CS Disco Inc.
11/05/2025 | Press release | Distributed by Public on 11/05/2025 16:08
Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 20, 2025. This discussion, particularly information with respect to our financial results of operations or financial condition, business strategy, plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special Note Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview
DISCO provides cloud-native, artificial intelligence-powered legal product offerings that simplify legal hold, legal request, ediscovery, legal document review and case management for enterprises, law firms, legal services providers and governments. Our scalable, integrated product offerings enable legal departments to easily collect, process and review enterprise data that is relevant or potentially relevant to legal matters. We leverage a cloud-native architecture and powerful artificial intelligence, or AI, models to automatically identify legally relevant documents and improve the accuracy and speed of legal document review. Our AI models continuously learn from legal work conducted on our product offerings and can be reused across legal matters, which further strengthens our ability to help our customers find evidence and resolve matters faster as they expand usage of our product offerings. We provide legal departments with the ability to centralize legal data into a single platform, improving security and privacy for our customers, enabling transparent collaboration with other legal industry participants and allowing customers to reuse data and lawyer work product across legal matters. By automating the manual, time-consuming and error-prone parts of legal hold, legal request, ediscovery, legal document review and case management, we empower lawyers to focus on delivering better legal outcomes.
We generate substantially all of our revenue from our customers' actual usage of our product offerings. Customers generally do not commit to purchase a specific amount of usage on our product offeringsand their usage can fluctuate based on the number and nature of legal matters they have at any particular time. As a result, our revenue and other financial results can fluctuate from period to period given the inherent unpredictability of the timing, duration and scope of legal casework. We also offer our customers the option to enter into subscriptions based on committed minimum usage on an annual or multi-year basis, which represented 9% and 10% of our revenue for thethree and nine monthsended September 30, 2025, respectively, and 11% of our revenue in each of the three and nine months ended September 30, 2024. In addition, we generate revenue from a range of professional services aimed at accelerating the time-to-value for our customers.
After using and realizing the benefits of our product offerings, our customers can increase usage of our product offeringsto cover additional legal matters and adopt more of our offerings. As the amount of enterprise data in our product offeringsincreases, the strategic value and stickiness of our product offeringswithin an organization is enhanced.
Our customers include a diverse set of enterprises across a broad set of industries, as well as law firms, legal services providers of all sizes and government organizations. While we serve customers across many different industries, the way in which lawyers and legal professionals use our product offeringsis similar regardless of the specific industry in which each customer operates. This commonality has created efficiencies in our sales and marketing and research and development activities because we do not need to tailor our sales and marketing activities to a wide range of different customer use cases.
Our go-to-market strategy is focused on acquiring new customers and driving continued use and increased usage of our product offeringsfor existing customers. We primarily sell through a direct sales force, which is organized based on the stages of our sales motion. Our sales organization is primarily segmented into sales development representatives, field sales, inside sales and our customer success team. In addition, our platform isdesigned such that customers can grant access to third parties, including law firms and other legal service providers, to use our product offerings on the customers' behalf. This access facilitates adoption of our product offerings, as these law firms and other legal service providers can become customers on their own or recommend our product offeringsto other legal industry participants after realizing the benefits of our product offerings. Likewise, if a law firm is our customer, the law firm may add users from its clients' legal departments to our platformin order to collaborate with them. These users may then become champions and encourage the companies they work for to become customers.
As of September 30, 2025, we had $28.8 million of cash and cash equivalents and $84.7 million of short-term investments. We generated revenue of $40.9 million and $36.3 million in the three months ended September 30, 2025 and 2024, respectively, representing a period-over-period growth of 13%, and $115.7 million and $107.8 million in the nine months ended September 30, 2025 and 2024, respectively, representing a period-over-period growth of 7%. Our net loss was $13.7 million and $9.2 million for the three months ended September 30, 2025 and 2024, respectively, and $35.9 million and $30.6 million for the nine months ended September 30, 2025 and 2024, respectively.
We generated Adjusted EBITDA of $(0.3) million and $(4.5) million in the three months ended September 30, 2025 and 2024, respectively, and $(8.1) million and $(14.4) million in the nine months ended September 30, 2025 and 2024, respectively. See the section titled "-Non-GAAP Financial Measure" for the definition of Adjusted EBITDA, as well as a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure stated in accordance with GAAP.
Macroeconomic and Industry Conditions
Unfavorable conditions in the economy, both in the United States and abroad, may negatively affect the growth of our business and our results of operations. For example, negative conditions in the general economy both in the United States and abroad, including conditions resulting from fluctuations in inflation and interest rates, the imposition of tariffs in the United States and abroad, and the Russia-Ukraine war and conflict in the Middle East, have led to economic uncertainty globally. Historically, during periods of economic uncertainty and downturns, businesses may slow spending on information technology, which may impact our business and our customers' businesses.
Further, unfavorable conditions in the legal industry may negatively affect the growth of our business and our results of operations. For example, in March 2025, President Trump issued executive orders against certain law firms with whom we partner, which could have the effect of restricting the ability of such firms to practice law in matters involving the federal government or under the jurisdiction of the federal court system. While we have not to date observed any adverse impact to our revenue from these law firm partners as a result of the executive orders, the validity of certain of these executive orders continues to be litigated in the federal court system and we cannot be certain that there will be no future adverse impact on our law firm partners' usage of our product offerings or that our law firm partners' clients will continue to engage such firms for their legal services. Additionally, under President Trump, certain federal agencies have decreased their levels of enforcement under President Trump. Finally, as of October 20, 2025, U.S. Federal courts are operating in a limited capacity until the lapse in government funding resulting from the U.S. government shutdown is resolved and operations are being determined on a court-by-court basis. To the extent the current government shutdown continues, or future shutdowns of the U.S. government occur, there may be delays in the advancement of litigation in the Federal courts government investigations or enforcement actions. Any of these factors could have the effect of reducing the volume of major legal matters experienced and, therefore, the usage of our product offerings.
The effect of macroeconomic and legal industry conditions may not be fully reflected in our results of operations until future periods. If, however, economic uncertainty increases, the global economy worsens or unfavorable conditions in the legal industry persist or worsen, our business, financial condition and results of operations may be harmed. For further discussion of the potential impacts of macroeconomic events and legal industry conditions on our business, financial condition, and operating results, see the section titled "Risk Factors".
Key Factors Affecting Our Performance
We believe that the growth and future success of our business depends on many factors. While each of these factors present significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth, improve our results of operations and establish and maintain profitability.
Maintain and Advance Our Innovation and Brand
Our success depends in part on our ability to maintain and advance our innovation and brand. We have a strong history of innovation, demonstrated by our DISCO Hold, DISCO Request, DISCO Ediscovery, DISCO Review and DISCO Case Builder offerings, and have built a research and development process that reliably produces features for these product offerings. We intend to continue combining our deep legal domain expertise and commitment to world-class software engineering to continue delivering features and introducing new product offerings to address more areas of legal work, such as our ediscovery chatbot, Cecilia, which was released in the fourth quarter of 2023 in the United States and in the third quarter of 2024 in Europe. Our future success is dependent on our ability to successfully develop, market and sell our product offerings to both new and existing customers.
Maintain and Increase Usage and Penetration Within Our Existing Customer Base
Our large base of customers, particularly those customers with significant annual ediscovery spend, large practice teams, and practices in legal areas with significant ediscovery needs, represents a significant opportunity for further sales expansion. We believe that we will be able to continue expanding customer relationships by increasing customers' usage of offerings that they already buy from us, selling more of our current offerings to existing customers, and introducing additional offerings to sell to existing customers. Our long-term offering strategy is aimed at building features and offerings that address more and more types of legal work so that customers can continue to centralize on our platform as the system of record and engagement for the legal function. Our ability to increase sales to existing customers will depend on a number of factors, including our customers' satisfaction with our product offerings, competition, pricing and overall changes in our customers' spending levels. Even if our customers expand their usage of our product offerings, we cannot guarantee that they will maintain those usage levels for any meaningful period of time or that they will renew their commitments.
A significant majority of our revenue is directly correlated with our customers' usage of our product offerings, which in turn is dependent on the timing of and activity driven by litigation, investigations and other legal matters for which our product offerings are used. As a result, our operating results have fluctuated significantly in the past in connection with the inception and conclusion of large legal matters, and we expect such fluctuations to continue for the foreseeable future.
Add New Customers
We believe we have a significant opportunity to continue to grow our customer base, particularly those customers with significant annual ediscovery spend, large practice teams, and practices in legal areas with significant ediscovery needs. As enterprises continue their digital transformation journeys and the demand for differentiation in the competitive market for legal services continues to grow, we expect more and more companies will struggle with existing legal solutions and ultimately will adopt an integrated, easy-to-use platform like DISCO to improve productivity and legal outcomes. We believe our market leadership and differentiated product offerings will enable us to efficiently acquire new customers across all channels. Our ability to attract new customers will depend on a number of factors, including the effectiveness and pricing of our products, the offerings of our competitors and the effectiveness of our sales and marketing efforts. We will need to dedicate significant resources to further develop the market for our product offerings and expand, retain and motivate our sales and marketing personnel.
Expand Our Sales Coverage
We intend to continue to enhance our sales force headcount in strategic locations across the United States and globally. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth. We will need to spend significant resources to expand, retain and motivate our sales and marketing personnel.
Extend and Strengthen Our Channel Partnerships and Integrations
Our partnerships, including with legal services providers and cloud infrastructure providers, assist us in driving awareness and adoption of DISCO and extending our reach. We intend to cultivate and leverage channel partners to grow our market presence, enhance the virality of our product offerings and drive greater sales efficiency. Our future success is dependent in part on our ability to develop and maintain relations with these partners.
Expand Our Offering Portfolio
We believe that our technology, and especially our approach to automation and AI, is applicable to a wider range of legal processes outside of our current core offerings. We intend to leverage our technology to introduce further offerings that increase lawyer productivity across more and more areas of legal work over time. We may expend significant resources in the development of additional offerings. For example, our ediscovery chatbot, Cecilia, which was released in the fourth quarter of 2023 in the United States and in the third quarter of 2024 in Europe. Our ability to successfully develop, market and sell new offerings will depend on a number of factors, including the availability of capital to invest in innovation, our customers' satisfaction with such offerings, competition, pricing and overall changes in our customers' spending levels.
Expand Internationally
Our market is global and we believe there is a significant opportunity to expand our international customer base, particularly in the United Kingdom, and further expand our operations internationally, particularly in India. In the three and
nine months ended September 30, 2025, less than 10% of our revenue was generated by customers outside of the United States. Operationally, we expect to continue to expand our global employee headcount in India.
Pursue Strategic Acquisitions and Strategic Investments
We intend to continue to selectively pursue acquisitions and strategic investments that we believe can expand the functionality and value of our product offerings and bring talent to our company. We believe that the combination of our market leadership, deep legal expertise and powerful end-to-end platform provides an advantage in pursuing select acquisitions. We may be required to expend significant resources in connection with the pursuit of acquisitions and investments.
Key Components of Statement of Operations
Revenue
All of our revenue-generating activities directly relate to the sale and support of our legal product offerings within a single operating segment. We have two primary types of contractual arrangements: usage-based and subscription. Our usage-based revenue is derived from contracts under which customers are typically billed monthly based on their usage of our offerings. Subscription revenue is derived from contracts where customers are contractually committed to a minimum data volume over a period of time. Revenue received from usage amounts above the fixed data volume in our subscription contracts is considered usage-based revenue.
In the three and nine months ended September 30, 2025, usage-based revenue represented 91% and 90% of total revenue, respectively, and subscription revenue fees represented 9% and 10% of total revenue, respectively. In the three and nine months ended September 30, 2024, usage-based revenue represented 89% of total revenue and subscription revenue fees represented 11% of total revenue.
Cost of Revenue
Cost of revenue consists primarily of third-party cloud infrastructure expenses incurred in connection with our customers' use of our product offerings. Cost of revenue also includes outsourced staffing costs, amortization of capitalized software development and personnel costs from employees involved in the delivery of our product offerings. Personnel costs include salaries, benefits, bonuses, stock-based compensation expenses and allocated overhead costs. We intend to continue to invest additional resources in our infrastructure to expand the capability of our product offerings and ensure that our customers are realizing the full benefit of our product offerings. The level, timing and relative investment in our cloud infrastructure could affect our cost of revenue in the future. Additionally, cost of revenue in future periods could be impacted by changes in outsourced staffing costs and amortization associated with capitalized software development costs.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation expenses and sales commissions. Operating expenses also include overhead costs for facilities and shared IT related expenses, including depreciation expense.
Research and Development
Research and development expenses consist primarily of personnel-related costs for our development team, including salaries, benefits, bonuses, stock-based compensation expenses and allocated overhead costs. Research and development expenses also include contractor or professional services fees and third-party cloud infrastructure expenses incurred in developing our product offerings. We expect that our research and development expenses will increase in absolute dollars but may fluctuate as a percentage of our revenue over time. In addition, research and development expenses that qualify as capitalized software development costs are capitalized, the amount of which may fluctuate significantly from period to period.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related costs directly associated with our sales and marketing staff, including salaries, benefits, bonuses, commissions, stock-based compensation and allocated overhead costs. Sales and marketing expenses also include advertising costs and other expenses associated with our marketing and business
development programs. In addition, sales and marketing expenses consist of travel-related expenses, software services dedicated for use by our sales and marketing organizations and outside services contracted for sales and marketing purposes. We expect that our sales and marketing expenses will increase in absolute dollars and will continue to be our largest operating expense for the foreseeable future as we grow our business. Our sales and marketing expenses may fluctuate as a percentage of our revenue over time.
General and Administrative
General and administrative expenses consist of personnel-related costs associated with our finance, legal, human resources and administrative personnel, including salaries, benefits, bonuses, stock-based compensation and allocated overhead costs. General and administrative expenses also include external legal, accounting and other professional services fees, software services dedicated for use by our general and administrative functions, insurance and other corporate expenses. Excluding the impact of the stockholder litigation, we expect that our general and administrative expenses will increase in absolute dollars but may fluctuate as a percentage of total revenue from period to period.
Interest and Other Income, Net
Interest and other income, net consists primarily of interest income, income related to non-operating activities, interest expense, gains and losses from foreign currency transactions and remeasurements of foreign currency-denominated monetary assets and liabilities to the U.S. dollar.
Income Tax Provision
Income tax provision consists primarily of income taxes related to foreign and state jurisdictions in which we conduct business. We maintain a valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred assets will be utilized.
Results of Operations
The following tables set forth our results of operations and such data as a percentage of our revenue for each of the periods presented (in thousands):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | |||||||||||||||||||||||
|
Revenue
|
$ | 40,919 | $ | 36,266 | $ | 115,678 | $ | 107,842 | ||||||||||||||||||
|
Cost of revenue(1)
|
10,008 | 9,740 | 29,194 | 27,880 | ||||||||||||||||||||||
|
Gross profit
|
30,911 | 26,526 | 86,484 | 79,962 | ||||||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||||
|
Research and development(1)
|
13,420 | 12,757 | 41,645 | 37,724 | ||||||||||||||||||||||
|
Sales and marketing(1)
|
15,032 | 14,988 | 44,800 | 46,294 | ||||||||||||||||||||||
|
General and administrative(1)
|
16,921 | 9,658 | 38,921 | 31,537 | ||||||||||||||||||||||
|
Total operating expenses
|
45,373 | 37,403 | 125,366 | 115,555 | ||||||||||||||||||||||
|
Loss from operations
|
(14,462) | (10,877) | (38,882) | (35,593) | ||||||||||||||||||||||
|
Interest and other income, net
|
937 | 1,837 | 3,499 | 5,328 | ||||||||||||||||||||||
|
Loss from operations before income taxes
|
(13,525) | (9,040) | (35,383) | (30,265) | ||||||||||||||||||||||
|
Income tax provision
|
(140) | (118) | (487) | (309) | ||||||||||||||||||||||
|
Net loss attributable to common stockholders
|
$ | (13,665) | $ | (9,158) | $ | (35,870) | $ | (30,574) | ||||||||||||||||||
______________
(1)Includes stock-based compensation expense as follows (in thousands):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | |||||||||||||||||||||||
|
Cost of revenue
|
$ | 561 | $ | 456 | $ | 1,622 | $ | 1,273 | ||||||||||||||||||
|
Research and development
|
1,959 | 1,680 | 6,246 | 5,856 | ||||||||||||||||||||||
|
Sales and marketing
|
1,420 | 1,213 | 4,242 | 3,464 | ||||||||||||||||||||||
|
General and administrative
|
2,150 | 1,798 | 6,337 | 6,285 | ||||||||||||||||||||||
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Total
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$ | 6,090 | $ | 5,147 | $ | 18,447 | $ | 16,878 | ||||||||||||||||||
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
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| 2025 | 2024 | 2025 | 2024 | |||||||||||||||||||||||
|
Unaudited Condensed Consolidated Statement of Operations and Comprehensive Loss as a percentage of revenue:**
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||||||||||||||||||||||||||
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Revenue
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100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||
|
Cost of revenue
|
24 | 27 | 25 | 26 | ||||||||||||||||||||||
|
Gross profit
|
76 | 73 | 75 | 74 | ||||||||||||||||||||||
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Operating expenses:
|
||||||||||||||||||||||||||
| Research and development | 33 | 35 | 36 | 35 | ||||||||||||||||||||||
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Sales and marketing
|
37 | 41 | 39 | 43 | ||||||||||||||||||||||
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General and administrative
|
41 | 27 | 34 | 29 | ||||||||||||||||||||||
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Total operating expenses
|
111 | 103 | 108 | 107 | ||||||||||||||||||||||
|
Loss from operations
|
(35) | (30) | (34) | (33) | ||||||||||||||||||||||
| Interest and other income, net | 2 | 5 | 3 | 5 | ||||||||||||||||||||||
|
Loss from operations before income taxes
|
(33) | (25) | (31) | (28) | ||||||||||||||||||||||
|
Income tax provision
|
* | * | * | * | ||||||||||||||||||||||
|
Net loss attributable to common stockholders
|
(33) | % | (25) | % | (31) | % | (28) | % | ||||||||||||||||||
______________
* Less than 0.5% of revenue.
** Columns may not add up to 100% due to rounding.
Comparison of the Three Months Ended September 30, 2025 and 2024
Revenue
|
Three Months Ended September 30, |
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| 2025 | 2024 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Revenue | $ | 40,919 | $ | 36,266 | $ | 4,653 | 13 | % | |||||||||||||||
Total revenue increased by $4.7 million, or 13%, for the three months ended September 30, 2025 compared to the same period in 2024. Revenue related to new customers added since September 30, 2024 contributed $4.7 million. Revenue from existing customers decreased by a $1.4 million due to decreased usage of our product offerings offset by a $1.3 million increase of contingent revenue as a result of a favorable resolution to a legal matter for one of our customers.
Revenue generated from our software product offerings increased by $5.1 million, or 17%, for the three months ended September 30, 2025 compared to the same period in 2024. Of this change, $3.9 million is attributable to increased usage of our software product offerings and $1.2 million is attributable to the favorable resolution of a contingent matter. Revenue generated from our services product offerings decreased by $0.4 million, or 7%, for the three months ended September 30, 2025 compared to the same period in 2024. This change was driven by decreases in usage of our services product offerings within managed review.
Cost of Revenue
|
Three Months Ended September 30, |
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| 2025 | 2024 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | 10,008 | $ | 9,740 | $ | 268 | 3 | % | |||||||||||||||
| Percentage of revenue | 24 | % | 27 | % | |||||||||||||||||||
Total cost of revenue increased by $0.3 million, or 3%, for the three months ended September 30, 2025 compared to the same period in 2024. This change was primarily driven by a $0.6 million increase in costs for cloud hosting as a result of increased usage of our software product offerings and a $0.4 million increase in salary and benefits costs. These changes were partially offset by a $0.7 million decrease in outsourced staffing vendor fees.
Research and Development
|
Three Months Ended September 30, |
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| 2025 | 2024 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 13,420 | $ | 12,757 | $ | 663 | 5 | % | |||||||||||||||
| Percentage of revenue | 33 | % | 35 | % | |||||||||||||||||||
Research and development expenses increased by $0.7 million, or 5%, for the three months ended September 30, 2025 compared to the same period in 2024. The change was primarily driven by an increase of $1.1 million in personnel costs, including stock-based compensation, partially offset by a $0.3 million increase in capitalized software development.
Sales and Marketing
|
Three Months Ended September 30, |
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| 2025 | 2024 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Sales and marketing | $ | 15,032 | $ | 14,988 | $ | 44 | 0.3 | % | |||||||||||||||
| Percentage of revenue | 37 | % | 41 | % | |||||||||||||||||||
Sales and marketing expenses remained relatively consistent for the three months ended September 30, 2025 compared to the same period in 2024. The change was driven by an increase of $0.3 million in personnel costs, including stock-based compensation, partially offset by decreases of $0.1 million in each of marketing expense and professional services.
General and Administrative
|
Three Months Ended September 30, |
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| 2025 | 2024 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| General and administrative | $ | 16,921 | $ | 9,658 | $ | 7,263 | 75 | % | |||||||||||||||
| Percentage of revenue | 41 | % | 27 | % | |||||||||||||||||||
General and administrative expenses increased by $7.3 million, or 75%, for the three months ended September 30, 2025 compared to the same period in 2024. This change was primarily attributable to an increase of $6.9 million in professional services costs related to legal fees and a legal loss contingency accrual for the securities litigation. In addition, personnel costs increased $0.9 million, including stock-based compensation, as a result of increased headcount. These increases were partially offset by a $0.2 million decrease in insurance expense.
Comparison of the Nine Months Ended September 30, 2025 and 2024
Revenue
|
Nine Months Ended September 30, |
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| 2025 | 2024 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Revenue | $ | 115,678 | $ | 107,842 | $ | 7,836 | 7 | % | |||||||||||||||
Total revenue increased by $7.8 million, or 7%, for the nine months ended September 30, 2025 compared to the same period in 2024. Revenue related to new customers added since September 30, 2024 contributed $10.6 million, which was offset by a $2.8 million decrease in revenue from customers that existed as of September 30, 2024. The change in revenue from existing customers was driven by a $4.1 million decrease in usage of our product offerings, partially offset by contingent revenue recognized of $1.3 million.
Revenue generated from our software product offerings increased by $9.5 million, or 11%, for the nine months ended September 30, 2025 compared to the same period in 2024. Of this change, $8.3 million is attributable to increased usage of our software product offerings and $1.2 million is attributable to the favorable resolution of a contingent matter. Revenue generated from our services product offerings decreased by $1.7 million, or 9%, for the nine months ended September 30, 2025 compared to the same period in 2024. This change was driven by decreases in usage of our services product offerings within managed review.
Cost of Revenue
|
Nine Months Ended September 30, |
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| 2025 | 2024 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | 29,194 | $ | 27,880 | $ | 1,314 | 5 | % | |||||||||||||||
| Percentage of revenue | 25 | % | 26 | % | |||||||||||||||||||
Total cost of revenue increased by $1.3 million, or 5%, for the nine months ended September 30, 2025 compared to the same period in 2024. This change was primarily driven by a $1.6 million increase in costs for cloud hosting as a result of increased usage of our software product offerings and a $1.0 million increase in salary and benefits costs. These changes were partially offset by a $1.5 million decrease in outsourced staffing vendor fees.
Research and Development
|
Nine Months Ended September 30, |
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| 2025 | 2024 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 41,645 | $ | 37,724 | $ | 3,921 | 10 | % | |||||||||||||||
| Percentage of revenue | 36 | % | 35 | % | |||||||||||||||||||
Research and development expenses increased by $3.9 million, or 10%, for the nine months ended September 30, 2025 compared to the same period in 2024. The change was primarily driven by an increase of $4.5 million in personnel costs, including stock-based compensation, as a result of increased headcount, partially offset by a $0.4 million increase in capitalized software development.
Sales and Marketing
|
Nine Months Ended September 30, |
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| 2025 | 2024 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Sales and marketing | $ | 44,800 | $ | 46,294 | $ | (1,494) | (3) | % | |||||||||||||||
| Percentage of revenue | 39 | % | 43 | % | |||||||||||||||||||
Sales and marketing expenses decreased by $1.5 million, or 3%, for the nine months ended September 30, 2025 compared to the same period in 2024. The change was primarily related to a decrease of $0.5 million in personnel costs, including stock-based compensation and variable compensation, for our sales personnel as a result of decreased headcount. In addition, marketing expenses decreased $0.8 million.
General and Administrative
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Nine Months Ended September 30, |
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| 2025 | 2024 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| General and administrative | $ | 38,921 | $ | 31,537 | $ | 7,384 | 23 | % | |||||||||||||||
| Percentage of revenue | 34 | % | 29 | % | |||||||||||||||||||
General and administrative expenses increased by $7.4 million, or 23%, for the nine months ended September 30, 2025 compared to the same period in 2024. This change was primarily attributable to an increase of $7.1 million in professional services costs primarily related to legal fees and a legal loss contingency accrual for the securities litigation. In addition,
personnel costs increased $1.5 million, including stock-based compensation. These increases were partially offset by a $0.7 million decrease in insurance expense.
Non-GAAP Financial Measure
We report our financial results in accordance with generally accepted accounting principles, or GAAP. However, management believes that Adjusted EBITDA, a non-GAAP financial measure, provides investors with additional useful information in evaluating our performance. We define Adjusted EBITDA as net loss, adjusted to exclude: depreciation and amortization expense; income tax provision; interest and other, net; stock-based compensation expense; payroll tax expense on employee stock transactions; expenses associated with stockholder litigation; and other one-time, non-recurring items, when applicable.
Adjusted EBITDA is a financial measure that is not required by or presented in accordance with GAAP. We believe that Adjusted EBITDA, when taken together with our financial results presented in accordance with GAAP, provides meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of Adjusted EBITDA is helpful to our investors as it is a measure used by management in assessing the health of our business and evaluating our operating performance, as well as for internal planning and forecasting purposes.
Adjusted EBITDA is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Some of these limitations include that: (i) it does not properly reflect capital commitments to be paid in the future; (ii) although depreciation and amortization expense is a non-cash charge, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures; (iii) it does not consider the impact of stock-based compensation expense and payroll tax expense on employee stock transactions; (iv) it does not reflect other non-operating expenses, including interest expense; (v) it does not consider the impact of expenses associated with the stockholder litigation; and (vi) it does not reflect tax payments that may represent a reduction in cash available to us. In addition, our use of Adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate Adjusted EBITDA in the same manner, limiting its usefulness as a comparative measure. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial measures, including our net loss and other results stated in accordance with GAAP. We expect Adjusted EBITDA to improve over the long term as we achieve greater scale in our business and efficiencies in our operating expenses.
The following table presents a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure stated in accordance with GAAP, for the periods presented (in thousands):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | |||||||||||||||||||||||
| Net loss | $ | (13,665) | $ | (9,158) | $ | (35,870) | $ | (30,574) | ||||||||||||||||||
| Depreciation and amortization expense | 902 | 989 | 2,731 | 3,092 | ||||||||||||||||||||||
| Income tax provision | 140 | 118 | 487 | 309 | ||||||||||||||||||||||
| Interest and other, net | (937) | (1,837) | (3,499) | (5,328) | ||||||||||||||||||||||
| Stock-based compensation expense | 6,090 | 5,147 | 18,447 | 16,878 | ||||||||||||||||||||||
| Payroll tax expense on employee stock transactions | 150 | 95 | 461 | 466 | ||||||||||||||||||||||
| Expenses associated with stockholder litigation | 7,023 | 143 | 9,169 | 726 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | (297) | $ | (4,503) | $ | (8,074) | $ | (14,431) | ||||||||||||||||||
Liquidity and Capital Resources
We have financed operations primarily through customer payments and net proceeds from sales of equity securities, including our IPO in July 2021. As of September 30, 2025, our principal sources of liquidity were cash and cash equivalents and short-term investments, totaling $28.8 million and $84.7 million, respectively. Cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. Short-term investments consist of highly-rated U.S. Treasury securities and corporate debt securities with maturities of more than three months but less than one year at the date of purchase. We believe our existing cash and cash equivalents and short-term
investments will be sufficient to fund anticipated cash requirements for the next 12 months. We believe we will meet our longer-term expected future cash requirements primarily from a combination of cash flow from operating activities and available cash and cash equivalents and short-term investments. We may also engage in equity or debt financings to secure additional funds.
The following table presents our material cash requirements for future periods as of September 30, 2025:
| Payments Due by Period | |||||||||||||||||||||||
| Remainder of 2025 | 2026 - 2027 | 2028 - 2029 | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
|
Operating lease commitments(a)
|
$ | 717 | $ | 5,923 | $ | 1,397 | $ | 8,037 | |||||||||||||||
|
Finance lease commitments(b)
|
11 | 94 | 28 | 133 | |||||||||||||||||||
|
Cloud platform purchase commitments(c)
|
5,385 | 44,280 | 33,210 | 82,875 | |||||||||||||||||||
|
Other purchase commitments(d)
|
373 | 1,704 | - | 2,077 | |||||||||||||||||||
|
Total
|
$ | 6,486 | $ | 52,001 | $ | 34,635 | $ | 93,122 | |||||||||||||||
a.We occupy certain facilities under non-cancelable lease arrangements. Our New York lease agreement is set to expire in January 2028 and our Austin lease agreement is set to expire in July 2028. We may lease or purchase additional space as needed to accommodate our needs.
b.We lease certain furniture and fixtures classified as a finance lease. The leased furniture is amortized on a straight-line basis over the shorter of the life of the lease or 5 years and is included in depreciation and amortization expense.
c.Cloud platform and service purchase commitments encompass non-cancellable agreements to support our software. These expenses are incurred as services are performed and are in the normal course of business.
d.Other purchase commitments primarily encompass non-cancellable software agreements to support our internal functions. These expenses are incurred as services are performed and are in the normal course of business.
Our future capital requirements will depend on many factors, including our revenue growth rate, usage of our product offerings, billing frequency, the timing and extent of spending to support further sales and marketing and research and development efforts, and the continuing market acceptance of our product offerings. Although fluctuations in general macroeconomic and industry conditions, including conditions resulting from fluctuations in inflation and interest rates, the imposition of tariffs in the United States and abroad, the Russia-Ukraine war and conflict in the Middle East, the executive orders issued by President Trump, and the ongoing U.S. government shutdown, have not materially impacted our liquidity to date, we plan to continue to evaluate aspects of our spending, including capital expenditures, discretionary spending and strategic investments throughout 2025. We have considered the impacts of these factors on our liquidity and capital resources to date, and we do not currently expect them to impact our ability to meet future liquidity needs.
We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
|
Nine Months Ended September 30, |
||||||||||||||||||||||||||
| 2025 | 2024 | Change | % Change | |||||||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||||
| Cash used in operating activities | $ | (15,698) | $ | (10,837) | $ | (4,861) | 45 | % | ||||||||||||||||||
| Cash used in investing activities | (8,328) | (52,157) | 43,829 | (84) | ||||||||||||||||||||||
|
Cash provided by (used in) financing activities
|
59 | (20,008) | 20,067 | (100) | ||||||||||||||||||||||
|
Net decrease in cash and cash equivalents
|
$ | (23,967) | $ | (83,002) | $ | 59,035 | (71) | % | ||||||||||||||||||
Operating Activities
Our largest source of operating cash is payments received from our customers. Our primary uses of cash from operating activities are for personnel-related expenses, marketing expenses, hosting expenses and overhead expenses. We have historically generated negative cash flows and have supplemented working capital requirements primarily through net proceeds from the sale of equity securities.
Net cash used in operating activities for the nine months ended September 30, 2025 was $15.7 million, an increase of $4.9 million from net cash used in operating activities of $10.8 million for the nine months ended September 30, 2024. The change in cash flow used in operations was partially due to an increase in net loss of $5.3 million. Fluctuations in net loss are further explained in the Comparison of the Nine Months Ended September 30, 2025 and 2024 section included elsewhere in Management's Discussion and Analysis. The change in cash flow used in operations was also caused by an increase of $15.5 million attributable to an estimated accrued legal loss contingency related to the stockholder litigation, which was partially offset by a $9.2 million decrease attributable to the insurance recovery receivable related to the legal loss contingency associated with the stockholder litigation. In addition, the change in accounts receivable decreased $3.7 million due to increased revenues and collections from customers and a decrease of $2.3 million related to accretion income of short-term investments.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2025 was $8.3 million, a decrease of $43.8 million from net cash used in investing activities of $52.2 million for the nine months ended September 30, 2024. The change in cash used in investing activities was primarily related to an increase in maturities of short-term investments of $149.6 million during the nine months ended September 30, 2025. This was partially offset by an increase of $105.5 million in purchases of short-term investments during the nine months ended September 30, 2025.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2025 was $0.1 million, a decrease of $20.1 million from net cash used in financing activities of $20.0 million for the nine months ended September 30, 2024. This change was primarily related to cash paid for the 2024 share repurchase program of $20.1 million.
Critical Accounting Estimates
Our unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors and adjust those estimates and assumptions when facts and circumstances dictate. Actual results could differ materially from those estimates and assumptions.
While our significant accounting policies are more fully described in Note 2, "Summary of Significant Accounting Policies," in the notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the accounting policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Capitalized Software Development
We capitalize certain costs related to the development of our product offerings and other software applications for internal use. In accordance with authoritative guidance, we begin to capitalize our costs to develop software during the application development stage. Capitalization of costs begins when two criteria are met: (i) the preliminary development efforts are successfully completed, and (ii) it is probable that the project will be completed and the software will be used as intended. We stop capitalizing these costs when the software is substantially complete and ready for its intended use, including the completion of all significant testing. These costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be four years. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditure will result in additional functionality and expense costs incurred for maintenance and minor upgrades and enhancements. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded within research and development expenses in our unaudited condensed
consolidated statements of operations and comprehensive loss. The capitalization of software development contains uncertainties because it requires management to exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our product offerings, assess the ongoing value of capitalized assets or determine the estimated useful lives over which the costs are amortized, the amount of software development costs we capitalize and amortize could change in future periods.
Acquisitions
When we acquire a business, the purchase consideration is allocated to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated respective fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, useful lives and discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to operating expense in the unaudited condensed consolidated statements of operations and comprehensive loss.
Recent Accounting Pronouncements
See Note 2, "Summary of Significant Accounting Policies - Accounting Pronouncements Not Yet Adopted," in our unaudited condensed consolidated financial statements of this Quarterly Report on Form 10-Q for more information.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and, for so long as we continue to be an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, pursuant to Section 107 of the JOBS Act, an emerging growth company may elect to take advantage of the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. However, we have irrevocably opted not to use the extended transition period for complying with any new or revised financial accounting standards, and as such, we are required to adopt new or revised standards at the same time as other public companies.
CS Disco Inc. published this content on November 05, 2025, and is solely responsible for the information contained herein. Distributed via Edgar on November 05, 2025 at 22:08 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]