CS Disco, Inc. (NYSE: LAW) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. CS Disco provides cloud-based, AI-powered ediscovery, legal document review, and case-management software. Most revenue is usage-based and varies with customers’ legal matters.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $34.5 million | $29.9 million | $102.7 million | $80.5 million |
| Revenue growth | 15% | 27% | ||
| Gross profit / margin | $25.8 million / 75% | $22.0 million / 74% | $76.6 million / 75% | $58.2 million / 72% |
| Operating loss | $20.1 million | $9.1 million | $51.8 million | $14.9 million |
| Net loss | $20.1 million | $9.2 million | $52.1 million | $15.2 million |
| Adjusted EBITDA loss (non-GAAP) | $13.1 million | $7.5 million | $33.3 million | $11.0 million |
| Net loss per share, basic and diluted | $0.34 | $0.19 | $0.89 | $0.61 |
Q3 operating expenses rose to $45.9 million from $31.1 million, driven mainly by higher personnel costs, including stock-based compensation, across research and development, sales and marketing, and general and administrative functions. Nine-month stock-based compensation was $14.4 million, versus $2.5 million a year earlier. The filing reports no positive operating or net income.
Cash, liquidity, and debt
- Cash and cash equivalents were $213.1 million at September 30, 2022, down $42.4 million from year-end 2021. Current assets were $241.8 million and current liabilities $22.3 million.
- For the first nine months, operating cash use was $36.7 million, investing cash use was $9.0 million, and financing cash provided was $3.3 million. Investing included $5.3 million paid for the Congruity acquisition.
- The company had no outstanding debt. Operating and finance lease liabilities totaled $11.1 million; it entered into new Austin headquarters and New York office leases during the period.
- Management believes existing cash will fund anticipated requirements for the next 12 months. Longer-term needs are expected to be met through operating cash flows and cash on hand; additional financing may be sought, but could be unavailable on acceptable terms.
Changes, outlook, and notable items
- Q3 revenue increased $4.6 million year over year. New customers contributed $6.2 million, partly offset by a $1.6 million decline from existing customers, principally due to reduced usage by two customers. Excluding those two customers, management attributed about 85% of the increase to new customers and 15% to existing customers.
- For the nine-month period, management attributed approximately 60% of revenue growth to new customers and 40% to increased usage and adoption by existing customers.
- Usage-based revenue was 89% of revenue in both Q3 periods and 89% of nine-month 2022 revenue; subscription revenue was 11% in Q3 and 11% for nine-month 2022.
- Management expects research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars as the business grows. It expects Adjusted EBITDA to fluctuate in the near term as it invests, with improvement over the longer term as scale and expense efficiencies develop. The filing provides no specific revenue or earnings guidance.
- In February 2022, the company acquired legal workflow solutions from Congruity for approximately $6.1 million, including an $0.8 million holdback, and up to $2.0 million of contingent consideration. Contingent consideration was estimated at $0.6 million at quarter-end. The acquisition added $5.9 million of goodwill and $1.2 million of intangible assets.
- CEO Kiwi Camara received a 10-year performance option covering approximately 4.37 million shares, with vesting tied to share-price milestones from $150 to $900. No milestones had been achieved as of September 30; $2.4 million of related compensation expense was recorded for the nine-month period.
Principal risks and contingencies
- Revenue depends heavily on customer usage and the timing, duration, and scope of legal matters; customers can reduce or stop usage, making results volatile. The filing identifies customer concentration as a risk and notes that two customers reduced usage in Q3.
- Continued losses, rising operating costs, and operating cash use could hinder the path to profitability. The company reported an accumulated deficit of $179.5 million.
- Other risks include competition, macroeconomic conditions and reduced legal spending, reliance on AWS and other third parties, cybersecurity and sensitive-data protection, privacy regulation, hiring and retention, and execution of growth and international expansion.
- Management said COVID-19, global uncertainty, and Russia’s war in Ukraine had not materially affected operations to date, but future effects remain uncertain. No litigation was identified as likely to have a material adverse effect; the company reported no material changes to commitments outside the ordinary course.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level, with no material change in internal control over financial reporting reported for the quarter.
Investor verification checklist
- Confirm whether customer usage, particularly among large customers, stabilizes or grows and whether revenue growth becomes less dependent on new customer additions.
- Track operating-expense growth, stock-based compensation, GAAP losses, and cash used in operations against revenue growth.
- Review cash runway and the effect of lease commitments, acquisition holdback, and contingent consideration.
- Assess progress integrating Congruity’s legal workflow products and any subsequent changes to acquisition valuations or contingent consideration.
- Distinguish GAAP results from management’s non-GAAP Adjusted EBITDA and review its reconciliation and exclusions.