CS Disco, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2021. CS Disco (NYSE: LAW) provides cloud-based, AI-powered e-discovery and legal software. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $29.5 million | $15.7 million | $50.7 million | $31.4 million |
| Revenue growth | 88% | — | 61% | — |
| Gross profit / margin | $20.9 million / 71% | $11.2 million / 71% | $36.2 million / 71% | $21.8 million / 69% |
| Operating loss | $3.0 million | $5.3 million | $5.8 million | $16.5 million |
| Net loss | $3.1 million | $5.5 million | $6.0 million | $16.7 million |
| Adjusted EBITDA loss | $1.6 million | $4.4 million | $3.5 million | $14.7 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(10.2) million | $(15.1) million |
Amounts are in U.S. dollars. Adjusted EBITDA is a non-GAAP measure; the company cautions that it has limitations and may not be comparable with similarly titled measures used by other companies.
- Q2 revenue growth reflected increased use by existing customers (about 27% of the increase) and new customers (about 73%). For the first half, the company attributed about 32% of the increase to existing-customer usage and 68% to new customers.
- Usage-based arrangements generated 89% of Q2 revenue and 88% of first-half revenue. Revenue therefore depends substantially on the timing and level of customer legal work and platform usage.
- Operating expenses increased 44% in Q2 to $23.8 million, including higher sales and marketing, research and development, and general and administrative spending. First-half operating expenses rose 10% to $42.0 million. Expense ratios improved as revenue grew.
- Cash and cash equivalents were $47.0 million at June 30, 2021, down from $58.6 million at year-end 2020. Current assets were $72.6 million and current liabilities $16.5 million. The balance sheet reported no outstanding borrowings under the $40 million revolving credit facility.
- First-half operating cash use was $10.2 million; investing cash use was $1.4 million. Accounts receivable increased $8.5 million, a significant use of operating cash. The filing reports $5.1 million of contract assets included in accounts receivable, versus $1.5 million at year-end.
- At June 30, the company had $15.9 million of remaining performance obligations, expected to be recognized as revenue: $8.6 million over the next 12 months and the balance thereafter. These obligations do not include certain time-and-materials contracts billed in arrears.
Material changes and notable events
- Compared with Q2 2020, revenue grew 88%, while gross margin remained 71%. Net loss narrowed to $3.1 million from $5.5 million. For the first half, net loss narrowed to $6.0 million from $16.7 million.
- Sales and marketing expense rose 51% in Q2, reflecting headcount, variable compensation, marketing activity, professional services and a return of in-person events. General and administrative expense rose 63%, including increased professional services associated with preparing to become a public company.
- In July 2021, the company completed its IPO, issuing 7.5 million shares at $32 per share and receiving approximately $223.2 million in net proceeds. The offering occurred after quarter-end and is not reflected in June 30 cash. Preferred stock converted into common stock upon the IPO.
- The company’s July 2021 five-for-one reverse stock split is reflected retroactively in the share and per-share information presented. The 2021 Equity Incentive Plan was also adopted after quarter-end, increasing the option pool by 4.7 million shares; no grants had been made under that plan as of the filing.
Outlook, risks and contingencies
- The company gave no specific numerical revenue or earnings guidance in the provided filing text. Management said it expects revenue growth investments to continue, including sales and marketing, product development, infrastructure and international expansion; it expects Adjusted EBITDA to fluctuate in the near term and improve over the long term as the business scales.
- Management stated that cash, including IPO proceeds, and available revolving-credit capacity were expected to fund anticipated cash requirements for at least the next 12 months. Future funding needs depend on growth, usage, billing, investment levels and market acceptance.
- Usage-based revenue can fluctuate with the timing, duration and scope of legal matters; most customers can reduce or end usage without long-term purchase commitments. Customer concentration, competition, pricing, customer retention and new-customer acquisition are identified risks.
- COVID-19 previously delayed litigation and data collection, affecting usage and revenue growth; management said the ultimate impact of the pandemic and variants remained uncertain. It also expected certain pandemic-related expense reductions, including travel and hiring effects, to reverse in the second half of 2021, with timing uncertain.
- The company relies substantially on AWS and other third parties for cloud infrastructure, and identifies service interruption, cybersecurity, privacy and data-protection risks. It also notes risks from international expansion, regulation, foreign exchange and its history of operating losses.
- A previously identified material weakness in internal controls concerned evaluation of secondary stock sales for potential compensation expense. Remediation was ongoing, including additional accounting resources and an external advisor. Management considered disclosure controls effective at a reasonable-assurance level but had not completed remediation of the material weakness.
- The company reported no litigation that management believed would have a material adverse effect and no material changes to contractual obligations during the half-year. It disclosed ordinary-course legal proceedings and ongoing litigation-related costs as potential risks.
Most important facts for investors to verify
- Whether customer usage, new-customer additions and revenue growth remain strong, given the predominantly usage-based model.
- Whether receivables and contract assets convert to cash on schedule, and how cash burn changes after the IPO.
- Whether gross margin holds as cloud-hosting, outsourced staffing and delivery costs rise with usage.
- How management deploys IPO proceeds and whether spending growth supports a path to sustained profitability.
- Progress and testing results for remediation of the internal-control material weakness.
- Customer concentration, security and privacy exposure, and the continuing effects of COVID-19 and legal-market conditions.