CS Disco, Inc. (NYSE: LAW) — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; the provided filing text does not give separate Q4 financial results.
Business context
DISCO sells cloud-native, AI-powered software for e-discovery, legal document review and case management, primarily on a usage-based model. It reported 1,126 customers at year-end, up from 825, and 214 large customers (over $100,000 in trailing-12-month revenue), up from 141. Dollar-based net retention was 146%, compared with 127% in 2020. The company completed its IPO in July 2021 and converted all outstanding preferred stock into common stock.
Financial performance and liquidity
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Revenue | $114.3 million | $68.4 million |
| Gross profit / gross margin | $83.2 million / 73% | $48.0 million / 70% |
| Operating loss | $(23.8) million | $(22.5) million |
| Net loss | $(24.3) million | $(22.9) million |
| Adjusted EBITDA (non-GAAP) | $(16.3) million | $(19.9) million |
| Cash used in operating activities | $(21.6) million | $(22.7) million |
- Revenue grew 67%; management attributed approximately 70% of the increase to greater usage by existing customers and 30% to new customers.
- Gross margin improved to approximately 73% from 70%. Net loss margin was approximately 21%, versus 33% in 2020; Adjusted EBITDA margin improved to approximately 14% negative from 29% negative.
- Year-end cash and cash equivalents were $255.5 million, compared with $58.6 million. Cash provided by financing was $221.7 million, primarily reflecting $219.8 million of net IPO proceeds.
- There were no borrowings at year-end; the company extinguished its revolving credit facility in November 2021. Current liabilities were $18.6 million and total liabilities were $18.7 million.
- Operating cash use remained substantial. Investing cash use was $3.1 million. Contractual commitments included $71.9 million for cloud platform purchases, primarily over the following four years.
Material changes and notable items
- Revenue growth and higher usage coincided with customer growth and improved retention. Large customers generated approximately 81% of revenue, up from 74%, although no individual customer exceeded 10% of revenue.
- Operating expenses rose: research and development increased 29%, sales and marketing 51%, and general and administrative 84%. The latter included higher public-company compliance, insurance and personnel costs.
- Stock-based compensation increased to $5.6 million from $2.0 million. The filing reports 1.0 million RSUs granted in January 2022, with an estimated $32.5 million of compensation expense to be recognized over approximately four years.
- The 2020 results included a $1.1 million sales-tax refund; there was no comparable refund in 2021. The 2020 COVID-related workforce reduction resulted in $0.7 million of severance charges.
- After year-end, on February 22, 2022, DISCO acquired legal workflow solutions from Congruity360 for approximately $6.1 million in cash plus up to $2.0 million contingent consideration.
Outlook, risks and contingencies
The company provided no numerical revenue, earnings or cash-flow guidance. Management said existing cash was expected to fund anticipated requirements for the next 12 months and expected Adjusted EBITDA to fluctuate in the near term as it continued investing, with improvement over the long term as scale and efficiencies increased. These are expectations, not guaranteed outcomes.
Key risks include variable customer usage and legal-matter timing, continued operating losses, customer concentration by revenue among large customers, competition and pricing pressure, reliance on AWS and other third parties, cybersecurity and privacy exposure, evolving regulation, and the effects of COVID-19 on customers and litigation activity. The filing reports no litigation expected to have a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements; management said disclosure controls were effective and a previously reported material weakness had been remediated. The auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether usage growth and the 146% dollar-based net retention rate persist, and how much revenue growth depends on a small group of large customers.
- Whether DISCO can narrow operating losses and fund growth without relying on additional financing; assess operating cash use alongside non-GAAP Adjusted EBITDA.
- The duration and terms of cloud commitments, and the company’s exposure to AWS service disruption or pricing changes.
- The expected financial impact of increased stock-based compensation and the Congruity360 acquisition, including contingent consideration.
- Whether the remediated internal-control processes remain effective as the company scales and meets public-company reporting requirements.