wdq-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022


o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-40624

CS Disco, Inc.

(Exact name of registrant as specified in its charter)


Delaware	7372	46-4254444
(State or other jurisdiction of incorporation or organization)	(Primary standard industrial classification code number)	(I.R.S. Employer Identification No.)
	3700 N. Capital of Texas Hwy. Suite 150 Austin, Texas 78746
	(Address of Principal Executive Offices) (Zip Code)

(833) 653-4726

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.005	LAW	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of April 30, 2022, the registrant had 58,550,540 shares of common stock, $0.005 par value per share, outstanding.

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TABLE OF CONTENTS


		Page
Part I - Financial Information		4
Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	4
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2022 and 2021	5
	Condensed Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) for the Three Months Ended March 31, 2022 and 2021	6
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 3 1 , 202 2 and 2021	7
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34

Part II - Other Information
Item 1.	Legal Proceedings	36
Item1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3.	Defaults Upon Senior Securities	67
Item 4.	Mine Safety Disclosures	67
Item 5.	Other Information	67
Item 6.	Exhibits	68
Signatures		69

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Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains express or implied forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions.

These forward-looking statements include, but are not limited to, statements concerning the following:

•our expectations regarding our revenue, expenses and other operating results;

•our ability to acquire new customers and successfully retain existing customers;

•our ability to increase usage of our solution;

•our ability to effectively manage our growth;

•our ability to achieve or sustain profitability;

•future investments in our business, our anticipated capital expenditures and our estimates regarding our capital requirements;

•the costs and success of our sales and marketing efforts and our ability to promote our brand;

•our growth strategies for our solution;

•the estimated addressable market opportunity for our solution;

•our reliance on key personnel and our ability to identify, recruit and retain skilled personnel;

•our ability to effectively manage our growth, including any international expansion;

•our ability to maintain, protect and enforce our intellectual property rights and any costs associated therewith;

•the effects of global events, such as the COVID-19 pandemic, including variants of COVID-19, or other public health crises and the Russian military operations in Ukraine, on our business and the global economy;

•our ability to compete effectively with existing competitors and new market entrants; and

•the growth rates of the markets in which we compete.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers,

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dispositions, joint ventures or investments.

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Part I - Financial Information

Item 1. Financial Statements

CS DISCO, INC.

Condensed Consolidated Balance Sheets

(in thousands, except par value amounts)

(unaudited)


	March 31, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	238,576	$	255,477
Accounts receivable, net	24,930		20,740
Other current assets	3,662		4,634
Total current assets	267,168		280,851
Property and equipment, net	5,848		5,335
Operating lease right-of-use assets	609		864
Intangible assets, net	1,173		—
Goodwill	5,898		—
Other assets	384		351
Total assets	$	281,080	$	287,401
Liabilities, redeemable convertible preferred stock, and stockholders’ equity
Current liabilities:
Accounts payable	$	7,545	$	4,686
Accrued expenses	3,816		2,844
Accrued salary and benefits	4,503		7,955
Deferred revenue	3,035		2,175
Operating leases	627		890
Finance lease	70		99
Total current liabilities	19,596		18,649
Other liabilities	653		75
Total liabilities	20,249		18,724
Commitments and contingencies (Note 8)
Stockholders’ equity
Preferred stock $0.005 par value, 100,000 shares authorized and no shares issued and outstanding as of March 31, 2022 and December 31, 2021	—		—
Common stock $0.005 par value, 1,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 58,427 and 58,010 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively	293		291
Additional paid-in capital	399,851		395,850
Accumulated deficit	(139,313)		(127,464)
Total stockholders’ equity	260,831		268,677
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity	$	281,080	$	287,401

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CS DISCO, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended March 31,
	2022		2021
Revenue	$	34,468	$	21,131
Cost of revenue	8,969		5,788
Gross profit	25,499		15,343
Operating expenses:
Research and development	12,318		6,262
Sales and marketing	16,419		7,876
General and administrative	8,519		4,053
Total operating expenses	37,256		18,191
Loss from operations	(11,757)		(2,848)
Other income (expense)
Interest and other income	30		13
Interest and other expense	(93)		(57)
Loss from operations before income taxes	(11,820)		(2,892)
Income tax provision	(29)		(36)
Net loss	$	(11,849)	$	(2,928)
Less accretion of redeemable convertible preferred stock	—		(26)
Net loss attributable to common stockholders	$	(11,849)	$	(2,954)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.20)	$	(0.22)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted	57,972		13,388

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CS DISCO, INC.

Condensed Consolidated Statements of Changes in Redeemable Convertible

Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands)

(unaudited)


	Common stock			Additional paid-in capital		Accumulated deficit		Total
	Shares	Amount
Balance at December 31, 2021	58,010	$	291	$	395,850	$	(127,464)	$	268,677
Exercise of stock options	409	2		969		—		971
Repurchase of common stock related to net share settlement	(6)	—		(233)		—		(233)
Vesting of restricted stock units	14	—		—		—		—
Stock compensation expense	—	—		3,265		—		3,265
Net loss	—	—		—		(11,849)		(11,849)
Balance at March 31, 2022	58,427	$	293	$	399,851	$	(139,313)	$	260,831


	Redeemable convertible preferred stock			Common stock			Additional paid-in capital		Accumulated deficit		Total
	Shares	Amount		Shares	Amount
Balance at December 31, 2020	35,793	$	160,800	13,533	$	68	$	8,129	$	(103,120)	$	(94,923)
Accretion to redemption value	—	26		—	—		(26)		—		(26)
Exercise of stock options	—	—		56	—		222		—		222
Repurchase of common stock related to net share settlement	—	—		(4)	—		(50)		—		(50)
Stock compensation expense	—	—		—	—		490		—		490
Net loss	—	—		—	—		—		(2,928)		(2,928)
Balance at March 31, 2021	35,793	$	160,826	13,585	$	68	$	8,765	$	(106,048)	$	(97,215)

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CS DISCO, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2022		2021
Cash flow from operating activities:
Net loss	$	(11,849)	$	(2,928)
Adjustments to reconcile net loss to cash used in operations:
Depreciation and amortization	455		424
Stock-based compensation	3,206		488
Charge to allowance for credit losses	180		130
Non-cash operating lease costs	255		242
Non-cash interest	—		21
Changes in operating assets and liabilities:
Accounts receivable	(4,370)		(2,171)
Other current assets	965		(75)
Other long-term assets	(39)		—
Accounts payable	2,773		679
Accrued expenses and other	(3,253)		(2,167)
Deferred revenue	556		1,110
Operating lease liabilities	(263)		(249)
Net cash used in operating activities	(11,384)		(4,496)
Cash flow from investing activities:
Purchases of property, equipment and capitalized internal-use software development costs	(631)		(586)
Cash paid for acquisitions	(5,310)		—
Net cash used in investing activities	(5,941)		(586)
Cash flow from financing activities:
Proceeds from public offering, net of underwriting discounts and commissions and other offering costs	(284)		—
Proceeds from exercise of stock options	970		222
Repurchase of common stock related to net share settlement	(233)		(50)
Principal payments on finance lease obligations	(29)		(27)
Net cash provided by financing activities	424		145
Net increase (decrease) in cash:	(16,901)		(4,937)
Cash & cash equivalents at beginning of period	255,477		58,569
Cash & cash equivalents at end of period	$	238,576	$	53,632
Supplemental disclosure:
Cash paid for interest	$	—	$	12
Cash paid for taxes	$	102	$	16
Non-cash investing and financing activities:
Accretion of preferred stock to redemption value	$	—	$	26
Property and equipment included in accounts payable and accrued liabilities	$	244	$	—
Acquisition holdback	$	800	$	—
Contingent consideration related to acquisition	$	593	$	—

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CS DISCO, INC.

Notes to the Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Nature of Operations

Overview

CS Disco, Inc. (the “Company” or “DISCO”), has built a cloud-native, AI-powered software platform that enterprises, law firms, legal services providers, and governments use for ediscovery, legal document review, and case management in a wide variety of legal matters, ranging from litigation to investigations to compliance to diligence. The Company incorporated as a Delaware corporation on December 2, 2013. The Company’s headquarters are located in Austin, Texas.

2. Summary of Significant Accounting Policies

Emerging Growth Company Status

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. The Company has elected to use the extended transition period under the JOBS Act until the earlier of the date it (1) is no longer an emerging growth company or (2) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, the Company’s financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

Basis of Presentation and Consolidation

The accompanying condensed consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (“GAAP”) for interim financial information. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2021, and related disclosures, have been derived from the audited consolidated financial statements at that date but do not include all of the information required by GAAP for complete consolidated financial statements.

The unaudited condensed consolidated financial statements include the accounts of the Company. All significant intercompany balances and transactions have been eliminated. There are no differences between the net loss and comprehensive loss.

Unaudited Interim Condensed Consolidated Financial Statements

The accompanying interim condensed consolidated balance sheet as of March 31, 2022, the interim condensed consolidated statements of operations and comprehensive loss, of cash flows, and of changes in redeemable convertible preferred stock and stockholders’ equity (deficit) for the three months ended March 31, 2022 and 2021, and the related notes to such interim condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements are presented in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and do not include all disclosures normally required in annual consolidated financial statements prepared in accordance with U.S. GAAP. In management’s opinion, the unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of March 31, 2022 and its results of operations and cash flows for the three months ended March 31, 2022 and 2021. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year or any other future interim or annual period. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on February 25, 2022, as amended on April 29, 2022.

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Risks and Uncertainties

The ongoing global COVID-19 pandemic has impacted many operational aspects of the Company’s business and may continue to do so in the future. Additionally, Russia’s military operations in Ukraine have not had a material impact on the Company’s operations, but could do so in the future. The Company assessed the impact these events had on its results of operations, including, but not limited to an assessment of its allowance for credit losses, the carrying value of other long-lived assets, and the impact to revenue recognition and cost of revenue. While these events have not had a material adverse impact on the Company’s financial operations to date, the future impacts are largely unknown. The Company will continue to actively monitor the impact that these events on the results of the Company’s business operations, and may make decisions required by federal, state or local authorities, or that are determined to be in the best interests of the Company’s employees, customers, partners, and suppliers. As a result, the Company’s estimates and judgments may change materially as new events occur or additional information becomes available to them.

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with GAAP requires the Company to make certain estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses during the reporting period. There is complexity and judgment required in the Company’s process in determining the nature and timing of the satisfaction of performance obligations which affect the amounts of revenue, unbilled receivables, and deferred revenue. Estimates are also used for, but not limited to, current expected credit losses, capitalization and useful life of the Company’s capitalized internal-use software development costs, useful lives of assets, fair value of acquired intangible aseets, carrying value of goodwill, fair value of contingent consideration, income taxes and deferred tax asset valuation and valuation of the Company’s stock-based awards. Numerous internal and external factors can affect estimates. Actual results could differ from those estimates and such differences could be material to the Company’s condensed consolidated financial position and results of operations.

Net Loss Per Share Attributable to Common Stockholders

Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. The Company had six series of redeemable convertible preferred stock. Upon closing of the Company’s IPO, the outstanding redeemable convertible preferred stock was automatically converted into 35,793,483 shares of common stock. All series of the Company’s redeemable convertible preferred stock were considered to be participating securities because all holders were entitled to receive a non-cumulative dividend on a pari passu basis in the event that a dividend is paid on the common stock. The holders of the redeemable convertible preferred stock did not have a contractual obligation to share in the Company’s losses. As such, the Company’s net losses were not allocated to these participating securities.

Under the two-class method, basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.

Diluted earnings per share attributable to common stockholders adjusts basic earnings per share for the potentially dilutive impact of stock options, restricted stock awards, restricted stock units, performance-based restricted stock units, stock warrants and redeemable convertible preferred stock. As the Company has reported losses for all periods presented, all potentially dilutive securities are anti-dilutive, and accordingly, basic net loss per share equaled diluted net loss per share.

Cash and Cash Equivalents

The Company considers all highly liquid investments acquired with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents, which include the Company’s money market account, are measured at fair value on a recurring basis.

Accounts Receivable

Accounts receivable are recorded and carried at the original invoiced amount less an allowance for credit losses. The Company determines its trade accounts receivable allowances in line with (Topic 326): Measurement of Credit Losses on Financial Instruments (“Topic 326”), based upon the assessment of various factors, such as: historical experience, credit quality of its customers, geographic related risks, economic conditions, and other factors that may affect a customer’s ability to pay. Increases and decreases in the allowance for credit losses are included as a component of general and administrative expense in

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the condensed consolidated statements of operations and comprehensive loss. The Company does not have any off-balance sheet credit exposure related to its customers.

Due to the short-term nature of the Company’s receivables, the estimate of the amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. The Company has provisioned $0.2 million for expected losses for the three months ended March 31, 2022 and $0.3 million has been written off and charged against the allowance for the three months ended March 31, 2022. Recoveries made by the Company were nominal for the three months ended March 31, 2022. The allowance for credit losses related to accounts receivable was $1.1 million and $

SEC Form 10-Q filed by CS Disco Inc.