CS Disco, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. CS Disco provides cloud-based, AI-powered software for e-discovery, legal document review and case management. Financial amounts below are in U.S. dollars; unless stated otherwise, figures are in millions.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $34.5 | $21.1 |
| Gross profit / gross margin | $25.5 / 74% | $15.3 / 73% |
| Operating expenses | $37.3 | $18.2 |
| Operating loss / margin | $(11.8) / (34)% | $(2.8) / (13)% |
| Net loss / margin | $(11.8) / (34)% | $(2.9) / (14)% |
| Adjusted EBITDA, non-GAAP | $(7.8) | $(1.9) |
| Cash used in operating activities | $(11.4) | $(4.5) |
Revenue increased 63% year over year. Management attributed approximately 65% of the increase to greater usage and adoption by existing customers and 35% to new customers. Usage-based revenue was 90% of total revenue, up from 87%; subscription revenue was 10%, down from 13%.
Cash and cash equivalents were $238.6 million at March 31, 2022, versus $255.5 million at December 31, 2021. Total assets were $281.1 million and stockholders’ equity was $260.8 million. The company reported no outstanding debt. Cash used in investing activities was $5.9 million, including $5.3 million paid for an acquisition; financing activities provided $0.4 million. Cash declined by $16.9 million during the quarter.
Remaining performance obligations were $22.1 million, of which approximately $11.9 million was expected to be recognized over the following 12 months. These amounts are not necessarily indicative of future revenue, in part because usage above contracted capacity is excluded.
Material changes versus the prior comparable period
- Revenue grew 63%, while cost of revenue increased 55%; gross margin improved by one percentage point to 74%.
- Operating expenses more than doubled, increasing to $37.3 million from $18.2 million. Research and development rose 97%, sales and marketing 108%, and general and administrative 110%, primarily reflecting higher headcount and related costs. Public-company compliance and insurance costs also increased.
- Net loss widened to $11.8 million from $2.9 million, and Adjusted EBITDA loss widened to $7.8 million from $1.9 million.
- Operating cash use increased to $11.4 million from $4.5 million, reflecting the higher net loss and increased accounts receivable, partly offset by noncash stock compensation and working-capital movements.
- Stock-based compensation expense rose to $3.2 million from $0.5 million.
- The company acquired legal workflow solutions from Congruity360 in February 2022. The preliminary allocation included $5.9 million of goodwill and $1.2 million of intangible assets.
Outlook, commentary and risks
Management stated that existing cash and cash equivalents were expected to fund anticipated cash requirements for at least the next 12 months. It expects continued investment in the business and says Adjusted EBITDA may fluctuate in the near term, with improvement over the long term dependent on scale and operating efficiencies. The filing provides no specific revenue, earnings or margin guidance.
Management noted that the usage-based business model makes revenue sensitive to the timing, duration and scope of customers’ legal matters. Most customers do not have long-term minimum usage commitments and may reduce or stop usage. The company also expects to continue investing in sales and marketing, research and development, infrastructure, international expansion and potential strategic acquisitions.
COVID-19 and Russia’s military operations in Ukraine had not materially adversely affected operations to date, according to the filing, but future effects were uncertain. Key disclosed risks include customer usage variability and concentration, competition and pricing pressure, dependence on AWS and other third parties, cybersecurity and privacy exposure, hiring and scaling challenges, and the company’s continuing losses. No litigation was identified as likely to have a material adverse effect. The Congruity transaction includes up to $2.0 million of contingent consideration; its estimated fair value at quarter-end was $0.6 million and is subject to quarterly remeasurement.
Important facts for investors to verify
- Whether revenue growth and customer expansion can continue given the high proportion of usage-based revenue and limited customer commitments.
- Whether operating expense growth can moderate relative to revenue growth, and what progress the company makes toward profitability and lower cash burn.
- Cash conversion and receivables: accounts receivable increased to $24.9 million from $20.7 million, and operating cash use reached $11.4 million.
- Integration and performance of the Congruity acquisition, including final purchase accounting and changes in contingent consideration.
- Whether management’s liquidity assessment remains appropriate as investment needs, customer usage and market conditions evolve.
- The impact of equity compensation and potential dilution: unrecognized RSU and PSU compensation costs were $55.7 million at quarter-end.