CS Disco, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. CS Disco provides cloud-based, AI-powered legal software, with most revenue tied to customer usage in legal matters. Financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $34.3 million | $33.7 million | $67.4 million | $68.2 million |
| Gross profit / margin | $25.2 million / 74% | $25.2 million / 75% | $50.1 million / 74% | $50.7 million / 74% |
| Operating loss | $17.0 million | $20.0 million | $39.3 million | $31.7 million |
| Net loss | $14.9 million | $20.2 million | $35.3 million | $32.0 million |
| Net loss per share, basic and diluted | $0.25 | $0.35 | $0.59 | $0.55 |
| Adjusted EBITDA (non-GAAP) | $(7.4) million | $(12.4) million | $(20.4) million | $(20.2) million |
Q2 operating expenses were $42.2 million, down 7% year over year; first-half operating expenses were $89.4 million, up 8%. Stock-based compensation was $6.9 million in Q2 and $14.1 million in the first half, compared with $5.5 million and $8.7 million, respectively, in 2022. Q2 operating and net loss margins were approximately 50% and 44%; first-half margins were approximately 58% and 52%.
- Cash and liquidity: Cash and cash equivalents were $178.9 million at June 30, down from $203.2 million at December 31, 2022. Management expects existing cash to cover anticipated requirements for at least the next 12 months.
- Cash flow, first half: Operating activities used $21.8 million, investing activities used $3.7 million, and financing activities provided $1.2 million. Cash declined by $24.3 million.
- Balance sheet: Total assets were $232.4 million and stockholders’ equity was $203.9 million. No borrowing or conventional debt balance is reported; lease liabilities totaled approximately $10.2 million, including current and non-current operating and finance leases.
- Other metrics: Accounts receivable, net, was $24.6 million; the allowance for credit losses was $2.3 million. Remaining performance obligations were $18.6 million, of which approximately $12.1 million was expected to be recognized within 12 months.
Material changes versus the prior comparable period
- Q2 revenue grew 2%, but first-half revenue declined 1%. New customers contributed $5.2 million of Q2 revenue and $9.4 million in the first half, offset by lower usage from existing customers of $4.7 million and $10.2 million, respectively. Management cited decreased usage by several existing customers, particularly in managed review for the first half.
- Q2 net loss narrowed year over year, while first-half net loss increased. Higher interest income on cash balances helped results: first-half interest and other income was $4.1 million versus $0.1 million a year earlier.
- First-half operating cash use was slightly lower than in 2022. Investing cash use fell principally because the prior-year period included more acquisition payments.
- The company committed to workforce reductions of approximately 9% in January and 8% in May 2023, recording $2.6 million of first-half restructuring charges, including $1.6 million in Q2.
- Usage-based revenue remained dominant: 89% of Q2 revenue and 88% of first-half revenue, compared with 89% in the comparable 2022 periods.
Outlook, commentary and risks
- Management expects research and development, sales and marketing, and general and administrative expenses to decrease in absolute dollars in the near term; sales and marketing is expected to remain the largest operating expense. It expects Adjusted EBITDA to improve over the long term as the business scales and achieves operating efficiencies.
- The filing provides no clear numerical revenue or earnings guidance. Management says it will continue evaluating spending, including capital expenditures, discretionary spending and strategic investments during 2023.
- Revenue is highly sensitive to the timing, duration and scope of customers’ litigation, investigations and other legal matters. Most customers can reduce or discontinue usage, creating volatility; decreases among existing customers have recently offset new-customer contributions.
- Management says macroeconomic conditions had not materially affected operations or liquidity to date, but future effects remain uncertain. Key exposures include customer spending, competition, customer concentration, reliance on AWS and other third parties, cybersecurity and privacy obligations, AI-related risks, and international operations and currency fluctuations.
- Contingent consideration related to the Congruity acquisition had an estimated fair value of $0.8 million at June 30, 2023; up to $1.6 million in aggregate additional payments remained possible, subject to referral-related terms. Management reported no litigation expected to have a material adverse effect.
- Management concluded disclosure controls and procedures were effective at the reasonable-assurance level as of June 30, 2023; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether usage and revenue from existing customers stabilize, and whether new-customer growth can offset decreases in usage, especially in managed review.
- Whether expense reductions translate into sustained improvement in operating losses and cash burn, while accounting for restructuring costs and elevated stock-based compensation.
- The pace of cash consumption relative to the $178.9 million cash balance and management’s stated 12-month liquidity expectation.
- Customer concentration and exposure to large, matter-driven usage swings; the filing does not provide a clear quantified concentration percentage.
- How contingent consideration, lease commitments, credit losses and other obligations evolve, and whether there are material developments in cybersecurity, privacy, AI regulation or litigation risks.