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~~ Yes ☒ NO 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~~ Yes ☒ NO 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.

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~~ Yes ☐ NO No ☒

As of May ~~13, 2021,~~12, 2022, there were ~~42,550,148~~42,701,216 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

	March 31, 2021			December 31, 2020			March 31, 2022			December 31, 2021
	(unaudited)						(unaudited)
Current assets
Cash and cash equivalents	$	47,808		$	51,201		$	38,403		$	46,468
Accounts receivable, net of allowance
for doubtful accounts of $9,015 and $8,513, respectively		83,617			83,985
for doubtful accounts of $8,573 and $9,774, respectively								98,950			93,273
Prepaid expenses		12,090			7,175			15,678			9,669
Other current assets		690			709			1,070			1,133
Total current assets		144,205			143,070			154,101			150,543
Property and equipment
Computer software and hardware		72,689			72,211			72,719			73,677
Leasehold improvements		26,821			27,271			26,564			26,796
Furniture, fixtures and other equipment		3,316			3,365			2,819			3,064
Accumulated depreciation		(79,480	)		(77,697	)		(82,066	)		(81,261	)
Property and equipment, net		23,346			25,150			20,036			22,276
Intangible assets, net		104,458			109,733			56,245			59,291
Goodwill		397,292			399,085			394,226			395,759
Other assets		3,051			2,708			8,395			8,535
Total assets	$	672,352		$	679,746		$	633,003		$	636,404
Current liabilities
Current portion of long-term debt, net	$	3,000		$	10,948		$	3,000		$	3,000
Accounts payable and accrued expense		32,109			33,504			32,828			27,067
Current portion of contingent consideration		714			695			655			646
Deferred revenue		2,498			3,955			3,497			4,800
Total current liabilities		38,321			49,102			39,980			35,513
Long-term debt, net		494,335			472,600			510,301			507,706
Deferred tax liabilities		7,677			7,335			6,957			6,772
Other liabilities		9,889			8,488			8,533			8,559
Total liabilities		550,222			537,525			565,771			558,550
Commitments and contingencies
Stockholders' equity
Common stock
$0.0001 par value, shares authorized - 200,000,000 shares authorized as of March 31, 2021 and December 31, 2020; shares issued and outstanding - 42,550,148 and 42,529,017 as of March 31, 2021 and December 31, 2020, respectively		4			4
$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
Preferred Stock
$0.0001 par value, 1,000,000 shares authorized, zero issued and outstanding as of March 31, 2021 and December 31, 2020		-			-
$0.0001 par value, 1,000,000 shares authorized, 0 issued and outstanding as of March 31, 2022 and December 31, 2021, respectively								—			—
Additional paid-in capital		382,614			385,387			387,126			386,028
Accumulated deficit		(270,280	)		(255,424	)		(325,547	)		(315,967	)
Accumulated other comprehensive income		9,792			12,254			5,649			7,789
Total stockholders' equity		122,130			142,221			67,232			77,854
Total liabilities and stockholders' equity	$	672,352		$	679,746		$	633,003		$	636,404

							Three Months Ended March 31, 2022			Three Months Ended March 31, 2021
	Three Months Ended March 31, 2021			Three Months Ended March 31, 2020
Revenues	$	75,450		$	78,271		$	81,898		$	75,450
Cost of revenues		37,422			39,520			43,272			37,422
Gross profit		38,028			38,751			38,626			38,028

Operating expenses
General and administrative		15,440			15,853			16,525			15,440
Research and development		2,171			1,667			3,068			2,171
Sales and marketing		9,457			11,645			10,844			9,457
Depreciation and amortization		7,641			8,916			4,914			7,641
Total operating expenses		34,709			38,081			35,351			34,709

Income from operations		3,319			670			3,275			3,319

Other (income) expenses
Other expenses
Other expense		14			28			—			14
Change in fair value of private warrants		(1,969	)		-
Change in fair value of Private Warrants								(191	)		(1,969	)
Interest expense		12,257			12,962			12,691			12,257
Loss on debt extinguishment		7,257			-			—			7,257
Loss before income taxes		(14,240	)		(12,320	)		(9,225	)		(14,240	)
Income tax provision		616			206			355			616

Net loss	$	(14,856	)	$	(12,526	)	$	(9,580	)	$	(14,856	)

Other comprehensive loss, net of tax
Foreign currency translation		(2,462	)		(4,428	)		(2,140	)		(2,462	)
Total other comprehensive loss, net of tax		(2,462	)		(4,428	)		(2,140	)		(2,462	)
Comprehensive loss	$	(17,318	)	$	(16,954	)	$	(11,720	)	$	(17,318	)

Net loss per share - basic and diluted	$	(0.35	)	$	(0.29	)	$	(0.22	)	$	(0.35	)

Weighted average shares outstanding - basic and diluted		42,532,915			42,529,017			42,686,216			42,532,915

Common Stock Issued

Additional
paid-in

Accumulated

Accumulated
other
comprehensive

Shares

Amount

capital

deficit

income

Total

Balance as of December 31, 2020

42,529,017

$
4

$
385,387

$
(255,424
)

$
12,254

$
142,221

Share-based compensation

-

-

1,003

-

-

1,003

Exercise of stock options

4,465

-

34

-

-

34

Stock issued in exchange for vested units

16,666

-

-

-

-

-

Warrants (See Note 2)

-

-

(3,810
)

-

-

(3,810
)
Foreign exchange translation

-

-

-

(2,462
)

(2,462
)
Net loss

-

-

-

(14,856
)

-

(14,856
)
Balance as of March 31, 2021

42,550,148

4

382,614

(270,280
)

9,792

122,130

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

Common Stock Issued

Additional
paid-in

Accumulated

Accumulated
other
comprehensive

Shares

Amount

capital

deficit

income

Total

Balance as of December 31, 2019

42,529,017

$
4

$
381,952

$
(205,498
)

$
7,307

$
183,765

Share-based compensation

-

-

825

-

-

825

Foreign exchange translation

-

-

-

-

(4,428
)

(4,428
)
Net loss

-

-

-

(12,526
)

-

(12,526
)
Balance as of March 31, 2020

42,529,017

$
4

$
382,777

$
(218,024
)

$
2,879

$
167,636

	Three Months Ended March 31, 2021			Three Months Ended March 31, 2020			Three Months Ended March 31, 2022			Three Months Ended March 31, 2021
Operating activities
Net loss	$	(14,856	)	$	(12,526	)	$	(9,580	)	$	(14,856	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		9,816			11,837			7,850			9,816
Non-cash interest		4,815			4,507			4,860			4,815
Loss on extinguishment of debt		7,257			-			—			7,257
Stock-based compensation		978			825			1,062			978
Provision for losses on accounts receivable		972			784			827			972
Deferred income taxes		342			112			185			342
Change in fair value of contingent consideration		19			29			9			19
Change in fair value of private warrants		(1,969	)		-
Change in fair value of Private Warrants								(191	)		(1,969	)
Changes in operating assets and liabilities:
Accounts receivable		(680	)		(7,487	)		(6,822	)		(680	)
Prepaid expenses and other assets		(5,087	)		(8,151	)		(6,190	)		(5,087	)
Accounts payable and accrued expenses		(2,986	)		(588	)		5,631			(2,986	)
Deferred revenue		(1,436	)		(1,298	)		(1,287	)		(1,436	)

Net cash used in operating activities		(2,815	)		(11,956	)		(3,646	)		(2,815	)
Investing activities
Acquisitions, net of cash acquired		-			(2,334	)
Purchases of property and equipment		(3,088	)		(2,767	)		(2,968	)		(3,088	)
Net cash used in investing activities		(3,088	)		(5,101	)		(2,968	)		(3,088	)
Financing activities
Issuance of common stock		34			-
Revolving credit facility - draws		-			29,000
Proceeds for exercise of stock options								—			34
Payments for capital lease obligations		(285	)		(224	)		(531	)		(285	)
Debt issuance costs		(2,031	)		-
Proceeds from long-term debt, net of original issue discount		294,000			-
Debt acquisition costs								—			(2,031	)
Proceeds long-term debt, net of original issue discount								—			294,000
Retirement of debt		(289,000	)		-			—			(289,000	)
Payments on long-term debt		-			(4,250	)		(750	)		—
Net cash provided by financing activities		2,718			24,526
Net cash (used in) provided by financing activities								(1,281	)		2,718
Effect of foreign exchange rates		(208	)		(265	)		(170	)		(208	)
Net (decrease) increase in cash		(3,393	)		7,204
Net decrease in cash								(8,065	)		(3,393	)
Cash at beginning of period		51,201			43,407			46,468			51,201
Cash at end of period	$	47,808		$	50,611		$	38,403		$	47,808
Supplemental disclosure:
Cash paid for interest	$	12,232		$	8,704		$	7,876		$	12,232
Income tax refunds	$	(591	)	$	(266	)
Net income taxes paid (refunded)							$	60		$	(591	)
Significant non-cash investing and financing activities
Purchases of property and equipment in accounts payable and accrued expenses on the consolidated balance sheets	$	682		$	931
Purchases of property and equipment in accounts payable and accrued expenses on the condensed consolidated balance sheets							$	1		$	682

For the ~~Three Months~~three months ended March 31, ~~2021~~2022 and ~~2020~~2021

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

KLDiscovery Inc. (the ~~“Company”~~“Company,” “we” or “us”) ~~provides technology-based litigation support~~is a leading global provider of eDiscovery, information governance and data recovery solutions ~~and services including computer e-discovery, data hosting, and managed review, predominantly~~ to ~~top~~corporations, law firms, ~~corporations~~insurance companies and ~~government agencies.~~individuals in 19 countries around the world. We provide technology solutionsto helpour clientssolvecomplexdatachallenges. The ~~majority of the~~ Company’s ~~current business is derived from these services. The Company’s~~ headquarters is arelocatedin McLean, ~~Virginia and~~Virginia.The Company has 3331 locations in 1819 countries, as well as 9 data centers and 1817 data recovery labs ~~around the globe.~~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.

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 of its subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation.

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

~~As a result of LD Topco, Inc. being the accounting acquirer,~~ the financial ~~reports~~and risk factor information included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which we previously filed with the Securities and Exchange Commission by the Company subsequent to the Business Combination are prepared “as if” LD Topco, Inc. is the predecessor and legal successor to the Company. The historical operations of LD Topco, Inc. are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of LD Topco, Inc. prior to the Business Combination; (ii) the combined results of the Company and LD Topco, Inc. following the Business Combination on December 19, 2019 (the ~~“Closing Date”~~“SEC”); (iii) the assets and liabilities of LD Topco, Inc. at their historical cost; and (iv) KLDiscovery Inc.’s equity structure for all periods presented. The recapitalization of the number of shares of common stock attributable to the purchase of LD Topco, Inc. in connection with the Business Combination is reflected retroactively to January 1, 2018 and will be utilized for calculating earnings per share in all prior periods presented. No step-up basis of intangible assets or goodwill was recorded in the Business Combination transaction consistent with the treatment of the transaction as a reverse capitalization of LD Topco, Inc..

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,~~Private Warrants (as defined in Note 3), the recoverability and useful lives of property and equipment, intangible assets, and other long-lived assets, the ~~impairment~~evaluation of goodwill for impairment, the valuation and realization of deferred income taxes, the fair value of the Company’s common stock, ~~and~~$0.0001 par value per share (the “Common Stock”), stock option awards, and acquisition-related contingent consideration.

The Company operates in ~~one~~1 business segment, providing technology-based litigation support solutions and services.

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

With respect to accounts receivable, the Company performs ongoing evaluations of its customers, generally grants uncollateralized credit terms to its customers, and maintains an allowance for doubtful accounts based on historical experience and management’s expectations of future losses. As of and for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, the Company did ~~not~~0t have a single customer that ~~represented~~represents ten percent (10%) or more ~~than five percent (5%)~~ of its consolidated revenues or accounts receivable. The Company believes that the geographic and industry diversity of the Company’s customer base throughout the U.S. and internationally minimizes the risk of incurring material losses due to concentrations of credit risk.The Company’s foreign revenues, principally from businesses in the UK and Germany, totaled approximately $14.1 million and $14.9 million for the three months ended March 31, 2022 and 2021, respectively. The Company’s long-lived assets in foreign countries, principally in the UK and Germany, totaled approximately $25.4 million and $25.6 million for the three months ended March 31, 2022 and 2021, respectively.

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.

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 are recorded at the original invoice ~~amounts~~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. Accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded when received.

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

Gains or losses on disposals are included in results of operations at amounts equal to the difference between the net book value of the disposed assets and the proceeds received upon disposal. Costs for replacements and betterments are capitalized, while the costs of maintenance and repairs are expensed as incurred. Property under capital leases ~~are~~is depreciated using the straight-line method over the lease term.

Depreciation expense totaled ~~$2.9~~$2.4 million and ~~$4.3~~$2.9 million for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively, and includes amortization of assets recorded under capital leases.

The Company capitalizes certain internal computer software costs incurred during the application development stage. The application development stage generally includes software design and configuration, coding, testing and installation activities. Training and maintenance costs are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditure will result in additional functionality. Capitalized software costs are ~~depreciated~~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 ~~depreciation~~amortization costs are recorded as a component of cost of revenue.

Capitalized software costs are reflected as part of “Intangible assets, net” in the Company’s Condensed Consolidated Balance Sheets and totaled ~~$19.5~~$15.6 million and ~~$18.5~~$14.7 million, net of accumulated amortization, as of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, 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.

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 million and $6.9 million for the three months ended March 31, 2022 and 2021, respectively; $2.5 million and $2.2 million of which 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 represents the excess of the total consideration paid over identified intangible and tangible assets of the Company and its acquisitions. The Company tests its goodwill for impairment at the reporting unit level ~~annually~~on an annual basis on October 1, ~~each year,~~ and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. As of the October 1, ~~2020~~2021 testing date, the Company determined there is ~~one~~1 reporting unit.

The Company considered COVID-19 as an indicator of impairment to the value of goodwill and intangible assets and performed a qualitative assessment. Management considered factors that could be affected by COVID-19 such as impact to stock price, consequences of “stay-at-home” orders, impacts to competitors due to COVID-19, changes in demand, and updates to the Company forecasts among other factors. Management concluded that there was no impairment of goodwill and intangible assets during the three months ended March 31, ~~2021.~~2022.

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 isare 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 ~~the~~ revolving ~~credit facility~~and unfunded term debt are presented in ~~“Other current assets” in~~ the ~~Company’s~~Condensed Consolidated Balance ~~Sheets.~~Sheets within “Other assets.”

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

The Company evaluates its revenue contracts with customers based on the five-step model under ~~ASC 606:~~Accounting Standard 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 Legal Technology services to our clients through several technology solutions including Nebula Ecosystem (“Nebula”) our internally developed end-to-end fully integrated proprietary solution. We also provide Data Recovery solutions.

The following table summarizes revenue from contracts with customers for the three months ended March 31, ~~2021 and 2020~~2022 (in thousands):

WeThe Company primarily ~~sell~~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.

~~We generate~~The Company generates the majority of ~~our~~its revenues by providing Legal Technology services to our clients. ~~All~~Most of ~~our~~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 ~~of our~~other eDiscovery contracts are subscription-based, ~~fixed fee~~fixed-fee arrangements, which have tiered pricing based on the quantity of data hosted. For a fixed monthly fee, our clients receive a variety of optional eDiscovery services, which are included in addition to the data hosting. ~~We recognize~~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 ~~we have~~the Company has a right to consideration for services completed to date.

~~Managed review services~~Other eDiscovery agreements are time and ~~materials types of arrangements. These agreements~~material arrangements that require the client to pay us based on the number of hours worked at contractually agreed-upon rates. ~~We recognize~~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 ~~we have~~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.

~~Ontrack PowerControls~~The Company offers term license subscriptions ~~for~~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 ~~fixes.~~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.

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.

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 the Company’s consolidated financial statements may not be comparable to other public companies 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 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, 2023, including interim periods within those fiscal years, and the Company is currently evaluating the impact that Topic 326 will have on its consolidated financial statements.

On April 12, 2021, ~~staff of~~ the SEC Staff issued a “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition ~~Companies~~Companies” (“SPACs”)” (the “SEC Staff Statement”). The Company evaluated ~~this statement~~the SEC Staff Statement and determined that its ~~private warrants,~~Private Warrants (as defined in Note 3), which had historically been accounted for as a component of equity, should ~~have been~~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 ~~Accounting Standards Codification~~ASC 250, Accounting Changes and Error Corrections, wethe Company evaluated the materiality of the errors from quantitative and qualitative perspectives and concluded that the errors were immaterial to the ~~Company's~~Company’s prior period interim and annual consolidated financial statements. ~~Since~~Because these ~~revisions~~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~~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.~~million in the Condensed Consolidated Balance Sheet.

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

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

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

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

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

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

The Company estimates the fair value of contingent purchase consideration based on the present value of the consideration expected to be paid during the remainder of the earn-out period, based on management’s assessment of the acquired operations’ forecasted earnings. This fair value measure is based on significant inputs not observed in the market and thus represents a Level 3 measurement. During 2019, the Company acquired three companies for total consideration of $5.5 million, of which $2.0 million was in cash, $1.5 million was in deferred payments which were subsequently paid, $1.2 million was in stock and contingent consideration, $1.0 million of which was recorded at its estimated fair value of $0.8 million. The fair value of future expected acquisition-related contingent purchase consideration obligations was ~~$0.9~~$0.7 million and $0.6 million at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

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

The Company has determined that the 6,350,000 ~~private~~ warrants to purchase Common Stock (the “Private Warrants”) issued in connection with the consummation of the Business Combination in December 2019 should be accounted for as liabilities in accordance with~~Accounting Standards Codification (“ASC”)~~ASC 815-40, Derivatives and Hedging — Contracts in Entity’s Own Equity. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of ~~private warrants~~Private Warrants in the Condensed Consolidated ~~Statement~~Statements of Comprehensive Loss. The fair value of the Private Warrants was $1.7million and $1.8 million as of March 31, 2022 and 2021, respectively.

To estimate the fair value of the Private Warrants as of December 31, ~~2020,~~2021 and March 31, 2022, the Company used a Black Scholes closed form model, which is a Level 3 fair value measurement. Significant inputs ~~into~~used in the Black Scholes model for the Private Warrants were as follows:

				December 31, 2021 & March 31, 2022
	December 31, 2020
Expected volatility		16.00	%		27.00	%
Expected term (in years)		3.97			2.94
Risk free interest rate		1.74	%		0.96	%
Dividend yield		0.00	%		0.00	%
Exercise Price	$	11.50		$	11.50
Fair value of common stock	$	8.05
Fair value of Common Stock				$	6.80

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

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

The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the periods ended March 31, ~~2021~~2022 and December 31, ~~2020~~2021 (in thousands):


Balance at December 31, 2019	$	822
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		98		(275	)
Balance at December 31, 2020	$	920
Private warrants		1,841
Balance at December 31, 2021				2,486
Change in fair value of Private Warrants				(191	)
Change in fair value of contingent consideration		19		9
Balance at March 31, 2021	$	2,780
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.

The Company leases office space and certain equipment under operating and capital lease agreements, expiring in various years through ~~2028.~~2029. Certain leases contain annual rent escalation clauses.

Rent expense totaled ~~$2.9~~$2.8 million and ~~$3.8~~$2.9 million for the three months ended March 31, 2022 and 2021, ~~and 2020,~~ respectively.

For periods subsequent to March 31, ~~2021,~~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):

March 31,	Capital Leases			Operating Leases
2021 (9 months)	$	1,353		$	7,038
2022		1,346			8,835
						Capital Leases			Operating Leases
2022 (9 months)						$	1,350		$	6,417
2023		721			8,475		1,057			8,032
2024		-			7,377		—			6,880
2025		-			3,810		—			3,457
2026							—			1,860
Thereafter		-			2,552		—			692
Total	$	3,420		$	38,087	$	2,407		$	27,338
Less interest on lease obligations		(316	)				(138	)
		3,104					2,269
Less current portion		(1,343	)				(1,452	)
Non-current portion	$	1,761				$	817

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

	March 31, 2021			December 31, 2020			March 31, 2022			December 31, 2021
First lien facility due 2022	$	-		$	289,000
Convertible debenture notes due 2024		216,685			214,541
2021 Credit Agreement due 2026		300,000			-
Convertible Debenture notes								231,676			229,382
2021 Credit Agreement								297,000			297,750
Total debt		516,685			503,541			528,676			527,132
Less: unamortized original issue discount		(17,312	)		(16,126	)		(13,760	)		(14,700	)
Less: unamortized debt issuance costs		(2,038	)		(3,867	)		(1,615	)		(1,726	)
Total debt, net		497,335			483,548			513,301			510,706

Current portion of debt		3,000			17,000			3,000			3,000
Less: current portion of unamortized original issue discount		-			(4,312	)		—			—
Less: current portion of unamortized debt issuance costs		-			(1,740	)		—			—
Total current portion of debt, net		3,000			10,948			3,000			3,000
Total long-term debt, net	$	494,335		$	472,600		$	510,301		$	507,706

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

The 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 ~~will be~~are available to the Loan Parties at any time prior to February 8, 2023, subject to certain conditions.

The Initial Term Loans and Delayed Draw Term Loans ~~will~~ bear interest, at the Loan Parties’ option, at the rate of (x) with respect to Eurocurrency Rate Loans (as defined in the 2021 Credit Agreement), the Adjusted Eurocurrency Rate (as defined in the 2021 Credit Agreement) with a 1.0% floor, plus 6.50% per annum, or (y) with respect to Base Rate Loans (as defined in the 2021 Credit Agreement), the Base Rate (as defined in the 2021 Credit Agreement) plus 5.50% per annum. The Revolving Credit Loans ~~will~~ bear interest, at our option, at the rate of (x) with respect to Eurocurrency Rate Loans, the Adjusted Eurocurrency Rate plus 4.00% per annum, or (y) with respect to Base Rate Loans, the Base Rate plus 3.00% per annum. The Initial Term Loans and Delayed Draw Term Loans amortize at a rate of 1.00% of the aggregate principal amount of Initial Term Loans and Delayed Draw Term Loans outstanding, payable in consecutive quarterly installments of $0.8 million, beginning on June 30, 2021.

The Initial Term Loans, Delayed Draw Term Loans and Revolving Credit Loans are each scheduled to mature on the earlier of February ~~16,~~8, 2026 or six months prior to maturity of our Debentures ~~(as defined below)~~ due in December 2024. The Initial Term Loans and Delayed Draw Term Loans may be voluntarily repaid at any time, but may be subject to a prepayment premium. The Initial Term Loans and Delayed Draw Term Loans are required to be repaid under certain circumstances, including with Excess Cash Flow (as defined in the 2021 Credit Agreement), the proceeds of an Asset Sale or Casualty Event (each as defined in the 2021 Credit Agreement) and the proceeds of certain refinancing indebtedness.

The obligations under the 2021 Credit Agreement are secured by substantially all of the Loan Parties’ assets. The 2021 Credit Agreement contains customary affirmative and negative covenants as well as a financial maintenance covenant that requires the Loan Parties to maintain a First Lien Net Leverage Ratio (as defined in the 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 Credit Agreement covenants as of March 31, 2022.

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

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

As of March 31, ~~2021,~~2022, there was $39.4 million available capacity for borrowing under the revolving loan commitment due to the $0.6 million of letters of credit outstanding (See Note 9 – Commitments and contingencies).

On December 9, 2016, certain subsidiaries of the Company entered into a credit agreement, ~~(the “2016~~or the 2016 Credit ~~Agreement”)~~Agreement, with a group of lenders to establish term loan facilities and a revolving line of credit for borrowings by LD Intermediate, Inc. and LD Lower Holdings, Inc. ~~(the “Initial Term Loans”).~~ The ~~Initial Term Loan~~initial term loan borrowings of $340.0 million ~~(“First Lien Facility”)~~under the first lien facility and $125.0 million ~~(“Second Lien Facility”)~~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 “Revolving Credit Facility”).~~2022. The ~~First Lien Facility~~first lien facility and the ~~Revolving Credit Facility~~revolving credit facility were repaid and retired on February 8, 2021 and the ~~Second Lien Facility~~second lien facility was repaid on December 19, 2019. The Company incurred a loss on debt extinguishment of ~~$7.2~~$7.3 million during the three months ended March 31, 2021 in connection with the retirement of the ~~2016 Credit Agreement~~first lien facility and ~~Revolving Credit Facility.~~the revolving credit facility.

On December 19, 2019, the Company issued ~~8% convertible debentures (“Debentures”) due~~Convertible Debentures, which mature in 2024, in an aggregate principal amount of $200 ~~million. The proceeds of~~million (the “Debentures” or the ~~Debentures were used in part to repay the Company’s outstanding Second Lien Facility and amounts outstanding under the Revolving Credit Facility.~~“Convertible Debentures”). At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the balance due under the Convertible Debentures was ~~$216.7~~$231.7 million and ~~$214.5~~$229.4 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, the Company will ~~add to~~increase the principal amount ~~(subject to reduction for any principal amount repaid)~~ of the Debentures by an amount equal to 3.00% of the original aggregate principal amount of the Debentures ~~outstanding.~~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.

~~Subject to approval to allow for the full conversion of the Debentures into common stock, the~~The Debentures are convertible into shares of ~~the Company’s 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.

The Debentures contain covenants that limit the Company’s ability to, among other things: (i) incur additional debt; (ii) create liens on assets; (iii) engage in certain transactions with affiliates; or (iv) designate the Company’s subsidiaries as unrestricted subsidiaries. The Debentures provide for customary events of default, including non-payment, failure to comply with covenants or other agreements in the Debentures and certain events of bankruptcy or insolvency. If an event of default occurs and continues, the holders of at least 25% in aggregate principal amount of the outstanding Debentures may declare the entire principal amount of all the Debentures to be due and payable immediately. As of March 31, ~~2021,~~ 2022, the Company was in compliance with all Debenture covenants.

On December 19, 2019, the Company adopted the 2019 Incentive Award Plan (the “2019 Plan”) under which eligible employees, officers, directors and consultants of the Company may be granted incentive or non-qualified stock options, restricted stock, restricted stock units, or other stock-based awards, including shares of ~~common stock.~~ Common Stock. Pursuant to the 2019 Plan, the number of shares of Common Stock available for issuance under the 2019 Plan automatically increases on each January 1 (commencing with January 1, 2021) until and including January 1, 2029, by an amount equal to the lesser of: (a) 5% of the shares of Common Stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by our Board of Directors (the “Board”). ~~Our Board determined that the number of shares available for issuance under the 2019 Plan would increase by 2,126,451 as of January 1, 2021.~~ The Compensation Committee ~~did not~~of the Board approved an increase to the share reserve ~~under~~as set out in the 2019 Plan in ~~2020.~~2021. As of March 31, ~~2021, 9,626,451~~2022, 11,760,678 shares of ~~common stock, $0.0001 par value per share (the “Common Stock”)~~Common Stock were reserved under the 2019 Plan, of which ~~4,330,506~~2,713,118 shares of Common Stock remained available for issuance.

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			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (1)
Options Outstanding, December 31, 2020		4,260,753		$	8.46		9.0	$	54
Options outstanding, December 31, 2021											5,093,682		$	8.34		8.4	$	24
Granted		1,187,500			8.05						1,130,850			6.00
Exercised		(4,465	)		8.00						—			—
Forfeited		(146,366	)		8.19						(27,829	)		8.29
Expired		(1,477	)		8.00						(24,633	)		8.48
Options Outstanding, March 31, 2021		5,295,945		$	8.37		9.1	$	806
Options Vested and Exercisable, March 31, 2021		1,224,595		$	8.22		8.8	$	216
Options Vested and Expected to vest, March 31, 2021		5,295,945		$	8.37		9.1	$	806
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

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

	2019 Plan				2019 Plan
	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020		Three Months Ended March 31, 2022		Three Months Ended March 31, 2021
Total fair value of stock options granted	$	2,125	$	7,970	$	2,884	$	2,125
Total fair value of options vested		18		-		609		18

~~Under the 2019 Plan, time-based~~Time-based vesting stock options generally vest over a three-year period, are subject to graded vesting schedules, and expire 10 years from the date of grant or within 90 days of termination. The weighted-average fair value per share of time-based vesting stock options granted by us was ~~$1.79,~~$2.55, and ~~$2.19~~$1.79, during the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively.

For the three months ended March 31, ~~2021~~2022, and ~~2020,~~2021 the Company recognized ~~$1.0~~$1.1 million and ~~$0.8~~$1.0 million of stock-based compensation expense, respectively, in connection with time-based vesting stock ~~options, respectively.~~ options. As of March 31, ~~2021,~~2022, there was ~~$7.0~~$6.2 million of unrecognized stock-based compensation expense related to unvested time-based vesting stock options that ~~are~~is expected to be recognized over a weighted-average period of ~~2.0~~two years.

The Company used valuation models to value both time and performance-based vesting stock options granted during the three months ended March 31, ~~2021~~2022 and ~~2020.~~2021. The following table summarizes the assumptions used in the valuation models to determine the fair value of awards granted to employees and ~~non-employees~~non-employee directors under the 2019 Plan:

	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020		Three Months Ended March 31, 2022		Three Months Ended March 31, 2021
Expected volatility	44.61%		37.63%		42.90%		44.61%
Expected term (in years)		6.00		6.00		6.00		6.00
Dividend yield	0.00%		0.00%		0.00%		0.00%
Risk-free interest rate	0.70%		1.43%		1.62%		0.70%

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

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

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

	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020		Three Months Ended March 31, 2022		Three Months Ended March 31, 2021
Cost of revenues	$	342	$	355	$	351	$	342
General and administrative		396		230		408		396
Research and development		64		73		103		64
Sales and marketing		176		167		200		176
Total	$	978	$	825	$	1,062	$	978

The Company granted RSUs to certain employees and ~~board members~~non-employee directors which are subject to certain vesting criteria. The 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 ~~is dependent~~depends on the type and timing of the liquidity event as it relates to the ~~Business Combination date of December 19, 2019.~~Closing Date. Generally, a portion of the RSUs will first vest upon the occurrence of the liquidity event and the remainder will vest in up to 3 annual installments thereafter, provided that if the liquidity event occurs after the third anniversary of the ~~Business Combination,~~Closing Date, all RSUs will vest immediately upon the liquidity event. The vesting of the RSUs held by a grantee is generally subject to his or her continued ~~employment.~~employment with the Company.

The Company grants certain non-employee directors time-based restricted stock units in satisfaction of their annual retainer payments. These units vest over a one-year or three-year period. During the three months ended March 31, 2022 and 2021, the Company recognized the grant-date fair value of the restricted stock units of $0.2 million and $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 RSUs awarded to employees and for time-based RSUs granted to non-employee directors under the 2019 Plan:

The Company determined ~~that~~ the achievement of the liquidity event was not probable and therefore no0 expense related to the performance based awards was recorded during the three months ended March 31, 2022 and 2021.

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

There were 0 stock issuances during the three months ended March 31, 2022 and 2021, other than pursuant to stock option exercises and vesting of non-employee director RSUs.

On ~~December 19, 2019,~~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 entitles the holder to purchase ~~one~~1 share of Common Stock for $11.50 per share. If Private Warrants are held by the initial purchaser of the Private Warrant or certain permitted transferees, the purchase can occur on a cashless basis. The Warrants will expire on December 19, 2024 or earlier upon redemption or liquidation.

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

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

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

On December 19, 2019, in connection with the consummation of the Business Combination, 550,000 shares of Common Stock held by Pivotal Acquisition Holdings LLC were subjected to an additional lockup that will be released only if the last reported sale price of the Common Stock equals or exceeds $15.00 for a period of 20 consecutive trading days during the five-year period following the Closing Date. If the last reported sale price of Common Stock does not equal or exceed $15.00 within five years from the Closing Date, such shares ~~of Common Stock~~ will be forfeited to the Company for no0 consideration. These shares are reported as outstanding in ~~our~~the Company’s financial ~~statements.~~statements and continue to be subject to the additional lockup as of March 31, 2022.

A valuation allowance has been established against ~~our~~the Company’s net U.S. federal and state deferred tax assets, including net operating loss (“NOL”) carryforwards. As a result, ~~our~~the Company’s income tax position is primarily related to foreign tax activity and U.S. deferred taxes for tax deductible goodwill and other indefinite-lived liabilities. During the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, the Company recorded an income tax provision of ~~$0.6~~$0.4 million and ~~$0.2~~$0.6 million, respectively, resulting in an effective tax rate of ~~(4.2)~~(4.3)% and ~~(1.6)~~(4.2)%, respectively. These effective tax rates differ from the U.S. federal statutory rate primarily due to the effects of foreign tax rate differences, state taxes and the valuation allowance against our domestic deferred tax assets.

The Company is involved in various legal proceedings, which ~~may~~ arise occasionally in the normal course of business. While the ultimate results of such matters generally cannot be predicted with certainty, management does not expect such matters to have a material effect on the financial position and results of operations as of March 31, ~~2021.~~2022.

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

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

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

As of March 31, ~~2021 $108.3~~2022, $115.8 million, including paid-in kind interest of the ~~Company’s~~ Debentures are owed to affiliates of MGG Investment Group, which is an affiliate of a director of the Company. For the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, the Company recognized ~~$3.1~~$3.4 million and ~~$3.0~~$3.1 million in interest expense, respectively, related to ~~the amounts~~Debentures owned by the MGG Investment Group.

The Company has evaluated subsequent events since the date on which these financial statements were issued through the ~~dates~~date on which this Quarterly Report on Form 10-Q was filed, ~~the date on which these financial statements were issued,~~ and identified nothe item below for disclosure:

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

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

~~We believe that this~~CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including information incorporated herein by reference, contains forward-looking statements ~~that are forward-looking~~within the meaning of Section 27A of the Securities Act and ~~as such~~Section 21E of the Exchange Act that are not historical facts. This includes, without limitation, statements regarding ~~the~~our financial position, business strategy and ~~the~~management’s plans and objectives ~~of management~~ for future operations. These statements constitute projections, forecasts and forward-looking statements, and are not guarantees of performance. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this 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:

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 ~~(some~~(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 ~~section titled “Risk Factors”~~related notes thereto included elsewhere in ~~Item 1A of our Annual~~this Quarterly Report on Form 10-K for the fiscal year ended December 31, 2020 (our “Annual Report”). These risks and uncertainties may be amplified by the ongoing COVID-19 pandemic and its potential impact on our business and the global economy.10-Q. 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, 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 “we,” “us,” “our,” “Company,” “KLDiscovery,” “KLD,” “KLDiscovery Inc.” or “LD Topco, Inc.” refer to KLDiscovery Inc. and its consolidated subsidiaries. As a result of Pivotal Acquisition Corp.’s acquisition of the ~~Business Combination,~~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, 2021.~~

~~We are one~~KLD is a leading global provider of ~~the leading~~ eDiscovery, ~~providers~~information governance and ~~the leading~~ data recovery ~~services provider~~solutions to corporations, law firms, ~~government~~insurance agencies and ~~individual consumers.~~individuals. We provide ~~technology-enabled services and software~~technology solutions to help ~~law firms, corporations, government agencies and consumers~~our clients solve complex legal, regulatory and data challenges. We have broad geographical coverage in the eDiscovery and data recovery industries with 3331 locations in 1819 countries, as well as 9 data centers and 1817 data recovery labs ~~around~~globally. Our integrated proprietary technology solutions enable the ~~globe. Our legal~~efficient and accurate collection, processing, transmission, review and/or recovery of complex and large-scale enterprise data. In conjunction with proprietary technology, ~~services cover both~~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 ~~information governance services~~data recovery challenges. We are continuously innovating to ~~support the litigation, regulatory compliance,~~provide a more reliable, secure and ~~internal investigation needs~~seamless experience when tackling various “big data” volume, velocity, and veracity challenges. A key example of our ~~clients.~~ 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.

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 as filed with the SEC on March 17, 2022 (our “Annual Report”), as supplemented by the additional discussion below. In addition, as discussed below, the COVID-19 pandemic has impacted our operating results.

The followingareamongthekey operationaland financialmetricswe use to measureand evaluateour performance,identifytrendsaffectingour business,formulatebusinessplans,and makestrategicdecisions.

We ~~offer data collection~~ have a strongtrackrecordof growing our clientbase,and ~~forensic investigation, early case assessment, electronic discovery~~we believethatour abilityto increasethenumber of clientsutilizingour LegalTechnologysolutions,includingNebula, isan importantindicatorof our market penetration,our businessgrowth, and our futureopportunities.

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 solutionduringthetwo yearspriorto theapplicabledate.

The followingtablesetsforththenumberof LegalTechnologyclientsand Nebula clientsas of thedatesshown:

We believeour abilityto continuouslygrow thenumberof matterson our platformovertimeisan important measureof scaleforour businessand isindicativeof our futuregrowth 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 theirdata ~~processing, application software,~~on 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 existingclients.

The followingtablesetsforththenumberof LegalTechnologymattersand Nebula mattersas of thedates shown:

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

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

For thethree months ended March 31, 2022 and 2021, our LegalTechnologyrevenuewas $72.4 million and 63.7 million,respectively,and our datarecoveryrevenuewas $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 and 2021, theCOVID-19pandemicimpactedour LegalTechnologynetrevenueretentionrate,as itimpactedtherestof our business,as certainaccountsexperienceda slowdown in thenumberand frequencyof matters.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 ~~managed review services. In addition,~~ processing,includingthroughNebula, we expectclientsto leverageour ~~global Ontrack Data Recovery name,~~ technologyearlierin thedata lifecycle,providingfurtheropportunityforus to increaseour productand servicepenetrationand clientretention. Furthermore,we ~~deliver world-class data recovery, email extraction~~ planto establishand ~~restoration, data destruction~~ broadenour channelpartnershipsovertimeand ~~tape management services.~~leveragethesestrong relationshipsto furtherour awarenessof our productsand overallusagewithintheindustry.

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

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

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

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

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

Time and materials arrangements are based on units of data stored or processed. Unit-based revenues are recognized as services are provided, based on either the amount of data stored or processed, the number of concurrent users accessing the information ~~governance market~~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 ~~highly fragmented~~recognized at a point in time, when the recovered data is sent to the customer.

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

The Company offers term license subscriptions to Ontrack PowerControls software to customers with on-premises installations of the software pursuant to contracts that are historically one to four years in length. The term license subscriptions include maintenance and ~~price competitive. While many of our competitors rely on third party software tools to provide their services, we offer our services utilizing our own end-to-end proprietary tools~~support, as well as ~~third party platforms. Because we can provide service offerings utilizing proprietary technology, we have more flexibility in pricing,~~access to future software upgrades and wepatches. The license and the additional support services are ~~not hindered by third party licensing software expenses. As such, our proprietary tools allow us~~deemed to be ~~less impacted by significant price compression than our competitors.~~

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

For the three months ended March 31, 2022 and 2021, ~~and 2020,~~ our ~~legal technology~~Legal Technology revenue was ~~$63.7~~$72.4 million and ~~$66.8~~63.7 million, respectively, and our data recovery revenue was $9.5 million and $11.7 million, respectively. For the three months ended March 31, 2022 and ~~$11.5~~2021, Legal Technology revenue from our technology solutions other than Nebula was $66.2 million and $58.3 million respectively, and revenue from for Nebula was $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, ~~2021~~2022 and ~~2020,~~2021, no single client accounted for more than 5%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 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.

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, including our end-to-end Nebula platform, including through hiring additional personnel. We expect these investments to cause research and development expense to increase in 2022 versus 2021, and thereafter anticipate research and development expense normalizing as a percentage of revenues. We also intend to significantly increase our investment in sales and marketing through the end of 2022 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 sales and marketing expense as a percentage of revenue over time. We also expect general and administrative expense to decrease slightly as a percentage of revenue over time due to our ability to scale as revenues increase and as a result of historical cost-cutting measures.

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 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.

We prepare ~~audited~~ financial statements in accordance with U.S. GAAP. We also disclose and discuss other non-U.S. GAAP financial measures such as EBITDA and adjusted EBITDA. ~~We believe~~Our management believes that these measures are relevant and provide useful supplemental information to investors by providing a baseline for ~~evaluation~~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 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. We believe these non-U.S. GAAP financial measures reflect our ongoing operating performance because the isolation of non-cash charges, such as amortization and depreciation, and other items, such as interest, income taxes, management fees and equity compensation, acquisition and transaction costs, restructuring costs, systems establishment and costs associated with strategic initiatives which are incurred outside the ordinary course of our business, provides information about our cost structure and helps us to track our operating progress. We encourage investors and potential investors to carefully review the U.S. GAAP financial information and compare them with our

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 ~~our~~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 ~~and~~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 represented by non-ordinary course earn-out valuation changes, rating agency fees, letter of credit and revolving facility fees, as well as professional service fees and direct expenses related to acquisitions. Because we do not acquire businesses on a predictable cycle, we do not consider the amount of acquisition- and integration-related costs to be a representative component of the day-to-day operating performance of our business.

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 ~~does~~do not reflect:

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

The ~~potential~~COVID-19 pandemic continues to impact the global economy and cause significant macroeconomic uncertainty. The future impacts of the ~~ongoing COVID-19~~ 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 ~~has made modifications to~~modified employee travel and work locations, and ~~cancellation of~~cancelled certain events, among other ~~modifications.~~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 ~~that ranged~~ranging from 2% to 20% in exchange for ~~receiving~~grants of an aggregate of 417,673 stock options and 211,207 ~~RSUs~~. RSUs. In December 2020, the Company extended the salary exchange program ~~through September 20, 2021~~ for the Company’s named executive officers and for ~~management positions~~the position of Vice-President and ~~higher. The~~higher but did not issue any additional stock options or RSUs in connection with the salary exchange program. As of June 2021, the Company ~~also initiated limited furloughs for certain employees.~~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 ~~may be~~ required by federal, state or local authorities or that it determines isare 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, ~~(the “CARES Act”), which is aimed at providing~~or the CARES Act, to provide emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally ~~supporting~~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%~~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, toof which $2.0 million was paid in December 2021 and $2.0 is expected to be paid in December 2022. The Company continues to analyze other aspects of the CARES Act as well as similar tax legislation in other countries it operates in but does not believe they will have a meaningful impact to its results.

For the three months ended March 31, ~~2021~~2022 compared with the three months ended March 31, ~~2020~~2021

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)	2021			2020			2022			2021
Revenues	$	75.4		$	78.3		$	81.9		$	75.4
Cost of revenues		37.4			39.5			43.3			37.4
Gross profit		38.0			38.8			38.6			38.0
Operating expenses		34.7			38.1			35.4			34.7
Income from operations		3.3			0.7			3.2			3.3
Interest expense		12.3			13.0			12.7			12.3
Change in fair value of private warrants		(2.0	)		-
Change in fair value of Private Warrants								(0.2	)		(2.0	)
Loss on debt extinguishment		7.2			-			—			7.2
Loss before income taxes		(14.2	)		(12.3	)		(9.2	)		(14.2	)
Income tax provision		0.6			0.2			0.4			0.6
Net loss		(14.8	)		(12.5	)		(9.6	)		(14.8	)
Total other comprehensive (loss) income, net of tax		(2.5	)		(4.4	)
Total other comprehensive income, net of tax								(2.1	)		(2.5	)
Comprehensive loss		(17.3	)		(16.9	)		(11.7	)		(17.3	)

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

Revenues ~~decreased~~increased by ~~$2.9~~$6.5 million, or ~~3.7%~~8.6%, to ~~$75.4~~$81.9 million for the three months ended March 31, ~~2021~~2022 as compared to ~~$78.3~~$75.5 million for the three months ended March 31, ~~2020.~~2021. This increase is ~~primarily~~ due to ~~a decrease~~an increase in ~~eDiscovery services~~Legal Technology revenue of ~~$5.4~~$8.6 million, resulting from an increase of $7.9 million from our technology solutions other than Nebula and an increase of $0.7 million from Nebula, partially offset by ~~an increase in both managed review revenue of $2.5 million and~~a decrease in data recovery revenue of ~~$0.6~~$2.2 million. The ~~decrease~~increase in ~~eDiscovery services~~Legal Technology revenue is ~~primarily~~ due to ~~the impact~~a higher volume of ~~COVID-19, as many clients have delayed the start of new matters and court systems have been slow to reopen.~~litigation.

Cost of revenues ~~decreased~~increased by ~~$2.1~~$5.9 million, or ~~5.3%~~15.8%, 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 as compared~~2021. This increase is primarily due to ~~$39.5~~increased wages of approximately $4.1 million for the three months ended March 31, 2020. This decrease is due to expense reduction measures implemented by management, which decreased occupancy expense by $0.9 million, outsourced costs of $0.7 million, and travel and entertainment expense by $0.3 million, as well as other smaller expense decreases. In addition, amortization expense decreased by $0.6 million and communications expenses decreased by $0.2 million. These decreases were partially offset by $0.7 million of increased wages expensedocument reviewers due to increased managed review ~~revenues.~~revenue, increased software costs of $0.5 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. As a percentage of revenue, our cost of revenues for the three months ended March 31, ~~2021 decreased~~2022 increased to ~~49.6%~~52.9% as compared to ~~50.4%~~49.6% for the three months ended March 31, ~~2020. This decrease~~2021, and was due to the factors noted above.

Gross profit ~~decreased~~increased by ~~$0.8~~$0.6 million, or ~~2.1%~~1.6%, to ~~$34.7~~$38.6 million for the three months ended March 31, ~~2021~~2022 as compared to ~~$38.8~~$38.0 million for the three months ended March 31, ~~2020.~~2021. Gross profit ~~decreased~~increased primarily due to the factors noted above. As a percentage of revenue, our gross profit for the three months ended March 31, ~~2021 was 50.4%~~2022 decreased to 47.1% as compared to ~~49.5%~~49.6% for the three months ended March 31, ~~2020.~~2021, and was due to the cost of revenues increases noted above.

Operating expenses ~~decreased~~increased by ~~$3.4~~$0.7 million, or ~~8.9%~~2.0%, 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 as compared~~2021. This increase is the result of an increase in wages of $1.1 million due to ~~$38.1~~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 ~~the three months ended March 31, 2020. This decrease is due to~~recruiting, an increase of $0.1 million in software expense, and an increase of $0.1 million in travel expense. These increases were partially offset by a $2.7 million decrease in depreciation and amortization expense of $1.3 million, decrease in professional services of $1.0 million, decrease in personnel expenses of $0.4 million, decrease in travel and entertainment expenses of $0.4 million, and decrease in marketing expenses by $0.3 million. These decreases were partially offset by an increase in costs incurred related to lease terminations to optimize our real estate footprint of $0.6 million.expense. As a percentage of revenue, our operating expenses for the three months ended March 31, ~~2021 increased~~2022 decreased to ~~47.7%~~43.2% as compared to ~~45.1%~~46.0% for three months ended March 31, ~~2020 due to the factors noted above.~~2021.

Interest expense ~~decreased~~increased by ~~$0.7~~$0.4 million, or ~~5.4%~~3.3%, 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 as compared to $13.0 million for the three months ended March 31, 2020.~~2021. This ~~decrease~~increase is primarily due to an increase in outstanding debt partially offset by lower interest rates on the refinanced First Lien Facility ~~partially offset by an increase in outstanding debt during the three months ended March 31, 2021 compared~~(as defined below) due to the ~~three months ended March 31, 2020.~~refinancing discussed below in the Liquidity and Capital Resources section.

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

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 recorded an adjustment to the Private Warrants liability of $0.2 million and $2.0 million, respectively.

During the three months ended March 31, 2022 and 2021, ~~and 2020, we~~the Company recorded an income tax ~~provision~~provisions of ~~$0.6~~$0.4 million and ~~$0.2~~$0.6 million, respectively, resulting in an effective tax rate of ~~(4.2)~~(4.3)% and ~~(1.6)~~(4.2)%, respectively. These effective tax rates differ from the U.S. federal statutory rate primarily due to the effects of foreign tax rate differences, U.S. state and local income taxes and the valuation allowance against our domestic deferred tax assets. The effective rate for the three months ended March 31, ~~2021 increased~~2022 decreased from the three months ended March 31, ~~2020~~2021 primarily due to a change in the allocation of our pre-tax earnings and losses among countries with differing statutory tax rates.

Net loss for the three months ended March 31, ~~2021~~2022 was ~~$14.8~~$(9.6) million compared to ~~$12.5~~$(14.8) million for the three months ended March 31, ~~2020.~~2021. Net loss ~~increased~~decreased for the three months ended March 31, ~~2021~~2022 as compared to the three months ended March 31, ~~2020~~2021 due to the factors noted above.

For the Three Months Ended March 31,

(in millions)

2021

2020

Net loss

$
(14.8
)

$
(12.5
)
Interest expense

12.3

13.0

Income tax provision

0.6

0.2

Depreciation and amortization expense

9.8

11.8

Extinguishment of debt

7.2

-

EBITDA

$
15.1

$
12.5

Acquisition, financing and transaction costs

0.8

0.1

Strategic initiatives:

Sign-on bonus amortization

-

0.2

Non-recoverable draw

-

0.3

Total strategic initiatives

-

0.5

Management fees, stock compensation and other

1.0

0.9

Change in fair value of private warrants

(2.0
)

-

Restructuring costs

0.1

0.6

Systems establishment

0.4

0.5

Adjusted EBITDA

$
15.4

$
15.0

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 ~~(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 on the majority of our eDiscovery accounts ~~receivables~~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 on our data recovery services accounts receivables within 30 to 45 days. Lastly, the majority of our data recovery software is billed monthly in advance with amounts typically due within 30 to 45 days; however, depending on the client contract, billing can occur annually, quarterly or monthly. Long outstanding receivables are not uncommon due to the nature of our ~~legal technology~~Legal Technology services as litigation cases can ~~go on~~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 onof our accounts receivable. As of March 31, ~~2021,~~2022, we had ~~$47.8~~$38.4 million in cash compared to ~~$51.2~~$46.5 million as of December 31, ~~2020.~~2021. As of March 31, ~~2021,~~2022, we had ~~$494.3~~$510.3 million of outstanding borrowings compared to ~~$472.6~~$507.7 million as of December 31, ~~2020.~~2021. We expect to finance our operations ~~over~~in the ~~next 12 months~~short- and long-term, primarily through existing cash balances and cash ~~flow.~~flow from operating activities.

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

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

Agreement), the Base Rate (as defined in the 2021 Credit Agreement) plus 5.50% per annum. The Revolving Credit Loans ~~will~~ bear interest, at our option, at the rate of (x) with respect to Eurocurrency Rate Loans, the Adjusted Eurocurrency Rate plus 4.00% per annum, or (y) with respect to Base Rate Loans, the Base Rate plus 3.00% per annum. The Initial Term Loans and Delayed Draw Term Loans amortize at a rate of 1.00% of the aggregate principal amount of Initial Term Loans and Delayed Draw Term Loans outstanding, payable in consecutive quarterly installments of $0.8 million, beginning on June 30, 2021.

The Initial Term Loans, Delayed Draw Term Loans and Revolving Credit Loans are each scheduled to mature on the earlier of February ~~16,~~8, 2026 or six months prior to maturity of our Debentures due in December 2024. The Initial Term Loans and Delayed Draw Term Loans may be voluntarily repaid at any time, but may be subject to a prepayment premium. The Initial Term Loans and Delayed Draw Term Loans are required to be repaid under certain circumstances, including with Excess Cash Flow (as defined in the 2021 Credit Agreement), the proceeds of an Asset Sale or Casualty Event (each as defined in the 2021 Credit Agreement) and the proceeds of certain refinancing indebtedness.

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

Loans pursuant to an unfunded revolver commitment for borrowing up to $40.0 million. As of March 31, ~~2021,~~2022, there was $39.4 million available capacity for borrowing under the revolving loan commitment due to the $0.6 million of letters of credit outstanding (See Note 9 – Commitments and contingencies).

~~Convertible Debenture Notes~~2016 Credit Agreement and Revolving Credit Facility

InOn 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 ~~Business Combination on~~retirement of the first lien facility and the revolving credit facility.

On December 19, 2019, wethe Company issued ~~$200 million~~Debentures, which mature in 2024, in an aggregate principal amount of convertible debentures due 2024 (the “Debentures”) in a private placement to certain “accredited investors” pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act. The equity structure as of the date of the Business Combination included 2,097,974 shares of common stock and 1,764,719 warrants for the issuance of common stock to the Debenture holders related to the Debenture issuance. The proceeds of the Debentures were used in part to repay our outstanding Second Lien Facility and amounts outstanding under the Revolving Credit Facility.$200 million. At March 31, ~~2021,~~2022 and December 31, ~~2020,~~2021, the balance due under the Convertible Debentures was ~~$216.7~~$231.7 million and ~~$214.5~~$229.4 million, respectively.

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

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

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

The Debentures contain covenants that limit ~~our~~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 ~~our~~the Company’s subsidiaries as unrestricted subsidiaries. The Debentures provide for customary events of default, including non-payment, failure to comply with covenants or

other agreements in the Debentures and certain events of bankruptcy or insolvency. If an event of default occurs and continues, the holders of at least 25% in aggregate principal amount of the outstanding Debentures may declare the entire principal amount of all the Debentures to be due and payable immediately. As of March 31, 2022, the Company was in compliance with all Debenture covenants.

Our net cash flows from operating, investing and financing activities for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021 were as follows:

	Three Months Ended March 31, 2021			Three Months Ended March 31, 2020
Net cash provided by (used in):
(in thousands)							Three Months Ended March 31, 2022			Three Months Ended March 31, 2021
Net cash (used in) provided by:
Operating activities	$	(2,815	)	$	(11,956	)	$	(3,646	)	$	(2,815	)
Investing activities	$	(3,088	)	$	(5,101	)	$	(2,968	)	$	(3,088	)
Financing activities	$	2,718		$	24,526		$	(1,281	)	$	2,718
Effect of foreign exchange rates	$	(208	)	$	(265	)	$	(170	)	$	(208	)
Net increase (decrease) in cash	$	(3,393	)	$	7,204
Net decrease in cash							$	(8,065	)	$	(3,393	)

Net cash used in operating activities was $3.6 million and $2.8 million for the three months ended March 31, 2022 and 2021, ~~as compared to net cash used in operating activities of $12.0 million for the three months ended March 31, 2020.~~respectively. The ~~decrease~~increase in net cash used is due to a ~~$2.3~~decrease in non-cash items of $7.9 million, ~~decrease~~partially offset by a higher net loss of $5.3 million and an increase in cash used ~~in net loss plus decreased cash used by~~for working capital of ~~$7.3~~$1.8 million. The ~~decrease~~increase in cash used infor working capital for the period is primarily due to ~~a $6.8~~an $8.9 million ~~decrease~~increase in cash used in accounts payable and accrued expenses offset by $6.1 million increase in cash provided by accounts receivable driven by the increase in revenue, and a ~~$3.1~~$1.1 million ~~decrease~~increase in cash used to settle outstanding prepaid expenses and other assets, ~~partially offset by $2.4~~including $0.7 million ~~increase in accounts payable~~reclassification of capitalized implementation costs related to cloud computing agreements after the implementation of ASU 2018-15. Accounts Receivable and ~~accrued expenses. Trade accounts receivable fluctuate from period-to-period depending on the period-to-period change in revenue and the timing of collections.~~ Accounts payable fluctuate from period-to-period depending on the timing of purchases and payments.

Net cash used in investing activities was ~~$3.1~~$3.0 million for the three months ended March 31, ~~2021~~2022 as compared to net cash used in investing activities of ~~$5.1~~$3.1 million for the three months ended March 31, ~~2020.~~2021. The decrease in cash used is due to ~~a $2.3~~$0.7 million ~~decrease in cash payments~~of capitalized implementation costs related to ~~acquisitions,~~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 ~~$0.3~~$0.6 million ~~decrease~~increase in purchases of property and equipment.

For the three months ended March 31, 2022, net cash used in financing activities was $1.3 million, related to the payments 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 ~~related to~~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. ~~For~~

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, 2020, net cash provided by financing activities was $24.5 million and related to the net borrowings under our Revolving Credit Facility of $29.0 million partially offset by payments of long-term debt of $4.3 million and payments on capital lease obligations of $0.2 million.

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

We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities or purchased any nonfinancial assets.2022.

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

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

We are subject to interest rate market risk in connection with our long-term indebtedness. Our principal interest rate exposure relates to outstanding amounts under the $300 million Initial Term Loans, the Revolving Credit Loans of $40 million and the Delayed Draw Term Loans of $50 million. Interest rate changes ~~generally~~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, ~~2021~~2022 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.

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

Transaction gains and losses arising from currency exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in “Other expense” in our condensed consolidated statements of comprehensive loss included elsewhere in this Quarterly Report on Form 10-Q. Such transaction gains and losses may be realized or unrealized depending upon whether the transaction settled during the period or remains outstanding at the balance sheet date.

During the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, we generated the equivalent of ~~$15.0~~$14.1 million and ~~$16.2~~$15.0 million, respectively, of U.S. dollar-denominated revenues in non-U.S. subsidiaries. Each 100-basis point increase or decrease in the average foreign currency rate to U.S. dollar exchange rate for the three-month period would have correspondingly changed our revenues by approximately $0.1 million and ~~$0.2~~$0.1 million for each of the three months ended March 31, ~~2021~~2022 and ~~2020.~~ 2021.

~~The Company carried out an evaluation under~~In the ~~supervision and~~ordinary course of business, our management, with the participation of ~~the Company's management, including the Company's~~our Chief Executive Officer and Chief Financial Officer, periodically reviews and evaluates the effectiveness of our internal control over financial reporting and makes changes, if appropriate, to our disclosure controls and procedures to improve such controls and increase efficiency, seeking to ensure that we maintain an effective internal control environment. An evaluation of the effectiveness of the design and operation of ~~the Company's~~our disclosure controls and procedures as of ~~March 31, 2021.~~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. Based upon that evaluation, ~~the~~our Chief Executive Officer and Chief Financial Officer concluded that, as ~~a result~~ of March 31, 2022, our disclosure controls and procedures are effective to provide reasonable assurance that the ~~material weakness~~information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and reported to 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.

Changes in internal control over financial reporting ~~as described below, our disclosure controls and procedures were not effective at~~

There has been no change in the ~~reasonable assurance level as of March 31, 2021.~~

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

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

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

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.

~~Except as noted below, there have been no material changes~~In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in ~~“Risk Factors” 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, ~~2020 as filed with the SEC on March 18, 2021.~~

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

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

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

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

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

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

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

~~Item 2.~~ ~~Unregistered Sales of Equity Securities~~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 ~~Use of Proceeds.~~globally.

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~~.authorized.

Delaware	61-1898603
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
8201 Greensboro Drive Suite 300 McLean, VA	22102
(Address of Principal Executive Offices)	(Zip Code)

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

		Page
Part I. Financial Information		1
Item 1. Financial Statements		1
Condensed Consolidated Balance Sheets		1
Condensed Consolidated Statements of Comprehensive Loss		2
Condensed Consolidated Statements of Changes in Stockholders’ Equity		3
Condensed Consolidated Statements of Cash Flows		4
Notes to Unaudited Condensed Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk		25
~~Item 4. Controls and Procedures~~		25
~~Part II. Other Information~~		26
~~Item 1. Legal Proceedings~~		26
~~Item 1A. Risk Factors~~		26
~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities~~		26
~~Item 6. Exhibits~~		27
~~Signatures~~		28
Item 4. Controls and Procedures	29
Part II. Other Information	30
Item 1. Legal Proceedings	30
Item 1A. Risk Factors	30
Item 6. Exhibits	30
Signatures	32

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

	2022 Q1						2021 Q1
	Technology Solutions		Nebula		Consolidated		Technology Solutions		Nebula		Consolidated
Legal Technology	$	66,240	$	6,117	$	72,357	$	58,329	$	5,405	$	63,734
Data Recovery		9,541		—		9,541		11,716		—		11,716
Total revenue	$	75,781	$	6,117	$	81,898	$	70,045	$	5,405	$	75,450

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☒

Emerging growth company	☒

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

Description	RSUs Outstanding
Balance at December 31, ~~2020~~2021		~~1,290,432~~1,513,892
Granted		~~308,750~~13,889
Vested - non-employee director awards		(~~16,666~~16,667	)
Forfeited		(~~51,190~~12,986	)
Expired		-—
Balance at March 31, ~~2021~~2022		~~1,531,326~~1,498,128

	Twelve Months Ended March 31,
	2022	2021
Legal Technology net revenue retention	109%	84%

Exhibit Number		Description
~~10.1~~3.1		~~Credit Agreement, dated as~~Second Amended and Restated Certificate of ~~February 8, 2021, by and among LD Lower Holdings,~~Incorporation of KLDiscovery Inc.~~, LD Topco, Inc., the other guarantors party thereto, the Lenders party thereto, each L/C Issuer party thereto and Wilmington Trust, National Association, as administrative agent and collateral agent~~ (incorporated by reference to Exhibit ~~10.1~~3.1 to the Current Report on Form 8-K filed ~~on February 8, 2021).~~December 26, 2019)
~~10.2~~3.2		~~Second Amendment to Stockholders’ Agreement dated February 2, 2021, by~~Amended and ~~among~~Restated Bylaws of KLDiscovery Inc. ~~(formerly known as Pivotal Acquisition Corp.) and CEOF II DE IAIV. LP, a partnership, and Revolution Growth III LP and certain other signatories thereto~~ (incorporated by reference to Exhibit ~~10.38~~3.2 to the Current Report on Form 8-K filed December 26, 2019)
10.1 #		Third Amendment to the Software License Agreement dated as of January 1, 2022 by and between KLDiscovery Ontrack, LLC (successor-in-interest to LDiscovery LLC) and Relativity ODA LLC (incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K filed on March ~~18, 2021).~~17, 2022)
31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
~~101.INS~~		~~XBRL Instance Document~~
~~101.SCH~~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

		KLDiscovery Inc.

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