CS Disco, Inc. (NYSE: LAW) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The company provides cloud-based, AI-powered legal software, with revenue primarily tied to customer usage. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $34.9 | $34.5 | $102.3 | $102.7 |
| Gross profit / margin | $26.0 / 74% | $25.8 / 75% | $76.1 / 74% | $76.6 / 75% |
| Operating loss | $(2.9) | $(20.1) | $(42.2) | $(51.8) |
| Net loss | $(1.0) | $(20.1) | $(36.3) | $(52.1) |
| Adjusted EBITDA, non-GAAP | $(4.5) | $(13.1) | $(24.9) | $(33.3) |
- Q3 diluted loss per share was $0.02, versus $0.34 a year earlier; nine-month loss per share was $0.61, versus $0.89.
- Cash and cash equivalents were $157.7 million at September 30, 2023, down from $203.2 million at December 31, 2022. Current assets were $191.0 million and current liabilities $21.1 million.
- For the first nine months, operating cash use was $28.7 million (versus $36.7 million); investing cash use was $18.8 million (versus $9.0 million); financing provided $1.9 million. Cash declined by $45.6 million.
- Total liabilities were $29.2 million, mainly including operating lease obligations; the filing reports no material debt borrowing. The company said existing cash should fund anticipated requirements for at least 12 months.
Material changes and notable items
- Revenue was nearly flat: Q3 increased 1% year over year, while nine-month revenue decreased 0.3%. New customers added $5.8 million in Q3 and $12.7 million over nine months, but lower usage by existing customers offset most or all of that contribution; nine-month declines were particularly associated with managed review.
- Operating expenses fell substantially, reflecting lower headcount and spending after workforce reductions of approximately 9% in January and 8% in May. The nine-month restructuring charge was $2.6 million.
- Q3 general and administrative expense was unusually low at $0.1 million. The principal unusual item was reversal of $7.7 million of previously recognized stock-based compensation after former CEO Kiwi Camara resigned on September 10, 2023, before any performance-price milestones were met. This helped reduce GAAP net loss but does not represent ordinary recurring expense performance.
- Interest and other income was $2.2 million in Q3 and $6.3 million for nine months, versus $0.4 million and $0.4 million, respectively, a year earlier.
- The company paid $14.0 million for a five-year Fastcase primary-law license, recorded as an intangible asset. It expects to begin amortization when the asset is ready for use.
Outlook, risks, and contingencies
- The filing provides no clear numerical revenue or earnings guidance. Management expects Adjusted EBITDA to improve over the long term as the business scales and achieves operating efficiencies. Near-term expense commentary anticipates R&D expense increasing, sales and marketing decreasing, and G&A increasing.
- Management planned a U.S. release of its Cecilia ediscovery chatbot in Q4 2023 and intended to launch primary-law functionality in 2024. These are forward-looking plans, not reported results.
- Revenue is highly sensitive to the timing and scope of customer litigation and other legal matters: usage-based arrangements represented 89% of Q3 revenue. Management cautions that usage and quarterly results may fluctuate, and that customer usage declines, customer concentration, competition, macroeconomic conditions, and reliance on cloud infrastructure could adversely affect results.
- Two purported shareholder class actions allege misleading statements about revenue-growth drivers between July 2021 and August 2022. One was filed September 19, 2023; a second was filed November 3, 2023. Damages sought are unspecified, and the filing does not provide a clear estimate of potential exposure.
- Management reported disclosure controls and procedures were effective at the reasonable-assurance level as of September 30, 2023, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether usage trends among existing customers stabilize, particularly in managed review, and whether new-customer additions can support sustained revenue growth.
- How much reported expense improvement reflects durable cost reductions versus the one-time $7.7 million CEO award reversal and other restructuring effects.
- Actual cash burn and the pace of cash depletion relative to management’s stated 12-month liquidity expectation.
- Progress, launch timing, customer adoption, and monetization of Cecilia and the Fastcase primary-law content.
- Developments in the shareholder litigation, including potential costs, insurance coverage, and any subsequent estimate of exposure.