KLDiscovery Inc. - Annual Report: 2021 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2021

OR

Commission File Number 001-38789

KLDiscovery Inc.

(Exact Name of Registrant as Specified in its Charter)

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

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  YES ☐ No ☒

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

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

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

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES ☐ NO ☒

As of June 30, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, based on the closing sales price of $7.81 on the OTC Pink Sheet Market, was approximately $73.5 million.

As of March 17, 2022, there were 42,684,549 of the registrant’s common stock, par value $0.0001 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement relating to its annual meeting of stockholders to be held in 2022 (the “2022 Annual Meeting”), to be filed with the Securities and Exchange Commission (the “SEC”) within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates, are incorporated herein by reference where indicated. Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K, such proxy statement is not deemed to be filed as part hereof.

Table of Contents

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, including information incorporated herein by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are not historical facts. This includes, without limitation, statements regarding our financial position, business strategy and management’s plans and objectives for future operations. These statements constitute projections, forecasts and forward-looking statements, and are not guarantees of performance. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this Annual Report on Form 10-K, 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-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expect, including:

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The forward-looking statements contained in this Annual Report on Form 10-K and in any document incorporated by reference are based on current expectations and beliefs, which we believe to be reasonable, concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (many of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. 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.

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RISK FACTOR SUMMARY

Our business is subject to numerous risks. The summary below highlights some of the risks you should consider with respect to our business. Additional risks, beyond those summarized below or discussed in “Risk Factors,” may also adversely impact our business, financial condition and results of operation. You should review and consider carefully the risks and uncertainties described in more detail in the “Risk Factors,” which includes a more complete discussion of the risks summarized here.

Privacy and Cybersecurity Risks

Risks Related to Our Business and Industry

Technology and Intellectual Property Related Risks

Other Business Risks

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Legal and Regulatory Risks

Risks Related to our Substantial Indebtedness

Risks Related to our Common Stock

Other Miscellaneous Risks

The foregoing summary is not complete and should be read together with the more detailed discussion of these risks and uncertainties in “Risk Factors,” together with all of the other information in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes thereto.

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PART I

Item 1. Business.

In this Annual Report on Form 10-K, unless otherwise specified or where the context requires otherwise, references to “we,” “our,” “us,” “KLD” and “the Company” (i) for the periods prior to the completion of the business combination between Pivotal Acquisition Corp. and LD Topco, Inc., which closed on December 19, 2019, refer to Pivotal Acquisition Corp., the special purpose acquisition company, and (ii) for the periods after completion of the business combination, to KLDiscovery Inc., the combined company, and its consolidated subsidiaries. References to and the descriptions of the business included in this Annual Report on Form 10-K refer, prior to the business combination, to the business of LD Topco, Inc., and after the business combination, to the business of KLDiscovery Inc. This Annual Report on Form 10-K also refers to our websites, but information contained on those sites is not part of this Annual Report on Form 10-K.

Mission

We solve complex legal, regulatory and data challenges for our clients around the world by leveraging our proprietary software and innovative technology-based solutions.

Our Company

The Company was incorporated by its founder, Pivotal Acquisition Holdings LLC, or Pivotal, under the name “Pivotal Acquisition Corp.” 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 February 4, 2019, the Company consummated its initial public offering, or the IPO, of units, with each unit consisting of one share of Class A common stock and one redeemable warrant entitling the holder to purchase one share of Class A common stock at a price of $11.50 per share, or the Public Warrants. On December 19, 2019, pursuant to an Agreement and Plan of Reorganization, dated as of May 20, 2019, as amended, the Company and LD Topco, Inc., or LD Topco, consummated a business combination transaction, or the Business Combination, pursuant to which, among other things, a merger subsidiary was merged with and into LD Topco, with LD Topco surviving the merger as a wholly owned subsidiary of the Company. The Business Combination was accounted for as a reverse merger in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. Under this method of accounting, Pivotal Acquisition Corp. was treated as the “acquired” company for financial reporting purposes.

Overview

We are a leading global provider of eDiscovery, information governance and data recovery solutions to corporations, law firms, insurance companies and individuals in 19 countries around the world. With our long- standing history and transformative acquisition in 2016 of Kroll Ontrack, a storied eDiscovery platform with history dating back more than 36 years, we have decades of experience designing, building, and developing innovative technology solutions that evolve with the needs of our clients. Our integrated, proprietary technology solutions enable clients to efficiently and accurately collect, process, transmit, review and recover complex and large-scale enterprise data. In conjunction with our proprietary technology, we provide immediate expert consultation and 24/7/365 support worldwide, empowering us to be a “first-call” partner for mission-critical, time-sensitive, and nuanced eDiscovery and data recovery challenges. We leverage our proprietary technology solutions and extensive industry expertise to provide a more reliable, secure and seamless experience for our clients when tackling “big data” volume, velocity, and veracity challenges.

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A key example of our purpose-built innovation is Nebula, our flagship, end-to-end AI / ML powered solution that serves as a singular platform of engagement for legal and other types of data. We also offer clients the optionality they desire—KLDiscovery-developed or externally-developed software and cloud-based or a number of different on-premise data storage options. We processed 7,823 and 7,598 Legal Technology matters for the years ended December 31, 2021 and 2020 respectively, and currently averaging over 40,000 data recoveries annually from all types of storage media. We believe our scale, expertise, proprietary technology and optionality, and global presence uniquely positions us to be the go-to partner for our clients and solve the world’s largest and most complicated data challenges.

Since January 1, 2020, we have provided services to a highly diverse base of more than over 5,400 Legal Technology clients. Our Legal Technology clients include both law firms and corporations serving many industry sectors including finance and banking, pharmaceutical and biotechnology, technology, insurance, and real estate. Our data recovery clients include corporations and individuals that need to recover and access data. Our loyal client base includes 97% of the highest-grossing law firms in the United States as ranked by American Lawyer, known as the AM Law 100, as well as 61% of Fortune 500 companies, as of December 31, 2021. We have longstanding relationships with many of our clients. For example, the average length of our relationships with our top 25 clients based on revenue for the year ended December 31, 2021 is approximately 13 years. We actively collect and review feedback from our clients to ensure we are investing in the features and services that address their ever-evolving needs. We believe our commitment to being a “first-call” provider for our clients’ largest and most complex cases has helped drive significant revenues from larger and more complex matters, with Legal Technology matters generating over $100,000 and $500,000 in revenue representing 77% and 47%, respectively, of our Legal Technology revenue during the year ended December 31, 2021.

The legal technology industry is fragmented and bifurcated into dozens of software providers, which concentrate on technology solutions, and service providers, which license software and focus on client support to assist with managing the third-party technology. Software providers have increasingly prioritized DIY solutions and generally lack full-service support to address complex data challenges, while service providers have relied on multiple, disparate third-party tools and systems that are limited in the client use cases they can address. We bridged this gap by establishing KLDiscovery as a leading legal technology provider with scale that merges state of the art proprietary software and white-glove services. This combination allows us to manage incidents from an organization’s smallest concerns to its most complex legal reviews, as well as time and strategically sensitive legal matters.

As the first provider to license Relativity, a ubiquitous document review tool, we set a new standard in eDiscovery workflow, being the first provider to reach over one million records on the platform. Since then, we have developed KLD AI and review automation proprietary tools to augment the Relativity offering. For those clients who may choose to use third-party tools like Relativity for data hosting, we complement and enhance their experience via our proprietary toolkit to maximize the hosting platform’s functionality.

In response to an increasing number of clients seeking an end-to-end, fully integrated offering, we launched our proprietary cloud-native Nebula ecosystem in 2018. Nebula is a differentiated, comprehensive platform that addresses the full lifecycle of the EDRM. Nebula is designed for enterprise adoption and can be seamlessly applied to address a multitude of use cases for the global legal and corporate communities. Clients who utilize our all-in-one platform benefit from a scalable, singular repository for their legal workflow processes, while reducing costs, and reducing data security risks inherent when processing and transferring data across multiple disparate systems and service providers. Nebula also offers clients flexibility in data delivery methods – in the public cloud, in our secure data centers, behind the client’s firewall in an enterprise server-rack and at a client’s location via Nebula Portable—optionality no other provider’s proprietary platform can offer. Regardless of data storage location, clients can seamlessly manage their data through the integrated Nebula platform. Demonstrating Nebula’s potential, we have experienced strong growth in Nebula revenues—for the year ended December 31, 2021, Nebula revenue was $25.9 million, a 38.0% increase from the prior year. Our diversified and deep-rooted client relationships provide a large and loyal user base to further accelerate the adoption and growth of Nebula.

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As Nebula’s capabilities continue to offer additional upstream use cases beyond eDiscovery, our clients are able to leverage our technology throughout their respective eDiscovery lifecycles. For example, we offer clients Nebula Big Data, which captures data across numerous platforms and provides a secure, searchable copy of data under preservation, as well as Nebula Legal Hold, which allows clients to ingest and manage hold data from any source. We believe the breadth of Nebula presents an attractive entry point for us to engage with clients early and bring them onto our platform.

Additionally, we are a global leader of data recovery services, currently averaging over 40,000 data recoveries annually from all types of storage media. With our in-lab, remote, and on-site capabilities, we recover data at an over 75% success rate from almost any device, storage manufacturer, operating system, database, and back up format. We expect to continue to benefit from our deep data recovery competencies, given the increasing relevance of data privacy and cybersecurity issues at the institutional, governmental, and international levels.

We believe we have a strong runway to capture a greater percentage of our large and growing market opportunity. Our unique combination of proprietary software and technology-enabled services, coupled with our full stack, scalable platform that covers the full EDRM life cycle, best positions us to tackle our clients’ “big data” challenges. Moreover, we believe our proprietary Nebula offering, unlike other existing solutions, offers broad flexibility in deployment methods, cost efficiency with customizable pricing models, and optimized accuracy with its underlying AI / ML technology. We see further opportunity to grow our sales among new and existing clients, scale internationally, and extend our technology leadership. For the years ended December 31, 2021 and 2020, we generated:

The following table sets forth the number of clients for Legal Technology and Nebula, respectively, as of the dates indicated. The number of Legal Technology clients includes the number of Nebula clients. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics” for additional information regarding number of clients and matters.

We define Legal Technology clients as each primary law firm and corporation to which we provided services in a litigation matter that we billed during the past two years. We define Nebula clients, each of which is included in the number of Legal Technology clients, as the total number of primary law firm, corporation, insurance company and service provider clients to which we provided legal technology solutions for a matter that we billed for use of our Nebula solution during the two years prior to the applicable date.

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The following table sets forth the number of matters for Legal Technology and Nebula, respectively, as of the dates indicated. The number of Legal Technology matters includes the number of Nebula matters. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics” for additional information regarding number of clients and matters.

We define Legal Technology matters as the total number of matters on which our Legal Technology solutions were used in the twelve months preceding the applicable date. Matters refer to a range of activities that include collecting, tracking, analyzing, and exchanging relevant data. Legal Technology solutions currently drive the majority of our revenue and provide the foundation for additional adoption of our proprietary technology solutions and other offerings. We define Nebula matters, which are included in the number of Legal Technology matters, as the total number of matters on which our Nebula solution was used in the twelve months preceding the applicable date. Nebula is our ecosystem of proprietary technology solutions that enables clients to collect, process, store, analyze, and govern their data on a single platform. Nebula comprises a steadily growing component of our revenue and we expect Nebula adoption to increase, and the number of Nebula matters to grow in the long term as we continue to introduce new product capabilities and cross-sell Nebula to our existing clients.

Industry background

The rule of law is integral to society—it is the foundation for systems of justice, underpins government functions, and upholds fair economic transactions and social development. From multi-national corporations and governments to local businesses and individual citizens, millions rely on legal services to navigate complex matters and uphold the law in an ever-changing world. According to Statista, legal services represent one of the largest sectors in the global economy, with worldwide spend estimated to increase from $767 billion in 2021 to $846 billion in 2023. As technology continues to revolutionize the legal services industry, there is a significant existing market opportunity for legal technology solutions that should continue to grow.

While the legal technology industry is vast and diverse, most organizations in the industry fall into one of four categories:

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Despite the clear distinctions among these categories, there is often overlap between their needs. Service providers commonly license and repackage technology with their services to law firms and corporations, who typically lack the full requisite of resources and domain expertise. Additionally, each organization has specific needs and requirements relating to where data can be hosted, ranging from entirely cloud to entirely behind their firewall, or somewhere in between. While each organization’s technology and service needs are unique, software providers can nevertheless market their solutions to all of those organizations, due to the overlap in needs.

These dynamics underscore the market potential for software providers and highlight the opportunity that exists today for a solution that has broad functionality, around-the-clock client service, and optionality in delivery vehicles to meet all of a buyer’s data needs.

Electronic Discovery Reference Model (EDRM)

eDiscovery

eDiscovery is a critical component of the legal industry: parties preserve, collect, review, and exchange information electronically for the purpose of using it as evidence in a civil, criminal or investigative legal case or regulatory action. Electronically Stored Information or, ESI, in eDiscovery can range from simple data sources such as emails, word documents, and databases, to increasingly modern and complex data sources such as social media messages, cell phone data, and mobile applications, such as internal digital chat data, and audio / visual calls. The volume and complexity of eDiscovery varies significantly from case-to-case, ranging from small matters comprising little data to highly complex matters with vast amounts of enterprise data where support from technology and legal experts is essential. According to the IDC the worldwide eDiscovery software and services market is forecasted to be $14.7 billion in 2021 and is expected to increase to $16.9 billion by 2024 due to the proliferation of data and legal challenges, thereby underscoring eDiscovery’s growing significance and use cases.

The eDiscovery market is highly fragmented, resulting in low penetration divided amongst many vendors. Further, within the eDiscovery industry, there is a significant disconnect between software providers and service providers. Most service providers of any scale have some proprietary technology, but very few have material portfolios and instead rely largely on licensing third party tools. These vendors lack fundamental control over the products they resell, which weakens the user experience and diminishes lifetime value.

Information governance

Information governance is a rapidly maturing discipline, the objective of which is to enable enterprises to manage their huge and growing data estates, taking into account the many demands placed upon that data. These demands include everything from ready access to data for business utility and continuity, to data protection against ransomware and other cyber-attacks, to complying with proliferating privacy and other regulatory requirements, to responding to regulatory investigations and civil litigation. Radicati estimates the information governance market to be $6.5 billion in 2021 and expects it to grow to approximately $8.9 billion in 2024.

Vendors that offer versatile solutions can help minimize costly and duplicative workflows arising from using separate systems to address multiple needs. Information governance products also serve as attractive entry points for

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new eDiscovery business opportunities. We expect increases in legal and regulatory demands, and burgeoning data volumes, as well as strategic needs to protect data from cyber-attacks, to drive the growing adoption of information governance solutions.

Data recovery

Data recovery technology providers help clients, ranging from Fortune 500 companies to individual consumers, recover data that would otherwise be lost for a myriad of reasons, such as system failures, accidental deletion, physical damage, natural disasters, ransomware or user error. Data recovery companies use software tools and physical inspection to diagnose and determine the condition of the media and what data may be recovered. Then, they make an image of the data and perform a logical reconstruction of it. In the case of physical damage, large- scale facilities are required as the device may need to be disassembled in a clean room lab and spare parts used to facilitate the recovery. According to the IDC, the worldwide data protection market, which consists of data recovery, archives, and backup spending, is projected to be $8.9 billion in 2021 and is expected to grow to $18.4 billion in 2025.

Many of the vendors in this fragmented industry are small electronics repair shops using off-the-shelf data recovery software tools. Many smaller data recovery vendors can recover data from hard disk or external drives, while some have the capability to assist with more complex data recovery from servers, storage systems, and networks. Very few global data recovery providers support large-scale operations such as clean room labs and physical data recovery capabilities. Data recovery also complements eDiscovery and information governance by minimizing the amount of data that cannot be recovered from lost or deleted files.

Industry trends

Growing significance of legal services worldwide

In an ever-evolving digital world, businesses are exposed to growing amounts of legal liability and greater risks related to their brand, reputation, and performance. As businesses expand their presence into new jurisdictions, they are also subject to increasingly complex disputes and legal matters. According to global law firm Norton Rose Fulbright’s litigation trends survey, 74% of companies in the United States faced at least one lawsuit in 2020. In order to safeguard their operations and minimize business disruptions, businesses must modernize their approach to legal matters through technology and are increasingly looking for comprehensive legal technology solutions to do so.

Technological transformation within the legal industry

Many believe that the legal industry has lagged behind other sectors in digital transformation. The lack of legal digital infrastructure is driven by the traditional bill-by-the-hour service model and legacy pure-play service providers who are unable to keep pace with evolving technology needs. As demand for legal services continues to grow, clients seek more technology-based solutions such as software applications to improve productivity and efficiency and drive greater certainty of legal outcomes. This profound transformation is increasingly powered by advancements of capabilities such as AI / ML and serviced by providers with domain expertise in both the legal and technology sectors. The COVID-19 pandemic and work-from-home orders further accelerated these trends and ushered in a new digitized environment where businesses and governments must adopt more legal technology solutions. With greater adoption of legal technology, lawyers and other legal service professionals increasingly require technical expertise and support from trusted providers to fully utilize and reap the benefits of these applications.

The proliferation of enterprise data

The volume and variety of enterprise data is growing at an exponential rate, with increased adoption of mobile devices, accessibility of hosted systems, and increased reliance on electronic data storage. According to the IDC, the amount of electronic data created and replicated will nearly triple from 64 zettabytes in 2020 to 180 zettabytes by 2025. With such rapid growth, traditional methods of manually collecting and reviewing data for documentary evidence have failed, having proven to be highly cumbersome and inefficient. Enterprises are increasingly seeking

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advanced technological solutions to review large datasets quickly, accurately, and securely, and to have data stored in a manner that facilitates access and the review process.

Increased focus on flexibility of solution delivery

With diverse business operations and locations and varying degree of adoption of cloud-based applications, clients need flexible legal technology solutions to suit their unique needs. There has been an ongoing industry shift towards cloud-based delivery methods, which we expect to become even more pervasive; however, many clients still rely on traditional, on-premise hosting licensed from third-party vendors. At the same time, others require more deployment optionality such as cloud, at a provider’s data center, or even portable solutions that can be brought on-site and air-gapped to address particularly sensitive data sets. Many factors drive these decisions, chief among them are the perceived benefits of enhanced data privacy and security, as well as a desire to have greater control over the company’s data. As such, clients need a flexible approach to how legal technology solutions are delivered to adequately meet the diverse and complex needs of the legal industry. As the industry continues to move away from a one-size fits all approach, there is a greater emphasis on customized legal technology offerings that feature seamless workflows from start to finish across multiple delivery options.

Users involved in complex cases require strong project management and client service

Complex cases, such as second requests from antitrust regulatory authorities such as the U.S. Federal Trade Commission or U.S. Department of Justice investigating possible anticompetitive consequences of a proposed M&A transaction and joint defense cases in which parties sharing similar legal interests are able to exchange information, require a significant amount of support—typically around the clock—from a team with diverse skill sets that can expertly navigate and execute work across many phases of the EDRM. Given the high stakes typically associated with these matters, law firms and corporations require a collaborative and consultative relationship with their technology solutions providers. Providers or platforms that favor a more “hands-off” approach may limit the types of engagements they will be considered for, as clients would need to engage third parties for support, and working with multiple providers introduces additional cost and risk at a critical juncture. With increasingly complex and nuanced cases, the provision of client service resources remains imperative for clients to realize the full benefits of the software in use.

Strategic relevance of privacy and security protocols

Clients are placing a greater emphasis on legal technology tools that not only increase productivity and accuracy, but also ensure data security and protection at industry-leading standards. This new and rapidly growing demand is driven by increased data privacy laws and regulations such as GDPR and the litany of state laws being enacted or considered for enactment in the United States. The rise of cybersecurity issues such as data breaches, ransomware and phishing attacks and other incidents is also driving demand. As a result, businesses and law firms have placed greater focus on secure record and access systems.

Limitations of existing offerings

Lack of providers offering both software and technology-enabled services

Historically, the legal technology industry has been characterized by a separation of software and service providers with industry participants falling in one of two major categories: software providers that create technology solutions and service providers that typically license and resell software and assist with managing the technology while offering client support and legal expertise.

Software providers do not offer critical client service resources

The relationship between software and services providers has been increasingly disrupted as the industry evolves. With the maturation of cloud and AI / ML technologies, certain software providers are prioritizing or limiting delivery of their software solution to the cloud while charging license fees. In turn, they rely solely on those licensing their software or third-party service providers charging clients usage-based fees to provide substantive client support. Furthermore, emerging software providers that typically offer DIY solutions, are in the early stages of expanding into the services space in order to expand their market opportunity, but they cannot support more

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complex and larger legal cases in the same way we can with our solutions. Despite this shift, these players continue to heavily prioritize self-help and “DIY” support models over full-service support, which is typically required for large and complex engagements.

Service providers rely almost exclusively on third-party technology

In contrast to software providers, service providers typically have very little proprietary technology and rely almost exclusively on third-party tools. These tools are expensive and often fail to individually address all of the various use-cases and needs of their buyers. This lack of technological independence either results in gaps in what a provider can offer or requires service providers to license multiple disparate systems in a manner that is neither seamless nor cost effective. Across the industry, service providers rely on licensing add-on technology tools for Relativity, or separate third-party apps such as Brainspace, often leading to a disjointed user experience resulting from the lack of any integration between separate technology platforms. There remains a gap – and industry need—for an integrated platform to provide users with flexibility across their technology stack, and a scalable solution that can address any type of legal case.

Lack of comprehensive solutions

Legacy point solutions fail to cover the full lifecycle of information governance, eDiscovery, and data recovery, and require legal teams and service providers to coordinate data and applications across numerous products and providers. The lack of a comprehensive and well-integrated offering results in inefficiency within workflow processes, as existing providers are often not interoperable. For example, a corporate client engaged in a large- scale defense case that is collecting digital evidence from various servers and needs assistance managing several case records typically requires multiple solutions with differing capabilities from different providers to meet its needs. However, using multiple solutions from multiple providers almost always results in additional license costs, inefficiencies and increases the risk of error and security breaches while transferring data between solutions. As legal matters become increasingly complex and costly with disparate solutions, an integrated and comprehensive platform becomes critical to deliver efficient and cost-effective performance as well as to provide a seamless user experience across offerings.

Limited flexibility and scalability of offerings

Many of the technology solutions within eDiscovery lack the flexibility and scalability to adapt to multiple delivery options. Most competing platforms have only one delivery model – either locally installed by the client or delivered as a SaaS platform by the provider. While cloud-based offerings are generally more cost-efficient, they sometimes lack the same degree of functionality and scalability as traditional offerings. This rigid bifurcation forces clients to decide between delivery methods – cloud or on-premise. Examples of this include eDiscovery providers looking to maximize margins by forcing clients to the cloud, to law firms looking to have “in-house” capabilities, to global corporations with smaller satellite offices in jurisdictions with strict data residency requirements and poor cloud provider coverage. There is a whitespace for a software solution with the flexibility to operate efficiently in both the cloud and on commodity hardware, to allow clients to benefit from optionality over the long term.

Lack of scalable, end-to-end technology solutions and expertise to handle complex cases

With the proliferation of enterprise data and the growing number of intricate cases, there remains a gap in offerings that are well-equipped to address the ever-evolving complexities within the legal landscape. The depth and breadth of eDiscovery cases vary greatly, ranging from internal investigations to highly complex legal cases, including second requests and joint defense cases.

Furthermore, as technologies such as ML advance and become increasingly accessible, it is now more important than ever for solutions to provide enrichment and automation wherever possible. This is especially critical for larger and more complex data sets where a “brute force” document-by-document approach is neither practical nor cost-effective.

Existing DIY solutions typically offer a one-size fits all approach, and lack the technology, functionality, expertise, and technical and project support required to help clients successfully navigate the complexity and nuances of large-scale projects. Revenue opportunities of any size, scale, or sustainability require a tight-knit client support matrix

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with a deep bench of talent with a high level of availability and experience. Any provider or solution lacking in this area will be unable to compete successfully.

Our solutions

We are a legal technology pioneer with a long-standing presence developing proprietary technology solutions. We provide an expansive suite of technology offerings including our end-to-end fully integrated solution, Nebula, which comprehensively addresses information governance, eDiscovery and data recovery needs. Our solutions have been developed in-house by capitalizing on our more than 15 years of technology expertise and legal process management experience. As the first provider to license Relativity, we have developed an entire suite of proprietary technology solutions that creates a bespoke and enhanced experience within the platform.

We introduced Nebula, our proprietary platform, in 2018 after years of learning from our many client relationships and the engagements on which we support them. Our vast experience taught us that our clients needed one comprehensive and integrated platform that can be used to complete all steps of the information governance and EDRM process, and we believe Nebula fills this critical need. Complemented by our world-class client service, Nebula empowers our clients with flexible, scalable, and innovative tools. As a result, unlike other providers who cannot update the third-party software they sell in real-time or technology companies who are unable to provide after-sale support, we fully control our proprietary technology—along with the user experience—enabling us to serve as a unified one-stop shop.

eDiscovery

We are a leader in eDiscovery with a broad suite of unique offerings that make us a provider of choice for our clients. Our core products include Nebula, EDR, and Relativity. Nebula offers end-to-end eDiscovery management in a single tool, enabling clients to efficiently analyze, process, review, and manage large data sets. EDR and Relativity are two platforms for hosted review, the former facilitates the eDiscovery search and review process in a single tool and the latter serves as a licensed platform focused on document review that provides our clients additional optionality for data hosting solutions. Whether our clients use our proprietary platforms, Nebula and EDR, or third-party licensed platforms, such as Relativity, we offer many complementary proprietary solutions that we have developed using cutting-edge AI / ML algorithms to enhance workflow efficiency and user experience.

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Nebula

Nebula is our premier end-to-end information governance and eDiscovery platform, which facilitates the identification, preservation, collection, processing, review, and exchange of ESI.

Developed in-house with our proprietary technology, we believe Nebula is one of the few comprehensive platforms in the marketplace that supports the entire lifecycle of EDRM. From initial identification to final production, Nebula covers all phases of eDiscovery within a single, easy to use platform, including, big data management, legal hold, ingestion and processing, early case assessment, or ECA, review, and production— infusing AI / ML and other advanced technologies every step of the way.

Using innovative technology, Nebula offers users maximum flexibility by supporting delivery in all environments, including in the public cloud, in our secure centers, behind the client’s firewall in an enterprise server-rack via Nebula Enterprise and at a client’s location via Nebula Portable. Nebula empowers users to make critical strategic decisions using the most relevant data with minimal human effort, disrupting traditional approaches to legal work and empowering adopters to do more with less.

As we continue to enhance Nebula, we remain focused on our strategy to attract more clients currently relying on third-party software onto our Nebula platform. Unlike many other providers who gather and resell technology tools created by others, our unified owned and operated platform offers greater flexibility and enables us to deliver greater lifetime value to our clients. We believe that these clients will not only benefit from Nebula’s cutting-edge technology and unique full array of delivery options but also the broader ecosystem we have created with proprietary tools to enhance legal departments’ productivity, efficiency, and quality of outcomes.

Nebula Big Data

Nebula extends our reach well beyond eDiscovery to include applications for cost-effective information governance solutions. Not only can it reliably capture data across dozens of platforms, it also meets ongoing legal hold requirements by providing a secure, defensible, and searchable copy of data under preservation. Nebula Big Data highlights the capabilities of our ecosystem to deliver both eDiscovery and information governance strategies. Nebula Big Data acts as an enterprise information archive, allowing organizations to cost- effectively use a single copy of data to satisfy multiple competing objectives in a unified platform that minimizes management overhead compared to managing data in source systems.

eDiscovery.com Review (EDR)

EDR is our proprietary solution tailored for technologists, such as a large law firm with sophisticated in-house technology expertise, who want a larger measure of control over their complex eDiscovery review and production. From eDiscovery investigations to document review and production, EDR integrates the eDiscovery process into one robust tool and includes analytics and matter management features that take extra time or create manual work in other applications. Not only does the intuitive interface allow users to easily search and review documents, but the automated routing and distribution of documents also helps users streamline reviews and maximize accuracy. With tried-and-true scalability and powered by next-generation technology, we have now reached over 100 million documents in a single EDR database. Over the past decade, our clients have produced approximately 6 billion pages to requesting parties using EDR. Unlike Nebula, which broadly addresses the full EDRM process, EDR was intentionally designed to focus specifically on large-scale review, analysis, and production.

Relativity

We are a leading licensee of Relativity, a ubiquitous document review tool that helps our clients analyze data for eDiscovery, litigation, investigations, and other legal matters. We license software from Relativity primarily on a fixed-fee basis with relatively minimal variable costs. Our current Relativity agreement expires on June 30, 2024.

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We are the longest tenured licensee of Relativity, with a partnership reaching back to 2006. Shortly after beginning the partnership, we hosted the first case to reach one million records on the Relativity platform, and we have a long and well-documented track record of innovation within the platform.

Our Relativity offering is differentiated by our own suite of exclusive and proprietary tools that affect every part of the project. As we augmented the Relativity offering with our proprietary supplemental products, we built a bespoke and proprietary user experience and broadened our competitive edge. In addition, our KLD AI and review automation tools help deliver efficient and reliable document review and allow users to maximize their Relativity experience. We currently host Relativity in six countries worldwide.

KLD AI and review automation

Developed in-house through a collaboration among our data scientists, engineers, and legal professionals, KLD

AI and review automation is one of the most advanced toolkits on the market. It offers a full range of technology- enabled review features to complement our extensive offerings including Nebula and Relativity. When our clients opt to use third-party tools like Relativity for data hosting, they adopt our toolkit to maximize their functionality, underscoring the efficacy of the proprietary technology that underpins KLDiscovery and the bespoke, full-suite solution we offer. Our toolkit includes:

Processing

KLDiscovery’s proprietary software stack ingests, normalizes, and prepares data for review, analysis, and production. Enterprise data is typically voluminous and routinely consists of a wide variety of data types coming from many disparate sources, meaning the quality, scalability, and reliability of the processing platform are critical. Most organizations license third party processing technologies, which are not integrated with their information governance, collection, review, or production platforms, creating an inefficient and costly workflow.

While our processing solution is integrated into Nebula, it can also be used with other third-party solutions. It supports dynamic resource management, allowing us to easily add technology resources (i.e., virtual machines) to provide high-powered scalability and performance. This powerful tool allows us to process significant amounts of data in a fraction of the time required with other applications.

This offering is well suited for service providers, law firms, and corporations who have a need to process data. Licensing our Nebula platform addresses various needs and requirements, which can range from a complete end-to-end solution to those that may require only a point solution for simple processing or early case assessment, or ECA.

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Regardless of the circumstances, clients reap the benefits of a mature processing technology that can not only be used at any scale and for any data set, but is also fully integrated into a larger, interconnected ecosystem.

Technology-enabled services

We deliver technology-enabled services to complement and maximize the power of our software portfolio. As part of our solutions, we engage with clients at every stage of their eDiscovery journey and personalize solutions focused on their individual needs. This process often serves as a starting point for new business opportunities as clients may use any combination of our technology solutions and services as their data and legal needs continue to evolve.

With the help of our team of experts, we aim to be our clients’ most trusted partner by providing support for all aspects of eDiscovery and data management. We also offer DIY tools such as RCMgr a comprehensive self- collection suite where end users and IT professionals alike can effortlessly and defensibly perform forensically sound collections of hard drives, loose files, and email servers. Leveraging decades of experience at the intersection of the legal, regulatory, and technology sectors, we provide technology-enabled managed review, digital forensics, informational archiving, and other advisory solutions 24/7/365 to users worldwide.

Data recovery

Business and private users routinely store business-critical data on servers, laptops, mobile devices, and phones. As a result, data loss events can be devastating. The cost to an enterprise can amount to millions of dollars if they are unable to access important data for business operations. To address those data loss events when they occur, we provide data recovery solutions worldwide.

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KLDiscovery value proposition

Highly differentiated combination of proprietary software and human capital

We believe our position as the differentiated legal technology provider with proprietary, state of the art, EDRM software combined with our white-glove services will help drive retention and support client growth. We have spent over 15 years investing in, delivering, and perfecting data-centric technology, including our flagship eDiscovery solution, Nebula. At the same time, we built a successful track record of solving some of the most challenging legal data problems through a combination of our proprietary technology and service-oriented culture. As the relationship between software and service providers shifts within the legal industry, we are well- positioned to disrupt the space as a singular, end-to-end and trusted provider of both software and services.

Full stack, scalable technology offerings covering the full spectrum of the EDRM

Through our proprietary technology offerings, we provide full stack, scalable AI-powered software solutions for corporate legal functions allowing clients to collect, process, transmit, store, analyze, and govern all of their data on a single platform in a timely and efficient manner. Nebula, our singular, end-to-end platform, allows us to provide a superior level of client service and minimize the risk of a data breach. Our solutions are designed for enterprise adoption and can be applied to a wide variety of enterprise use cases outside of litigation such as internal investigations, merger clearance, and legal holds.

Nebula is a highly differentiated and comprehensive technology platform

Our proprietary platform, Nebula, addresses virtually all potential eDiscovery and information governance use cases for the global legal and corporate communities. This end-to-end platform allows our clients to contract with a single solution provider and provides one, instantly scalable, secure repository for their legal data that avoids error-prone processes of moving data through different disparate systems. Our platform enables greater efficiency and optionality by offering our clients control over the location of their data and method of delivery. Regardless of data storage location or size, clients can seamlessly manage their data through the integrated Nebula platform with consistent user experience, performance, and features. In addition, Nebula, with its single- source platform and simple usage-based pricing model, addresses virtually all use cases, thus allowing our users to benefit from greater cost predictability and improved efficiency. With existing software solutions limited by any combination of expensive pricing models, limited features, and a lack of delivery options, we believe there is an underserved population of buyers, including eDiscovery service providers, law firms, corporations, and other organizations, that can immediately benefit from Nebula. By supporting a variety of deployment environments with increased cost-efficiency, we believe Nebula is the premier, unified solution that meets and will evolve with the needs of our clients.

State of the art AI / ML functionality

Our leading-edge AI / ML technology allows clients to review their legal data accurately and quickly. We have a strong, decades-long track record of developing award-winning workflow batching software, predictive coding, and AI / ML programs that maximize the efficiency and productivity of lawyers around the world. Developed through continuous use and refinement, our legal review technology has predictive capabilities that we believe are superior to our competitors, giving us an advantage as our clients use our solutions.

Simplified and flexible pricing to provide end-to-end optimization

Our pricing model, customized based on platform functionality and data volume, allows us to offer a wide variety of optionality for our clients. We employ different pricing structures across our large suite of offerings including usage-based subscriptions, transactional, à la carte, and alternative fee arrangements for software such as our proprietary Nebula platform and our technology-enabled services and data recovery engagements. We set transparent and attractive pricing, which allows us to deepen our relationships with our large, blue-chip client base. We believe the ease of our pricing structure and solutions, even for the largest and most complex organizations, provides critical

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entry points for us to onboard additional products and expand beyond traditional use cases. As the strategic value of our technology solutions continues to grow, our pricing strategy will attract both existing and new clients deeper into our ecosystem.

Our business model

We offer differentiated solutions to our clients via a flexible and scalable, usage-based business model, where, as an example, clients pay us on the basis of the amount of data processed, ingested, and/or reviewed on our platform, which drives future business opportunities. Our proprietary data and technology fuels referrals from our large global client base. As more clients begin to use our software and solutions, we have opportunities to cross- and up-sell to drive growth of our complementary features and add-ons. By continuously expanding our usage, we increase our global reach and create more value for clients and stakeholders.

For the years ended December 31, 2021 and 2020, revenues arising from usage-based agreements comprised 90.7% and 89.3% of revenue, respectively, while subscription agreements comprised 9.3% and 10.7% of revenue, respectively.

Our clients

Our Legal Technology clients include both law firms and corporations serving many industry sectors including finance and banking, pharmaceutical and biotechnology, technology, insurance, and real estate. Our data recovery clients include corporations and individuals that need to recover and access data.

Our definition of a Legal Technology client includes each primary law firm and corporation to which we provided services in a litigation matter that we billed during the past two years. Since January 1, 2020, we provided services to over 5,400 Legal Technology clients. As of December 31, 2021, our clients include 97% of the AM Law 100 and 61% of Fortune 500 companies.

We have longstanding relationships with our clients; the average length of our client relationship with the top 25 clients for the year ended December 31, 2021 is 13 years. For the years ended December 31, 2021 and 2020, no single client accounted for more than 5% of our revenue.

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Our key differentiators

A trusted partner for the most complex, mission critical legal matters and data needs

Through our decades of experience, we have built a reputation of technological excellence and “first-call” expertise for the most complex legal and data challenges worldwide. Our proven ability to perform the most difficult legal data reviews (such as antitrust second requests, joint defense, and large-scale M&A matters) and help our clients through their most challenging moments (such as mitigating and navigating a ransomware event) has made us a critical partner for our clients. Our proprietary technology capabilities and ability to evolve with the needs of our clients results in better outcomes for their organizations. By building a reputation as a trusted legal solution provider, we have created a loyal client base that will allow us to drive future business opportunities and expand the reach of our offerings including Nebula. Our comprehensive offerings distinctly position us to navigate our dedicated client base through the technological transformation of the legal industry while serving as a critical partner for all their legal technology needs.

Comprehensive technology solutions that expand beyond traditional eDiscovery use cases

As Nebula continues to expand further upstream within the EDRM, our technology is leveraged earlier in the data lifecycle, opening an attractive entry point for engaging our clients and moving them along the eDiscovery journey within our end-to-end Nebula platform. We believe our position as a one-stop platform that offers comprehensive solutions allows clients to contract with a single provider, avoiding frictions and risks in moving data and contracting multiple providers. Additionally, we are a global leader of data recovery services, supporting both small businesses and large enterprises with business server recoveries and backup tape restorations. Our proprietary incident response solutions enable our clients to recover from the deletion or destruction of data due to malicious or accidental incidents. The rapid proliferation of ransomware episodes faced by organizations worldwide validates the value of data today and how critical it is to retrieve.

Founder led, proven and experienced management team

Chris Weiler, our Chief Executive Officer, co-founded our Company in 2005 with a mission to support clients through their most complex and stressful legal and data challenges. As one of the longest-tenured CEOs in the global eDiscovery sector, he provides extensive industry expertise and relationships. Moreover we have a deep team of seasoned executives, including Dawn Wilson (Chief Financial Officer) and Danny Zambito (Chief Operating Officer), Daniel Balthaser (EVP of Engineering), Robert Hunter (EVP of Global IT and eDiscovery Operations), Krystina Jones (EVP of Global Sales and Marketing), Anthony DeJohn (SVP of Machine Learning), Oscar Vega (SVP of Global Sales), Peter Boehret (COO, Data Recovery) and Andy Southam (General Counsel), who have collectively spent over 180 years in the legal and technology industries. Furthermore, our sales and software development executives have worked together over the past 15+ years and developed a seamless feedback loop to improve our technology in response to the changing needs of our clients. Together, our experienced and passionate team is committed to delivering best-in-class solutions and a superior user experience to our clients worldwide.

Expansive global footprint

Our geographic presence spans 32 locations in 19 countries. Our broad reach provides us with the ability to act as a first responder when clients have urgent work requiring immediate attention. In addition, our familiarity with local laws and regulations allows us to effectively assist clients in navigating complex, cross-border situations.

Highly qualified and experienced sales force

Our sales management team recruits and retains highly qualified and experienced sales team members, focusing on expertise, knowledge and tenure, prioritizing the quality of team members over the quantity. Our top 15 sales team professionals by revenue average 15 plus years of experience in the eDiscovery industry and averaged more than $13.4 million in revenue per person for the year ended December 31, 2021, while our entire sales organization had a revenue per person average of over $6.7 million for the same period. We rely on a team of value-add sales professionals to act as consultants for their clients across a wide array of offerings. In 2020, we effectively integrated our data recovery and legal technology sales teams to better offer the full KLDiscovery portfolio of technology and solutions to a wider base of existing clients.

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Established track-record with scale and financial flexibility to fund investments

Our size and scale provide us with the financial flexibility to self-fund the development of our Nebula platform as we continue to advance new product features and enhancements. We possess a unique combination of industry-leading scale, with our loyal client base of more than 5,400 Legal Technology clients and with offices in 19 different countries as of December 31, 2021, and financial flexibility. We have a strong track record of funding our growth expansion in a disciplined manner, and we believe our robust financial profile affords us the continued financial flexibility to do so. Our net loss was $(60.5) million and $(49.9) million, while our adjusted EBITDA was $65.2 million and $63.3 million, respectively, for the years ended December 31, 2021 and 2020. We plan to devote significant resources to our salesforce expansion and research and development to aid in the evolution of our technology offerings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-U.S. GAAP Financial Measures.”

Our market opportunity

We operate within the legal services industry, one of the largest sectors in the global economy, which we believe is in the early stages of a major technological transformation. According to Statista, legal services represents one of the largest sectors in the global economy, with worldwide spend estimated to increase from $767 billion in 2021 to $846 billion in 2023. eDiscovery is an essential component of the legal industry, and the market remains highly fragmented. According to the IDC, the worldwide eDiscovery software and services market is forecasted to be $14.7 billion in 2021 and is expected to increase to $16.9 billion by 2024 due to the proliferation of data and legal challenges. Additionally, our information governance solutions are also part of the broader information governance market, which is expected to be $6.5 billion in 2021 and grow to approximately $8.9 billion in 2024, according to Radicati. Data recovery is another mission-critical offering that we provide, and the market is characterized by numerous small providers who rely on third-party data recovery software tools. As noted by the IDC, the worldwide data protection market, which consists of data recovery, archives, and backup spending, is projected to be $8.9 billion in 2021 and is expected to grow to $18.4 billion in 2025.

We believe our TAM will continue to grow over the long term, with the acceleration in the volume and variety of enterprise data that are critical to legal cases. Traditional methods of manual collection and review of data are being and will continue to be increasingly displaced by the use of technology solutions, and we believe the efficacy and functionality of our proprietary platform and our flagship ecosystem, Nebula, enable us to capture a greater percentage of this expanding TAM. With increased global scrutiny and added regulations within cybersecurity, businesses remain increasingly focused on adopting technology solutions whether within information governance or data recovery, that ensure comprehensive data security. These industry tailwinds, alongside the greater adoption of legal technology on an industry-wide basis and need for providers with both proprietary software and human capital, will organically broaden our TAM. We intend to continue to capitalize on opportunities to increase our share of the TAM by expanding the use cases for our solutions through our commitment to product innovation and platform expansion.

Our growth strategy

Building on the many strengths of our existing business and strategy, we are focused on continuing to enhance our proprietary solutions, expand our ecosystem, and extend our reach to capitalize on our large and growing market opportunity.

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Our products and technology

We have developed an array of integrated technologies and offerings that allows us to provide exceptional value to our clients.

eDiscovery

Nebula

Nebula epitomizes the modern, cloud-native application boasting the latest in AI / ML. Our award-winning software development and data science teams have incorporated best-of-breed technologies ranging from our own patented AI / ML technology to cutting-edge public cloud machine learning suites throughout Nebula to enhance efficiencies, streamline user experiences, and drive results.

Nebula can be delivered across numerous delivery vehicles, allowing the technology to be viable for virtually any use-case.

As with all Nebula deployments, security and compliance are top requirements. Microsoft Azure supports compliance with a broad set of industry-specific laws and meets comprehensive international standards. For example, Azure has ISO 27001, ISO 27017, ISO 27018, ISO 22301, ISO 9001 certifications, PCI DSS Level 1 validation, SOC 1 Type 2 and SOC 2 Type 2 attestations, HIPAA Business Associate Agreement, and HITRUST certification. Operated and maintained globally, Microsoft Azure is regularly and independently verified for compliance with industry and international standards and provides clients the foundation to achieve compliance for their applications.

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Nebula includes an array of tools and features including:

Nebula Big Data

Nebula Big Data provides a critical foundation to any information governance program. It captures data as it is created in dozens of platforms, such as Office 365, Slack, Box, and more. It provides the means to effectively classify and manage that data over the course of its lifecycle, including reliably preserving data subject to legal hold. It offers excellent data assurance against loss or alteration via a separate, secure copy of critical business data. It also enhances data with the ability to search and effectively retrieve targeted results, even from petabytes of source data.

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Lastly, it reliably and defensibly disposes of data no longer required to be retained for any business or regulatory compliance purpose.

Nebula Big Data provides an alternative and/or enhancement to traditional backup solutions, particularly in the cloud era when many SaaS productivity platforms lack effective recovery means in response to inadvertent data loss, alteration, or ransomware attacks. Nebula Big Data offers a platform that is designed to satisfy strict retention and data assurance regulations, such as those of FINRA and the SEC governing broker-dealer communications. In addition, it is the foundation of a cost-effective eDiscovery strategy, permitting what we believe is unprecedented insight into data very early in a case and a highly effective means of selecting the most relevant data for quick and easy promotion within the Nebula platform.

KLD AI and review automation

To support our review platforms, we offer cutting-edge tools for our users that enhances productivity and efficiency for eDiscovery.

Nebula’s entity extraction engine is trained to recognize eight distinct categories of real-world entities, then visually cluster documents referencing the same entities. This approach, based on semantic understanding rather than simple word frequency, provides enhanced insight into the data, allowing users to isolate and retrieve relevant information or filter non-relevant material quickly. Nebula can also uncover topics that might otherwise go unnoticed, giving legal teams an advantage.

Nebula’s sentiment analysis tools analyze tone at both the document and sentence levels. At its core, sentiment analysis applies Natural Language Processing techniques and computational linguistics to derive emotional attributes from text content. By leveraging sentiment analysis, users can better understand how communications are perceived and help discern the author’s tone and intent. This gives Nebula users an edge in contexts where more than just the words themselves matter, as in, for example, matters related to workplace harassment. Companies can use this feature to learn the tone of their employees to help determine if communications are positive, negative, or neutral, and help

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understand the behaviors and communication styles of employees and clients to identify trends and identify bad actors.

Processing

Our proprietary technology is purpose-built to address large and complex matters as easily and efficiently as it does the small and simple ones. With full integration in the Nebula ecosystem, our Processing technology allows us to address diverse needs on a massive, global scale.

We believe Nebula Processing allows us to process data with a higher degree of quality and, due to the lack of third-party licensing costs, at a lower cost point, as compared to providers relying exclusively on licensed technology. For organizations licensing Nebula for their eDiscovery needs—providers, law firms, and corporations alike—they reap the benefits of a mature processing technology that can not only be used at any scale and for any data set, but is also fully integrated and does not require any of the wrappers or clunky export/ import processes that come with licensing disparate third-party solutions.

Professional services

Leveraging our industry expertise and focus on delivering differentiated user experience, we complement our offerings with a suite of technology-enabled services.

Data recovery

Ontrack EasyRecovery

Developed through our partnership with one of the world’s leading data recovery software manufacturers, Ontrack EasyRecovery allows clients to perform precise file recovery of data lost through deletion, reformatting, and a number of other data loss scenarios. The product recovers data from solid-state drives and conventional hard drives, memory cards, USB hard drives, flash drives, and optical media. The product functions on both Windows and Mac operating systems and comes in several different versions, covering needs ranging from a small, one-time recovery to the most complex projects. There is a “free” version that is capable of recovering up to 1 GB of data, a “Home” version for straightforward recoveries, a “Professional” version suitable for small to medium businesses, and a “Technician” version that includes the tools needed to successfully perform data recoveries on all types of computer storage devices and rebuild broken RAID volumes.

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Ontrack PowerControls

We believe Ontrack PowerControls is a market leading granular restore software product, developed from Ontrack’s expertise in data recovery. Ontrack PowerControls is used to find and export email, SharePoint items and structured query language tables for eDiscovery, litigation, investigations, compliance, selective migration, develop and test, and general restore use cases for IT.

We believe Ontrack PowerControls provides a more powerful and faster search tool than native tools, and, most importantly for legal and compliance use cases, it does not alter the metadata, making it forensically sound. Most enterprise backup platforms do not have granular restore capabilities, so they collaborate with Ontrack and integrate Ontrack PowerControls with their products.

We are currently licensing Ontrack PowerControls to more than 300 organizations globally.

Ransomware recovery

Ransomware is a form of malicious software designed to block access to a computer system or certain data or publishes a victim’s data online. The attacker demands a ransom from the victim, promising—not always truthfully—to restore access to the data upon payment. When organizations are struck with ransomware, and crucial data cannot be accessed, it can be an extremely stressful time for all involved. Getting access to that critical data as quickly as possible is vital to ensure downtime is minimized and the organization can get back to normal.

The last decade has seen an increase of various ransomware Trojans surface, but the real opportunity for attackers has increased since the introduction of Bitcoin. This and other cryptocurrencies allow attackers to easily collect money from their victims without going through traditional channels.

No vertical is safe from the effects of ransomware. Unfortunately, some are more susceptible to successful attacks than others. There are various reasons for this: the technology they deploy, the security they have in place; identity governance and privilege maturity, and their overall cybersecurity protocols. And human error will always pose its own risks.

We continually track over 280 different types of ransomware, a population that is always evolving and growing. Ransomware changes and develops all of the time, so we want to make sure we are watching and studying the latest changes and advancements. Studying ransomware and its ever-changing forms provides additional knowledge and experience, leading to a higher probability that we will recover data that has been lost as a result of an attack.

Email extraction

We offer professional email recovery solutions for consumers and businesses alike. From individual files to entire databases, we maintain the expertise and technology to support practically any use case. The success of email recovery depends on where the email is stored. Email software, such as Microsoft Outlook, commonly stores email on hardware like a laptop, desktop, mobile phone, tablet, or server. We can easily recover email from both functioning and non-functioning hardware. Additionally, our recovery engineers are experienced in recovering enterprise email no matter how it is stored on a client’s server, whether it is inside a database, a Microsoft Exchange Information Store or individual messages in separate files, such as .pst containers.

Tape Solutions

We provide a range of tape services to solve the problems associated with legacy backup tapes and regularly support our clients to solve the following challenges:

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Data destruction solutions

Permanently deleting data is not as straightforward as pressing the delete button—it takes time and proper resources. Data that is not completely expunged before the media is disposed of is vulnerable to exposure. To increase the security of data, a secure, verified data destruction process is required. Based on their knowledge, our data experts seek to select and execute the most appropriate data destruction method for the client’s media. Once the data has been destroyed, we provide a certificate of destruction and disposal.

We support our clients throughout the whole data destruction process by offering data destruction solutions in our labs or onsite using Blancco Erasing Software or our Ontrack Degausser. For clients who want to handle the data destruction process themselves, we sell these products to the client and advise them how to best use them.

Sales

We operate with a global sales team that was integrated in 2020 across our offerings to address the specialized needs of our client base and cultivate strategic partnerships with key clients in our industry. As of December 31, 2021, our sales organization comprised of 67 professionals and is led by our sales executives and regional managers. Our business development managers have developed “first-call” relationships with several of our largest clients while providing significant expertise in the technical nature of the services.

Our global sales structure is tailored to deliver quick responses on pricing, account ownership requests, and general assistance with client requests and training. This structure is built on our foundational values of teamwork and responsiveness. Our global sales force pursues opportunities in a wide range of geographies and is not confined by the traditional territorial structure that competitors offer. This allows us to maximize relationships and revenue.

Sales leadership encourages representatives around the world to collaborate. A global sales strategy initiative has been implemented to facilitate communication between teams on shared major accounts, which includes the coordination of regular calls and information sharing on key accounts. Most law firms have multiple buyers, and this model maximizes our ability to increase penetration.

Sales executives are encouraged to act as their own entrepreneurs, backed by the support of seasoned sales leadership and a global sales operations team. The sales operations team assists the sales team with all client requests including conflict checks, SalesForce data entry, estimate creation, and generation of client agreements and work orders. This global support team allows the sales representatives to focus on what they do best— generating new business and maintaining existing client relationships. Our global sales structure and sales operations teams deliver quick responses to representatives and clients, flexible pricing models, and simplified matter initiation, giving us a competitive advantage in a fast-paced industry.

Marketing

We focus on connecting with our clients through our marketing team. Our marketing campaigns are developed internally and are focused on our mantra “KLD Difference. One KLD.” and our “Proprietary Powerhouse” technology. We advertise in a wide variety of trade publications and at sports and entertainment events. We also sponsor a variety of events, seminars, and conferences around the world. We operate approximately 35 global websites, which highlight our leadership, products, services, technology, industry experience, press clippings, and our community contributions. Holding true to our values, we are heavily focused on charitable donations and community work, which are highlighted on our “KLD Community” website page. We also have several video advertising campaigns which are shared via YouTube, Twitter, and LinkedIn. Additionally, we own the

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“ediscovery.com” domain and believe that KLDiscovery will capture significant internet search results on eDiscovery matters, due to this highly valuable and unique domain name.

Research and Development

Our research and development organization is responsible for the design, development, testing, and scaling of our proprietary technology infrastructure. We believe that our continued investment in research and development, including hiring top engineering talent, is critical for us to provide a leading and differentiated ecosystem that can tackle the industry’s most complex data problems. Additionally, our application development process is informed by the continuous feedback we receive from our own service providers, as well as long-term clients who are looking for a better and more secure solution.

Our research and development team is based across the United States and European Union, primarily in Minnesota and Poland, with an expanding presence in Greece. As of December 31, 2021, we had 180 employees in our research and development department.

Our competition

We believe the eDiscovery and information governance market is bifurcated, highly fragmented, competitive, and evolving. We encounter competition from different software and service providers with various business model and product offerings that overlap with parts of our solutions, including:

We believe the principal competitive factors in this industry include:

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There are many small regional eDiscovery providers which may have a few captive relationships but lack the resources or scale to compete for meaningful work. Likewise, most of the global and national providers lack a comprehensive proprietary platform to complement their scale and resources. We believe we are distinctly positioned with an ideal complement of global reach, scale of resources, and proprietary technology to address almost any client need.

Additionally, we serve the data recovery market, which is highly fragmented and generally competitive. Clients choose vendors based on brand awareness and reputation, speed, price, and security. Our competitors in the data recovery market include Drivesavers, Gillware Data Recovery, Stellar Data Recovery, Disk Doctors, Digital Data Recovery DDC, and Myung Information Technologies.

We also compete in the legal hold market with companies such as Exterro, OpenText, ZApproved, and Zylab.

Intellectual property

We own a range of issued, registered and applied for intellectual property rights across the world, primarily trademarks and patents.

As of December 31, 2021, we owned 140 trademark registrations globally and had 36 trademark applications at various stages in the application process. Our material trademarks are either registered or are the subject of pending applications for registrations in the U.S. Patent and Trademark office and various non-U.S. jurisdictions (but with a focus on the European Union, the United Kingdom, Norway, Switzerland, Japan, Australia, China, Singapore and Hong Kong). We use “KLDiscovery”, “Ontrack”, and “Ibas” as our primary corporate trademarks. The trademark “KLDiscovery” has proceeded to registration in Australia, China, Brazil, the European Union, Hong Kong, Japan, India, Switzerland, and the United Kingdom. Additionally, we have applied to register “Nebula,” the brand name for our proprietary eDiscovery platform, in our key markets and, to date, applications have proceeded to registration in the United States, Japan, the European Union, United Kingdom, Hong Kong, Switzerland, and Brazil.

We use “Kroll Ontrack” and “KrolLDiscovery” subject to a license from Kroll, LLC. In the third quarter of 2021, we negotiated the termination of our license for the Kroll Ontrack and KrolLDiscovery tradenames and executed the final agreements relating to the termination in October 2021. Under these agreements, our rights to use the trade names will expire on October 29, 2023. Part of the terms of the amended license are that the licensed marks will be withdrawn and/or cancelled upon our instructions and Kroll, LLC will be prevented from using and/or registering the same or similar marks. This agreement was a triggering event which resulted in an evaluation of impairment of our Kroll Ontrack and KrolLDiscovery tradenames capitalized as part of our 2016 Kroll Ontrack acquisition. See Note 1—Organization, business and summary of significant accounting policies to our audited consolidated financial statements.

We are the registered owner of over 500 domain names including our key domains used to promote our activities, namely: kldiscovery.com, ontrack.com, and ibas.com (along with many local variants of these main domain names). We are also the registered owner of ediscovery.com, which we believe will capture significant internet traffic in the future. Information contained on these websites or linked therein or otherwise connected thereto does not constitute part of nor is it incorporated by reference into this Annual Report on Form 10-K, and the inclusion of these website addresses is an inactive textual reference only.

We own the copyright of many of our business software and tools as they have been created by employees in the course of their employment. These include the Nebula and EDR platforms, the PMDB Database (internal job tracking tool), Service Cloud (data recovery portal), PowerControls, and the various Relativity applications to enhance the license of standard Relativity platform services.

We have more than 20 patent registrations, including recently granted patents for our Nebula offering.

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Human Capital Management

As of December 31, 2021, we had 2,855 employees. This total includes 1,220 regular employees and 1,635 temporary contingent employees who are employed on a project basis to work on active managed review matters. Our employees are not represented by a labor union, and we have not experienced any work stoppages. We believe employee relations are good.

The skills, experience, and industry knowledge of our employees significantly benefit our operations and performance. We continuously evaluate, modify, and enhance our internal processes and technologies to increase employee engagement, productivity, and efficiency.

We strive to hire employees who adhere to the following cultural values:

Annual employee training is used to reinforce these values across our global employee base. These trainings cover topics related to ethics, environment, health and safety, cyber-security, and emergency responses.

We believe that an inclusive culture where all employees feel valued and engaged makes KLDiscovery a desirable place to work, helps us to attract key talent and retain employees as they grow in their careers and fosters an environment that enhances each individual’s productivity and professional satisfaction.

As of December 31, 2021, not including employees who were employed temporarily to work on active managed review matters, our employees, including those employed by region, were located as follows:

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In order to comply with local employee-related laws, we do not require our employees to disclose their race and ethnicity. As of December 31, 2021, based on self-reported information of approximately 65% of our U.S. based employees, our gender and ethnicity demographics were as follows:

Government regulation

We collect, store, transmit, use, disclose and otherwise process, which we refer to herein as “Process” or “Processing,” data that was collected from and about persons or their devices, including personal information, which is defined broadly by relevant privacy and cybersecurity laws, and other regulated or confidential client data. In addition to terms in our contractual arrangements with clients, there are numerous federal, state, local and foreign laws, regulations and directives regarding privacy and the Processing and protection of such personal information and client data, the scope of which is continually evolving and subject to differing interpretations. We and our clients must comply with such laws, regulations and directives and we and our clients may be subject to significant consequences, including penalties and fines, for our failure to comply.

For example, on May 25, 2018, GDPR replaced the Data Protection Directive 95/46/EC with respect to the Processing of personal information in the European Union. The GDPR imposes several stringent requirements for controllers and processors of personal information (including non-E.U. processors who Process personal data on behalf of E.U. controllers), including, for example, more robust internal accountability controls, a strengthened individual data rights regime, shortened timelines for mandatory data breach notifications, limitations on retention and secondary use of information and additional obligations when we contract with third parties in connection with the Processing of personal information. Failure to comply with the requirements of the GDPR and the applicable national data protection laws of the E.U. member states may result in fines of up to €20 million or up to 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher, and other administrative penalties. Complying with the GDPR has required us to implement additional internal processes to seek to ensure that we Process personal information in a compliant way and we have regularly re-drafted all our standard contracts to meet specific articles within the GDPR and new interpretations of the GDPR. As we continue to operate under the GDPR, compliance may become onerous and adversely affect our business, financial condition, results of operations and prospects.

In addition, following Brexit (the process by which the United Kingdom left the European Union), the United Kingdom enacted the Data Protection Act 2018, which implemented legislation similar to the GDPR, referred to as the UK GDPR, which provides for fines of up to the greater of £17.5 million (sterling) or 4% of global turnover.

Furthermore, recent legal developments in Europe have created complexity and compliance uncertainty regarding certain transfers of information from the EEA to the United States. For example, on July 16, 2020, the E.U.-U.S. Privacy Shield Framework, which allowed for the transfer of personal data from the US to the EU, was invalidated by the European Court of Justice, or CJEU, and this was followed on September 8, 2020 by the invalidation of the equivalent Swiss-US Privacy Shield Framework. Three of our group companies were accredited under the E.U.-U.S. Privacy Shield Framework to legitimize the transfer of personal data from the EEA to the United States. Although the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal information transfer mechanism) upon which we rely for intra group transfers of personal information (and which is the most widely used transfer mechanism by our clients), it made

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clear that use of the standard contractual clauses must now be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of individuals. Additionally, the European Data Protection Board (assigned by the European Commission to oversee data privacy in the EU) has issued guidance concerning data transfers following these CJEU decisions which places a higher burden on compliance for data transfers. The European Union has recently re-issued the standard contractual clauses which must be used for all new personal data transfers after September 27, 2021 (a sunset date for existing personal data transfers on December 27, 2022 means that any existing personal data transfers must be subject to the new standard contractual clauses by this date). The United Kingdom’s exit from the European Union has also imposed different requirements on personal data transfers which are currently subject to consultation by the United Kingdom’s Data Protection Authority. Given these legal developments and potential court cases concerning their validity, the long-term future of the standard contractual clauses remains uncertain, and we could be impacted by changes in law, including any future review of transfer mechanisms by the European courts or any supervisory authorities, which could require us to undertake substantial additional review of agreements on a going forward basis. If further legal bases for transferring personal information from Europe to the United States are invalidated, or if we are unable to transfer personal information between and among countries and regions in which we operate, it could affect the manner in which we provide our solutions or could adversely affect our financial results.

The California Consumer Protection Act, or CCPA, which became effective on January 1, 2020, introduced the most stringent data privacy laws in the United States to date, though several other states have passed or are in the process of passing laws and regulations governing privacy of their residents. Among other things, the CCPA requires covered companies to provide new disclosures to California residents and affords such residents expanded rights to access and delete their personal information and certain opt-out rights for sales of personal information. The CCPA includes a private right of action for certain data breaches, with potential for severe statutory damages. In November 2020, California voters passed the California Privacy Rights Act of 2020, or the CPRA. The CPRA further expands the CCPA, imposing additional data privacy compliance requirements that may impact our business, and establishing a regulatory agency dedicated to enforcing those requirements. In addition, Virginia enacted the Virginia Consumer Data Protection Act, creating the second comprehensive U.S. state privacy law, which will take effect on January 1, 2023, and Colorado enacted the Colorado Privacy Act, which will go into effect partially on July 1, 2023; both laws are substantively similar to the CCPA and the CPRA in many respects, but also include their own unique compliance requirements. Certain aspects of the interpretation and enforcement of these laws remain uncertain as regulating bodies in these jurisdictions continue to work out applicability and scope of the laws and regulations. Comprehensive privacy laws have also been proposed in several other states and at the federal level. The effects of such laws could be significant and may require us to modify our data Processing practices and policies and incur substantial compliance-related costs and expenses. Additionally, many laws and regulations relating to privacy and the Processing and protection of certain types of data are subject to varying degrees of enforcement and new and changing interpretations by courts. Companies like ours that operate on a national and international scale are responsible for monitoring and complying with the patchwork of state requirements in the United States as well as other jurisdictions worldwide.

Furthermore, any failure, or perceived failure, by us to comply with or make effective modifications to our policies, or to comply with any federal, state or international privacy, data-retention or data-protection-related laws, regulations, orders or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others (including clients), a loss of client confidence, damage to our brand and reputation or a loss of clients, any of which could have an adverse effect on our business. In addition, various federal, state, and foreign legislative or regulatory bodies may enact new or additional laws and regulations concerning privacy, data-retention and data-protection issues, including laws or regulations mandating disclosure to domestic or international law enforcement bodies, which could adversely impact our business, our brand or our reputation with clients. For example, some countries have adopted laws mandating that personal information regarding clients in their country be maintained solely in their country. Having to maintain local data centers and redesign product, service, and business operations to limit personal information Processing to within individual countries could increase our operating costs significantly and require that we establish a physical presence in a country or region where we otherwise may not have opened any facilities.