.1 million for the three months ended March 31, 2023 as compared to $38.6 million for the three months ended March 31, ~~2022 as compared to $38.0 million for the three months ended March 31, 2021.~~2022. Gross profit increased primarily due to the factors noted above. As a percentage of revenue, our gross profit for the three months ended March 31, ~~2022 decreased~~2023 increased to ~~47.1%~~51.9% as compared to ~~49.6%~~47.1% for the three months ended March 31, ~~2021,~~2022, and was due to the increase in revenue noted above that was greater in percentage than the comparable increase in cost of ~~revenues increases noted above.~~revenues.

Operating Expenses

Operating expenses increased by ~~$0.7~~$0.3 million, or ~~2.0%~~0.8%, to $35.7 million for the three months ended March 31, 2023 as compared to $35.4 million for the three months ended March 31, ~~2022 as compared to $34.7 million for the three months ended March 31, 2021.~~2022. This increase is primarily the result of ana $1.0 million increase in wages of $1.1 million due to increased development headcount, an increase of $0.7 million in vacated lease costs, increased commissions of $0.6 million, increased payroll benefits of $0.2 million, an increase in contract labor costs of $0.2 million, an increase in marketing costs of $0.2 million, an increase of $0.1 million for recruiting, an increase of $0.1 million in software expense, and an increase of $0.1 million in travel expense. These increases wereprofessional services, partially offset by a ~~$2.7~~$0.4 million decrease in ~~depreciation~~occupancy expense due to the consolidation of our real estate footprint and ~~amortization expense.~~a $0.3 million decrease in marketing costs primarily associated with the optimization of our digital marketing program. As a percentage of revenue, our operating expenses for the three months ended March 31, ~~2022~~2023 decreased to ~~43.2%~~39.4% as compared to ~~46.0%~~43.2% for three months ended March 31, ~~2021.~~2022.

Interest Expense

Interest expense increased by ~~$0.4~~$3.1 million, or ~~3.3%~~24.4%, to $15.8 million for the three months ended March 31, 2023 as compared to $12.7 million for the three months ended March 31, ~~2022 as compared to $12.3 million for the three months ended March 31, 2021. This~~2022. The increase is primarily due to an increase in ~~outstanding~~the variable interest rate on borrowings under the Amended 2021 Credit Agreement, which resulted in a $2.7 million increase in expense, and an increase in the debt ~~partially offset by lower interest rates on the refinanced First Lien Facility (as defined below)~~balance due to the ~~refinancing discussed below~~quarterly accruals of Paid in Kind ("PIK") interest on the ~~Liquidity and Capital Resources section.~~Convertible Debentures issued by the Company, which resulted in a $0.2 million increase in interest expense.

~~Loss on Debt Extinguishment~~

~~For thethree months ended March 31, 2021, we incurreda losson debtextinguishmentof $7.2 millionin connectionwith theretirementof thefirst lien facility and the revolving creditfacility under the credit agreement entered into in 2016.There were no such losses in the three months ended March 31, 2022.~~

Change in Fair Value of Private Warrants

During the first quarter of 2021, the Company determined that its Private Warrants, which had historically been accounted for as a component of equity, should be reclassified and recorded as a liability at fair value during each reporting period. For the three months ended March 31, ~~2022 and 2021, we~~2023 the Company recorded ~~an adjustment~~a gain to the Private Warrants liability of $0.2 million and ~~$2.0 million, respectively.~~for the three months ended March 31, 2022 the Company recorded a loss of $0.2 million.

Income Tax Provision

During the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, the Company recorded an income tax ~~provisions~~provision of ~~$0.4~~$0.3 million and ~~$0.6~~$0.4 million, respectively, resulting in an effective tax rate of ~~(4.3)~~(7.1)% and ~~(4.2)~~(4.3)%, 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, ~~2022~~2023 decreased from the three months ended March 31, ~~2021~~2022 primarily due to a change in the allocation of our pre-tax earnings and losses among countries with differing statutory tax rates.

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

Net Loss

Net loss for the three months ended March 31, ~~2022~~2023 was ~~$(9.6)~~$(4.5) million compared to ~~$(14.8)~~$(9.6) million for the three months ended March 31, ~~2021.~~2022. Net loss decreased for the three months ended March 31, ~~2022~~2023 as compared to the three months ended March 31, ~~2021~~2022 due to the factors noted above.

Liquidity and Capital Resources

Our primary cash needs are and have been to meet debt service requirements and to fund working capital and capital expenditures. We fund these requirements from cash generated by our operations, as well as funds available under our revolving credit facility discussed below. We may also seek to access the capital markets opportunistically from time-to-time depending on, among other things, financial market conditions. Although our eDiscovery solutions and information archiving services are billed on a monthly basis in arrears with amounts typically due within 30 to 45 days, the eDiscovery industry tends towards longer collectability trends. As a result, we have typically collected the majority of our eDiscovery accounts receivable within 90 to 120 days, which is consistent within the industry. With respect to our data recovery services, they are billed as the services are provided, with payments due within 30 days of billing. We typically collect our data recovery services accounts receivables within 30 to 45 days. Lastly, the majority of our data recovery software is billed monthly in advance with amounts typically due within 30 to 45 days; however, depending on the client contract, billing can occur annually, quarterly or monthly. Long outstanding receivables are not uncommon due to the nature of our Legal Technology services as litigation cases can continue for years, and in certain instances, our collections are delayed until the customer has received payment for their services in connection with a legal matter or the case has been settled. These long-outstanding invoices are a function of the industry in which we operate, rather than indicative of an inability to collect. We have experienced no material seasonality trends as it relates to collection of our accounts receivable. As of March 31, ~~2022,~~2023, we had ~~$38.4~~$26.3 million in cash compared to ~~$46.5~~$32.6 million as of December 31, ~~2021. As of March 31, 2022, we had $510.3 million of outstanding borrowings compared to $507.7 million as of December 31, 2021.~~2022. We expect to finance our operations inover the ~~short- and long-term,~~next 12 months primarily through existing cash balances and cash flow from operating activities.

Our Debentures mature in December 2024 and our Initial Term Loans and Revolving Credit Loans mature on February 8, 2026, unless the Debentures are outstanding six months prior to the December 19, 2024 maturity date thereof, in which case the loans outstanding under the Amended 2021 Credit Agreement mature on June 19, 2024. Our ability to refinance and/or replace our outstanding debt securities and credit facilities on acceptable terms, or at all, will depend on, among other things, our financial performance and credit ratings, general economic factors, including inflation and then-current interest rates, the condition of the credit and capital markets and other events, some of which may be beyond our control.

Amended 2021 Credit Agreement

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

The Amended 2021 Credit Agreement provides for (i) initial term loans in an aggregate principal amount of $300 million, ~~(the “Initial~~or the Initial Term ~~Loans”),~~Loans, (ii) delayed draw term loans in an aggregate principal amount of $50 million, ~~(the “Delayed~~or the Delayed Draw Term ~~Loans”),~~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~~or the Revolving Credit ~~Loans”).~~Loans. The Delayed Draw Term Loans ~~are~~were available to the Loan Parties at any time prior to February 8, 2023, subject to certain conditions. As of March 31, 2023, there were no outstanding Delayed Draw Term Loans.

The Initial Term Loans bear, and while they were available, the Delayed Draw Term Loans ~~bear~~bore, interest, at the Loan Parties’ option, at the rate of (x) with respect to ~~Eurocurrency~~SOFR Rate Loans, ~~(as defined in the 2021 Credit Agreement),~~ the Adjusted ~~Eurocurrency~~SOFR Rate ~~(as defined in the 2021 Credit Agreement)~~ with a ~~1.0%~~1.00% floor, plus 6.50% per annum, plus the Term SOFR Adjustment of 0.10% 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.~~ annum, plus the Term SOFR Adjustment of 0.10%.

The Revolving Credit Loans bear interest, at our option, at the rate of (x) with respect to ~~Eurocurrency~~SOFR Rate Loans, the Adjusted ~~Eurocurrency~~SOFR Rate plus 4.00% per annum, or (y) with respect to Base Rate Loans, the Base Rate plus 3.00% per annum. The Initial Term Loans ~~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. On March 31, 2023, the balance due was $294.0 million with an interest rate of 4.89833% plus an Adjusted Term SOFR Rate of 6.60%.

Revolving Credit Loans

The Amended 2021 Credit Agreement also provides for ~~the Revolving Credit Loans pursuant to~~ an unfunded revolver commitment for borrowing up to $40.0 ~~million.~~million (the “Revolving Credit Loans”). As of March 31, ~~2022,~~2023, there was $39.4 million available capacity for borrowing under the revolving loan commitment due to the $0.6 million of letters of credit outstanding (See Note 98 – Commitments and ~~contingencies)~~Contingencies).

~~2016 Credit Agreement and Revolving Credit Facility~~

On December 9, 2016, certain subsidiaries of the Company entered into a credit agreement, or 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 loan borrowings of $340.0 million and the second lien facility of $125.0 million 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 initial term loan 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 $7.3 million during the three months ended March 31, 2021 in connection with the retirement of the first lien facility and the revolving credit facility.

Convertible Debentures

On December 19, 2019, the Company issued Convertible Debentures, which mature in 2024, in an aggregate principal amount of $200 ~~million.~~million (the “Debentures” or the “Convertible Debentures”). At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, the balance due under the Convertible Debentures was ~~$231.7~~$247.3 million and ~~$229.4~~$244.8 million, respectively.

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

At any time, upon notice as set forth in the Debentures, the Debentures ~~are~~will be redeemable at the Company’s option, in whole or in part, at a price equal to 100% of the principal amount of the Debentures redeemed, plus accrued and unpaid interest thereon.

The Debentures are convertible into shares of ~~Common Stock~~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. ~~We are seeking stockholder approval of the conversion of the Debentures into common stock at our 2022 Annual Meeting of Stockholders.~~ 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.

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, ~~2022,~~ 2023, the Company was in compliance with all Debenture covenants.

Cash Flows

Our net cash flows from operating, investing and financing activities for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022 were as follows:


(in thousands)	Three Months Ended March 31, 2022			Three Months Ended March 31, 2021			Three Months Ended March 31, 2023			Three Months Ended March 31, 2022
Net cash (used in) provided by:
Operating activities	$	(3,646	)	$	(2,815	)	$	(3,046	)	$	(3,646	)
Investing activities	$	(2,968	)	$	(3,088	)	$	(2,072	)	$	(2,968	)
Financing activities	$	(1,281	)	$	2,718		$	(1,283	)	$	(1,281	)
Effect of foreign exchange rates	$	(170	)	$	(208	)	$	117		$	(170	)
Net decrease in cash	$	(8,065	)	$	(3,393	)	$	(6,284	)	$	(8,065	)

Cash Flows Used in Operating Activities

Net cash used in operating activities was ~~$3.6~~$3.0 million ~~and $2.8~~compared to net cash used in operating activities of $3.6 million for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively. The ~~increase~~decrease in net cash used in operating activities is due to a ~~decrease in non-cash items~~decreased net loss of ~~$7.9~~$5.1 million, partially offset by a ~~higher net loss of $5.3 million and an increase~~decrease in cash ~~used for~~provided by working capital of ~~$1.8~~$3.2 million and decreased non-cash items of $1.3 million. The ~~increase~~decrease of $3.2 million in cash ~~used for~~provided by working capital ~~for the period~~ is primarily due to ~~an $8.9~~a $0.4 million ~~increase~~decrease in ~~cash used~~accounts receivable, a $2.3 million decrease in accounts payable and accrued expenses, ~~offset by $6.1~~a $0.8 million ~~increase~~decrease in ~~cash provided by accounts receivable driven by the increase in revenue, and a $1.1 million increase in cash used to settle outstanding~~ prepaid expenses and other assets, ~~including $0.7~~partially offset by a $0.3 million ~~reclassification of capitalized implementation costs related to cloud computing agreements after the implementation of ASU 2018-15.~~increase in deferred revenue. Accounts Receivable and Accounts ~~payable~~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 ~~$3.0~~$2.1 million for the three months ended March 31, ~~2022~~2023 as compared to net cash used in investing activities of ~~$3.1~~$3.0 million for the three months ended March 31, ~~2021.~~2022. The decrease in cash used is due to ~~$0.7~~a $0.9 million of capitalized implementation costs related to cloud computing agreements in the prior year that are classified in operating cash flows in the current year as a result of the implementation of ASU 2018-15, partially offset by a $0.6 million increasedecrease in purchases of property and equipment.

Cash Flows Used ~~in/Provided by~~in Financing Activities

For both the three months ended March 31, 2023 and March 31, 2022, net cash used in financing activities was $1.3 million related to the ~~payments~~repayments of long-term debt of $0.8 million and capital lease obligations of $0.5 million. For the three months ended March 31, 2021, net cash provided by financing activities was $2.7 million and included 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.

Capital Resources and Material Cash Requirements

A summary of our capital resources and material cash requirements is presented in Part II, Item 7 of our Annual Report. Other than as described above, there were no material changes to our capital resources and material cash requirements during the three months ended March 31, ~~2022.~~2023.

Recent Accounting Pronouncements

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

Critical Accounting Policies and Estimates

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

We are subject to interest rate market risk in connection with our long-term indebtedness. Our principal interest rate exposure relates to outstanding amounts under the Amended 2021 Credit Agreement $300 million Initial Term Loans and the Revolving Credit Loans of up to $40 ~~million and the Delayed Draw Term Loans of $50~~ million. Interest rate changes may impact the amount of our interest payments and, therefore, our future net income and cash flows, assuming other factors are held constant. Assuming the amounts outstanding at March 31, ~~2022~~2023 are fully drawn, each one-eighth percentage point increase or decrease in the applicable interest rates would correspondingly change our annualized interest expense by approximately $0.4 million. We do not currently hedge our interest rate exposure.

Exchange Rate Risk

Results of operations for our non-U.S. subsidiaries are translated from the designated functional currency to the reporting currency of the U.S. dollar. Revenues and expenses are translated at average exchange rates for each month, while assets and liabilities are translated at balance sheet date exchange rates. The resulting net translation adjustments are recorded as a component of stockholders’ equity in “Accumulated other comprehensive (loss) income” in our Condensed Consolidated Balance Sheets included elsewhere in this Quarterly Report on Form 10-Q.

Transaction gains and losses arising from currency exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in “Other expense” in our ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~comprehensive loss~~ 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, ~~2022~~2023 and ~~2021,~~2022, we generated the equivalent of ~~$14.1~~ $12.6million and ~~$15.0~~$14.1 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~~three month period would have correspondingly changed our revenues by approximately $0.1 million and $0.1 million for each of the three months ended March 31, ~~2022~~2023 and ~~2021.~~2022.

We do not currently hedge our exchange rate exposure.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures

We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act, that are designed to ~~provide reasonable assurance~~ensure that information required to be ~~timely~~disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, ~~in a~~including our principal executive and principal financial officers, as appropriate to allow timely fashion. We recognize that the effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. In addition, projections of any evaluation of effectiveness in future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management is necessarilydecisions regarding required ~~to use judgment in evaluating the effectiveness of our controls and procedures and the information disclosed to management thereunder.~~disclosure.

~~In the ordinary course of business, our~~Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, ~~periodically reviews and evaluates~~has evaluated the effectiveness of ~~our internal control over financial reporting and makes changes, if appropriate, to~~ our disclosure controls and procedures ~~to improve such controls~~(as defined in Rules 13a-15(e) and ~~increase efficiency, seeking to ensure that we maintain an effective internal control environment. An evaluation of~~15d-15(e) under the ~~effectiveness of the design and operation of our disclosure controls and procedures~~Exchange Act ), as of the end of the period covered by this ~~report was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer.~~Form 10-Q. Based ~~upon that~~on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, ~~2022,~~2023, our disclosure controls and procedures ~~are~~were effective to provide reasonable assurance that the information required to be disclosed by us in this Form 10-Q was (a) reported within the ~~Company in the reports that it files or submits under the Exchange Act is accumulated~~time periods specified by SEC rules and ~~reported~~regulations and (b) communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding any required ~~disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC.~~disclosure.

Changes in internal control over financial reporting

There ~~has been~~were no ~~change~~changes in ~~the Company’s~~our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act during the ~~most recently completed fiscal~~ quarter ended March 31, 2023 that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Part I, Item 1A under the caption “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021,~~2022, which risks could materially and adversely affect our business, results of operations, financial condition and liquidity. No material changes in the risk factors discussed in such Form 10-K has occurred. Such risk factors do not identify all risks that we face because our business operations could also be affected by additional factors not presently known to us or that we currently consider to be immaterial to our operations. Our business operations could also be affected by additional factors that apply to all companies operating in the U.S. and globally.

Item 6. Exhibits.

Exhibits

Exhibit Index

a)Exhibit

Number

~~Exhibits~~

~~Exhibit Index~~

~~Exhibit~~ ~~Number~~		Description
3.1		Second Amended and Restated Certificate of Incorporation of KLDiscovery Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed December 26, 2019).
3.2		Amended and Restated Bylaws of KLDiscovery Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed December 26, 2019).
~~10.1 #~~10.1#		~~Third~~Fifth Amendment to the Software License Agreement dated as of January 1, ~~2022~~2023 by and between KLDiscovery Ontrack, LLC (successor-in-interest to LDiscovery LLC) and Relativity ODA LLC (incorporated by reference to Exhibit ~~10.24~~10.30 to the Annual Report on Form 10-K filed March ~~17, 2022)~~16, 2023).
10.2#		Sixth Amendment to the Software License Agreement dated as of January 5, 2023 by and between KLDiscovery Ontrack, LLC (successor-in-interest to LDiscovery LLC) and Relativity ODA LLC (incorporated by reference to Exhibit 10.31 to the Annual Report on Form 10-K filed March 16, 2023).
10.3#		Seventh Amendment to the Software License Agreement dated as of February 28, 2023 by and between KLDiscovery Ontrack, LLC (successor-in-interest to LDiscovery LLC) and Relativity ODA LLC (incorporated by reference to Exhibit 10.32 to the Annual Report on Form 10-K filed March 16, 2023).
10.4#		First Amendment to Credit Agreement, dated as of March 3, 2023, by and among KLDiscovery Holdings, Inc (f/k/a LD Lower Holdings Inc.), LD Topco Inc, and other guarantors party thereto, the Lenders party thereto, Ally Bank as a lender and L/C Issuer, and Wilmington Trust National Association, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.34 to the Annual Report on Form 10-K filed March 16, 2023).
31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101

*	~~Filed herewith.~~

**	~~Furnished herewith.~~

* Filed herewith.

** Furnished herewith.

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

SIGNATURES

~~Certain confidential information contained in this agreement has been omitted in reliance on Item 601(b)(10)(iv).~~

~~SIGNATURES~~

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


		KLDiscovery Inc.

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

Date: May ~~12, 2022~~11, 2023

3230

	December 31, 2021 & March 31, 2022

Expected volatility		27.00	%
Expected term (in years)		2.94
Risk free interest rate		0.96	%
Dividend yield		0.00	%
Exercise Price	$	11.50
Fair value of Common Stock	$	6.80

Balance at December 31, 2020	$	920
Private Warrants		3,810
Change in fair value of Private Warrants		(1,969	)
Change in fair value of contingent consideration		(275	)
Balance at December 31, 2021		2,486
Change in fair value of Private Warrants		(191	)
Change in fair value of contingent consideration		9
Balance at March 31, 2022	$	2,304

	Capital Leases			Operating Leases
2022 (9 months)	$	1,350		$	6,417
2023		1,057			8,032
2024		—			6,880
2025		—			3,457
2026		—			1,860
Thereafter		—			692
Total	$	2,407		$	27,338
Less interest on lease obligations		(138	)
		2,269
Less current portion		(1,452	)
Non-current portion	$	817

	March 31, 2022			December 31, 2021
Convertible Debenture notes		231,676			229,382
2021 Credit Agreement		297,000			297,750
Total debt		528,676			527,132
Less: unamortized original issue discount		(13,760	)		(14,700	)
Less: unamortized debt issuance costs		(1,615	)		(1,726	)
Total debt, net		513,301			510,706

Current portion of debt		3,000			3,000
Less: current portion of unamortized original issue discount		—			—
Less: current portion of unamortized debt issuance costs		—			—
Total current portion of debt, net		3,000			3,000
Total long-term debt, net	$	510,301		$	507,706