S-1/A 1 d176601ds1a.htm S-1/A S-1/A
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As filed with the Securities and Exchange Commission on July 19, 2021.

Registration No. 333-257435

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 3

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

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

(833) 653-4726

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

 

 

Kiwi Camara

Chief Executive Officer

CS Disco, Inc.

3700 N. Capital of Texas Hwy.

Suite 150

Austin, Texas 78746

(833) 653-4726

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Nicole Brookshire

Jodie Bourdet

Nicolas H.R. Dumont

Trey Reilly

Cooley LLP

55 Hudson Yards

New York, New York 10001

(212) 479-6000

 

Michael Lafair

Chief Financial Officer

CS Disco, Inc.

3700 N. Capital of Texas Hwy.

Suite 150

Austin, Texas 78746

(833) 653-4726

 

Joanne R. Soslow

Morgan, Lewis & Bockius LLP

1701 Market Street

Philadelphia, Pennsylvania 19103

(215) 963-5000

 

 


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Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

Large accelerated filer      Accelerated filer  
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 7(a)(2)(B) of the Securities Act.  ☐

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Amount

to be

Registered(1)

 

Proposed

Maximum

Offering Price

Per Share(2)

 

Proposed

Maximum

Aggregate

offering price(1)(2)

 

Amount of

registration fee(3)

Common stock, $0.005 par value per share

  7,700,000   $31.00   $238,700,000   $26,043

 

 

(1)

Includes 700,000 additional shares that the underwriters have the option to purchase.

(2)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) of the Securities Act of 1933, as amended. Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.

(3)

$24,363 of this registration fee was previously paid by the Registrant in connection with the filings of its Registration Statement on Form S-1 on June 25, 2021 and July 12, 2021.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant will file a further amendment which specifically states that this Registration Statement will thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement will become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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LOGO

The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to completion. dated July 19, 2021 Preliminary prospectus 7,000,000 shares Common stock This is an initial public offering of shares of common stock of CS Disco, Inc. We are offering 7,000,000 shares of common stock. Prior to this offering, there has been no public market for our common stock. The initial public offering price is expected to be between $30.00 and $31.00 per share. We have applied to list our common stock on the New York Stock Exchange, or NYSE, under the symbol “LAW.” We are an “emerging growth company” and “smaller reporting company” as defined under the federal securities laws and, as such, we have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings. Per share Total Initial public offering price $ $ Underwriting discounts and commissions(1) $ $ Proceeds, before expenses, to us $ $ (1) See the section titled “Underwriting” for a description of the compensation payable to the underwriters. To the extent that the underwriters sell more than 7,000,000 shares of common stock, the underwriters have the option to purchase up an additional 500,000 shares of common stock from us and up to 200,000 additional shares of common stock from the selling stockholder at the initial public offering price less the underwriting discount and commission. We will not receive any proceeds from the sale of stock by the selling stockholder. Certain funds and accounts managed by subsidiaries of BlackRock, Inc. and entities affiliated with Dragoneer Investment Group, LLC, which we refer to collectively as the cornerstone investors, have indicated an interest in purchasing up to an aggregate of up to $25.0 million each (up to $50.0 million in the aggregate) in shares of common stock offered in this offering at the initial public offering price. These indications of interest have been made severally but not jointly. Because these indications of interest are not binding agreements or commitments to purchase, the cornerstone investors may decide to purchase more, fewer or no shares of our common stock in this offering, or the underwriters may decide to sell more, fewer or no shares of our common stock in this offering to the cornerstone investors. The underwriters will receive the same discount from any shares of common stock sold to the cornerstone investors as they will from any other shares of common stock sold to the public in this offering. Investing in our common stock involves risks. Please see “Risk Factors” beginning on page 18 to read about factors you should consider before buying our common stock. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. The underwriters expect to deliver the shares of common stock to purchasers on , 2021. J.P. Morgan BofA Securities Citigroup Jefferies Canaccord Genuity Cowen Needham & Company Stifel Loop Capital Markets , 2021


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LOGO

TECHNOLOGY TO STRENGTHEN THE RULE OF LAW


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LOGO

“The DISCO Ediscovery platform empowered our litigation support team to more efficiently support clients’ needs due to its advanced feature res, stability, ease of use, responsiveness and pred edictable pricing.”
— Jim Rosenthal Director of Litigation Support
“DISCO provides us with increasased speed to evidence while helping to control our co costs with outside counsel.”
— Stephen Gage, ge, Director of eDiscovery
“We think of DISCO as more than just a technology vendor — DISCO is a true part partner to our team.”
— Anna Berman, Partner
“We appreciate DISCO’s consultative approach to our ediscovery and managed revie review needs. We have been pleased with the end-to-end service rvice offering offering and the platform’ platform’s e ease of use, which has resulted in significa significant time and cost savings.”
— Arka Chatteterjee Senior Intellectual Property Coounsel
“DISCO creates a competitive advantage for for Perkins Coie. Not only can we e move incredi incredibly quickly when need ded, we can n ensure our be best legal minds are se eeing the most ost important important documents as soon as possible.”
— Geoffrey Vance, Chair of E-Discovery Services & Strategy
“DISCO is a best-in-class discovery disc platform and their team of professionals profession are true partners in helping us leverage tec echnology to simplify the discovery process and remain focused on our client work.”
— Patrick Murphy, Partner


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LOGO

OUR VALUES INNOVATION GRACE GRIT & ALL-IN


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LOGO

Donating to Central Texas Food Bank Catered lunch at DISCO HQ Volunteering at Central Texas Food Bank DISCO’s 2020 Company Kickoff Donating presents to Salvation Army Angel Tree DISCO’s macot, Fetch Product design sprint


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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1  

THE OFFERING

     13  

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

     16  

RISK FACTORS

     18  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     57  

MARKET AND INDUSTRY DATA

     59  

USE OF PROCEEDS

     60  

DIVIDEND POLICY

     61  

CAPITALIZATION

     62  

DILUTION

     64  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     66  

LETTER FROM KIWI CAMARA, OUR FOUNDER AND CEO

     89  

LETTER FROM KENT RADFORD, OUR FOUNDER

     91  

BUSINESS

     92  

MANAGEMENT

     133  

EXECUTIVE COMPENSATION

     142  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     155  

PRINCIPAL AND SELLING STOCKHOLDERS

     159  

DESCRIPTION OF CAPITAL STOCK

     162  

SHARES ELIGIBLE FOR FUTURE SALE

     167  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR COMMON STOCK

     170  

UNDERWRITING

     174  

LEGAL MATTERS

     182  

EXPERTS

     182  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     182  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

Through and including                , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Neither we, the selling stockholder nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholder nor any of the underwriters take responsibility for, or can provide any assurance as to the reliability of, any other information that others may give you. We, the selling stockholder and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only under circumstances and in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

For investors outside the United States: neither we, the selling stockholder nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, all references in this prospectus to “CS Disco,” “DISCO,” the “company,” “we,” “our,” “us” or similar terms refer to CS Disco, Inc. and its subsidiaries.

Our Mission

Our mission is to use technology to strengthen the rule of law.

Overview

DISCO provides a cloud-native, artificial intelligence-powered legal solution that simplifies ediscovery, legal document review and case management for enterprises, law firms, legal services providers and governments. Our scalable, integrated solution enables 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 solution 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 solution. We provide legal departments with the ability to centralize legal data into a single solution, 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. As of March 2021, our solution held more than 10 billion files and 2.5 petabytes of data and we used more than 14 billion serverless compute calls in 2021 to process and enrich data for our customers. By automating the manual, time-consuming and error-prone parts of ediscovery, legal document review and case management, we empower legal departments to focus on delivering better legal outcomes.

Since our founding in 2013, and beginning with our founders, DISCO has assembled a team that combines strength in software engineering, cloud computing and AI, with deep legal expertise and a rich understanding of the problems that lawyers and legal professionals face and how they work. This combination of expertise means that our team is distinctly well-positioned to execute on our vision of building technology that powers the legal function across companies in every industry.

Lawyers and legal professionals love our solution, as demonstrated by our Net Promoter Score, or NPS, of 63 as of December 31, 2020. We calculate NPS based on the basis of a survey that asks, “How likely are you to recommend DISCO to a colleague?”. The survey respondent can choose an integer between zero and ten, with the percentage of users responding with a 6 or below subtracted from the percentage of users responding with a 9 or 10 to calculate the NPS. Our relentless focus on delivering a solution that legal professionals love is coupled with a simple and transparent usage-based business model. We believe this enables our customers to easily adopt our solution, realize rapid time-to-value, scale their usage within and across applications to match their changing needs and collaborate with others. This has allowed us to build a powerful product-led growth engine that efficiently expands the usage of our solution for more legal matters and use cases within organizations, spreads our solution across the legal ecosystem through collaboration and word-of-mouth and increases the value of our solution as we collect and process more data and lawyers do more legal work in our solution. The success of this growth model is underscored by our dollar-based net retention rate of 122% as of March 31, 2021, as well as by the fact that, in 2020, 171 law firms in the 2020 AmLaw 200, a ranking of the 200-highest grossing law firms in the United States, used DISCO in the course of legal work on behalf of their clients. As of March 31, 2021, we had 909 enterprises, law firms, legal services providers and government organizations as DISCO customers.


 

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Law affects everyone, from the largest multinational corporations to local mom-and-pop businesses, from the most powerful national governments to the smallest towns and from major civic organizations to individual citizens. The impact of law on the business world is only growing, with businesses today operating in more jurisdictions than ever before and increasingly exposed to a growing number of constantly changing laws and regulations that can materially damage a company’s brand and operations. This has turned the corporate legal function into a mission-critical, strategic component of the modern enterprise and contributed to the growth in global spend on legal services, which is forecasted by Statista to be $767 billion in 2021. But despite its enormous scale and attractive opportunities for automation and the application of AI to improve lawyer productivity and job satisfaction, the legal industry has lagged behind other industries in digitization and cloud technology adoption.

Since our inception, our principal goal has been to create experiences that feel “magical” to lawyers, by delivering intuitive, intelligent offerings that are well-tailored to lawyers’ workflows and a joy for legal professionals to use. Our solution is enabled by our deep investment in a modern, scalable cloud architecture that accelerates application development; makes our offerings robust, scalable and secure; and enables us to act as a secure single system of record and engagement for all legal data at enterprise scale. We have built our solution to incorporate the latest advances in automation and AI directly into existing lawyer workflows to multiply lawyer productivity across the ediscovery and legal document review lifecycle. Our cloud-native, AI-powered software is augmented with deep expertise, consultative professional services and flexible customer support that enables us to be a single-source provider and meet the diverse needs of customers in every industry. With our full-stack solution, legal departments no longer need to rely on a fragmented network of slow, antiquated processes and law firms and service providers manually collecting, searching and reviewing documents. We believe this reduces legal costs, increases lawyer productivity and improves legal outcomes. We intend to extend our solution and apply it to other kinds of legal work over time, enabling us to compete for an increasing share of global spend on legal services.

Our approach has enabled us to serve 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 legal professionals use our solution is similar regardless of the specific industry in which each customer operates. This commonality has created efficiencies in our sales, marketing and research and development efforts because we do not need to tailor our solution to a wide range of industries. The broad applicability of our solution across a spectrum of industries has created a significant market opportunity for us, which we estimate to be $42 billion globally.

We believe that great achievements come from aiming great people at big problems, and that our employees, who we call “Discovians,” are the principal driver of our success. We strive to attract, retain, develop and promote humble, curious and empathetic Discovians across all areas of our business. We are committed to fostering a diverse and inclusive workplace that values input from every corner of our business and creating an environment where all people feel welcome and connected regardless of their background. Our culture is guided by the principles we set forth in our MAGIC core values: Meaningful impact, All-in, Grit and grace, Innovation and Craft. These principles shape our culture and guide the way we work, support each other and our communities and serve our customers. We believe that our culture and commitment to giving back to our community are critical to advancing our mission of using technology to strengthen the rule of law.

We have experienced rapid growth in recent periods. Since inception, we have raised $161.1 million of capital and we had $53.6 million of cash and cash equivalents as of March 31, 2021. We generated revenue of $48.6 million and $68.4 million in 2019 and 2020, respectively, representing year-over-year growth of 41%. We generated revenue of $15.7 million and $21.1 million in the three months ended March 31, 2020 and 2021, respectively, representing period-over-period growth of 35%. Our net loss was $29.8 million, $22.9 million, $11.2 million and $2.9 million for the years ended December 31, 2019 and 2020 and the three months ended


 

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March 31, 2020 and 2021, respectively. We generated Adjusted EBITDA of $(25.4) million, $(19.9) million, $(10.3) million and $(1.9) million for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—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.

Industry Background

Law is fundamental to society, affecting everyone from the largest multinational corporations to local mom-and-pop businesses, from the most powerful national governments to the smallest towns, from major civic organizations to individual citizens. The impact of law on business is only growing, with legal issues creating headline news, from the opioids epidemic to litigation over national elections to the creation of new business models such as the burgeoning gig economy. According to a study by Statista, the estimated global spend on legal services is forecasted to be $767 billion in 2021.

Key trends that are influencing the legal industry include:

The Legal Function is Increasingly Mission-Critical to Every Organization in the World

Three related trends are increasing the relative strategic importance of the legal function in organizations:

 

   

As businesses operate in more jurisdictions, they are exposed to more and more varied laws and regulations;

 

   

Many jurisdictions are continuously creating more laws and regulations, often in new and evolving areas, increasing the exposure of businesses to legal liability; and

 

   

Legal issues increasingly create liability and front-page news for businesses, with attendant risks to a company’s brand, reputation and business outcomes.

Digital Transformations that have Happened in Other Business Functions are Now Happening in the Legal Function

Despite the enormous scale of the legal industry, the increasing sophistication of enterprise clients and rampant digital transformation in other industries, the legal industry has lagged behind nearly every other industry in digitization and cloud technology adoption. This is finally changing, driven by a growing realization that the only way to effectively cope with the increasing demand for legal services and the increasing complexity of the legal environment is to leverage technology to increase the productivity of lawyers and by the maturity of underlying technologies like cloud computing and AI that make it possible to build transformative legaltech applications.

The Volume, Variety and Velocity of Enterprise Data that can Become Documentary Evidence in Legal Matters is Exploding

The large and growing volume, variety and velocity of enterprise data has made the traditional ways of collecting, searching and reviewing enterprise data to find documentary evidence extremely cumbersome, complex and time-consuming. This is driving legal departments to adopt more sophisticated and easier to use technology solutions that can accelerate the process of collecting, searching and reviewing massive amounts of diverse enterprise data with accuracy, speed and security.


 

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Artificial Intelligence and Cloud Computing Have Reached a Point of Technological Maturity Where They Enable Legaltech Applications to Transform Legal Work

Cloud computing and modern approaches to AI create the conditions under which it is possible to build modern legaltech applications that can automate much of the previously manual, time-consuming work done by legal professionals. These technological advances make it possible to build legaltech applications that increase lawyer productivity, improve lawyer job satisfaction and ultimately empower lawyers to improve legal outcomes for their clients.

The Pursuit of Differentiation in the Highly Competitive Legal Industry is Driving Rapid Technology Adoption by Legal Departments, Law Firms and Legal Services Providers

The legal industry is highly fragmented and competitive. Law firms and legal services providers must differentiate themselves from their competitors or risk declining market share, declining earnings, consolidation, or all of the above. The competitive dynamics of the legal industry has led to increasing pressure to adopt legaltech.

Legal Professionals are Increasingly Seeking a Modern, Fast and Easy-to-Use Solution that is Purpose-Built for How They Work

The rapid growth in use of consumer software and other consumer technology, including the proliferation of mobile devices; the generational shift of lawyers; and the increasing career mobility of lawyers are all contributing to a radical change in expectations for legal technology.

Limitations of Existing Solutions

Today, most legal departments rely on a fragmented, services-heavy and multi-vendor approach which poses several challenges that limit the productivity of lawyers and legal professionals, including:

 

   

Incomplete Point Solutions that are Poorly Integrated.    Existing solutions generally force legal departments to coordinate the flow of work across law firms and legal services providers and require some or all of these stakeholders to manage the flow of data between multiple, non-interoperable, legacy software point solutions.

 

   

Extremely Manual.    Existing ediscovery point solutions generally lack a robust, software-driven automation layer, which requires legal departments to rely on a heavy layer of human services provided by legal services providers. Additionally, legal document review solutions often lack robust software tools for data reuse and easy-to-use AI integrated directly into lawyer workflows, forcing existing legal document review solutions to rely on large teams of lawyers to manually review documents.

 

   

Difficult to Use.    The complexity and poor usability of existing solutions often deter lawyers from using them directly and limit their widespread adoption across teams, preventing legal departments from fully realizing the benefits of advances in technology such as AI.

 

   

Slow.    Most existing solutions do not take advantage of elastic computing and modern approaches to automation and AI and are slow to complete basic tasks across the spectrum of ediscovery and legal document review. Additionally, the heavy reliance on human services as part of existing solutions introduces further delays, with lawyers repeatedly waiting for legal services providers to complete tasks that they cannot complete themselves.

 

   

Lack Robust, Easy-to-Use AI Capabilities.    Most existing solutions lack comprehensive AI capabilities that can help lawyers classify and comprehend massive amounts of structured and unstructured data quickly and reliably. Additionally, many existing solutions lack the ability to


 

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continuously improve AI models in real-time based on lawyers’ work or train and use these models across multiple legal matters so that legal document review need not start from scratch in each new legal matter.

 

   

Inability to Scale.    Existing solutions often fail to take advantage of modern developments in cloud computing such as elastic compute and serverless compute to dynamically scale computing resources to handle, store and process transient spikes in data required by modern legal matters in real-time.

 

   

Lack of Security, Privacy, Control and Extensibility.    Most existing solutions fail to provide legal departments with a secure system of record and engagement for enterprise data involved in legal matters.

 

   

Expensive and Unpredictable.    Existing solutions can require legal departments to manage multiple solutions from multiple vendors with separate, opaque pricing models.

Our Solution

Our solution is the result of uniquely combining an ability to deliver world-class software engineering with a deep love and respect for the law. Our aim is to create a solution that feels “magical” to lawyers. Our full-stack solution currently includes the following offerings:

 

   

DISCO Ediscovery automates much of the ediscovery process, saving legal departments from costly and cumbersome manual tasks associated with collecting, processing, enriching, searching, reviewing, analyzing, producing and using enterprise data that is at issue in legal matters.

 

   

DISCO Review is AI-powered document review that consistently delivers legal document reviews that are high quality, on time and on budget.

 

   

DISCO Case Builder allows legal professionals to collaborate across teams to effectively build a compelling case by offering a single place to search, organize and review witness testimony and other important legal data.

The key elements of our solution include:

 

   

Comprehensive and Full-Stack.    We deliver an end-to-end, full-stack solution designed to address each part of the problem of managing enterprise data and witness testimony in legal matters, from ediscovery to legal document review to case management.

 

   

Automation that Renders Heavy Human Ediscovery Services Obsolete.    We designed our solution to automate most bill-by-the-hour professional services traditionally involved in ediscovery.

 

   

AI that Simplifies and Streamlines Legal Document Review.    Our AI models apply cloud computing and sophisticated machine learning methods to classify and sort massive amounts of data and provide precise predictions of document relevance in a fraction of the time required for traditional review.

 

   

Purpose-Built for Lawyers and Other Legal Professionals.    The extensive background that many DISCO employees have as former practicing lawyers, as well as our deep product engagement with customers on each matter, give us a deep understanding of the needs and preferences of legal professionals. Every feature of our solution was built to seamlessly integrate with the workflows lawyers actually employ on a daily basis.

 

   

Powerful, Scalable and Extensible Modern Cloud Architecture.    Our state-of-the-art cloud-native architecture delivers superior performance, scalability and extensibility.

Our Business Model

We believe that the combination of our designed-for-legal applications and our usage-based business model makes it easy for customers to adopt and begin using our solution, realize rapid time to value and expand their


 

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usage of our solution over time. Our business model benefits from viral characteristics and powerful network effects that continuously enhance the value of our solution, extend our reach and help us efficiently acquire new customers as we grow. These effects happen along several dimensions, which together we refer to as our “product-led growth engine.”

 

   

Viral Expansion Within an Organization.    Our business model allows customers to easily adopt and use our solution for an initial set of legal matters, regardless of size. After realizing the benefits of our solution, customers often both expand usage of our solution to more legal matters and adopt more of our offerings. This dynamic is reflected in our 122% dollar-based net retention rate as of March 31, 2021.

 

   

Viral Expansion Through Our Ecosystem.    We designed our solution to facilitate widespread adoption across legal industry participants by allowing for potential customers to use our solution to collaborate with existing customers. These users may then become champions and encourage the companies they work for to become customers. Since many companies use multiple law firms and most law firm represents multiple companies, this process repeats itself as we acquire more customers, enabling a frictionless cycle of adoption across the legal ecosystem.

 

   

Network Effects Driven by Usage.    As more lawyers use our solution the scale and diversity of the data, we collect and process and the nature of the legal work done on our solution grows. We enable customers to easily retain data and reuse it for future legal matters. Additionally, our AI models improve as they are trained on more data and observe more lawyer work on that data in our solution, which allows our customers to uncover evidence more quickly as we grow.

Key Benefits of Our Solution

Our end-to-end solution was designed to improve the everyday experience of lawyers and legal professionals and improve legal outcomes for legal departments. We deliver the following key benefits:

 

   

Full Stack and Turnkey.    We enable customers to consume our offerings in a self-service way or as a turnkey, full-stack solution, giving our customers the flexibility to tailor their ediscovery and legal document review processes to their own legal work strategy and use different combinations of our offerings on different subsets of their legal work.

 

   

High End-User Satisfaction Driven by Applications Built for Lawyers and Other Legal Professionals.    We strive to create product experiences that feel “magical” to lawyers: intuitive, easy to use, powerful and comprehensive.

 

   

Increased Accuracy and Quality of Review.    Our solution allows lawyers to use AI and analytics integrated into a lawyer-friendly and highly automated workflow to increase the accuracy and quality of legal reviews.

 

   

Faster Resolution of Legal Matters with Better Outcomes.    Our solution enables lawyers to determine the facts and use those facts to assess legal matters and produce evidence more quickly. We believe this enables them to resolve legal matters faster, which can result in significantly reduced legal costs and the reduction or avoidance of legal risks across their full portfolio of legal matters.

 

   

Scalable, Secure, Single System of Record and Engagement for Legal Data.    The scalability, performance and extensibility of our cloud-native architecture allows customers to use DISCO as a secure single system of record and engagement for all enterprise data related to legal matters at enterprise scale.

 

   

Cost Flexibility and Predictability.    Our simple, all-in pricing model and flexible terms align with our customers’ needs, are easy to understand and guarantee costs for our customers, allowing legal departments to improve cost predictability and budget planning.


 

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What Sets Us Apart

We believe that the combination of our cloud-native technology, full-stack solution, world-class engineering and our deep legal expertise has resulted in several unique competitive strengths. These competitive advantages include:

 

   

Full-Stack, Comprehensive Solution.    We offer an end-to-end solution that is used for both ediscovery (DISCO Ediscovery) and AI-powered legal document review (DISCO Review), giving our customers the flexibility to decide how much of their ediscovery and legal document review process to outsource to us versus handle internally or through law firms and legal services providers. Our cloud-native, AI-powered solution is augmented with deep expertise, consultative professional services and flexible customer support.

 

   

Efficient Product-Led Growth Engine with Powerful Network Effects.    Our model has enabled us to build an efficient, usage-based, product-led growth engine that spreads our solution across the legal ecosystem through collaboration and powerful word-of-mouth and facilitates rapid customer adoption and expansion.

 

   

Lawyer-Centric Applications Built by a Unique Combination of Deep Expertise and Continuous Solution Innovation.    Our expertise in both engineering and law and our unique product design and development process, which we call “Law Review,” allows us to understand and anticipate what legal professionals need to accelerate and improve their work.

 

   

Cloud-Native, Scalable and Secure Solution Built on a High-Performing Application Architecture.    Designed to operate on the cloud from the beginning, our solution architecture cannot be easily replicated and offers superior performance, scalability, availability, true multi-tenancy and lower operating costs compared to legacy software providers.

 

   

Powerful AI Coupled with Robust Data Management.    Our use of AI coupled with our ability to be a secure, single system of record and engagement for our customers’ legal data allows legal departments to easily gather, act on, retain and reuse enterprise data for ongoing legal work, all within our solution. Our solution transforms an organization’s legal data from a potential liability into a potential competitive advantage.

 

   

Designed for the Enterprise.    Our solution is designed for enterprise adoption and can be applied to a wide variety of enterprise use cases, including not only litigation, but also for example, internal investigations, merger clearance and compliance.

 

   

Founder-Led Management Team with Deep Domain Expertise.    Our deep familiarity with the day-to-day needs and preferences of lawyers forms the basis for the development of our solution and has enabled us to repeatedly deliver product experiences that lawyers and legal professionals love.

 

   

Strong Culture Committed to Our Employees, Our Community and the Rule of Law.    We foster a culture of innovation, experimentation, acceptance and compassion that extends beyond the workplace.

Our Market Opportunity

Legal services is a massive, growing global industry that we believe is significantly underpenetrated by modern technology solutions. According to Statista, total global legal services spend is forecasted to be $767 billion in 2021 and grow to $846 billion in 2023. Within legal services, DISCO Ediscovery addresses the ediscovery market. According to International Data Corporation, the worldwide ediscovery software and services market is forecasted to be $14.7 billion in 2021 and grow to $16.9 billion by 2024.

With the introduction of DISCO Review, we expanded the portion of the total legal services market that we address to include legal document review. We estimate the market for our solution to be approximately


 

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$42 billion. To estimate our total market opportunity, we identified the number of companies worldwide across all industries with at least 100 employees, based on certain independent industry data from S&P Global Market Intelligence. We then segmented these companies into four categories based on total number of employees: companies with 100-249 employees, companies with 250-2,499 employees, companies with 2,500-9,999 employees and companies with 10,000 or more employees. We then multiplied the number of companies in each category by the average revenue per corporate customer (excluding law firm and legal services provider customers) in each such cohort in 2020, which we believe represents a customer that has broadly deployed our solution across the enterprise and then summed the results from each category. We believe our estimated market opportunity will continue to grow as customers expand usage of our solution for more legal matters and adopt more of our offerings for more legal use cases.

Our Growth Strategies

We are pursuing multiple levers for future growth:

Fuel the DISCO Product-Led Growth Engine

 

   

Maintain and advance our innovation and brand;

   

Add new customers; and

   

Increase usage and penetration within our existing customer base.

Extend Our Reach

 

   

Expand our sales coverage and establish a digital sales channel;

   

Expand internationally;

   

Extend and strengthen our channel partnerships and integrations;

   

Expand our offering portfolio; and

   

Pursue strategic acquisitions and strategic investments.

Risks Related to Our Business and Investment in Our Common Stock

Investing in our common stock involves substantial risk. The risks described in the section titled “Risk Factors” immediately following this summary may cause us to not realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the more significant challenges include the following:

 

   

Our recent rapid growth may not be indicative of our future growth. Our rapid growth also makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

 

   

Our limited operating history and our history of operating losses makes it difficult to evaluate our current business and prospects and may increase the risks associated with your investment.

 

   

Our business depends on customers increasing their use of our solution and any loss of customers or decline in their use of our solution could harm our business.

 

   

Usage of our solution accounts for substantially all of our revenue.

 

   

If we are unable to attract new customers and retain existing customers, our business, financial condition and results of operations will be adversely affected.

 

   

We rely upon third-party providers of cloud-based infrastructure to host our cloud-based solution. Any disruption in the operations of these third-party providers, limitations on capacity or interference with our use could adversely affect our business, financial condition and results of operations.


 

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We expect fluctuations of our financial results, which may cause quarterly comparisons not to be meaningful.

 

   

Our revenue growth depends in part on the success of our strategic relationships with law firms and other legal services providers, and if we are unable to establish and maintain successful relationships with them, our business, operating results and financial condition could be adversely affected.

 

   

The markets in which we participate are competitive, and if we do not compete effectively, our business will be harmed.

 

   

We employ a pricing model that subjects us to various challenges, and given our limited history with our pricing model, we may not be able to accurately predict the optimal pricing necessary to attract new customers and retain existing customers.

 

   

We rely on the performance of highly skilled personnel, including our management and other key employees, and the loss of one or more of such personnel, or of a significant number of our team members, could harm our business.

 

   

Our current operations are international in scope and we plan on further geographic expansion, creating a variety of operational challenges.

 

   

Unfavorable conditions in our industry or the global economy or reductions in legal spending could harm our business.

 

   

Our business and results of operations may be materially adversely affected by the recent COVID-19 outbreak or other similar outbreaks.

 

   

We may in the future be subject to legal proceedings and litigation, including intellectual property disputes, which are costly and may subject us to significant liability and increased costs of doing business. Our business may suffer if it is alleged or determined that our technology infringes the intellectual property rights of others.

 

   

We operate in a highly regulated industry and either are or may be subject to a wide range of federal, state and local, as well as foreign, laws, rules and regulations, and our failure to comply with these laws and regulations may force us to change our operations or harm our business.

 

   

Our computer systems, or those of any third parties on whom we depend, may fail or suffer security or data privacy breaches or other unauthorized or improper access to, use of, or destruction of our proprietary or confidential data, employee data, or personal data, which could result in additional costs, loss of revenue, significant liabilities, harm to our brand and material disruption of our operations.

 

   

Insiders have substantial control over us and will be able to influence corporate matters.

Corporate Information

We were incorporated in Delaware in December 2013. Our principal executive offices are located at 3700 N. Capital of Texas Hwy., Suite 150, Austin, Texas 78746, and our telephone number at that address is (833) 653-4726. Our website address is www.csdisco.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus or in deciding to purchase our common stock.

“DISCO” and our other registered and common law trade names, trademarks and service marks are the property of CS Disco, Inc. or our subsidiaries. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus may be referred to without the ® and symbols, but such references should not be construed as any indicator that their respective owners will not assert their rights thereto.


 

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Implications of Being an Emerging Growth Company and a Smaller Reporting Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We may take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions for up to five years or until we are no longer an emerging growth company, whichever is earlier. In addition, the JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until those standards apply to private companies. We have elected to use the extended transition period under the JOBS Act. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

We will remain an emerging growth company until the earliest of: (1) the last day of the fiscal year following the fifth anniversary of this offering; (2) the last day of the first fiscal year in which our annual gross revenue is $1.07 billion or more; (3) the date on which we have, during the previous rolling three-year period, issued more than $1.0 billion in non-convertible debt securities; and (4) the last day of the fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of June 30 of such fiscal year.

We are also a “smaller reporting company” as defined in the Securities Exchange Act of 1934, as amended. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) the market value of our voting and non-voting common stock held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter. Specifically, as a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and have reduced disclosure obligations regarding executive compensation, and, similar to emerging growth companies, if we are a smaller reporting company with less than $100 million in annual revenue, we would not be required to obtain an attestation report on internal control over financial reporting issued by our independent registered public accounting firm.


 

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Recent Developments

Preliminary Consolidated Financial Results for the Three Months Ended June 30, 2021

Set forth below are preliminary estimates of selected unaudited financial and other information for the three months ended June 30, 2021 and actual unaudited financial results for the three months ended June 30, 2020. Our unaudited interim consolidated financial statements for the three months ended June 30, 2021 are not yet available. The following information reflects our preliminary estimates based on currently available information and is subject to change. We have provided ranges, rather than specific amounts, for the preliminary estimates of the financial information described below primarily because our financial closing procedures for the three months ended June 30, 2021 are not yet complete and as a result, our final results upon completion of our closing procedures may vary from the preliminary estimates. In addition, our historical results are not necessarily indicative of the results that should be expected in the future and our estimated results for the three months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2021 or any other future period.

 

     Three Months Ended June 30,  
     2020     2021  

(in thousands)

   Actual     Low     High  
     (unaudited)  

Revenue

   $ 15,727     $ 28,500     $ 29,750  

Net loss

   $ (5,477   $ (4,358   $ (2,423

Non-GAAP Financial Measure—Adjusted EBITDA

      

Adjusted EBITDA

   $ (4,386   $ (2,747   $ (1,062

For the three months ended June 30, 2021:

 

   

We expect revenue to be between $28.5 million and $29.8 million, representing an estimated increase of approximately 81.2% to 89.2% as compared to revenue of $15.7 million for the three months ended June 30, 2020.

 

   

We expect net loss to be between $4.4 million and $2.4 million, as compared to net loss of $5.5 million for the three months ended June 30, 2020.

 

   

We expect adjusted EBITDA to be between $(2.7) million and $(1.1) million, as compared to adjusted EBITDA of $(4.4) million for the three months ended June 30, 2020. Adjusted EBITDA is a financial measure not calculated in accordance with accounting principles generally accepted in the United States, or GAAP. See below for a reconciliation of adjusted EBITDA to expected net loss for the ranges presented above for the three months ended June 30, 2021 and the actual results for the three months ended June 30, 2020. For further information about the limitations of the use of adjusted EBITDA, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measure.”


 

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The following table reconciles adjusted EBITDA for the three months ended June 30, 2021 (estimated) and the three months ended June 30, 2020 (actual) to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

     Three Months Ended June 30,  
     2020      2021  

(in thousands)

   Actual      Low      High  
     (unaudited)  

Net loss

   $ (5,477    $ (4,358    $ (2,423

Depreciation and amortization expense

     421        432        382  

Provision for income taxes

     20        55        30  

Interest and other, net

     146        82        57  

Stock-based compensation expense

     504        1,042        892  
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ (4,386    $ (2,747    $ (1,062

The estimates presented above have been prepared by, and are the responsibility of, management. The preliminary results presented reflect management’s estimates based solely upon information available to us as of the date of this prospectus and is not a comprehensive statement of our financial results as of and for the three months ended June 30, 2021. Our independent registered public accounting firm, Ernst & Young LLP, has not audited, reviewed, compiled, or performed any procedures with respect to such preliminary information. Accordingly, Ernst & Young LLP does not express an opinion or any other form of assurance with respect thereto. We currently expect that our final results will be consistent with the estimates set forth above, but such estimates are preliminary and our final results could differ from these estimates due to the completion of our financial closing procedures, final adjustments and other developments that may arise between now and the time such unaudited interim consolidated financial statements for the three months ended June 30, 2021 are issued. For example, during the course of the preparation of the respective financial statements and related notes, additional items that would require adjustments to be made to the preliminary estimated financial information presented above may be identified. There can be no assurance that these estimates will be realized, and estimates are subject to risks and uncertainties, many of which are not within our control. See “Risk Factors,” “Special Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding these risks and uncertainties, including other factors that could cause our preliminary estimates to differ from the actual financial results that we will report for the three months ended June 30, 2021.


 

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THE OFFERING

 

Common stock offered by us

7,000,000 shares

 

Option to purchase additional shares of common stock from us

500,000 shares

 

Option to purchase additional shares of common stock offered by the selling stockholder

200,000 shares

 

Common stock to be outstanding after this offering

56,378,863 shares (56,878,863 shares if the underwriters’ option to purchase additional shares of our common stock from us and the selling stockholder is exercised in full)

 

Use of proceeds

We estimate that our net proceeds from the sale of our common stock that we are offering will be approximately $195.1 million (or approximately $209.3 million if the underwriters’ option to purchase additional shares of our common stock from us and the selling stockholder is exercised in full), assuming an initial public offering price of $30.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholder.

 

  The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and facilitate our future access to the capital markets. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds we receive from this offering for working capital and other general corporate purposes, including developing and enhancing our technical infrastructure, solution and services, expanding our research and development efforts and sales and marketing operations, meeting the increased compliance requirements associated with our transition to and operation as a public company and expanding into new markets. We may also use a portion of the net proceeds to acquire complementary businesses, products, services or technologies. However, we do not have agreements or commitments to enter into any acquisitions at this time.

 

  See the section titled “Use of Proceeds” for additional information.

 

Selling stockholder; concentration of ownership

The selling stockholder identified in this prospectus has granted the underwriters an option to purchase an additional 200,000 shares of common stock following this offering. Following this offering, our


 

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executive officers, directors and stockholders holding more than 5% of our outstanding shares, together with their affiliates, will hold, in the aggregate, approximately 37.9% of our outstanding capital stock (or 37.6% of our outstanding capital stock following this offering if the underwriters exercise their option in full to purchase additional shares of common stock from us and the selling stockholder), without giving effect to any purchases that these holders may make through our directed share program or otherwise in this offering. See the section titled “Principal and Selling Stockholders” for additional information.

 

Directed share program

At our request, the underwriters have reserved up to 5% of the common stock for sale at the initial public offering price to persons who are directors, officers, employees, or who are otherwise associated with us through a directed share program. The number of shares of common stock available for sale to the general public will be reduced by the number of directed shares purchased by participants in the program. Any directed shares not purchased will be offered by the underwriters to the general public on the same basis as all other shares of common stock offered. Fidelity Capital Markets, a division of National Financial Services LLC, an entity affiliated with Fidelity Management & Research Company, or FMR, will administer our directed share program. We have agreed to indemnify the underwriters and their affiliates against certain liabilities and expenses, including liabilities under the Securities Act, in connection with sales of the reserved shares. For additional information, see the section titled “Underwriting.”

 

Indications of interest

The cornerstone investors have indicated an interest in purchasing up to an aggregate of up to $25.0 million each (up to $50.0 million in the aggregate) in shares of common stock offered in this offering at the initial public offering price. These indications of interest have been made severally but not jointly. Because these indications of interest are not binding agreements or commitments to purchase, the cornerstone investors may decide to purchase more, fewer or no shares of our common stock in this offering, or the underwriters may decide to sell more, fewer or no shares of our common stock in this offering to the cornerstone investors. The underwriters will receive the same discount from any shares of common stock sold to the cornerstone investors as they will from any other shares of common stock sold to the public in this offering.

 

Risk factors

You should carefully read the “Risk Factors” beginning on page 18 and other information included in this prospectus for a discussion of facts that you should consider before deciding to invest in shares of our common stock.

 

Proposed NYSE trading symbol

“LAW”

 

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The number of shares of our common stock that will be outstanding immediately after this offering is based on 49,378,863 shares of our common stock outstanding as of March 31, 2021, and excludes:

 

   

3,034,660 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2021 under our Long Term Incentive Plan, or 2013 Plan, with a weighted average exercise price of $3.96 per share;

 

   

537,180 shares of common stock issuable upon the exercise of options granted after March 31, 2021 under our 2013 Plan, with a weighted average exercise price of $18.70 per share;

 

   

49,869 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2021, with a weighted average exercise price of $2.93 per share;

 

   

4,700,000 new shares of common stock reserved for future issuance under our 2021 Equity Incentive Plan, or 2021 Plan, plus any future increases in the number of shares of common stock reserved for issuance thereunder, as more fully described in the section titled “Executive Compensation—Employee Benefit Plans;” and

 

   

1,100,000 shares of common stock reserved for issuance under our 2021 Employee Stock Purchase Plan, or ESPP, plus any future increases in the number of shares of common stock reserved for issuance thereunder, as more fully described in the section titled “Executive Compensation—Employee Benefit Plans.”

In addition, unless we specifically state otherwise, the information in this prospectus assumes:

 

   

the filing of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering;

 

   

a five-for-one reverse stock split of our common stock and redeemable convertible preferred stock effected on July 9, 2021;

 

   

the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into 35,793,483 shares of common stock effective immediately prior to the completion of this offering;

 

   

no purchase of shares of our common stock by certain individual officers and directors through the directed share program described under “Underwriting”;

 

   

no exercise of the underwriters’ option to purchase up to an additional 500,000 shares of common stock from us and up to an additional 200,000 shares from the selling stockholder in this offering; and

 

   

no exercise of the outstanding stock options or warrants.


 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The summary consolidated statements of operations and comprehensive loss data for the years ended December 31, 2019 and 2020 and the summary consolidated balance sheet data as of December 31, 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations and comprehensive loss data for the three months ended March 31, 2020 and 2021 and the summary consolidated balance sheet data as of March 31, 2021 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position and results of operations. You should read the consolidated financial data set forth below in conjunction with our consolidated financial statements and the accompanying notes and the information in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected for any period in the future.

 

    Year Ended December 31,     Three Months Ended March 31,  

(in thousands, except share and per share amounts)

  2019     2020     2020     2021  
                (unaudited)  

Consolidated Statements of Operations and Comprehensive Loss

       

Revenue

  $ 48,556     $ 68,444     $ 15,668     $ 21,131  

Cost of revenue(1)

    14,457       20,449       5,071       5,788  
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    34,099       47,995       10,597       15,343  

Operating expenses:

       

Research and development(1)

    25,352       26,599       8,203       6,262  

Sales and marketing(1)

    26,122       31,061       9,322       7,876  

General and administrative(1)

    12,975       13,893       4,258       4,053  

Refund of sales and use taxes

          (1,057            
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    64,449       70,496       21,783       18,191  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (30,350     (22,501     (11,186     (2,848

Other income (expense):

       

Interest and other income

    652       155       63       13  

Interest and other expense

    (124     (456     (88     (57
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    528       (301     (25     (44

Loss from operations before income taxes

    (29,822     (22,802     (11,211     (2,892

Provision for income taxes

    (10     (71     (25     (36
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (29,832   $ (22,873   $ (11,236   $ (2,928
 

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of redeemable convertible preferred stock

    (86     (92     (23     (26
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (29,918   $ (22,965   $ (11,259   $ (2,954
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted(2)

  $ (2.32   $ (1.74   $ (0.86   $ (0.22
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share, basic and diluted(2)

    12,920,172       13,171,176       13,099,205       13,388,045  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share, basic and diluted(3)

    $ (0.50     $ (0.06
   

 

 

     

 

 

 

Weighted-average shares used to compute pro forma net loss per share, basic and diluted(3)

      45,966,083         49,181,528  
   

 

 

     

 

 

 

 

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(1)

Includes stock-based compensation expense as follows:

 

     Year Ended
December 31,
     Three Months Ended
March 31,
 

(in thousands)

   2019      2020          2020              2021      
                   (unaudited)  

Cost of revenue

   $ 7      $ 28      $ 6      $ 8  

Research and development

     727        864        222        201  

Sales and marketing

     301        335        70        83  

General and administrative

     3,085        766        190        196  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,120      $ 1,993      $ 488      $ 488  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)

See Note 13 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted loss per share attributable to common stockholders and the weighted-average number of shares used in the computation of the per share amounts.

(3) 

Pro forma net loss per share gives effect to the automatic conversion of all outstanding shares of redeemable convertible preferred stock into an aggregate of 35,793,483 shares of common stock.

 

     As of March 31, 2021  

(in thousands)

   Actual     Pro
Forma(1)
     Pro Forma
as Adjusted(2)(3)
 

Consolidated Balance Sheet Data

       

Cash and cash equivalents

   $ 53,632     $ 53,632    $ 248,721

Working capital(4)

     58,143       58,143        253,232  

Total assets

     76,188       76,188        271,277  

Total liabilities

     12,577       12,577        12,577  

Redeemable convertible preferred stock

     160,826               

Total stockholders’ (deficit) equity

     (97,215     63,611        258,700  

 

(1) 

The pro forma consolidated balance sheet data gives effect to (a) the automatic conversion of all outstanding shares of redeemable convertible preferred stock into an aggregate of 35,793,483 shares of common stock and (b) the filing and effectiveness of our amended and restated certificate of incorporation, each of which will occur immediately prior to the completion of this offering.

(2) 

The pro forma as adjusted consolidated balance sheet data gives effect to (a) the items described in footnote (1) above and (b) our receipt of estimated net proceeds from the sale of 7,000,000 shares of common stock that we are offering at an assumed initial public offering price of $30.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(3) 

A $1.00 increase (decrease) in the assumed initial public offering price of $30.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity by $6.5 million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity by $28.4 million, assuming the assumed initial public offering price of $30.50 per share of common stock remains the same, and after deducting the estimated underwriting discounts and commissions.

(4) 

Working capital is defined as current assets less current liabilities.


 

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RISK FACTORS

This offering and an investment in our common stock involve a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before you decide to purchase shares of our common stock. If any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial actually occurs, our business, financial condition, results of operations and prospects could be materially and adversely affected. Unless otherwise indicated, references in these risk factors to our business being harmed will include harm to our business, reputation, brand, financial condition, results of operations and prospects. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock.

Risks Related to Our Growth and Capital Requirements

Our recent rapid growth may not be indicative of our future growth. Our rapid growth also makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

We have experienced substantial growth in our business since inception. For example, our revenue was $48.6 million, $68.4 million, $15.7 million, and $21.1 million for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively. We have also experienced significant growth in headcount, our number of customers, usage and amount of data delivered across our solution. You should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. Even if our revenue continues to increase, we expect that our revenue growth rate may decline in the future as a result of a variety of factors, including the maturation of our business, increased competition, changes to technology, a decrease in the growth of our overall market, or our failure, for any reason, to continue to take advantage of growth opportunities. Overall growth of our revenue depends on a number of factors, including our ability to:

 

   

price our solution effectively so that we are able to attract new customers and expand sales to our existing customers;

 

   

expand the functionality applications of our solution;

 

   

maintain and expand the rates at which customers use our solution;

 

   

provide our customers with support that meets their needs;

 

   

maintain or increase customer satisfaction with our solution;

 

   

continue to introduce and sell our solution to new markets;

 

   

continue to develop applications and new functionality on our solution and successfully further optimize our solution, including continued innovation of our artificial intelligence system for legal documents;

 

   

successfully identify and acquire or invest in businesses, products or technologies that we believe could complement or expand our solution;

 

   

recruit, hire, train and manage additional qualified developers, professionals and sales and marketing personnel; and

 

   

increase awareness of our brand on a global basis and successfully compete with other companies.

We may not successfully accomplish any of these objectives, and as a result, it is difficult for us to forecast our future results of operations. If the assumptions that we use to plan our business are incorrect or change in reaction to changes in the markets in which we operate, or if we are unable to maintain consistent revenue or revenue growth, our stock price could be volatile and it may be difficult to achieve and maintain profitability.

 

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In addition, we expect to continue to expend substantial financial and other resources on:

 

   

our technology infrastructure, including systems architecture, scalability, availability, performance and security;

 

   

sales and marketing, including a significant expansion of our sales organization to engage existing and prospective customers, increase brand awareness and drive adoption of our solution;

 

   

product development, including investments in our development team and the development of new applications of our solution and new functionality for our existing applications and in the protection of our intellectual property rights related to our product development;

 

   

services and support for the benefit and assistance of customers using our solution;

 

   

acquisitions or strategic investments;

 

   

international expansion; and

 

   

general administration, including increased legal and accounting expenses associated with being a public company.

These investments may not be successful on the timeline we anticipate or at all and may not result in increased revenue growth. If we are unable to maintain or increase our revenue at a rate sufficient to offset the expected increase in our costs, our business, financial position and results of operations will be harmed and we may not be able to achieve or maintain profitability over the long term. Additionally, we have encountered, and may in the future encounter, risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as unforeseen operating expenses, difficulties, complications, delays and other known or unknown factors that may result in losses in future periods. If our revenue growth does not meet our expectations in future periods, our business, financial position and results of operations may be harmed and we may not achieve or maintain profitability in the future.

We may not be able to successfully manage our growth and, if we are not able to grow efficiently, our business, financial condition and results of operations could be harmed.

The rapid growth we have experienced in our business places significant demands on our operational infrastructure. As usage of our solution grows, we will need to devote additional resources to improving and maintaining our infrastructure and integrating with third-party applications, including open source software. In addition, we will need to appropriately scale our internal business systems and our services organization, including customer support and professional services, to serve our growing customer base. Any failure of or delay in these efforts could lead to impaired system performance and reduced customer satisfaction, resulting in decreased sales to customers, lower dollar-based net retention rates, the issuance of service credits or requested refunds, which would hurt our revenue growth and our reputation. Even if we are successful in our expansion efforts, they will be expensive and complex, and require the dedication of significant management time and attention. We could also face inefficiencies or service disruptions as a result of our efforts to scale our internal infrastructure. We cannot be sure that the expansion of and improvements to our internal infrastructure will be effectively implemented on a timely basis, if at all, and such failures could harm our business, financial condition and results of operations.

Our limited operating history and our history of operating losses makes it difficult to evaluate our current business and prospects and may increase the risks associated with your investment.

We launched our business in 2013 and have experienced net losses in each fiscal year since inception. We incurred net losses of $29.8 million, $22.9 million, $11.2 million and $2.9 million for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively. As of March 31, 2021, we had an accumulated deficit of $106.0 million. We will need to generate and sustain increased revenue levels and manage costs in future periods in order to become profitable. Even if we achieve profitability,

 

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we may not be able to maintain or increase our level of profitability. We intend to continue to incur significant costs to support further growth and further develop our solution, including expanding the functionality of our solution, technology infrastructure and business systems, expanding our direct sales force and partner ecosystem, increasing our marketing activities and growing our international operations. We will also face increased compliance costs associated with growth, expansion of our customer base and the costs of being a public company. These increased expenditures will make it harder for us to achieve or sustain profitability and we cannot predict if we will achieve or sustain profitability in the near term or at all. We may incur significant losses in the future for a number of reasons, including the other risks described herein, and unforeseen expenses, difficulties, complications and delays and other unknown events. If we are unable to achieve and sustain profitability, the value of our common stock could decline and our business may be harmed.

We have limited historical financial data and operate in a rapidly evolving market. As a result, it is difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth, and any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market. We have encountered and will continue to encounter risks and difficulties frequently experienced by rapidly growing companies in constantly evolving industries, including the risks described in this prospectus. If we do not address these risks successfully, our business may be harmed.

Our ability to timely raise capital in the future may be limited, or such capital may be unavailable on acceptable terms, if at all.

We have funded our operations since inception primarily through payments received from our customers, sales of equity securities and borrowings under our credit facility. We cannot be certain when or if our operations will generate sufficient cash to fully fund our ongoing operations or the growth of our business. We intend to continue to make investments to support our business and may require additional funds. We evaluate financing opportunities from time to time and our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance and condition of the capital markets at the time we seek financing. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could harm our business, operating results and financial condition. Furthermore, if we issue additional equity securities, stockholders will experience dilution and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in future offerings will depend on numerous considerations, including factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future issuances of debt or equity securities. As a result, our stockholders bear the risk of future issuances of debt or equity securities reducing the value of our common stock and diluting their interests.

Our issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans or otherwise will dilute all other stockholders.

We may issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards to employees, directors and consultants under our equity incentive plans. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in companies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline.

 

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Risks Related to Our Business and Industry

Our business depends on customers increasing their use of our solution and any loss of customers or decline in their use of our solution could harm our business.

Our ability to grow and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with existing customers and to have them increase their usage of our solution. Customers are charged in part based on their usage of our solution. If our customers do not increase their usage of our solution, our revenue may decline and our results of operations may be harmed. Most of our customers do not have long-term contractual financial commitments to us and, therefore, most of our customers may reduce or cease their use of our solution at any time. Customers may terminate or reduce their use of our solution for any number of reasons, including the settlement or other resolution of legal matters, reductions in the volume of major legal matters experienced, customer budget constraints, customer satisfaction or negative perceptions as to the reliability of our solution relative to traditional methods of performing legal services, changes in our customers’ underlying businesses and financial conditions, changes in the type and size of our customers, pricing changes, legal industry trends away from litigation toward alternative forms of dispute resolution, competitive conditions and general economic conditions. In addition, even if our customers expand their usage of our solution, we cannot guarantee that they will maintain those usage levels for any meaningful period of time.

Customers under usage-based contracts can cancel their contracts or reduce their usage at any time. The loss of customers or reductions in their usage of our solution may each have a negative impact on our business, results of operations and financial condition. In addition, existing customers may negotiate lower rates for their usage in exchange for an agreement to renew, expand their usage in the future or adopt new solutions. As a result, these customers may not reduce their usage of our solution, but the revenue we derive from that usage will decrease. If our customers reduce their usage of or do not continue to use our solution, our revenue and other results of operations will decline and our business will suffer.

Our future success also depends in part on our ability to expand our existing customer relationships by increasing usage and selling additional solutions to our existing customers. The rate at which our customers purchase solutions from us depends on a number of factors, including our ability to develop additional solutions for our solution and the quality of such applications, general economic conditions and pricing and services offered by our competitors. If our efforts to increase usage and sell additional solutions to our customers are not successful, our business may be harmed.

Usage of our solution accounts for substantially all of our revenue.

We have derived and expect to continue to derive substantially all of our revenue from our solution. As such, market adoption of our solution is critical to our continued success. Our operating results could suffer due to:

 

   

any decline in demand for our solution;

 

   

the failure of our solution to achieve continued market acceptance;

 

   

the failure of the market for cloud-based technologies for the legal market to continue to grow, or grow as quickly as we expect;

 

   

the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our solution;

 

   

technological innovations or new standards that our solution does not address;

 

   

sensitivity to current or future prices offered by us or our competitors;

 

   

our customers’ development of their own proprietary solutions; and

 

   

our inability to release enhanced versions of our solution on a timely basis.

 

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If the market for our solution grows more slowly than expected or if demand for our solution does not grow as quickly as anticipated, whether as a result of competition, pricing sensitivities, product obsolescence, technological change, unfavorable economic conditions, uncertain geopolitical environment, budgetary constraints of our customers or other factors, our business would be harmed.

If we are unable to attract new customers and retain existing customers, our business, financial condition and results of operations will be adversely affected.

We must attract new customers and retain existing customers to continue to grow our business. Our success will depend to a substantial extent on the widespread adoption of our solution as an alternative to existing offerings, including as an alternative to traditional systems relying on manual tasks and processes. Our customers include law firms and other legal services providers, legal departments of corporate enterprises and organizations and governmental entities. We must convince potential customers of the value of our cloud software solution and that our technologies can automate and simplify legal services more accurately, efficiently and securely than lawyers and their staff and the products of our competitors. This may require significant and costly sales efforts that are targeted at law firms and legal departments of corporate enterprises and organizations and the senior management of these potential customers. In addition, our ability to attract new customers depends in part on our partner ecosystem, consisting of law firms and other legal services providers who resell our solution., We must develop and maintain strong relations with our partner ecosystem and convince our partners of the value of our solution so that they drive adoption of our solution by their customers. Additionally, our solution allows our customers to add other legal industry participants as non-paying users of our solution. Our ability to attract new customers depends in part on our ability to convert the non-paying part users. Our success also depends in part on our ability to offer compelling solutions and the effectiveness of our sales organization. Numerous other factors, many of which are out of our control, may now or in the future impact our ability to acquire new customers, including, but not limited to:

 

   

competitive offerings;

 

   

potential customers’ commitments to other providers;

 

   

real or perceived costs of switching to our solution;

 

   

our failure to expand, retain and motivate our sales and marketing personnel;

 

   

our failure to develop or expand relationships with potential customers and our partner ecosystem;

 

   

failure by us to help our customers to successfully deploy our solution;

 

   

negative media or industry or financial analyst commentary regarding us or our solution;

 

   

negative perceptions about the reliability of cloud-based legal solutions;

 

   

litigation activity;

 

   

and deteriorating general economic conditions.

If the legal market and the demand for legal services decline, customers may decide not to adopt our solution and our existing customers may cease using our solution to reduce costs. As a result of these and other factors, we may be unable to attract new customers or retain existing customers, which would adversely affect our business, financial condition and results of operations.

If our solution fails to perform properly due to defects, interruptions, delays in performance or similar problems and if we fail to resolve any defect, interruption, delay or other problem, we could lose customers, become subject to service performance or warranty claims or incur significant costs.

Our operations are dependent upon our ability to prevent system interruption. The technologies underlying our cloud solution are complex and may contain material defects or errors, which may cause disruptions in

 

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availability or other performance problems. We have from time to time found defects in our solution and may discover additional defects in the future that could result in service issues. These defects or errors could also be found in third-party applications on which we rely. We may not be able to detect and correct defects or errors before a customer begins using our solution. Consequently, we or our customers may discover defects or errors after our solution has been deployed.

In addition, we may experience system slowdowns and interruptions from time to time. Continued growth in our customer base could place additional demands on our solution and could cause or exacerbate slowdowns or interrupt the availability of our solution. If there is a substantial increase in the volume of usage on our solution, we will be required to further expand and upgrade our technology and infrastructure. There can be no assurance that we will be able to accurately project the rate or timing of increases, if any, in the use of our solution or expand and upgrade our systems and infrastructure to accommodate such increases on a timely basis. In such cases, if our users are not able to access our solution or encounter slowdowns when doing so, we may lose customers or partners. In order to remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our solution. Our response to such slowdowns or interruptions may not be sufficient to address all aspects or any unanticipated consequence or incidents and our insurance may not be sufficient to compensate us for the losses that could occur.

Our customers use our solution to manage critical aspects of their businesses and operations. The occurrence of any defects, errors, disruptions in service or other performance problems, or delays with our solution, whether in connection with the day-to-day operations or otherwise, could result in:

 

   

loss of customers;

 

   

loss of partners;

 

   

reduced customer usage of our solution;

 

   

reduced ability to attract new customers;

 

   

lost or delayed market acceptance and sales of our solution;

 

   

delays in payment to us by customers;

 

   

injury to our reputation and brand;

 

   

legal claims, including warranty claims, against us; and

 

   

diversion of our resources, including through increased service and warranty expenses or financial concessions, and increased insurance costs.

The costs incurred in correcting any material defects, errors or other performance problems in our solution may be substantial and could harm our business.

Incorrect or improper use of our solution could result in customer dissatisfaction and harm our business, results of operations, financial condition and growth prospects.

We regularly train our customers in the proper use of and the variety of benefits that can be derived from our solution to maximize its potential. Our failure to train customers on how to efficiently and effectively deploy and use our solution, or our failure to provide effective support or professional services to our customers, whether actual or perceived, may result in negative publicity or legal actions against us. Also, as we continue to expand our customer base, any actual or perceived failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our related services.

Customers may find our solution to be complicated to use and it may not be easy to maximize the value of our solution without proper training. Moreover, we have designed our solution to allow for use by law firms and

 

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legal services providers who are not direct customers. If our customers or such third-parties perceive that our solution is too complex or time-consuming to learn and use, customer perceptions of our company and our solution may be impaired, our reputation and brand may suffer and customers may choose not to use our solution or increase their purchases of our offerings. Further, incorrect or improper use of our solution by our customers or their external legal services providers may result in negative legal outcomes and potentially subject such parties to claims of malpractice, which would adversely affect our reputation and customer confidence in our solution.

We rely upon third-party providers of cloud-based infrastructure to host our cloud-based solution. Any disruption in the operations of these third-party providers, limitations on capacity, or interference with our use could adversely affect our business, financial condition and results of operations.

Our continued growth depends in part on the ability of our existing and potential customers to continue to adopt and utilize our cloud-based solution. We outsource substantially all of the infrastructure relating to our cloud-based solution to third-party hosting services. In particular, Amazon Web Services, or AWS, provides the cloud computing infrastructure that we use to host our solution and many of the internal tools we use to operate our business. Customers of our cloud-based solution expect to be able to access our solution at any time, without interruption or degradation of performance. Our cloud-based solution depends on protecting the virtual cloud infrastructure hosted by third-party hosting services by maintaining its configuration, architecture, features and interconnection specifications, as well as the information stored in these virtual data centers, which is transmitted by third-party internet service providers. Any disruption as a result of cyber-attacks or similar issues, or any limitation on the capacity of our third-party hosting services, could impede our ability to onboard new customers or expand the usage of our existing customers or otherwise adversely affect our business, which could adversely affect our financial condition and results of operations. Due the fact that we rely on third-party providers of cloud-based infrastructure to host our cloud-based solution, it may become increasingly difficult to maintain and improve their performance, especially during peak usage times and as our cloud capabilities become more complex and our user traffic increases, because we do not control the infrastructure supporting these services. In addition, any incident affecting our third-party hosting services’ infrastructure that may be caused by cyber-attacks, natural disasters, fire, flood, severe storm, earthquake, power loss, telecommunications failures, outbreaks of contagious diseases, terrorist or other attacks and other similar events beyond our control could negatively affect our cloud-based solution. If our cloud-based solution is unavailable or if our users are unable to access our cloud-based solution within a reasonable amount of time or at all, we may experience a loss of customers, lost or delayed market acceptance of our solution, delays in payment to us by customers, injury to our reputation and brand, legal claims against us and the diversion of our resources. We may also incur significant costs for using alternative equipment or taking other actions in preparation for, or in reaction to, events that damage the third-party hosting services we use.

As our business grows, we may need to engage additional providers of cloud computing infrastructure to support our operations. Adequate additional support may not be available to us on acceptable terms, or at all. Furthermore, certain customers may require that we use or avoid specific providers of cloud computing infrastructure. If we fail to enter into agreements or integrate our solution with third-party offerings that our customers require to operate their businesses, or to provide the proper support or ease of integration our customers require, we may not be able to offer the functionality that our customers and their consumers expect, which would harm our business. In addition, in the event that our service agreements with our third-party hosting services are terminated, or there is a lapse of service, elimination of services or features that we utilize, interruption of internet service provider connectivity or damage to such facilities, we could experience interruptions in access to our cloud-based solution as well as significant delays and additional expense in arranging or creating new facilities and services and/or re-architecting our cloud-based solution for deployment on a different cloud infrastructure service provider, which could adversely affect our business, financial condition and results of operations.

 

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We rely on AWS to host our solution, and any disruption of service from AWS or material change to our arrangement with AWS could adversely affect our business.

We currently host our solution and support most of our operations using AWS, a provider of cloud infrastructure services. We do not control the operations of AWS’s facilities. AWS’s facilities are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cyber security attacks, terrorist attacks, power losses, telecommunications failures and similar events or could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. The occurrence of any of these events, a decision to close the facilities or cease or limit providing services to us without adequate notice or other unanticipated problems could result in interruptions to our solution, which may be lengthy. Our solution’s continuing and uninterrupted performance is critical to our success and employers and job seekers may become dissatisfied by service interruption. Sustained or repeated system failures could reduce the attractiveness of our solution to customers, cause our customers to decrease their use of or stop using our solution and otherwise adversely affect our business. Moreover, negative publicity from disruptions could damage our reputation.

AWS does not have an obligation to renew its agreements with us on commercially reasonable terms, or at all. If we cannot renew our agreement or are unable to renew on commercially reasonable terms, we may experience costs or downtime in connection with the transfer to, or the addition of, new cloud infrastructure or other data center. If these providers charge high costs for or increase the cost of their services, we will experience higher costs to operate our business and may have to increase the fees to use our marketplace and our operating results may be adversely impacted.

Upon expiration or termination of our agreement with AWS, we may not be able to replace the services provided to us in a timely manner or on terms and conditions, including service levels and cost, that are favorable to us, and a transition from one vendor to another vendor could subject us to operational delays and inefficiencies until the transition is complete. Switching our operations from AWS to another cloud or other data center provider would also be technically difficult, expensive and time consuming.

Any of the above circumstances or events may harm our reputation, cause customers to stop using our solution, impair our ability to increase revenue from existing customers, impair our ability to grow our customer base, subject us to financial penalties and liabilities under our service level agreements and otherwise harm our business, results of operations and financial condition.

We expect fluctuations of our financial results, which may cause quarterly comparisons not to be meaningful.

Our business model is usage-based and there is inherent unpredictability in the timing, duration and scope of our customers’ legal matters requiring use of our solution. Our operating results have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our quarterly results of operations, including the levels of our revenues, working capital and cash flows, may vary significantly in the future, such that period-to-period comparisons of our results of operations may not be meaningful. Our financial results may fluctuate due to a variety of factors, many of which are outside of our control and may be difficult to predict, including, but not limited to:

 

   

the timing of our customers’ usage of our solution;

 

   

the level of demand for or pricing of our solution;

 

   

our ability to grow or maintain usage by our existing customers and acquire new customers;

 

   

the timing and success of new functionality, features, integrations, capabilities and enhancements by us to our solution, or by our competitors to their products, or any other changes in the competitive landscape of our market;

 

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the timing and amount of our investments to expand the capacity of our third-party cloud infrastructure providers;

 

   

changes in our customers’ budgets and in the timing of their budget cycles and purchasing decisions;

 

   

changes in regulatory or legal environments that may cause us to incur, among other elements, expenses associated with compliance;

 

   

general economic conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers participate;

 

   

the effects of potential acquisitions and their integration;

 

   

the impact of new accounting pronouncements;

 

   

changes in the competitive dynamics of our market, including consolidation among competitors or customers;

 

   

significant security breaches of, technical difficulties with or interruptions to the delivery and use of our solution;

 

   

awareness of our brand and our reputation in our target markets;

 

   

errors in our forecasting of the demand for our solution, which would lead to lower revenues, increased costs, or both; and

 

   

our ability to control costs, including research and development and sales and marketing expenses.

Any one or more of the factors above may result in significant fluctuations in our quarterly results of operations. In addition, because we were founded in 2013 and have experienced rapid expansion of our business and revenues since such time, we do not have a long history upon which to base forecasts of future revenue and operating results. Accordingly, we may be unable to accurately forecast our revenues. As a result, our past results may not be indicative of our future performance, and the variability and unpredictability of our quarterly results of operations or other operating metrics could result in our failure to meet our expectations or those of investors or analysts with respect to revenues or other metrics for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the trading price of our common stock could decline substantially and we could face lawsuits that are costly and may divert management’s attention, including securities class action suits.

If we fail to forecast our revenue accurately, or if we fail to manage our expenditures, our operating results could be adversely affected.

Because our recent growth has resulted in the rapid expansion of our business and revenues, we do not have a long history upon which to base forecasts of future revenue and operating results. We cannot accurately predict customers’ usage given the uncertain timing and duration of legal matters and the diversity of our customer base across industries, geographies and size and other factors. Accordingly, we may be unable to accurately forecast our revenues notwithstanding our substantial investments in sales and marketing, infrastructure and research and development in anticipation of continued growth in our business. If we do not realize returns on these investments in our growth, our results of operations could differ materially from our forecasts, which would adversely affect our results of operations and could disappoint analysts and investors, causing our stock price to decline.

If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations and changing customer needs, requirements or preferences, our solution may become less competitive.

The market in which we compete is relatively new and subject to rapid technological change, evolving industry standards and regulatory changes, as well as changing customer needs, requirements and preferences.

 

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The success of our business will depend, in part, on our ability to adapt and develop enhancements for our solution that respond effectively to these changes on a timely basis and in a user-friendly manner. If we are unable to evolve our cloud solution to satisfy our customers’ needs and provide enhancements or add new and innovative features and capabilities to our solution that keep pace with rapid technological and industry change, our revenue and operating results could be adversely affected. If new technologies emerge that enable our competitors to deliver competitive products, services and applications at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete. If our solution does not allow us or our customers to comply with the latest regulatory requirements, our existing customers may decrease their usage on our solution and new customers will be less likely to adopt our solution.

A limited number of customers represent a substantial portion of our revenue. If we fail to retain these customers, our revenue could decline significantly.

We derive a substantial portion of our revenue from sales to our top 10% customers. As a result, our revenue could fluctuate materially and could be materially and disproportionately impacted by purchasing decisions of these customers or any other significant future customer. Any of our significant customers may decide to purchase less than they have in the past, may alter their purchasing patterns at any time with limited notice, or may decide not to continue to use our solution at all, any of which could cause our revenue to decline and adversely affect our financial condition and results of operations. If we do not further diversify our customer base, we will continue to be susceptible to risks associated with customer concentration.

Our revenue growth depends in part on the success of our strategic relationships with law firms and other legal services providers, and if we are unable to establish and maintain successful relationships with them, our business, operating results and financial condition could be adversely affected.

We seek to grow our partner ecosystem as a way to grow our business. We plan to continue to establish and maintain similar strategic relationships with law firms and other legal services providers and we expect these entities to become an increasingly important aspect of our business. Our future growth in revenue and ability to achieve and sustain profitability depends in part on our ability to identify, establish and retain successful strategic partner relationships in the United States and internationally, which will take significant time and resources and involve significant risk. In order to develop and expand our distribution channel, we must develop and improve our processes for partner introduction and training. If we do not succeed in identifying suitable strategic partners or maintain our relationships with such partners, our business, operating results and financial condition may be adversely affected.

Moreover, we cannot be certain that these law firm and other legal services provider partners will prioritize or provide adequate resources to promote or utilize our solution. Further, some of our partners also work with our competitors. As a result of these factors, many of our law firm and other legal services provider partners may choose to promote alternative technologies in addition to or in lieu of our solution, either on their own or in collaboration with others, including our competitors. We cannot assure you that our law firm and other legal services provider partners will continue to cooperate with us. In addition, actions taken or omitted to be taken by such parties may adversely affect us. Even if we are successful in establishing and maintaining these relationships with law firms and other legal services providers, we cannot assure you that these relationships will result in increased customer usage of our solution or increased revenue to us.

Failure to effectively develop and expand our marketing and sales capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our solution.

Our ability to increase our customer base and achieve broader market acceptance of our solution will significantly depend on our ability to expand our marketing and sales operations. We plan to continue expanding our sales force and strategic partners, both domestically and internationally. We also plan to dedicate significant resources to sales, marketing and demand-generation programs, including various online marketing activities as

 

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well as targeted account-based advertising. The effectiveness of our targeted account-based advertising has varied over time and may vary in the future. All of these efforts will require us to invest significant financial and other resources and if they fail to attract additional customers, our business will be harmed. If our lead generation methods do not result in broader market acceptance of our solution, we will not realize the intended benefits of this strategy and our business will be harmed.

We believe that there is significant competition for sales personnel, including sales representatives, sales managers and sales engineers, with the skills and technical knowledge that we require. 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. New hires require significant training and may take significant time before they achieve full productivity. Our recent hires may not become productive as quickly as we expect, if at all, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. In addition, particularly if we continue to grow rapidly, new members of our sales force will have relatively little experience working with us, our solution and our business model. If we are unable to hire and train sufficient numbers of effective sales personnel, our sales personnel do not reach significant levels of productivity in a timely manner, or our sales personnel are not successful in acquiring new customers or expanding usage by existing customers, our business will be harmed.

The markets in which we participate are competitive, and if we do not compete effectively, our business will be harmed.

The market for technology solutions for law firms, private enterprises and government and other organizations is highly fragmented, competitive and constantly evolving. With the introduction of new technologies and market entrants, we expect that the competitive environment in which we compete will remain intense going forward. Almost all potential customers have existing solutions for ediscovery and legal document review in place, which typically consists of a mix of on-premise point solutions and human professional service providers to deliver these solutions. Our competitors include (i) legal services providers, including large dedicated legal services providers such as Consilio LLC, Epiq Systems, Inc. and KLDiscovery Inc., the legal services divisions of large professional firms such as Deloitte & Touche LLP, Ernst and Young LLP, KPMG LLP and PricewaterhouseCoopers LLP, as well as a large number of smaller regional and local services companies and certain law firms providing in-house ediscovery and document review solutions; (ii) legacy on-premise software providers, such as Nuix Limited, Open Text Corporation and Relativity ODA LLC, or Relativity, RELX PLC and Thomson Reuters Corporation; and (iii) cloud software providers, such as Everlaw, Inc., Logik Systems, Inc. (d.b.a. Logikcull), Relativity’s through its RelativityOne offering and Reveal Data Corporation. In addition, we expect to expand our solution to address additional areas of the legal function and we likely face further competition from existing companies in such areas.

Some of our competitors have made or may make acquisitions or be acquired by private equity sponsors, enterprises or special purpose acquisition companies or may enter into commercial relationships or other strategic relationships that may provide more comprehensive offerings than they individually had offered. Such acquisitions or relationships may help competitors achieve greater economies of scale than us. In addition, new entrants not currently considered to be competitors may enter the market through acquisitions, partnerships or strategic relationships.

We compete on the basis of a number of factors, including:

 

   

our solution’s functionality, scalability, performance, ease of use, reliability, security, availability and cost-effectiveness relative to that of our competitors’ products and services;

 

   

our ability to utilize new and proprietary technologies to offer services and features previously not available in the marketplace;

 

   

our ability to identify new markets, applications and technologies;

 

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our ability to attract and retain customers;

 

   

our brand, reputation and trustworthiness;

 

   

perceptions about the security, privacy and availability of our solution relative to competitive products and services;

 

   

the quality of our customer support;

 

   

our ability to recruit software developers and sales and marketing personnel; and

 

   

our ability to protect our intellectual property.

Our competitors vary in size and in the breadth and scope of the products and services offered. Many of our competitors and potential competitors have greater name recognition, greater market penetration, longer operating histories, more established customer relationships and installed customer bases and substantially greater financial, human, technical and other resources than we do and may be able to offer competing solutions to potential customers on more favorable terms than us. While some of our competitors provide a platform with applications to support one or more use cases, many others provide point-solutions that address a single use case. Other potential competitors not currently offering competitive applications may expand their product offerings to compete with our solution. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards and customer requirements. An existing competitor or new entrant could introduce new technology that reduces demand for our solution. In addition to application and technology competition, we face pricing competition. Some of our competitors offer their applications or services at a lower price, which has resulted in pricing pressures. Some of our larger competitors have the operating flexibility to bundle competing applications and services with other offerings, including offering them at a lower price or for no additional cost to customers as part of a larger sale of other products. For all of these reasons, we may not be able to compete successfully and competition could result in the failure of our solution to achieve or maintain market acceptance, any of which could harm our business.

If the estimates and assumptions we have used to calculate the size of our addressable market opportunity are inaccurate, our future growth rate may be limited.

We have estimated the size of our addressable market opportunity based on data published by third parties and on internally generated data and assumptions. While we believe our market size information is generally reliable, such information is inherently imprecise and relies on our and third parties’ projections, assumptions and estimates within our target market, which are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in this prospectus. Our market is developing and may develop differently than we expect. Market opportunity estimates and growth forecasts included in this prospectus are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. If such third-party or internally generated data prove to be inaccurate or we make errors in our projections, assumptions or estimates based on that data, including how current customer data and trends may apply to potential future customers and the number and type of potential customers, our addressable target market opportunity and/or our future growth rate may be less than we currently estimate. In addition, these inaccuracies or errors may cause us to misallocate capital and other business resources, which could divert resources from more valuable alternative projects and harm our business.

The variables that go into the calculation of our market opportunity are subject to change over time and there is no guarantee that any particular number or percentage of addressable users or companies covered by our addressable target market opportunity estimates will purchase our solution at all or generate any particular level of revenue for us. Any expansion in our market depends on a number of factors, including the cost, performance and perceived value associated with our solution and applications and those of our competitors. Even if the market in which we compete meets the size estimates and growth forecasted in this prospectus, we may not be successful in capitalizing on such market opportunity and our business could fail to grow for a variety of reasons, including reasons outside of our control, such as competition in our industry.

 

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Our growth is subject to many factors, including our success in expanding our international operations, continuing to expand the use of our solution by our customers and otherwise implementing our business strategy, which are subject to many risks and uncertainties. Accordingly, the information regarding the size of our addressable market opportunity included in this prospectus should not be taken as indicative of our future growth. For more information regarding our estimates of market opportunity and the forecasts of market growth included in this prospectus, see the section titled “Market, Industry and Other Data.”

If we fail to develop, maintain and enhance our brand, our ability to expand our customer base will be impaired and our business, results of operations and financial condition may suffer.

We believe that maintaining and enhancing our brand is important to continued market acceptance of our existing and future applications, attracting new customers and retaining existing customers. We also believe that the importance of brand recognition will increase as competition in our market increases. Successfully maintaining and enhancing our brand will depend largely on the effectiveness of our marketing efforts and strategies, our ability to provide a reliable solution that continues to meet the needs of our customers at competitive prices, our ability to maintain our customers’ trust, our ability to continue to develop new functionality and applications for our solution and our ability to successfully differentiate our solution from competitive products and services. Additionally, our brand and reputation may be affected if customers do not have a positive experience with our law firm and other legal services provider partners’ services. Our brand promotion activities may not generate customer awareness or yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, our business may be harmed.

Furthermore, any negative publicity relating to our employees, customers or others associated with these parties may also tarnish our own reputation simply by association and may reduce the value of our brand. Damage to our brand and reputation may result in reduced demand for our solution and increased risk of losing market share to our competitors. Any efforts to restore the value of our brand and rebuild our reputation may be costly and may not be successful.

We employ a pricing model that subjects us to various challenges, and given our limited history with our pricing model, we may not be able to accurately predict the optimal pricing necessary to attract new customers and retain existing customers.

We generally charge our customers for their usage of our solution across a variety of dimensions of usage. We do not know whether our current or potential customers or the market in general will continue to accept this pricing model going forward and, if it fails to gain acceptance, our business could be harmed. In addition, we have limited experience with respect to determining the optimal pricing for our solution and, as a result, we have changed our pricing model in the past and expect that we may need to change it in the future, our pricing model from time to time. As the market for our solution matures and technology changes and improves, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers at the same price or based on the same pricing models as we have used historically. Pricing decisions may also impact the mix of adoption among our customers and negatively impact our overall revenue. Moreover, frequent or significant users of our solution may demand substantial price concessions. As a result, in the future we may be required to reduce our prices or develop new pricing models, which could adversely affect our revenue, gross margin, profitability, financial position and cash flow.

Our sales cycles with customers can be long and unpredictable and our sales efforts require considerable time and expense.

The timing of our sales with our enterprise customers and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for these customers. In addition, for our enterprise customers, the lengthy sales cycle for the evaluation and implementation of our solution may also cause us to

 

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experience a delay between incurring expenses for such sales efforts and the generation of corresponding revenue. The length of our sales cycle for these customers can vary substantially from customer to customer. Our sales efforts involve educating our customers about the use, technical capabilities and benefits of our solution. Customers often undertake a prolonged evaluation process, which frequently involves not only our solution but also those of our competitors. In addition, the size of potential customers may lead to longer sales cycles. As the use of our solution can be dependent upon the timing of work in legal matters, our sales cycle can extend to even longer periods of time. During the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a completed sale. Additional factors that may influence the length and variability of our sales cycle include:

 

   

the effectiveness of our sales force, particularly new salespeople, as we increase the size of our sales force and train our new salespeople to sell to enterprise customers;

 

   

the discretionary nature of customers’ purchasing decisions and budget cycles;

 

   

customers’ procurement processes, including their evaluation of competing products and services;

 

   

economic conditions and other factors affecting customer budgets;

 

   

the regulatory environment in which our customers operate;

 

   

customers’ familiarity with cloud computing solutions;

 

   

evolving customer demands; and

 

   

competitive conditions.

Given these factors, it is difficult to predict whether and when a customer will switch to our solution.

Further, some of our potential customers may undertake a significant evaluation and negotiation process due to size, organizational structure and approval requirements, all of which can lengthen our sales cycle. We may also face unexpected deployment challenges with such enterprises or more complicated deployment of our solution. These enterprises may demand additional features, support services and pricing concessions or require additional security management or control features. We may spend substantial time, effort and money on sales efforts to these customers without any assurance that our efforts will produce any sales or that these customers will deploy our solution widely enough across their organization to justify our substantial upfront investment. As a result, it is difficult to predict exactly when, or even if, we will make a sale to a potential customer or if we can increase sales to our existing customers.

If we cannot maintain our corporate culture as we grow, our success and our business and competitive position may be harmed.

We believe our culture has been a key contributor to our success to date and that the critical nature of the solution that we provide promotes a sense of greater purpose and fulfillment in our employees. We have invested in building a strong corporate culture and believe it is one of our most important and sustainable sources of competitive advantage. Any failure to preserve our culture could negatively affect our ability to retain and recruit personnel, which is critical to our growth, and to effectively focus on and pursue our corporate objectives. As we grow and develop the systems and processes associated with being a public company, we may find it difficult to maintain these important aspects of our culture. In addition, as we grow and our resources become more globally dispersed, we may find it increasingly difficult to maintain these beneficial aspects of our corporate culture. If we fail to maintain our corporate culture, or if we are unable to retain or hire key personnel, our business and competitive position may be harmed.

The success of our business depends on our customers’ continued and unimpeded access to our solution on the internet.

Our customers must have internet access in order to use our solution. We have experienced, and may in the future experience, disruptions, outages, defects and other performance and quality problems with the public

 

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cloud and internet infrastructure on which our cloud solution relies. These problems can be caused by a variety of factors, including introductions of new functionality, vulnerabilities and defects in proprietary and open source software, human error or misconduct, capacity constraints, design limitations, as well as from internal and external security breaches, malware and viruses, ransomware, cyber events, denial or degradation of service attacks or other security-related incidents. In addition, some internet providers may take measures that affect their customers’ ability to use our solution, such as degrading the quality of the content we transmit over their lines, giving that content lower priority, giving other content higher priority than ours, blocking our content entirely, or attempting to charge their customers more for using our solution. As we expand our operations internationally, these problems will be further exacerbated and we will face additional complexity due to our inability to control internet infrastructure outside the United States. Any disruptions, outages, defects and other security performance and quality problems with the public cloud and internet infrastructure on which our cloud solution relies, or any material change in our contractual and other business relationships with our public cloud providers, could result in reduced use of our solution, increased expenses, including significant, unplanned capital investments and harm to our brand and reputation, any of which could have a material adverse effect on our business, financial condition and results of operations.

Any failure to offer high-quality support and professional services for our customers may harm our relationships with our customers and, consequently, our business.

Once our solution is deployed, our customers sometimes request consulting and training to assist them in integrating our solution into their business and rely on our customer support personnel to resolve issues and realize the full benefits that our solution provides. Our ability to provide effective customer support is largely dependent on our ability to attract, train and retain qualified personnel with experience in supporting customers with a cloud solution such as ours and maintaining the same. The number of our customers has grown significantly, which is likely to increase demand for consulting, training, support and maintenance related to our solution and place additional pressure on our customer support teams. If we are unable to provide sufficient high-quality consulting, training, integration and maintenance resources, our customers may not effectively integrate our solution into their business or realize sufficient business value from our solution to justify further usage, which could impact our future financial performance. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for technical support or maintenance assistance. We also may be unable to modify the future, scope and delivery of our maintenance services and technical support to compete with changes in the technical services provided by our competitors. Increased customer demand for support and professional services, without corresponding revenue, could increase costs and negatively affect our operating results. In addition, as we continue to grow our operations and support our global customer base, we need to be able to continue to provide efficient support and effective maintenance that meets our customers’ needs globally at scale. Our ability to attract new customers is highly dependent on our business reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality support services, or a market perception that we do not maintain high-quality support services for our customers, would harm our business.

We rely on the performance of highly skilled personnel, including our management and other key employees and the loss of one or more of such personnel, or of a significant number of our team members, could harm our business.

We believe our success has depended, and continues to depend, on the efforts and talents of senior management and key personnel, including Kiwi Camara, our Co-Founder and Chief Executive Officer. From time to time, there may be changes in our management team resulting from the hiring or departure of executives and key employees, which could disrupt our business. We also are dependent on the continued service of our existing software engineers because of the complexity of our solution, and our existing salespeople, because of their relationship with our customers. Our senior management and key employees are employed on an at-will basis. In addition, many of our senior management and key employees may be able to receive significant proceeds from sales of our equity in the public markets after our initial public offering, which may

 

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reduce their motivation to continue to work for us. We cannot ensure that we will be able to retain the services of any member of our senior management or other key employees or that we would be able to timely replace members of our senior management or other key employees should any of them depart. The loss of one or more of our senior management or other key employees could harm our business.

The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy.

To execute our business strategy and growth plan, we must attract and retain highly qualified personnel. Competition for executive officers, software developers, legal professionals, sales and customer support personnel and other key employees in our industry is intense. In particular, we compete with many other companies for software developers with high levels of experience in designing, developing and managing cloud-based software, as well as for legal professionals to support our solution and skilled sales and operations professionals. In addition, we believe that the success of our business and corporate culture depends on employing people with a variety of backgrounds and experiences and the competition for such diverse personnel is significant. While the market for such talented personnel is particularly competitive in Austin, Texas, where our headquarters is located, it is also competitive in other markets where we maintain operations and the increased prevalence of remote work has increased competition for employees in all markets. Moreover, to the extent we expand our operations to additional markets, we may face difficulties attracting talented personnel to such locations. Many of the companies with which we compete for experienced personnel have greater resources than we do and can frequently offer such personnel substantially greater compensation than we can offer. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business would be harmed.

Future acquisitions, strategic investments, partnerships, or alliances could be difficult to identify and integrate, divert the attention of management, disrupt our business and dilute stockholder value.

While we have not made acquisitions historically, we may in the future make acquisitions of other companies, products and technologies that we believe could complement, expand or enhance the features and functionality of our solution and technical capabilities, broaden our service offerings or offer growth opportunities. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals and any acquisitions we complete could be viewed negatively by customers, developers or investors. In addition, we may not be able to integrate acquired businesses successfully or effectively manage the combined company following an acquisition. If we fail to successfully integrate our acquisitions, or the people or technologies associated with those acquisitions, into our company, the results of operations of the combined company could be adversely affected. Any integration process will require significant time and resources, require significant attention from management and disrupt the ordinary functioning of our business and we may not be able to manage the process successfully, which could harm our business. In addition, we may not successfully evaluate or utilize the acquired technology and accurately forecast the financial impact of an acquisition transaction, including accounting charges.

We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could affect our financial condition or the value of our capital stock. The sale of equity to finance any such acquisitions could result in dilution to our stockholders. If we incur more debt, it would result in increased fixed obligations and could also subject us to covenants or other restrictions that would impede our ability to flexibly operate our business.

Our current operations are international in scope and we plan on further geographic expansion, creating a variety of operational challenges.

A component of our growth strategy involves the further expansion of our operations and customer base internationally. For the year ended December 31, 2020, the percentage of revenue generated from customers

 

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outside the United States was less than 5.0% of our total revenue. Beyond the United States, we have operational presence internationally in Canada and the United Kingdom. We are continuing to adapt to and develop strategies to address international markets but there is no guarantee that such efforts will have the desired effect. In connection with such expansion, we may face difficulties, including costs associated with expansion, varying seasonality patterns, potential adverse movement of currency exchange rates, longer payment cycle difficulties in collecting accounts receivable in some countries, increased management, travel, infrastructure and legal compliance costs associated with having operations and developing our business in multiple jurisdictions, different technical standards, existing or future regulatory and certification requirements and required features and functionality, political and economic conditions and uncertainty in each country or region in which we operate and general economic and political conditions and uncertainty around the world, tariffs and trade barriers, a variety of regulatory or contractual limitations on our ability to operate, adverse tax events, reduced protection of intellectual property rights in some countries and a geographically and culturally diverse workforce and customer base. In addition, our solution has been developed with a focus on the practice of law in the United States and the rules and regulations applicable domestically in the United States and we may be required to expend substantial time and resources to update our solution or develop new applications to address alternative systems of legal resolution in other jurisdictions. Furthermore, in certain jurisdictions in which we seek to enter, the rules and regulations governing the practice of law and e-discovery may impose additional obligations or restrictions on our operations. Failure to overcome any of these difficulties could harm our business.

Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to further expand our international operations and are unable to do so successfully and in a timely manner, our business may be harmed.

We are exposed to fluctuations in currency exchange rates.

Our sales contracts are primarily denominated in U.S. dollars and therefore substantially all of our revenue is not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our solution to our customers outside of the United States, which could adversely affect our operating results. In addition, an increasing portion of our operating expenses is incurred and an increasing portion of our assets is held outside the United States. These operating expenses and assets are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates. While we do not currently engage in hedging efforts, if we do not successfully hedge against the risks associated with currency fluctuations as our international operations and customer base grow, our business may be harmed.

Current and future indebtedness could restrict our operations, particularly our ability to respond to changes in our business or to take specified actions.

Our current revolving credit facility contains, and any future indebtedness would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to take actions that may otherwise be in our best interests. Our ability to meet those financial covenants can be affected by events beyond our control and we may not be able to continue to meet those covenants. In addition, a breach of a covenant under our revolving credit facility or any future indebtedness may result in a cross-default under a separate credit facility. If we seek to enter into a new or additional credit facility, we may not be able to obtain debt financing on terms that are favorable to us, if at all. The lender under our revolving credit facility has rights senior to holders of common stock to make claims on our assets and the terms of our revolving credit facility restrict our operations, including our ability to pay dividends on our common stock. If we are unable to obtain adequate financing or financing on terms that are satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired and our business may be harmed.

 

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Risks Related to Socioeconomic Factors

Unfavorable conditions in our industry or the global economy or reductions in legal spending could harm our business.

Our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers and potential customers. This risk is presently heightened by the uncertain economic impact of the ongoing COVID-19 pandemic. Current or future economic uncertainties or downturns could adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, political turmoil, natural catastrophes, warfare and terrorist attacks on the United States, Europe, the Asia-Pacific region, or elsewhere, could cause a decrease in business investments, including spending on information technology, which would harm our business. To the extent that our solution is perceived by customers and potential customers as too costly, or difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. Moreover, corporate entities may elect to reduce legal spending, both internally and through outside counsel, or be less willing to try alternatives to the traditional legal function. Also, our competitors, many of whom are larger and have greater financial resources than we do, may respond to market conditions by lowering prices and attempting to lure away our customers. We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry.

Our business and results of operations may be materially adversely affected by the recent COVID-19 outbreak or other similar outbreaks.

Our business could be materially adversely affected by the outbreak of a widespread health epidemic or pandemic, including the recent outbreak of the COVID-19, which has been declared a “pandemic” by the World Health Organization. The COVID-19 outbreak has reached across the globe, resulting in the implementation of significant governmental measures, including lockdowns, closures, quarantines and travel bans intended to control the spread of the virus. Government authorities, including those in Austin, Texas, where our headquarters is located, instituted policies that required most of our employees in that area to work remotely. These policies have, and are expected to continue to have, an impact on our business and the business of our customers. For example, customers’ inability to access their office resulted in delays in collecting data for use in legal matters and delayed increases in usage of our solution consequently reduced our revenue growth. This impact could increase if further actions that alter our operations are required by applicable government authorities or if we determine further actions are in the best interests of our customers’ or of our employees.

To the extent that these restrictions remain in place, additional prevention and mitigation measures are implemented in the future, or there is uncertainty about the effectiveness of these or any other measures to contain or treat COVID-19, there potentially could be an adverse impact on global economic conditions, which could materially and adversely impact our customers through reduced consumer demand for their products and services, which could in turn negatively impact our customers’ willingness or ability to enter into or renew contracts with us. While at this time we are working to manage and mitigate potential disruptions to our operations, the fluid nature of the pandemic and uncertainties regarding the related economic impact are likely to result in sustained market turmoil, which may harm our business, results of operations and financial condition. We cannot predict how the COVID-19 pandemic will continue to develop, whether and to what extent government regulations or other restrictions may impact our operations or those of our customers, or whether or to what extent the COVID-19 pandemic or the effects thereof may have longer-term unanticipated impacts on our business.

The extent of COVID-19’s effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on our business. However, if the pandemic continues to persist as a severe

 

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worldwide health crisis, the disease may harm our business and may also have the effect of heightening many of the other risks described in this “Risk Factors” section.

Risks Related to Our Intellectual Property

Any failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.

Our success and ability to compete depends in part on our intellectual property and our other proprietary technology information. We seek to control access to our proprietary information by entering into a combination of confidentiality and proprietary rights agreements, invention assignment agreements and nondisclosure agreements with our employees, consultants and third parties with whom we have relationships.

As of March 31, 2021, we had two U.S. granted patents and six pending U.S. patent applications related to our solution and its technology. We cannot assure you that any of our patent applications will result in the issuance of a patent or that the examination process will not require us to narrow our claims. Any patents that issue from any patent applications may not give us the protection that we seek or may be challenged, invalidated or circumvented. Any patents that may issue in the future from our pending or future patent applications may not provide sufficiently broad protection and may not be valid and enforceable in actions against alleged infringers. Any patents we have obtained or may obtain in the future may be found to be invalid or unenforceable in light of recent and future changes in the law, or because of technology developed prior to the inventions we have sought to patent or because of defects in our patent prosecution process.

We may in the future be subject to legal proceedings and litigation, including intellectual property disputes, which are costly and may subject us to significant liability and increased costs of doing business. Our business may suffer if it is alleged or determined that our technology infringes the intellectual property rights of others.

The software industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and other intellectual property rights. Companies in the software industry are often required to defend against litigation claims based on allegations of infringement, misappropriation or other violations of intellectual property rights. Our technologies may not be able to withstand any third-party claims or rights against their use. In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights (and may also have greater resources to defend claims that may be brought against them). Any litigation may also involve patent holding companies or other adverse patent owners that have no relevant product revenue and against which our patents may therefore provide little or no deterrence. If a third party is able to obtain an injunction preventing us from accessing such third-party intellectual property rights, or if we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop offering applications impacted by the claim or injunction or cease business activities covered by such intellectual property and may be unable to compete effectively. Any inability to license third-party technology in the future would have an adverse effect on our business or operating results and would adversely affect our ability to compete. We may also be contractually obligated to indemnify our customers in the event of infringement of a third party’s intellectual property rights and any such claims could hurt our business as well. Such claims, regardless of their merit, can be time-consuming, costly to defend in litigation and damaging to our reputation and brand. In addition, although we carry general liability and cyber security insurance, our insurance may not be adequate to indemnify us for all liability that may be imposed or otherwise protect us from liabilities or damages with respect to claims alleging compromises of customer data and any such coverage may not continue to be available to us on acceptable terms or at all.

Lawsuits are time-consuming and expensive to resolve, and they divert management’s time and attention and could cause current or potential customers to seek other providers. Although we carry insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed nor the full extent of the harm that we might face. We cannot predict the outcome of lawsuits and the results of any such actions may harm our business.

 

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Failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brands as well as our competitive advantage.

We currently rely on a combination of patent, trademark, copyright and trade secret laws and other intellectual property rights and confidentiality or license agreements with our employees, customers, partners and others, to protect our intellectual property rights. Our success and ability to compete depend, in part, on our ability to protect our intellectual property, including our proprietary technology and our brands. If we are unable to protect our proprietary rights adequately, our competitors could use the intellectual property we have developed to enhance their own products and services, which may harm our business. It can be difficult to successfully enforce intellectual property rights and the fact that we have certain intellectual property rights does not necessarily mean that such rights are broad or strong enough to afford us a meaningful degree of protection. Furthermore, irrespective of the scope of our intellectual property rights, we may not be able to stop competitors from developing similar technologies or offering similar solutions.

We may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time-consuming and unsuccessful.

Third parties, including our competitors, could be infringing, misappropriating or otherwise violating our intellectual property rights. In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property.

Further, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights, and if such defenses, counterclaims or countersuits are successful, we could lose valuable intellectual property rights. An adverse determination of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our related patents, patent applications and trademark filings at risk of being invalidated, not issuing or being cancelled. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our solution, impair the functionality of our solution, delay introductions of new applications, result in our substituting inferior or more costly technologies into our solution or injure our reputation. Any of the foregoing could adversely impact our business, financial condition and results of operations.

We may be subject to claims asserting that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property.

Although we try to ensure that our employees, consultants and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these individuals have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

 

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In addition, while it is our policy to require our employees and contractors who may be involved in the creation or development of intellectual property on our behalf to execute agreements assigning such intellectual property to us, we may be unsuccessful in having all such employees and contractors execute such an agreement. The assignment of intellectual property may not be self-executing or the assignment agreement may be breached and we may be forced to bring claims against third parties or defend claims that they may bring against us to determine the ownership of what we regard as our intellectual property. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

Provisions in various agreements to which we are party potentially expose us to substantial liability for intellectual property infringement, data protection and other losses.

Our agreements with customers and other third parties sometimes include provisions under which we are liable or agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, data protection, damages caused by us to property or persons, or other liabilities relating to or arising from our solution, services, or other contractual obligations. Some of these agreements provide for uncapped liability for which we would be responsible, and some provisions survive termination or expiration of the applicable agreement. Large liability payments could harm our business, results of operations and financial condition. Although we normally contractually limit our liability with respect to such obligations, we may still incur substantial liability related to them, and in case of an intellectual property infringement indemnification claim, we may be required to cease use of certain functions of our solution as a result of any such claims. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other existing customers and new customers and harm our business. Even when we have contractual protections against such customer claims, we may choose to honor a customer’s request for indemnification or otherwise seek to maintain customer satisfaction by issuing customer credits, assisting our customer in defending against claims, or in other ways.

Any significant change to applicable laws, regulations or industry practices regarding the collection, use, retention, security or disclosure of our customers’ content, or regarding the manner in which the express or implied consent of customers for the collection, use, retention or disclosure of such content is obtained, could increase our costs and require us to modify our solution, possibly in a material manner, which we may be unable to complete and may limit our ability to store and process customer data or develop new applications and features.

Risks Related to Litigation, Regulatory Compliance and Governmental Matters

Any future litigation against us could be costly and time-consuming to defend.

We are, and may become, subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our customers in connection with commercial disputes or employment claims made by our current or former employees. Litigation might result in substantial costs and may divert management’s attention and resources, which might seriously harm our business, financial condition and results of operations. Insurance might not cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims and might not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, potentially harming our business, financial position and results of operations.

We operate in a highly regulated industry and either are or may be subject to a wide range of federal, state and local, as well as foreign, laws, rules and regulations and our failure to comply with these laws and regulations may force us to change our operations or harm our business.

The legal industry is and will continue to be subject to extensive and evolving U.S. federal, state and foreign laws, rules and regulations, including the rules and regulations of the organizations and other authorities

 

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governing the legal profession in the jurisdictions in which we or our customers operate. These laws, rules and regulations can vary significantly from jurisdiction to jurisdiction. For example, in the United States, each state has adopted laws, regulations and codes of ethics that provide for the licensure of attorneys, generally grant licensed attorneys the exclusive right to practice law in that state and place restrictions upon the activities of licensed lawyers. The practice of law other than by an attorney entitled to practice in the jurisdiction is generally referred to as the unauthorized practice of law. As a company, we are not authorized to practice law. In the United States, we may not provide legal advice to our clients, primarily because we do not meet the ethical and regulatory requirements, present in nearly every U.S. jurisdiction, of being exclusively owned by licensed attorneys.

Our solution includes alternatives to certain traditional methods of legal services and we therefore may face claims that we are engaged in the unauthorized practice of law. Despite our belief that our operations are not subject to, or are otherwise compliant with, the requirements of the jurisdictions in which we or our customers operate, regulators or other authorities of such jurisdictions could deem that we, our employees or our customers are engaged in the unauthorized practice of law or otherwise determine that we are subject to the relevant rules and regulations governing the conduct of attorneys. In such circumstances, regulators may enjoin our operations, subject us to rules governing conflicts of interests, require registration, seek to impose punitive fines or sanctions or take other disciplinary actions against us, our employees or our customers, any of which may inhibit our ability to do business in those jurisdictions, adversely impact our reputation, increase our operating expenses and adversely affect our financial condition and results of operations.

In addition, we are subject to regulations and laws specifically governing the internet and the collection, storage, processing, transfer and other use of personal information and other customer data. We also are subject to laws and regulations involving taxes, privacy and data security, anti-spam, content protection, electronic contracts and communications, mobile communications, unencumbered internet access to our solution, the design and operation of websites and internet neutrality.

The foregoing description of laws and regulations to which we are or may be subject is not exhaustive and the regulatory framework governing our operations is subject to evolving interpretations and continuous change. Moreover, if we expand into additional jurisdictions, we will be subject to an increased variety of new and complex laws and regulations.

We are subject to anti-corruption, anti-bribery, anti-money laundering and similar laws and noncompliance with such laws can subject us to criminal or civil liability and harm our business, financial condition and results of operations.

We are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, U.S. domestic bribery laws, the United Kingdom Bribery Act and other anti-corruption and anti-money laundering laws in the countries in which we conduct activities. Due to the international scope of our operations, we must comply with these laws in each jurisdiction where we operate. Additionally, many anti-bribery and anti-corruption laws, including the FCPA, have long-arm statutes that can expand the applicability of these laws to our operations worldwide. Accordingly, we must incur significant operational costs to support our ongoing compliance with anti-bribery and anti-corruption laws at all levels of our business. If we fail to comply with these laws, we may be subject to significant penalties. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees and their third-party intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. As we increase our international and public sector sales and businesses, we may engage with business partners and third-party intermediaries to market our solution and to obtain necessary permits, licenses and other regulatory approvals. In addition, we or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party intermediaries and our employees, representatives, contractors, partners and agents, even if we do not explicitly authorize such activities.

 

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While we have policies and procedures to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. As we increase our international sales and business, our risks under these laws may increase.

Detecting, investigating and resolving actual or alleged violations of anti-corruption laws can require a significant diversion of time, resources and attention from senior management. In addition, noncompliance with anti-corruption, anti-bribery or anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, enforcement actions, fines, damages, other civil or criminal penalties or injunctions, suspension or debarment from contracting with certain persons, reputational harm, adverse media coverage and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal proceeding, our business, financial condition and results of operations could be harmed. In addition, responding to any action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees.

Sales to government entities and highly regulated organizations are subject to a number of challenges and risks.

We intend to sell our solution to U.S. federal, state and local, as well as foreign, governmental agency customers, as well as to customers in highly regulated industries such as financial services and healthcare. Sales to such customers are subject to a number of challenges and risks. Selling to such customers can be highly competitive, expensive and time-consuming, often requiring significant upfront time and expense without any assurance that these efforts will generate a sale. These current and prospective customers may also be required to comply with stringent regulations in connection with purchasing and implementing our solution or particular regulations regarding third-party vendors that may be interpreted differently by different customers. In addition, Congress and regulatory agencies may impose requirements on third-party vendors generally, or our company in particular, that we may not be able to, or may not choose to, meet. In addition, government customers and customers in these highly regulated industries often have a right to conduct audits of our systems and practices, which can be time-consuming and expensive. In the event that one or more customers determine that some aspect of our business does not meet regulatory requirements, we may be limited in our ability to continue or expand our business and could be subject to audits or investigations by government enforcement personnel. In addition, if our solution does not meet the standards of new or existing regulations, we may be in breach of our contracts with these customers, allowing or requiring them to terminate their agreements.

Government contracting requirements may also change and in doing so restrict our ability to sell into the government sector until we have attained the requisite approvals or until our solution meets government requirements. Government demand and payment for our solution are affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our solution.

These customers may also be subject to a rapidly evolving statutory and regulatory framework that may influence their ability to use our solution. Moreover, changes in the underlying statutory and regulatory conditions that affect these types of customers could harm our ability to efficiently provide them access to our solution and to grow or maintain our customer base. If we are unable to enhance, modify or improve our solution to keep pace with evolving customer requirements, or if new technologies emerge that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently, or more securely than our solution, our business, financial condition and results of operations could be adversely affected.

Further, governmental and highly regulated entities may demand contractual terms that differ from our standard arrangements and are less favorable than terms agreed with private sector customers, including preferential pricing or “most favored nation” terms and conditions or are contract provisions that are otherwise

 

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time-consuming and expensive to satisfy and monitor. In the United States, applicable federal contracting regulations change frequently and the President may issue executive orders requiring federal contractors to adhere to new compliance requirements after a contract is signed that could result in the loss of contracts for contractors who do not meet those requirements. If we undertake to meet special standards or requirements and do not meet them, we could be subject to significant liability from our customers or federal and state regulators and enforcement agencies. Even if we do meet these special standards or requirements, the additional costs associated with providing our solution to government and highly regulated customers could harm our operating results. In addition, engaging in sales activities with foreign governments introduces additional compliance risks specific to the FCPA, the United Kingdom Bribery Act and other similar statutory requirements prohibiting bribery and corruption in the jurisdictions in which we operate.

Such entities may have statutory, contractual or other legal rights to terminate contracts with us or our partners for convenience or for other reasons. Any such termination may adversely affect our ability to contract with other government customers as well as our reputation, business, financial condition and results of operations.

We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate such controls.

Our solution is subject to U.S. export controls, including the Export Administration Regulations administered by the U.S. Commerce Department and economic sanctions administered by the Office of Foreign Assets Control, or OFAC, of the U.S. Treasury Department, and we incorporate encryption technology into certain of our applications. These encryption products and the underlying technology may be exported outside of the United States or accessed by foreign persons within the United States only with the required export authorizations.

Furthermore, our activities are subject to U.S. economic sanctions laws and regulations that generally prohibit the direct or indirect exportation or provision of products and services without the required export authorizations to countries, governments and individuals and entities targeted by U.S. embargoes or sanctions, except to the extent authorized by OFAC or exempt from sanctions. Obtaining the necessary export license or other authorization for a particular sale may not always be possible, and, even if the export license is ultimately granted, the process may be time-consuming and may result in the delay or loss of sales opportunities. Violations of U.S. sanctions or export control laws can result in significant fines or penalties and possible incarceration for responsible employees and managers could be imposed for criminal violations of these laws.

Other countries also regulate the import and export of certain encryption products and technology through import and export licensing requirements and have enacted laws that could limit our ability to distribute our solution or could limit our customers’ ability to implement our solution in those countries. Changes in our solution or future changes in export and import regulations may create delays in the introduction of our solution in international markets, prevent our customers with international operations from deploying our solution globally, or, in some cases, prevent the export or import of our solution to certain countries, governments or persons altogether. From time to time, various governmental agencies have proposed additional regulation of encryption products and technology, including the escrow and government recovery of private encryption keys. Any change in export or import regulations, economic sanctions or related legislation, increased export and import controls, or change in the countries, governments, persons or technologies targeted by such regulations could result in decreased use of our solution by, or in our decreased ability to export or sell our solution to, existing or potential customers with international operations. Any decreased use of our solution or limitation on our ability to export or sell our solution would harm our business.

 

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Risks Related to Information Technology and Cybersecurity

The unavailability of or change in the terms or nature of access to third-party technology could harm our business

We license certain software from third parties and incorporate or integrate such components into and with our solution. Certain third-party software has become central to the operation and delivery of our solution. Any inability to license necessary third-party technology in the future, or maintain sufficient rights or reasonable terms under existing third-party technology that we rely upon, could have an adverse effect on our business or operating results and adversely affect our ability to compete.

A large portion of our third-party software license contracts have fixed durations and may be renewed only by mutual consent. There is no assurance that we will be able to renew these contracts as they expire or that such renewals will be on the same or substantially similar terms or on conditions that are commercially reasonable to us. If we fail to renew these contracts as they expire, we may be unable to offer certain aspects of our solution to our customers. In addition, all of our third-party software licenses are nonexclusive; and therefore, our competitors may obtain the right to license certain of the technology covered by these agreements to compete directly with us.

If certain of our third-party licensors were to change product offerings, cease actively supporting the technologies, fail to update and enhance the technologies to keep pace with changing industry standards, encounter technical difficulties in the continuing development of these technologies, significantly increase prices, terminate our licenses, suffer significant capacity or supply chain constraints or suffer significant disruptions, we would need to seek alternative suppliers and incur additional internal or external development costs to ensure continued performance of our solution. Such alternatives may not be available on attractive terms or may not be as widely accepted or as effective as the current licenses provided by our existing suppliers. Furthermore, certain customers may require that we use or ensure that our solution is compatible with certain enterprise software offerings, such as Microsoft Office 365. If we fail to obtain licenses to use such third-party offerings or otherwise integrate our solution with such offerings, our business may be harmed. If the cost of licensing or maintaining the third-party intellectual property significantly increases, our operating earnings could significantly decrease. In addition, interruption in functionality of our solution as a result of changes in or with third-party licensors could adversely affect our commitments to customers, future sales of our solution and harm our business.

Elements of our solution use open source software, which may restrict the functionality of our solution or require that we release the source code of certain applications subject to those licenses.

Our solution incorporates software licensed under open source licenses and we expect to continue to incorporate software licensed under open source licenses in the future. Such open source licenses sometimes require that source code subject to the license be made available to the public and that any modifications or derivative works to open source software continue to be licensed under open source licenses. Few courts have interpreted open source licenses and the manner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. We rely on multiple software programmers to design our proprietary technologies and we do not exercise complete control over the development efforts of our programmers and we cannot be certain that our programmers have not incorporated open source software into our proprietary solution and technologies or that they will not do so in the future. There is a risk that open source licenses could be construed in a manner that imposes unanticipated conditions, restrictions or costs on our ability to provide or distribute our software solution. To that end, while we try to mitigate the likelihood of such risks, we may from time to time face claims from third parties alleging ownership of, or demanding release or general availability of, the open source software or derivative works that we developed using such software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation, which could be costly for us to defend and could adversely affect our core functionality and services. If we face such problems and attempt or are required to re-engineer our solution to mitigate them, it could require significant additional research and development resources and we may not be able

 

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to complete it successfully or in a timely manner. In addition to risks related to license requirements, usage of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. Many of these risks could be difficult to eliminate or manage and could reduce or eliminate the value of our solution and technologies and materially and adversely affect our ability to sustain and grow our business.

Our actual or perceived failure to comply with privacy, data protection and information security laws, regulations and similar non-regulatory obligations could harm our business.

We are subject to numerous federal, state, local and international laws and regulations regarding privacy, data protection, information security and the storing, sharing, use, processing, transfer, disclosure and protection of personal information and other content, the scope of which is changing, subject to differing interpretations and may be inconsistent among countries, or conflict with other rules. We are also subject to the terms of our privacy policies and obligations to third parties (including contractual) related to privacy, data protection and information security. We strive to comply with applicable laws, regulations, policies and other legal obligations relating to privacy, data protection and information security. However, the regulatory framework for privacy and data protection worldwide is unclear, and is likely to remain uncertain, for the foreseeable future, and it is possible that these or other actual or perceived obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We also expect that there will continue to be new laws, regulations and industry standards concerning privacy, data protection and information security proposed and enacted in various jurisdictions.

The collection, use, storage, disclosure, transfer or other processing of personal data regarding European Union, or EU, data subjects in the European Economic Area, or EEA, and/or carried out in the context of the activities of our establishment in any EEA member state, may be subject to the General Data Protection Regulation, or GDPR, which became effective on May 25, 2018. The GDPR is wide-ranging in scope and imposes numerous additional requirements on companies that process personal data of individuals residing in Europe, requiring that consent of individuals to whom the personal data relates is obtained in certain circumstances, requiring additional disclosures to individuals regarding data processing activities, requiring that appropriate safeguards are implemented to protect the security and confidentiality of personal data, creating mandatory data breach notification requirements in certain circumstances and requiring that certain measures (including contractual requirements) are put in place when engaging third-party data processors. The GDPR permits data protection authorities to impose large penalties for violations of the GDPR, including potential fines of up to €20 million or 4% of annual global revenue, whichever is greater. The GDPR also provides individuals with various rights in respect of their personal data, including rights of access, erasure, portability, rectification, restriction and objection and confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies and obtain compensation for damages resulting from violations of the GDPR. The GDPR requirements may apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, including employee information.

Although there are legal mechanisms to allow for the transfer of personal data from the United Kingdom, the EEA and Switzerland to the United States, uncertainty about compliance with such data protection laws remains and such mechanisms may not be available or applicable with respect to the personal data processing activities necessary to research, develop and market our solution. For example, legal challenges in Europe to the mechanisms allowing companies to transfer personal data from the EEA to the United States could result in further limitations on the ability to transfer personal data across borders, particularly if governments are unable or unwilling to reach agreement on or maintain existing mechanisms designed to support cross-border data transfers, such as the EU-U.S. and Swiss-U.S. Privacy Shield Frameworks, or the Privacy Shield Frameworks. Specifically, on July 16, 2020, the Court of Justice of the EU invalidated Decision 2016/1250 which had deemed the protection provided by the EU-U.S. Privacy Shield Framework adequate under EU privacy law, specifically under the GDPR. To the extent that we or any of our vendors, contractors or consultants had been relying on the EU-U.S. Privacy Shield Framework, we will not be able to do so in the future, which could increase our costs,

 

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inhibit transfer of any personal data to the United States and may limit our ability to process personal data from the EU. The same decision also cast doubt on the ability to use one of the primary alternatives to the Privacy Shield Frameworks, namely, the European Commission’s Standard Contractual Clauses, to lawfully transfer personal data from Europe to the United States and most other countries. At present, there are few if any viable alternatives to the Privacy Shield Frameworks and the Standard Contractual Clauses for the foregoing purposes. On September 8, 2020, Switzerland’s Federal Data Protection and Information Commissioner similarly invalidated the use of the Privacy Shield Frameworks as a vehicle for lawful data transfers from those countries to the United States and authorities in the United Kingdom may likewise invalidate use of the Privacy Shield Frameworks as a mechanism for lawful data transfers to the United States. As such, our processing of personal data from Europe may not comply with European data protection law, may increase our exposure to the GDPR’s heightened sanctions for violations of its cross-border data transfer restrictions and may reduce demand for our services from companies subject to European data protection laws. Challenges involving import personal data from Europe may also require us to increase our data processing capabilities in Europe at significant expense. Additionally, other countries outside of Europe have enacted or are considering enacting similar cross-border data transfer restrictions and laws requiring local data residency, which could increase the cost and complexity of delivering our services and operating our business.

Further, the exit of the United Kingdom from the EU, often referred to as Brexit, has created uncertainty with regard to data protection regulation in the United Kingdom. Specifically, the United Kingdom exited the EU on January 1, 2020, subject to a transition period that ended December 31, 2020. Under the post-Brexit Trade and Cooperation Agreement between the EU and the United Kingdom, the United Kingdom and EU have agreed that transfers of personal data to the United Kingdom from EEA member states will not be treated as “restricted transfers” to a non-EEA country for a period of up to four months from January 1, 2021, plus a potential further two-month extension, or the Extended Adequacy Assessment Period. Although the current maximum duration of the Extended Adequacy Assessment Period is six months, it may end sooner, for example, in the event that the European Commission adopts an adequacy decision in respect of the United Kingdom, or the United Kingdom amends the United Kingdom General Data Protection Regulation, or UK GDPR, and/or makes certain changes regarding data transfers under the UK GDPR/Data Protection Act 2018 without the consent of the EU (unless those amendments or decisions are made simply to keep relevant UK laws aligned with the EU’s data protection regime). If the European Commission does not adopt an “adequacy decision” in respect of the United Kingdom prior to the expiry of the Extended Adequacy Assessment Period, from that point onwards the United Kingdom will be an “inadequate third country” under the GDPR and transfers of personal data from the EEA to the United Kingdom will require a “transfer mechanism” such as the Standard Contractual Clauses.

California also enacted the California Consumer Privacy Act of 2018, or CCPA, which affords consumers expanded privacy protections as of January 1, 2020. The potential effects of this legislation are far reaching and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply, where applicable. For example, the CCPA gives California residents expanded rights to access and require deletion of their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used. The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches that may increase data breach litigation. In addition, the CCPA has prompted a number of proposals for new federal and state privacy legislation that, if passed, could increase our potential liability, increase our compliance costs and adversely affect our business. Additionally, a new privacy law, the California Privacy Rights Act, or CPRA, was passed by voters in California as part of the November 3, 2020 election. The CPRA is expected to significantly modify the CCPA, potentially resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply. The enactment of the CCPA is prompting a wave of similar legislative developments in other states in the United States, which could create the potential for a patchwork of overlapping but different state laws. For example, on March 2, 2021, the Virginia Consumer Data Protection Act was signed into law and will go into effect on January 1, 2023. Some countries also are considering or have passed legislation requiring local storage and processing of data, or similar requirements, which could increase the cost and complexity of operating our solution and other aspects of our business.

 

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With laws and regulations such as the GDPR in the EU and the CCPA and other state statutes in the United States imposing new and relatively burdensome obligations, and with substantial uncertainty over the interpretation and application of these and other laws and regulations, there is a risk that the requirements of these laws and regulations, or of contractual or other obligations relating to privacy, data protection or information security, will be interpreted or applied in a manner that is, or is alleged to be, inconsistent with our management and processing practices, our policies or procedures or the features of our solution. We may face challenges in addressing their requirements and making necessary changes to our policies and practices and may incur significant costs and expenses in an effort to do so. Although we endeavor to comply with our published policies, certifications and documentation, we may at times fail to do so or may be perceived to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees or vendors do not comply with our published policies and documentation. Any failure or perceived failure by us to comply with our privacy policies, our privacy-, data protection- or information security-related obligations to customers or other third parties or any of our other legal obligations relating to privacy, data protection or information security may result in governmental investigations or enforcement actions, litigation, claims or public statements against us by consumer advocacy groups or others and could result in significant liability or cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations and policies that are applicable to the businesses of our customers may limit the adoption and use of, and reduce the overall demand for, our solution. Additionally, if third parties we work with, such as vendors or developers, violate applicable laws or regulations or our policies, such violations may also put our customers’ content at risk and could in turn have an adverse effect on our business.

Any significant change to applicable laws, regulations or industry practices regarding the collection, use, retention, security or disclosure of our customers’ content, or regarding the manner in which the express or implied consent of customers for the collection, use, retention or disclosure of such content is obtained, could increase our costs and require us to modify our solution, possibly in a material manner, which we may be unable to complete and may limit our ability to store and process customer data or develop new applications and features.

Our computer systems, or those of any third parties on whom we depend, may fail or suffer security or data privacy breaches or other unauthorized or improper access to, use of, or destruction of our proprietary or confidential data, employee data, or personal data, which could result in additional costs, loss of revenue, significant liabilities, harm to our brand and material disruption of our operations.

Despite the implementation of security measures in an effort to protect systems that store our information, given their size and complexity and the increasing amounts of information maintained on our information technology systems and those of our third-party contractors and consultants, these systems are potentially vulnerable to breakdown or other damage or interruption from service interruptions, system malfunction, natural disasters, terrorism, war and telecommunication and electrical failures, as well as security breaches from inadvertent or intentional actions by our employees, contractors, consultants, business partners and/or other third parties, or from cyber-attacks by malicious third parties (including supply chain cyber attacks or the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information), which may compromise our system infrastructure or lead to the loss, destruction, alteration, denial of access to, disclosure or dissemination of, or damage or unauthorized access to, our data (including trade secrets or other confidential information, intellectual property, proprietary business information and personal information) or data that is processed or maintained on our behalf, or other assets, which could result in financial, legal, business and reputational harm to us.

Companies have, in general, experienced an increase in phishing and social engineering attacks from third parties in connection with the COVID-19 pandemic and the increase in remote working further increases security threats. To the extent that any disruption or security incident were to result in any loss, destruction,

 

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unavailability, alteration, disclosure or dissemination of, or damage or unauthorized access to, our applications, any other data processed or maintained on our behalf or other assets, or for it to be believed or reported that any of these occurred, we could incur liability, financial harm and reputational damage. We cannot assure you that our data protection efforts and our investment in information technology, or the efforts or investments of our consultants or other third parties, will prevent significant breakdowns or breaches in systems or other cyber incidents that cause loss, destruction, unavailability, alteration or dissemination of, or damage or unauthorized access to, our data and other data processed or maintained on our behalf or other assets that could have a material adverse effect upon our reputation, business, operations or financial condition. Further, any such event that leads to loss, damage, or unauthorized access to, or use, alteration, or disclosure or dissemination of, personal information, including personal information regarding our clinical trial subjects or employees, could harm our reputation directly, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information, which could result in significant legal and financial exposure and reputational damages that could potentially have an adverse effect on our business.

Notifications and follow-up actions related to a security incident could impact our reputation and cause us to incur significant costs, including legal expenses and remediation costs. We expect to incur significant costs in our ongoing efforts to detect and prevent security incidents and we may face increased costs and requirements to expend substantial resources in the event of an actual or perceived security incident. To the extent that any disruption or security incident were to result in any loss, destruction, or alteration of, or damage or unauthorized access to, our data or other information that is processed or maintained on our behalf, or inappropriate disclosure of or dissemination of any such information, we could be exposed to litigation and governmental investigations and we could be subject to significant fines or penalties for any noncompliance with certain state, federal and/or international privacy and security laws.

Our insurance policies may not be adequate to compensate us for the potential losses arising from any such disruption in or failure or security breach of our systems or third-party systems where information important to our business operations or commercial development is stored. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, our insurance may not cover all claims made against us and could have high deductibles in any event, and defending a suit, regardless of its merit, could be costly and divert management attention.

If the security of the personal information that we (or our vendors) collect, store, or process is compromised or is otherwise accessed without authorization, or if we fail to comply with our commitments and assurances regarding the privacy and security of such information, our reputation may be harmed and we may be exposed to liability and loss of business.

Our business involves the collection and storage of potentially highly sensitive electronic documentation for use in various legal matters, including litigation and governmental investigations. In addition, we collect and maintain data about individuals and customers, including personally identifiable information, as well as other confidential, privileged or proprietary information. We may use third-party service providers and sub-processors to help us deliver services to our customers. These vendors may store or process personal information on our behalf.

Cyberattacks and other malicious internet-based activity continue to increase. In addition to traditional computer “hackers,” malicious code (such as viruses, worms and ransomware), employee theft or misuse and denial-of-service attacks, sophisticated nation-state and nation-state supported actors and organized crime now engage in attacks (including advanced persistent threat intrusions). We cannot guarantee that our or our vendors’ security measures will be sufficient to protect against unauthorized access to or other compromise of personal information and our confidential or proprietary information. Due to the COVID-19 pandemic, our employees are temporarily working remotely, which may pose additional data security risks. The techniques used to sabotage or to obtain unauthorized access to our or our vendors’ solutions, systems, networks and/or physical facilities in

 

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which data is stored or through which data is transmitted change frequently and we or our vendors may be unable to implement adequate preventative measures or stop security breaches while they are occurring. The recovery systems, security protocols, network protection mechanisms and other security measures that we have integrated into our solution, systems, networks and physical facilities and any such measures implemented by our vendors, which are designed to protect against, detect and minimize security breaches, may not be adequate to prevent or detect service interruption, system failure, or data loss. Our solution, systems, networks and physical facilities, and those of our vendors, in the past have been, and in the future could be, attacked and/or breached and personal information has been and could be otherwise compromised. Third parties could attempt to fraudulently induce our employees or our customers to disclose information or user names and/or passwords, or otherwise compromise the security of our solution, networks, systems and/or physical facilities. Third parties have exploited in the past, and could exploit in the future, vulnerabilities in, or could obtain unauthorized access to, platforms, systems, networks and/or physical facilities utilized by our vendors.

We are required to comply with laws, rules, regulations and other obligations that require us to maintain the security of personal information. We may have contractual and other legal obligations to notify relevant stakeholders of security breaches. We operate in an industry that is prone to cyber-attacks. We have previously and may in the future become the target of cyber-attacks by third parties seeking unauthorized access to such data, including our or our customers’ data or to disrupt our ability to provide our services. Failure to prevent or mitigate cyber-attacks could result in the unauthorized access to personal information. Most jurisdictions have enacted laws requiring companies to notify individuals, regulatory authorities and others of security breaches involving certain types of data. In addition, our agreements with certain customers and partners may require us to notify them in the event of a security breach. Such mandatory disclosures are costly, could lead to negative publicity, may cause our customers to lose confidence in the effectiveness of our security measures and require us to expend significant capital and other resources to respond to and/or alleviate problems caused by the actual or perceived security breach. A security breach of any of our vendors that processes personal information of our customers may pose similar risks. The costs to respond to a security breach and/or to mitigate any security vulnerabilities that may be identified could be significant, our efforts to address these issues may not be successful, and these issues could result in interruptions, delays, cessation of service, negative publicity, loss of customer trust, diminished use of our solution as well as other harms to our business and our competitive position. Remediation of any potential security breach may involve significant time, resources and expenses. Any security breach may result in regulatory inquiries, litigation or other investigations and can affect our financial and operational condition.

A security breach may cause us to violate the terms of our customer contracts. Our agreements with certain customers may require us to use industry-standard or reasonable measures to safeguard personal information. We also may be subject to laws that require us to use industry-standard or reasonable security measures to safeguard personal information. A security breach could lead to claims by our customers or other relevant stakeholders that we have failed to comply with such legal or contractual obligations. As a result, we could be subject to legal action or our customers could end their relationships with us. There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from liabilities or damages and in some cases our customer agreements do not limit our remediation costs or liability with respect to data breaches.

Litigation resulting from security breaches may adversely affect our business. Unauthorized access to our solution, systems, networks, or physical facilities, or those of our vendors, could result in litigation with our customers or other relevant stakeholders. These proceedings could force us to spend money in defense or settlement, divert management’s time and attention, increase our costs of doing business, or adversely affect our reputation. We could be required to fundamentally change our business activities and practices or modify our solution and/or platform capabilities in response to such litigation, which could have an adverse effect on our business. If a security breach were to occur, and the confidentiality, integrity, or availability of personal information was disrupted, we could incur significant liability, or our solution, systems, or networks may be perceived as less desirable, which could negatively affect our business and damage our reputation.

 

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We may not have adequate insurance coverage for security incidents or breaches. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or that our insurers will not deny coverage as to any future claim.

Risks Related to Tax and Accounting Matters

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

Our net operating loss, or NOL, carryforwards could expire unused and be unavailable to offset future income tax liabilities. Our NOLs generated in tax years beginning on or prior to December 31, 2017 are only permitted to be carried forward for 20 years under applicable U.S. tax law. Under legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act, or Tax Act, as modified by the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, our federal NOLs generated in tax years beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of such federal NOLs in tax years beginning after December 31, 2020 is limited to 80% of current year taxable income. It is uncertain if and to what extent various states will conform to the Tax Act or the CARES Act.

In addition, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is generally subject to limitations on its ability to utilize its pre-change NOLs to offset post-change taxable income. We may have experienced ownership changes in the past and may experience ownership changes in the future as a result of this offering and/or subsequent shifts in our stock ownership (some of which shifts are outside our control). Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons, we may not be able to utilize a material portion of the NOLs, even if we were to achieve profitability.

Our international operations may subject us to potential adverse tax consequences.

We are expanding our international operations and staff to better support our growth into international markets. Our corporate structure and associated transfer pricing policies contemplate future growth into the international markets and consider the functions, risks and assets of the various entities involved in the intercompany transactions. The amount of taxes we pay in different jurisdictions may depend on the application of the tax laws of the various jurisdictions, including the United States, to our international business activities; changes in tax rates; new or revised tax laws or interpretations of existing tax laws and policies; and our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for pricing intercompany transactions pursuant to our intercompany arrangements or disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a challenge or disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Our financial statements could fail to reflect adequate reserves to cover such a contingency.

Our results of operations may be harmed if we are required to collect sales or other related taxes for our subscriptions in jurisdictions where we have not historically done so.

We collect and remit sales tax in a number of jurisdictions where we, through our employees, have a presence and where we have determined, based on the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. and legal precedents in the jurisdiction, that we have “economic nexus” or sales of our solution are otherwise classified as taxable. The application of indirect taxes (such as sales and use tax, value-added tax, or VAT, goods and services tax, or GST, business tax and gross receipt tax) to businesses that transact online, such as ours, is a

 

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complex and evolving area. There is uncertainty as to what constitutes sufficient physical presence or nexus for a state or local jurisdiction to levy taxes, fees and surcharges for sales made over the internet and our characterization of our solution as not taxable in certain jurisdictions may not be accepted by state and local taxing authorities. As a result, it may be necessary to reevaluate whether our activities give rise to sales, use and other indirect taxes as a result of any nexus or transaction thresholds in those states in which we are not currently registered to collect and remit taxes. A successful assertion by a state, country, or other jurisdiction that we should have been or should be collecting additional sales, use, or other taxes could, among other things, result in substantial tax payments, create significant administrative burdens for us, discourage potential customers from subscribing to our solution due to the incremental cost of any such sales or other related taxes, or otherwise harm our business. We continue to analyze our exposure for such taxes and liabilities.

Additionally, we have not historically collected VAT or GST on sales of our solution, generally, because we make all of our sales through our office in the United States, and we believe, based on information provided to us by our customers, that most of our sales are made to business customers. Taxing authorities may challenge our position that we do not have sufficient nexus in a taxing jurisdiction or that our solution is subject to use, VAT, GST and other taxes, which could result in increased tax liabilities for us or our customers, which could harm our business.

The application of existing, new or future laws, whether in the United States or internationally, could harm our business. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which we conduct or will conduct business.

Changes in our effective tax rate or tax liability may harm our business.

Our effective tax rate could be adversely impacted by several factors, including:

 

   

Changes in the relative amounts of income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;

 

   

Changes in tax laws, tax treaties and regulations or the interpretation of them, including the Tax Act;

 

   

Changes to our assessment about our ability to realize our deferred tax assets that are based on estimates of our future results, the prudence and feasibility of possible tax-planning strategies and the economic and political environments in which we do business;

 

   

The outcome of current and future tax audits, examinations or administrative appeals; and

 

   

Limitations or adverse findings regarding our ability to do business in some jurisdictions.

Should our effective tax rate rise, our business could be harmed.

Our financial results may be adversely affected by changes in accounting principles applicable to us.

Generally accepted accounting principles in the United States, or U.S. GAAP, are subject to interpretation by the Financial Accounting Standards Board, the Securities and Exchange Commission, or SEC, and other various bodies formed to promulgate and interpret appropriate accounting principles. Changes in these accounting principles could adversely affect our financial results. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm our business.

If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion

 

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and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to allowance for credit losses, fair value of financial instruments, valuation of stock-based compensation, valuation of warrant liabilities and the valuation allowance for deferred income taxes. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. Significant judgments, estimates and assumptions used in preparing our consolidated financial statements include, or may in the future include, those related to revenue recognition, stock-based compensation expense, income taxes, goodwill and intangible assets.

Risks Related to Being a Public Company

We will incur increased costs as a result of operating as a public company and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, which we expect to further increase after we are no longer an “emerging growth company.” The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the NYSE and other applicable securities rules and regulations impose various requirements on public companies. Our management and other personnel are expected to devote a substantial amount of time to compliance with these requirements, which may divert their attention from managing our business operations. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the specific timing of such costs.

Our management team has limited experience managing a public company.

Our management team has limited experience managing a publicly traded company, interacting with public company investors and securities analysts and complying with the increasingly complex laws pertaining to public companies. These new obligations and constituents require significant attention from our management team and could divert their attention away from the day-to-day management of our business, which could harm our business, results of operations and financial condition.

We have identified a material weakness in our internal control over financial reporting. If our remediation of the material weakness is not effective, or we fail to develop and maintain effective internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.

Neither our management nor an independent registered public accounting firm has ever performed an evaluation of our internal controls over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required. We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal controls over financial reporting for the fiscal year ending December 31, 2022. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal controls over financial reporting in our first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company.” We have recently commenced the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, but we may not be able to complete our evaluation, testing and any required remediation in a timely fashion once initiated. Our compliance with Section 404 will require that we incur substantial expenses and expend significant management efforts. We will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404.

 

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During the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal controls over financial reporting, we will be unable to certify that our internal controls over financial reporting is effective. A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

In the course of preparing our audited consolidated financial statements for the year ended December 31, 2019, a material weakness was identified in our internal controls over financial reporting related to secondary sales transactions by current and former employees. Specifically, we did not design and maintain effective controls to evaluate and assess secondary sales transactions in our common stock to determine, in a timely manner, whether additional compensation expense was incurred based on the nature of the transaction.

We have begun implementation of a plan to remediate the material weakness described above. Those remediation measures are ongoing and include the following:

 

   

We are recruiting additional personnel, in addition to utilizing third-party consultants and specialists, to supplement the quality, depth and experience of our accounting and finance internal resources; and

 

   

We engaged an external advisor to assist us with designing and implementing improved processes and internal controls and monitoring remediation progress.

We cannot assure you the measures we are taking to remediate the material weakness will be sufficient or that they will prevent future material weaknesses. Additional material weaknesses or failure to maintain effective internal control over financial reporting could cause us to fail to meet our reporting obligations as a public company and may result in a restatement of our financial statements for prior periods.

We may not be able to successfully manage the growth of our business if we are unable to improve our internal systems, processes and controls.

We need to continue to improve our internal systems, processes and controls to effectively manage our operations and growth. We may not be able to successfully implement and scale improvements to our systems and processes in a timely or efficient manner or in a manner that does not negatively affect our operating results. For example, we may not be able to effectively monitor certain extraordinary contract requirements or provisions that are individually negotiated by our sales force as the number of transactions continues to grow. In addition, our systems and processes may not prevent or detect all errors, omissions or fraud. We may experience difficulties in managing improvements to our systems, processes and controls or in connection with third-party software, which could impair our ability to offer our solution to our customers in a timely manner, causing us to lose customers, limit us to smaller deployments of our solution or increase our technical support costs.

We are an “emerging growth company” and a “smaller reporting company,” and we cannot be certain if the reduced reporting and disclosure requirements applicable to emerging growth companies and smaller reporting companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and 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 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. Pursuant to Section 107 of the JOBS Act, as an emerging growth company, we have elected to use the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors. In addition, if we cease to be an emerging growth company, we will no longer be able to use the extended transition period for complying with new or revised accounting standards.

 

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We will remain an emerging growth company until the earliest of: (1) the last day of the fiscal year following the fifth anniversary of this offering; (2) the last day of the first fiscal year in which our annual gross revenue is $1.07 billion or more; (3) the date on which we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities; and (4) the last day of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million as of June 30 of such fiscal year.

We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) the market value of our voting and non-voting common stock held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter.

We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. For example, if we do not adopt a new or revised accounting standard, our future results of operations may not be as comparable to the results of operations of certain other companies in our industry that adopted such standards. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Risks Related to Ownership of Our Common Stock and This Offering

We will have broad discretion in the use of the net proceeds that we receive from this offering and may not use them effectively.

We will have broad discretion in the application of the net proceeds that we receive from this offering, including for any of the purposes described in the section titled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, our ultimate use may vary substantially from our currently intended use. Investors will need to rely upon the judgment of our management with respect to the use of such proceeds. Pending use, we may invest the net proceeds that we receive from this offering in short-term, investment-grade, interest-bearing securities, such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government that may not generate a high yield for our stockholders. If we do not use the net proceeds that we receive in this offering effectively, our business, results of operations and financial condition could be harmed, and the market price of our common stock could decline.

Insiders have substantial control over us and will be able to influence corporate matters.

Following this offering, our directors, officers and their respective affiliates will beneficially own, in the aggregate, approximately 37.9% of our outstanding common stock (or approximately 37.6% if the underwriters’ option to purchase additional shares of common stock from us and the selling stockholder is exercised in full), based on the number of shares outstanding as of March 31, 2021 and without giving effect to any purchases that these holders may make through our directed share program or otherwise in this offering. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership will limit the ability of other stockholders to influence corporate matters and may cause us to make strategic decisions that could involve risks to you or that may not be aligned with your interests. This control may adversely affect the market price of our common stock.

You will experience immediate and substantial dilution in the net tangible book value of the shares of common stock you purchase in this offering.

The initial public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of our common stock immediately after this offering. If you purchase shares of our common

 

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stock in this offering, you will suffer immediate dilution of $25.91 per share, representing the difference between our pro forma as adjusted net tangible book value per share after giving effect to the sale of common stock in this offering at the assumed initial public offering price of $30.50 per share, which is the midpoint of the price range set forth on the cover of this prospectus. See the section titled “Dilution.”

Our stock price may be volatile, and the value of our common stock may decline.

The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control, including:

 

   

actual or anticipated fluctuations in our financial condition or results of operations;

 

   

variance in our financial performance from expectations of securities analysts;

 

   

changes in the pricing of our solution;

 

   

changes in our projected operating and financial results;

 

   

announcements by us or our competitors of significant business developments, acquisitions or new offerings;

 

   

changes in laws or regulations applicable to our solution;

 

   

significant data breaches, disruptions to or other incidents involving our software;

 

   

our involvement in litigation;

 

   

future sales of our common stock by us or our stockholders, as well as the anticipation of lock-up releases;

 

   

changes in senior management or key personnel;

 

   

the trading volume of our common stock;

 

   

changes in the anticipated future size and growth rate of our market; and

 

   

general economic and market conditions.

Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may also negatively impact the market price of our common stock.

No public market for our common stock currently exists and an active public trading market may not develop or be sustained following this offering.

No public market for our common stock currently exists. An active public trading market for our common stock may not develop following the completion of this offering or, if developed, it may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies by using our shares as consideration.

In addition, the cornerstone investors have indicated an interest in purchasing up to an aggregate of up to $25.0 million each (up to $50.0 million in the aggregate) in shares of common stock offered in this offering at the initial public offering price. These indications of interest have been made severally but not jointly. Because these indications of interest are not binding agreements or commitments to purchase, the cornerstone investors may decide to purchase more, fewer or no shares of our common stock in this offering, or the underwriters may decide to sell more, fewer or no shares of our common stock in this offering to the cornerstone investors. If one or more of the cornerstone investors are allocated all or a portion of the shares in which they have indicated an interest in this offering or more, and purchase any such shares, such purchase could reduce the available public float for our shares if the cornerstone investors hold such shares long term.

 

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Future sales of our common stock in the public market could cause the market price of our common stock to decline.

Sales of a substantial number of shares of our common stock in the public market following the completion of this offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Many of our existing equityholders have substantial unrecognized gains on the value of the equity they hold based upon the price of this offering and therefore they may take steps to sell their shares or otherwise secure the unrecognized gains on those shares. We are unable to predict the timing of or the effect that such sales may have on the prevailing market price of our common stock.

All of our directors and officers, the selling stockholder and the holders of substantially all of our capital stock and securities convertible into our capital stock are subject to lock-up agreements that restrict their ability to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any of our shares of common stock, any options or warrants to purchase any of our shares of common stock or any securities convertible into or exchangeable for or that represent the right to receive shares of our common stock for 180 days from the date of this prospectus, subject to certain exceptions. J.P. Morgan Securities LLC and BofA Securities, Inc. may, in their sole discretion, permit our stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements, subject to applicable notice requirements. If not earlier released, all of the shares of common stock sold in this offering will become eligible for sale upon expiration of the 180-day lock-up period, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act of 1933, or the Securities Act.

Notwithstanding the foregoing, if at any time beginning 90 days after the date of this prospectus, the last reported closing price of our common stock on the NYSE is at least 25% greater than the initial public offering price per share set forth on the cover page of this prospectus for five out of any ten consecutive trading days ending on or after the 90th day after the date of this prospectus, then the terms of the lock-up agreements will expire with respect to 25% of each stockholder’s aggregate number of shares of common stock and securities convertible into or exchangeable for common stock subject to the lock-up agreement as of the date of this prospectus (the “Early Lock-Up Expiration”), and such shares will become for sale immediately prior to the opening of trading on the third trading day following the date on which all of the below conditions are satisfied (the “Early Lock-Up Expiration Date”); provided, that, if at the time of such Early-Lock-Up Expiration, we are in or within five trading days prior to a broadly applicable and regularly scheduled period during which trading in our securities is not permitted (a “Blackout Period”) under our insider trading policy, the date of the Early Lock-Up Expiration will be delayed until immediately prior to the opening of trading on the second trading day following the first date that we are no longer in a blackout period under our insider trading policy.

In addition, if (a) the 180-day lock-up period is scheduled to end during a Blackout Period under our insider trading policy, (b) at least 135 days have elapsed since the date of this prospectus, and (c) we have publicly released results from the quarterly period during which this offering occurred, then the lock-up period shall end with respect to all remaining shares of common stock and securities convertible into or exchangeable for common stock subject to the lock-up agreement immediately prior to the opening of trading on the tenth trading day prior to the commencement of such Blackout Period (the “Blackout Release Date”). For the avoidance of doubt, notwithstanding anything to the contrary, in no event will the lock-up period end earlier than 135 days after the commencement of this public offering.

In addition, there were 3,034,660 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2021. We intend to register all of the shares of common stock issuable upon the exercise of outstanding options or other equity incentives we may grant in the future, for public resale under the Securities Act. The shares of common stock will become eligible for sale in the public market to the extent such options are exercised, subject to the lock-up agreements described above and compliance with applicable securities laws.

Further, based on shares outstanding as of March 31, 2021, holders of an aggregate of 39,342,982 and 47,788,619 shares of our capital stock after the completion of this offering, will have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders, respectively.

 

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If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, the market price and trading volume of our common stock could decline.

The market price and trading volume of our common stock following the completion of this offering will be heavily influenced by the way analysts interpret our financial information and other disclosures. We do not have control over these analysts. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, our stock price would be negatively affected. If securities or industry analysts do not publish research or reports about our business, downgrade our common stock, or publish negative reports about our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price to decline and could decrease the trading volume of our common stock.

We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our capital stock and we do not intend to pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, you may need to rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on your investment.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as they will be in effect upon the completion of this offering, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws will include provisions that:

 

   

authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights and preferences determined by our board of directors that may be senior to our common stock;

 

   

require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

 

   

specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of our board of directors or our chief executive officer;

 

   

establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

 

   

establish that our board of directors is divided into three classes, with each class serving three- year staggered terms;

 

   

prohibit cumulative voting in the election of directors;

 

   

provide that our directors may be removed for cause only upon the vote of at least 6623% of our outstanding shares of voting stock;

 

   

provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and

 

   

require the approval of our board of directors or the holders of at least 6623% of our outstanding shares of voting stock to amend our bylaws and certain provisions of our certificate of incorporation.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is

 

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responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any of the foregoing provisions could limit the price that investors might be willing to pay in the future for shares of our common stock and they could deter potential acquirers of our company, thereby reducing the likelihood that you would receive a premium for your shares of our common stock in an acquisition.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation, as will be in effect upon the completion of this offering, will provide that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:

 

   

any derivative claim or cause of action brought on our behalf;

 

   

any claim or cause of action asserting a breach of fiduciary duty;

 

   

any claim or cause of action against us arising under the Delaware General Corporation Law;

 

   

any claim or cause of action arising under or seeking to interpret our amended and restated certificate of incorporation or our amended and restated bylaws; and

 

   

any claim or cause of action against us that is governed by the internal affairs doctrine.

The provisions would not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation will further provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause or causes of action arising under the Securities Act, including all causes of action asserted against any defendant to such complaint. For the avoidance of doubt, this provision is intended to benefit and may be enforced by us, our officers and directors, the underwriters to any offering giving rise to such complaint and any other professional entity whose profession gives authority to a statement made by that person or entity and who has prepared or certified any part of the documents underlying the offering.

While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.

These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, 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,” “expect,” “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, dollar-based net retention rate 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 COVID-19 or other public health crises 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 prospectus 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 prospectus. 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 prospectus. 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 prospectus. 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.

 

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The forward-looking statements made in this prospectus 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 prospectus to reflect events or circumstances after the date of this prospectus 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, dispositions, joint ventures or investments.

 

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MARKET AND INDUSTRY DATA

This prospectus contains statistical data, estimates and forecasts that are based on independent industry publications or other publicly available information, as well as other information based on our internal sources. While we believe the industry and market data included in this prospectus are reliable and are based on reasonable assumptions, these data involve many assumptions and limitations and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in these industry publications and other publicly available information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the projections and estimates made by the independent third parties and us.

The sources of certain statistical data, estimates and forecasts contained in this prospectus are the following independent industry publications or reports:

 

   

Federal Register Statistics, Code of Federal Regulations, Total Pages and Volumes, published July 2020;

 

   

International Data Corporation, Worldwide Global DataSphere Forecast, 2021–2025: The World Keeps Creating More Data—Now, What Do We Do with It All?, published March 2021;

 

   

International Data Corporation, Worldwide eDiscovery Services Forecast, 2020–2024, published September 2020;

 

   

International Data Corporation, Worldwide eDiscovery Software Forecast, 2020–2024, published June 2020;

 

   

S&P Global Market Intelligence, S&P Capital IQ Database, accessed in May 2021;

 

   

Statista, Size of the Global Legal Services Market 2015-2023, published November 2020; and

 

   

Thomson Reuters Acritas, 2021 Report on the State of the Legal Market, published January 2021.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $195.1 million based on the assumed initial public offering price of $30.50 per share of common stock, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses. If the underwriters’ option to purchase additional shares of our common stock from us and the selling stockholder is exercised in full, we estimate that the net proceeds to us would be approximately $209.3 million, after deducting the underwriting discounts and commissions and estimated offering expenses. We will not receive any of the proceeds from the sale of common stock in this offering by the selling stockholder identified in this prospectus in the event that the underwriters exercise their option to purchase additional shares.

A $1.00 increase (decrease) in the assumed initial public offering price of $30.50 per share of common stock would increase (decrease) the net proceeds to us from this offering by approximately $6.5 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $28.4 million, assuming the assumed initial public offering price of $30.50 per share of common stock remains the same, and after deducting estimated underwriting discounts and commissions.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and facilitate our future access to the capital markets. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds we receive from this offering for working capital and other general corporate purposes, including developing and enhancing our technical infrastructure, solution and services, expanding our research and development efforts and sales and marketing operations, meeting the increased compliance requirements associated with our transition to and operation as a public company and expanding into new markets. We may also use a portion of the net proceeds to acquire complementary businesses, products, services or technologies. However, we do not have agreements or commitments to enter into any acquisitions at this time.

We will have broad discretion over how to use the net proceeds to us from this offering. We intend to invest the net proceeds to us from the offering that are not used as described above in investment-grade, interest-bearing instruments.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate declaring or paying any cash dividends in the foreseeable future. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions (including any restrictions in our then-existing debt arrangements), capital requirements, business prospects and other factors our board of directors may deem relevant. In addition, our revolving credit facility places restrictions on our ability to pay cash dividends without the prior written consent of the lender.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2021:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to (1) the automatic conversion of all of our outstanding shares of redeemable convertible preferred stock into shares of common stock and (2) the filing and effectiveness of our amended and restated certificate of incorporation, both of which will occur immediately prior to the completion of this offering; and

 

   

on a pro forma as adjusted basis, giving effect to (1) the pro forma adjustments set forth above and (2) our receipt of estimated net proceeds from the sale of shares of common stock that we are offering at the assumed initial public offering price of $30.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.

You should read this table together with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of March 31, 2021  

(in thousands except share and per share amounts)

   Actual     Pro Forma     Pro Forma
as Adjusted
 

Cash and cash equivalents

   $ 53,632     $ 53,632     $ 248,721  
  

 

 

   

 

 

   

 

 

 

Redeemable convertible preferred stock, $0.005 par value, 178,967,444 shares authorized, 35,793,483 shares issued and outstanding, actual, and no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     160,826              

Stockholders’ (deficit) equity:

      

Preferred stock, $0.005 par value, no shares authorized, issued, and outstanding, actual, and 100,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                  

Common stock, $0.005 par value, 277,406,431 shares authorized, 13,585,380 shares issued and outstanding, actual, 1,000,000,000 shares authorized and 49,378,863 shares issued and outstanding, pro forma, and 1,000,000,000 shares authorized and 56,378,863 shares issued and outstanding, pro forma as adjusted

     68       247       282  

Additional paid-in capital

     8,765       169,412       364,466  

Accumulated deficit

     (106,048     (106,048     (106,048
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

   $ (97,215 )   $ 63,611     $ 258,700  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 63,611   $ 63,611     $ 258,700  
  

 

 

   

 

 

   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $30.50 per share of common stock, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $6.5 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $28.4 million, assuming the assumed initial public offering price of $30.50 per share of common stock remains the same, and after deducting estimated underwriting discounts and commissions.

 

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The number of shares of our common stock that will be outstanding immediately after this offering is based on 49,378,863 shares of our common stock outstanding as of March 31, 2021, and excludes:

 

   

3,034,660 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2021 under our 2013 Plan, with a weighted average exercise price of $3.96 per share;

 

   

537,180 shares of common stock issuable upon the exercise of options granted after March 31, 2021 under our 2013 Plan, with a weighted average exercise price of $18.70 per share;

 

   

49,869 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2021, with a weighted average exercise price of $2.93 per share;

 

   

4,700,000 new shares of common stock reserved for future issuance under our 2021 Plan, plus any future increases in the number of shares of common stock reserved for issuance thereunder, as more fully described in the section titled “Executive Compensation—Employee Benefit plans;” and

 

   

1,100,000 shares of common stock reserved for issuance under our ESPP, plus any future increases in the number of shares of common stock reserved for issuance thereunder, as more fully described in the section titled “Executive Compensation—Employee benefit plans.”

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of common stock and the pro forma as adjusted net tangible book value per share immediately after this offering.

Our pro forma net tangible book value as of March 31, 2021 was $63.5 million, or $1.29 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of our shares of common stock outstanding as of March 31, 2021, after giving effect to the automatic conversion of all outstanding shares of redeemable convertible preferred stock into an aggregate of 35,793,483 shares of common stock immediately prior to the completion of this offering.

After giving effect to the sale by us of 7,000,000 shares of common stock in this offering at the assumed initial public offering price of $30.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of March 31, 2021 would have been $258.6 million, or $4.59 per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $3.30 per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $25.91 per share to new investors purchasing common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of common stock. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

      $ 30.50

Pro forma net tangible book value per share as of March 31, 2021

   $ 1.29     

Increase in pro forma as adjusted net tangible book value per share attributable to new investors purchasing shares in this offering

     3.30     
  

 

 

    

Pro forma as adjusted net tangible book value per share after this offering

        4.59  
     

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

      $ 25.91  
     

 

 

 

The dilution information discussed above is illustrative only and may change based on the actual initial public offering price and other terms of this offering. A $1.00 increase (decrease) in the assumed initial public offering price of $30.50 per share of common stock, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $0.12 per share and increase (decrease) the dilution to new investors by $0.88 per share, in each case assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. Similarly, each increase of 1,000,000 shares in the number of shares of common stock offered by us would increase our pro forma as adjusted net tangible book value by approximately $0.42 per share and decrease the dilution to new investors by approximately $0.42 per share, and each decrease of 1,000,000 shares in the number of shares of common stock offered by us would decrease our pro forma as adjusted tangible book value by approximately $0.43 per share, in each case assuming the assumed initial public offering price of $30.50 per share of common stock remains the same, and after deducting estimated underwriting discounts and commissions.

If the underwriters exercise their option to purchase additional shares of common stock in full, the pro forma net tangible book value per share, as adjusted to give effect to this offering, would be $4.80 per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $25.70 per share.

 

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The following table summarizes, as of March 31, 2021, on a pro forma as adjusted basis as described above, the number of shares of our common stock, the total consideration and the average price per share (1) paid to us by existing stockholders and (2) to be paid by new investors acquiring our common stock in this offering at the assumed initial public offering price of $30.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent        

Existing stockholders

     49,378,863        87.6     162,614,566        43.2     3.29  

New investors

     7,000,000        12.4       213,500,000        56.8       30.50  
  

 

 

    

 

 

   

 

 

    

 

 

   

Totals

     56,378,863        100.0     $376,114,566        100.0     6.67  
  

 

 

    

 

 

   

 

 

    

 

 

   

If the underwriters exercise their option in full to purchase 500,000 additional shares of common stock from us and 200,000 additional shares of common stock from the selling stockholder, the number of shares held by existing stockholders will be reduced to 49,178,863 shares, or 86.5% of the total number of shares of our capital stock outstanding following the completion of this offering, and the number of shares held by new investors will be increased to 7,700,000 shares, or 13.5% of the total number of shares of our capital stock outstanding following the completion of this offering.

Each $1.00 increase (decrease) in the assumed initial public offering price of $30.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors and total consideration paid by all stockholders by approximately $6.5 million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

The number of shares of our common stock that will be outstanding immediately after this offering is based on 49,378,863 shares of our common stock outstanding as of March 31, 2021, and excludes:

 

   

3,034,660 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2021 under our 2013 Plan, with a weighted average exercise price of $3.96 per share;

 

   

537,180 shares of common stock issuable upon the exercise of options granted after March 31, 2021 under our 2013 Plan, with a weighted average exercise price of $18.70 per share;

 

   

49,869 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2021, with a weighted average exercise price of $2.93 per share;

 

   

4,700,000 new shares of common stock reserved for future issuance under our 2021 Plan, plus any future increases in the number of shares of common stock reserved for issuance thereunder, as more fully described in the section titled “Executive Compensation—Employee Benefit Plans;” and

 

   

1,100,000 shares of common stock reserved for issuance under our ESPP, plus any future increases in the number of shares of common stock reserved for issuance thereunder, as more fully described in the section titled “Executive Compensation—Employee Benefit Plans.”

To the extent that any outstanding options are exercised or new options are issued under our stock-based compensation plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. If all outstanding options under our 2013 Plan as of March 31, 2021 were exercised or settled, then our existing stockholders, including the holders of these options, would own 37.9% and our new investors would own 37.6% of the total number of shares of our common stock outstanding upon the completion of this offering.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

DISCO provides a cloud-native, artificial intelligence-powered legal solution that simplifies ediscovery, legal document review and case management for enterprises, law firms, legal services providers and governments. Our scalable, integrated solution enables 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 solution 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 solution. We provide legal departments with the ability to centralize legal data into a single solution, 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. As of March 2021, our solution held more than 10 billion files and 2.5 petabytes of data and we used more than 14 billion serverless compute calls in 2021 to process and enrich data for our customers. By automating the manual, time-consuming and error-prone parts of ediscovery, legal document review and case management, we empower legal departments to focus on delivering better legal outcomes.

DISCO was founded in 2013 with the vision of replacing conventional ediscovery tools with an integrated technology-focused solution. Since that time, we have expanded our operations and offerings to provide a full-stack solution to address ediscovery, legal document review and case management. The key milestones in our history include the following:

 

   

2013: Founded

 

   

2014: First AmLaw 200 customer

 

   

2014: Surpassed 50 customers

 

   

2016: Launched DISCO AI

 

   

2016: Surpassed 150 customers

 

   

2017: Launched DISCO Review

 

   

2017: Launched DISCO Cares, our corporate social responsibility program

 

   

2018: Moved our headquarters to Austin, TX and opened our first international office in London, UK

 

   

2018: Surpassed 400 customers; 75+ customers spent over $100,000

 

   

2020: Launched DISCO Case Builder

 

   

2020: Named to Forbes Cloud 100

 

   

2020: Surpassed 800 customers; 140+ customers spent over $100,000

 

   

2020: Had 171 of the AmLaw 200 law firms using DISCO, including 49 out of the largest 50 firms

 

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We generate substantially all of our revenue from our customers’ usage of our solution. Our revenues are based on our customers’ actual usage of our solution. Customers generally do not commit to purchase a specific amount of usage on our solution and 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 12%, 14% and 13% of our revenue for the years ended December 31, 2019 and 2020, and the three months ended March 31, 2021, respectively. 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 solution, our customers often increase usage of our solution to cover additional legal matters and adopt more of our offerings. As our customers use our solution over time, the amount of enterprise data in our solution increases, enhancing the strategic value and stickiness of our solution within an organization. This dynamic of increased activity from our existing customer accounts and overall customer satisfaction is best demonstrated by our dollar-based net retention rate. As of December 31, 2019, December 31, 2020, March 31, 2020 and March 31, 2021, our dollar-based net retention rate was 146%, 127%, 136% and 122%, respectively.

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 solution is 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. As of March 31, 2021, we had 909 customers, increasing from 635 and 825 customers as of December 31, 2019 and 2020, respectively. As of March 31, 2021 we had 157 large customers, defined as customers with revenue in excess of $100,000 over the previous 12-month period, increasing from 113 and 141 large customers as of December 31, 2019 and 2020, respectively. Large customers accounted for approximately 75%, 74%, and 74% of our revenue for the trailing twelve months ended March 31, 2021 and the years ended December 31, 2019 and 2020, respectively.

Our go-to-market strategy is focused on acquiring new customers and driving continued use and increased usage of our solution for 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 segmented into sales development representatives, field sales, inside sales, solution architects and our customer success team. In addition, our solution is designed such that customers can grant access to third parties, including law firms and other legal service providers, to use our applications on the customers’ behalf. This access facilitates widespread adoption of our solution, as these law firms and other legal service providers often become customers on their own or recommend our solution to other legal industry participants after realizing the benefits of working on our solution. Likewise, if a law firm is our customer, the law firm may add users from its clients’ legal departments to our solution in order to collaborate with them. These users may then become champions and encourage the companies they work for to become customers.

We have experienced rapid growth in recent periods. Since inception, we have raised $161.1 million of capital, and we had $53.6 million of cash and cash equivalents as of March 31, 2021. We generated revenue of $48.6 million and $68.4 million in 2019 and 2020, respectively, representing year-over-year growth of 41%. We generated revenue of $15.7 million and $21.1 million in the three months ended March 31, 2020 and 2021, respectively, representing a period-over-period growth of 35%. Our net loss was $29.8 million, $22.9 million, $11.2 million and $2.9 million for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively. We generated Adjusted EBITDA of $(25.4) million, $(19.9) million, $(10.3) million, and $(1.9) million for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, 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.

 

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Impact of COVID-19 on Our Business

The COVID-19 pandemic has caused general business disruption worldwide beginning in January 2020. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, cash flows and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. As a result of the COVID-19 pandemic, governments in many of the jurisdictions in which we or our customers operate instituted shelter-in-place orders in March and April 2020 to mitigate the outbreak of COVID-19, forcing court closures and causing general delays in litigation proceedings, as well as leading to delays in the collection of enterprise data. Due to these factors, we experienced flat revenue growth in the second quarter of 2020 from the first quarter of 2020, during which we generated $15.7 million in each quarter, and saw a softening in our dollar-based net retention rate compared to the prior year period, decreasing from 146% as of December 31, 2019 to 127% as of December 31, 2020. In addition, we executed a reduction in our workforce in March 2020 in response to the COVID-19 pandemic. This reduction in workforce resulted in a total impact of $0.7 million of charges related to severance. As shelter-in-place orders expired and businesses and court systems adjusted their operations to accommodate remote work policies, usage in our solution increased and our revenue in the third quarter of 2020 returned to pre-pandemic levels of growth.

We have also experienced, and may continue to experience, a modest positive impact on other aspects of our business, including slower growth in certain operating expenses due to reduced business travel, deferred hiring for some positions and the virtualization or cancellation of customer and employee events. While a reduction in operating expenses may have an immediate positive impact on our results of operations, we do not yet have visibility into the full impact this will have on our business.

We cannot predict how long we will continue to experience these impacts as shelter-in-place orders and other related measures are expected to change over time. However, as certain of our customers or partners experience downturns or uncertainty in their own business operations or revenue resulting from the spread of COVID-19, they may decrease or delay their legal spending or request pricing discounts, any of which may result in decreased revenue for us. In addition, we may experience customer losses, including due to bankruptcy or our customers ceasing operations, which may result in an inability to collect accounts receivable from these customers. In addition, in response to the spread of COVID-19, we have required substantially all of our employees to work remotely to minimize the risk of the virus to our employees and the communities in which we operate and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

The global impact of COVID-19 continues to rapidly evolve and we will continue to monitor the situation and the effects on our business and operations closely. We do not yet know the full extent of potential impacts on our business or operations or on the global economy as a whole, particularly if the COVID-19 pandemic continues and persists for an extended period of time. Given the uncertainty, we cannot reasonably estimate the impact on our future results of operations, cash flows or financial condition. For additional details, 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 Ediscovery, DISCO Review and DISCO Case Builder

 

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offerings, and have built a research and development process that reliably produces applications and features that lawyers love. We intend to continue combining our deep legal domain expertise and commitment to world-class software engineering to continue delivering features that lawyers love and introducing new applications to address more areas of legal work. Our future success is dependent on our ability to successfully develop, market and sell existing and new applications of our solution to both new and existing customers.

Add New Customers

We believe we have a significant opportunity to continue to grow our customer base. 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 integrated, easy-to-use solutions like DISCO to improve productivity and legal outcomes. We believe our market leadership and differentiated solution will enable us to efficiently acquire new customers across all channels. As of March 31, 2021, we had 909 customers, increasing from 635 and 825 customers as of December 31, 2019 and 2020, respectively. 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 marketing efforts. We will need to dedicate significant resources to further develop the market for our solution and expand, retain and motivate our sales and marketing personnel.

Increase Usage and Penetration Within Our Existing Customer Base

Our large base of customers 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 existing offerings to existing customers, and, in the future, introducing additional offerings to sell to existing customers. Our long-term offerings 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 solution 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 solution, competition, pricing and overall changes in our customers’ spending levels. Even if our customers expand their usage of our solution, we cannot guarantee that they will maintain those usage levels for any meaningful period of time or that they will renew their commitments.

We have a history of growing with our customers as they increase their annual spend with us over time. The chart below illustrates the total revenue generated within a given cohort over the years presented. Each cohort represents customers from which we received revenue for the first time in a given fiscal year. For example, the 2017 cohort represents all customers who generated revenue for us for the first time at any point between January 1, 2017 and December 31, 2017. We have seen significant expansion across all of our cohorts. We expect cohort revenue will fluctuate from one period to another depending on, among other factors, our ability to increase revenue generated by the customers within a given cohort and other changes to offerings we sell to such customers. While we believe these cohorts are a fair representation of our overall customer base, there is no assurance that they will be representative of any future group of customers or periods.

 

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LOGO

A further indication of the propensity of our customers to continue to work with and expand their relationship with us over time is our dollar-based net retention rate, which compares our revenue from the same set of customers in one period to the prior year period. As of March 31, 2020 and 2021, our dollar-based net retention rate was 136% and 122%, respectively, and as of December 31, 2019 and 2020, it was 146% and 127%, respectively. We calculate our dollar-based net retention rate as of the end of a period by using (a) the revenue from all customers during the twelve months ending one year prior to such period as the denominator and (b) the revenue from all customers during the twelve months ending as of the end of such period minus the revenue from all customers who are new customers during those twelve months as the numerator. While we have maintained this high net retention over the past three years, this number has decreased and may further decrease over time as our customer base matures and the amount of revenue used in the denominator to calculate net retention grows.

Expand Our Sales Coverage and Establish a Digital Sales Channel

We intend to continue to increase our salesforce headcount in strategic locations across the United States and globally. Additionally, we plan to develop a digital, self-service sales channel that can simplify the sales process and enable customers to easily adopt our solution through our website without the need to speak with a sales representative. 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.

Expand Internationally

Our market is global and we believe there is a significant opportunity to expand internationally. In 2020, less than 5% of our revenue was generated by customers outside of the United States. International expansion, including our global sales efforts, will add increased complexity and cost to our business.

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 solution 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

 

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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. 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.

Pursue Strategic Acquisitions and Strategic Investments

We intend to selectively pursue acquisitions and strategic investments that we believe can expand the functionality and value of our solution and bring talent to our company. We believe that the combination of our market leadership, deep legal expertise and powerful end-to-end solution 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 solution within a single operating segment. We have two primary types of contractual arrangements: usage-based and subscription solutions. Our usage-based revenue is derived from contracts under which customers are 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 years ended December 31, 2019 and 2020 and three months ended March 31, 2020 and 2021, usage-based revenue represented 88%, 86%, 87%, and 87% of our total revenue, respectively. In the years ended December 31, 2019 and 2020 and three months ended March 31, 2020 and 2021, subscription revenue fees represented 12%, 14%, 13%, and 13% of total revenue, respectively.

Cost of Revenue

Cost of revenue consists primarily of third-party cloud infrastructure expenses incurred in connection with our customers’ use of our solution. Cost of revenue also includes outsourced staffing costs, amortization of internal-use software and personnel costs from employees involved in the delivery of our solution. Personnel costs include salaries, benefits, bonuses and stock-based compensation and allocated overhead costs. We intend to continue to invest additional resources in our infrastructure to expand the capability of solutions and ensure that our customers are realizing the full benefit of our solutions. 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 internal-use software costs.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing, general and administrative expenses and refund of sales and use taxes. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, share-based compensation expenses and sales commissions. Operating expenses also include overhead costs for facilities and shared IT related expenses, including depreciation expense. During the year ended December 31, 2020, certain operating expenses decreased as a result of the COVID-19 pandemic and a related reduction in force. We expect certain expenses impacted by COVID-19 to resume in the second half of 2021, although the timing and magnitude of these expenses will depend on a number of factors including the trend of the pandemic and potential lifting of stay-at-home orders.

 

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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 solution. During the year ended December 31, 2020, growth in research and development expenses was offset by a one-time reduction in force in response to the COVID-19 pandemic. We expect that our research and development expenses will increase in absolute dollars as our business grows, particularly as we incur additional costs related to continued investments in our solution. However, we expect that our research and development expenses will decrease as a percentage of our revenue over time. In addition, research and development expenses that qualify as internal-use 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 and 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 are comprised of travel-related expenses, software services dedicated for use by our sales and marketing organizations and outside services contracted for sales and marketing purposes. Travel-related expenses, decreased in the year ended December 31, 2020 due to the COVID-19 pandemic. We currently expect travel-related expenses to resume in the second half of 2021, although the timing is uncertain and related to the trend of the pandemic. We expect that our sales and marketing expenses will increase in absolute dollars and continue to be our largest operating expense for the foreseeable future as we grow our business. However, we expect that our sales and marketing expenses will decrease 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.

Following the completion of this offering, we expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations and increased expenses for insurance, investor relations and professional services. We expect that our general and administrative expenses will increase in absolute dollars as our business grows. However, we expect that our general and administrative expenses will decrease as a percentage of our revenue as our revenue grows over the longer term.

Refund of Sales and Use Taxes

Refund of sales and uses taxes consist of a one-time gain due to a sales tax refund related to sales tax paid in prior periods based on the resolution of a sales tax audit.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income, income related to non-operating activities, interest expense and gains and losses from foreign currency transactions and remeasurements of foreign currency-denominated monetary assets and liabilities to the U.S. Dollar.

 

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Provision for Income Taxes

Provision for income taxes 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.

 

     Year Ended
December 31,
    Three Months Ended
March 31,
 

(in thousands)

   2019     2020     2020     2021  
           (unaudited)  

Revenue

   $ 48,556     $ 68,444     $ 15,668     $ 21,131  

Cost of revenue(1)

     14,457       20,449       5,071       5,788  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     34,099       47,995       10,597       15,343  

Operating expenses:

        

Research and development(1)

     25,352       26,599       8,203       6,262  

Sales and marketing(1)

     26,122       31,061       9,322       7,876  

General and administrative(1)

     12,975       13,893       4,258       4,053  

Refund of sales and use taxes

     —         (1,057     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     64,449       70,496       21,783       18,191  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (30,350     (22,501     (11,186     (2,848
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest and other income

     652       155       63       13  

Interest and other expense

     (124     (456     (88     (57
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     528       (301     (25     (44
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (29,822     (22,802     (11,211     (2,892

Provision for income taxes

     (10     (71     (25     (36
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (29,832   $ (22,873   $ (11,236   $ (2,928
  

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of redeemable convertible preferred stock

     (86     (92     (23     (26
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributed to common stockholders

   $ (29,918   $ (22,965   $ (11,259   $ (2,954
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes stock-based compensation expense as follows:

 

     Year Ended
December 31,
     Three Months Ended
March 31,
 

(in thousands)

   2019      2020      2020      2021  
            (unaudited)  

Cost of revenue

   $ 7      $ 28      $ 6      $ 8  

Research and development

     727        864        222        201  

Sales and marketing

     301        335        70        83  

General and administrative

     3,085        766        190        196  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,120      $ 1,993      $     488      $     488  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Year Ended
December 31,
    Three Months Ended
March 31,
 
     2019     2020     2020     2021  
                 (unaudited)  

Consolidated Statement of Operations and Comprehensive Loss as a percentage of revenue:**

        

Revenue

     100     100     100     100

Cost of revenue(1)

     30       30       32       27  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     70       70       68       73  

Operating expenses:

        

Research and development(1)

     52       39       52       30  

Sales and marketing(1)

     54       45       59       37  

General and administrative(1)

     27       20       27       19  

Refund of sales and use taxes

           (2            
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     133       103       139       86  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (63     (33     (71     (13
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest and other income

     1       *       *       *  

Interest and other expense

     *       (1     (1     *  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     1       *       *       *  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (61     (33     (72     (14

Provision for income taxes

     *       *       *       *  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (61     (33     (72     (14
  

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of redeemable convertible preferred stock

     *       *       *       *  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributed to common stockholders

     (62     (34     (72     (14
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Less than 0.5% of revenue.

**

Columns may not add up to 100% due to rounding.

Comparison of Three Months March 31, 2020 and 2021

Revenue

 

     Three Months Ended
March 31,
    

 

    

 

 
     2020      2021      Change      % Change  
     (dollars in thousands)         

Revenue

   $ 15,668      $ 21,131      $ 5,463        35

Total revenue increased by $5.5 million, or 35%, for the three months ended March 31, 2021 compared to the same period in 2020. Approximately 27% of the increase related to additional usage and adoption of our solution by our existing customers. The remaining 73% increase in revenue related to new customers added during the period. The number of customers increased from 713 customers as of March 31, 2020, to 909 customers as of March 31, 2021, an increase of 196, or 27%.

 

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Cost of Revenue

 

     Three Months Ended
March 31,
    

 

    

 

 
         2020              2021          Change      % Change  
     (dollars in thousands)         

Cost of revenue

   $ 5,071      $ 5,788      $ 717        14

Total cost of revenue increased by $0.7 million, or 14%, for the three months ended March 31, 2021 compared to the same period in 2020. The increase was primarily driven by an increase in costs for cloud hosting of $0.2 million related to increased usage of our solution, an increase in salary and benefits costs related to an increase in headcount of $0.5 million, including stock-based compensation. Gross margin increased five percentage points for the three months ended March 31, 2021 compared to the same period in 2020, due to hosting costs decreasing on a relative basis due to continued growth and savings due to scale.

Operating Expenses

Research and Development

 

     Three Months Ended
March 31,
   

 

   

 

 
     2020     2021     Change     % Change  
     (dollars in thousands)        

Research and development

   $ 8,203     $ 6,262     $ (1,941     (24 )% 

Percentage of revenue

     52     30    

Research and development expenses decreased by $1.9 million, or 24%, for the three months ended March 31, 2021 compared to the same period in 2020. The decrease was primarily due to a decrease of $1.3 million in salaries, including stock-based compensation, due to the decrease in headcount as well as $0.5 million related to a one-time reduction in force that occurred in the first quarter of 2020. Additionally, expense decreased by $0.2 million related to decreased allocated corporate overhead due to decreased operating costs related to the COVID-19 pandemic.

Sales and Marketing

 

     Three Months Ended
March 31,
   

 

   

 

 
         2020             2021         Change     % Change  
     (dollars in thousands)        

Sales and marketing

   $ 9,322     $ 7,876     $ (1,446     (16 )% 

Percentage of revenue

     59     37    

Sales and marketing expenses decreased by $1.4 million, or 16%, for the three months ended March 31, 2021 compared to the same period in 2020. The decrease was primarily related to salary and related costs of $0.6 million, including stock-based compensation, due to the decrease in headcount as well as $0.2 million related to a one-time reduction in force that occurred in the first quarter of 2020. Additionally, the decrease in sales and marketing expenses included decreases in travel and entertainment expenses of $0.3 million and marketing events of $0.2 million, both of which relate to our response to the COVID-19 pandemic.

 

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General and Administrative

 

     Three Months Ended
March 31,
   

 

   

 

 
         2020             2021         Change     % Change  
     (dollars in thousands)        

General and administrative

   $ 4,258     $ 4,053     $ (205     (5 )% 

Percentage of revenue

     27     19    

General and administrative expenses decreased by $0.2 million, or 5%, for the three months ended March 31, 2021 compared to the same period in 2020. The decrease was primarily due to a $0.5 million decrease in travel and entertainment related to our response to the COVID-19 pandemic and a decrease in salary and related costs due to a decrease in headcount of $0.1 million, including stock-based compensation. The decrease in general and administrative expenses was offset by an increase in professional services of $0.4 million related to supporting our growth.

Comparison of the Years Ended December 31, 2019 and 2020

Revenue

 

     Year Ended
December 31,
    

 

    

 

 
     2019      2020      Change      % Change  
     (dollars in thousands)         

Revenue

   $ 48,556      $ 68,444      $ 19,888        41

Total revenue increased by $19.9 million, or 41%, for the year ended December 31, 2020 compared to the same period in 2019. Approximately 67% of the increase related to additional usage and adoption of our solution by our existing customers. The remaining 33% increase in revenue related to new customers added throughout the period. The number of customers increased from 635 customers as of December 31, 2019, to 825 customers as of December 31, 2020, an increase of 190, or 30%.

Cost of Revenue

 

     Year Ended
December 31,
    

 

    

 

 
     2019      2020      Change      % Change  
     (dollars in thousands)         

Cost of revenue

   $ 14,457      $ 20,449      $ 5,992        41%  

Total cost of revenue increased by $6.0 million, or 41%, for the year ended December 31, 2020 compared to the same period in 2019. The increase was primarily driven by an increase in costs for cloud hosting of $3.1 million related to increased usage of our solution, an increase in salary and benefits costs related to an increase in headcount of $1.2 million, including stock-based compensation and an increase in outsourced staffing vendors fees of $1.2 million.

Operating Expenses

Research and Development

 

     Year Ended
December 31,
    

 

    

 

 
     2019      2020      Change      % Change  
     (dollars in thousands)         

Research and development

   $ 25,352      $ 26,599      $ 1,247        5%  

Percentage of revenue

     52%        39%        

 

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Research and development expenses increased by $1.2 million, or 5%, for the year ended December 31, 2020 compared to the same period in 2019. The increase was primarily due to hosting and software fees of $0.7 million and an increase of $0.5 million in salaries, including stock-based compensation, related to personnel involved in continued enhancements to our solution. The increase also includes $0.5 million related to a one-time reduction in force, offset by a $0.8 million decrease in recruiting costs related to our response to the COVID-19 pandemic. Additionally, expense increased by $0.5 million due to a decrease in capitalization of internal-use software development costs.

Sales and Marketing

 

     Year Ended
December 31,
    

 

    

 

 
     2019      2020      Change      % Change  
     (dollars in thousands)         

Sales and marketing

   $ 26,122      $ 31,061      $ 4,939        19%  

Percentage of revenue

     54%        45%        

Sales and marketing expenses increased by $4.9 million, or 19%, for the year ended December 31, 2020 compared to the same period in 2019. The increase was primarily related to salary and related costs of $6.1 million, including stock-based compensation, as well as software related expenses of $0.5 million due to the growth of our sales and marketing organization. The increase in sales and marketing expenses was partially offset by decreases in travel and entertainment expenses of $1.3 million and recruiting costs of $0.3 million, both of which relate to our response to the COVID-19 pandemic.

General and Administrative

 

     Year Ended
December 31,
    

 

    

 

 
     2019      2020      Change      % Change  
     (dollars in thousands)         

General and administrative

   $ 12,975      $ 13,893      $ 918        7%  

Percentage of revenue

     27%        20%        

General and administrative expenses increased by $0.9 million, or 7%, for the year ended December 31, 2020 compared to the same period in 2019. The increase was primarily due to an increase in salary and related costs related to an increase in headcount of $2.4 million, including stock-based compensation, a $0.6 million increase in software related expenses related to continued investments to support the growth of our business. The increase in general and administrative expenses was partially offset by a decrease of $2.5 million in stock-based compensation expense related to common stock sold in excess of fair value in 2019. There were no similar transactions in the current period. The increase in general and administrative expenses was further offset by a decrease in travel and entertainment of $0.3 million related to our response to the COVID-19 pandemic.

Refund of Sales and Use Taxes

 

     Year Ended
December 31,
   

 

   

 

 
     2019      2020     Change     % Change  
     (dollars in thousands)        

Refund of sales and use taxes

   $ —        $ (1,057   $ (1,057     —  %  

Percentage of revenue

     —  %        2%      

During the year ended December 31, 2020, we received a sales tax refund of $1.1 million related to sales tax paid in prior periods based on the resolution of a sales tax audit. There were no similar transactions in the prior period.

 

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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, provision for income taxes, interest and other, net, stock-based compensation expense, refund of sales and use taxes related to sales tax in prior periods and other one-time, non-recurring items, when applicable. We monitor Adjusted EBITDA as a non-GAAP financial measure to supplement the financial information we present in accordance with generally accepted accounting principles, or GAAP, to provide investors with additional information regarding our financial results.

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; (iv) it does not reflect other non-operating expenses, including interest expense; (v) it does not consider the impact of any contingent consideration liability valuation adjustments 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 fluctuate in the near term as we continue to invest in our business and 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:

 

     Year Ended
December 31,
    Three Months Ended
March 31,
 
     2019     2020     2020     2021  
     (in thousands)  

Net loss

   $ (29,832   $ (22,873   $ (11,236   $ (2,928

Depreciation and amortization expense

     803       1,624       378       424  

Provision for income taxes

     10       71       25       36  

Interest and other, net

     (528     301       25       44  

Stock-based compensation expense

     4,120       1,993       488       488  

Refund of sales and use taxes

     —         (1,057     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (25,427   $ (19,941   $ (10,320   $ (1,936
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Quarterly Results of Operations

The following tables summarize our selected unaudited quarterly consolidated statements of operations and comprehensive loss data for each of the quarters indicated, as well as the percentage that each line item represents of our revenue for each quarter presented. The information for each of these quarters has been prepared on the same basis as our audited annual consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair statement of the results of operations for these periods. This data should be read in conjunction with our consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected for the full fiscal year or any other period.

 

    Three months ended  
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
    March 31,
2021
 
    (in thousands)  

Revenue

  $ 10,378     $ 11,305     $ 12,652     $ 14,221     $ 15,668     $ 15,727     $ 17,863     $ 19,186     $ 21,131  

Cost of revenue(1)

    2,902       3,307       3,620       4,628       5,071       4,509       5,522       5,347       5,788  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    7,476       7,998       9,032       9,593       10,597       11,218       12,341       13,839       15,343  

Operating expenses:

                 

Research and
development(1)

    4,809       6,471       7,190       6,882       8,203       6,215       6,227       5,954       6,262  

Sales and marketing(1)

    5,346       5,890       6,998       7,888       9,322       7,170       7,182       7,387       7,876  

General and
administrative(1)

    4,417       2,866       2,631       3,061       4,258       3,144       3,030       3,461       4,053  

Refund of sales and use taxes

    —         —         —         —         —         —         (1,057     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    14,572       15,227       16,819       17,831       21,783       16,529       15,382       16,802       18,191  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (7,096     (7,229     (7,787     (8,238     (11,186     (5,311     (3,041     (2,963     (2,848
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

                 

Interest and other income

    180       202       156       113       63       15       55       22       13  

Interest and other expense

    (33     (22     (28     (40     (88     (161     (170     (37     (57
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    147       180       128       73       (25     (146     (115     (15     (44
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before operations

    (6,949     (7,049     (7,659     (8,165     (11,211     (5,457     (3,156     (2,978     (2,892

Provision for income taxes

    (3     (2     (2     (3     (25     (20     (13     (13     (36
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (6,952   $ (7,051   $ (7,661   $ (8,168   $ (11,236   $ (5,477   $ (3,169   $ (2,991   $ (2,928
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of redeemable convertible preferred stock

    (22     (22     (22     (22     (23     (23     (23     (23     (26
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributed to common stockholders

  $ (6,974   $ (7,073   $ (7,683   $ (8,190   $ (11,259   $ (5,500   $ (3,192   $ (3,014   $ (2,954
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes stock-based compensation expense as follows:

 

    Three months ended  
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
    March 31,
2021
 
    (in thousands)  

Cost of revenue

  $ —       $ 3     $ 2     $ 2     $ 6     $ 7     $ 7     $ 8     $ 8  

Research and development

    48       228       222       229       222       217       217       208       201  

Sales and marketing

    90       69       52       90       70       88       89       88       83  

General and administrative

    2,494       234       177       180       190       192       193       191       196  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $   2,632     $     534     $     453     $     501     $     488     $     504     $     506     $     495     $     488  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Three Months Ended  
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
    March 31,
2021
 

Consolidated Statement of Operations and Comprehensive Loss as a percentage of revenue:**

                 

Revenue

    100     100     100     100     100     100     100     100     100

Cost of revenue

    28       29       29       33       32       29       31       28       27  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    72       71       71       67       68       71       69       72       73  

Operating expenses:

                 

Research and development

    46       57       57       48       52       40       35       31       30  

Sales and marketing

    52       52       55       55       59       46       40       39       37  

General and administrative

    43       25       21       22       27       20       17       18       19  

Refund of sales and use taxes

    —         —         —         —         —         —         (6     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    140       135       133       125       139       105       86       88       86  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (68     (64     (62     (58     (71     (34     (17     (15     (13
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

                 

Interest and other income

    2       1       2       1       *       *       *       *       *  

Interest and other expense

    *       *       (1     *       (1     (1     (1     *       *  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    1       2       1       1       *       (1     (1     *       *  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before operations

    (67     (62     (61     (57     (72     (35     (18     (16     (14

Provision for income taxes

    *       *       *       *       *       *       *       *       *  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (67     (62     (61     (57     (72     (35     (18     (16     (14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of redeemable convertible preferred stock

    *       *       *       *       *       *       *       *       *  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributed to common stockholders

    (67     (63     (61     (58     (72     (35     (18     (16     (14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Less than 0.5% of revenue.

**

Columns may not add up to 100% due to rounding.

Revenue

Our revenue increased sequentially in each of the quarters presented due to the acquisition of new customers and the continued and increasing usage of our solution by existing customers. The number of customers increased from 459 as of December 31, 2018 to 909 as of March 31, 2021.

Cost of Revenue and Gross Margin

On a quarterly basis, cost of revenue increased in absolute dollars for all quarters presented, except for a nominal decrease in the second and fourth quarters of 2020, primarily due to the growth from new customers and increased usage from existing customers. Throughout all quarters in 2019, 2020, and 2021, gross margin (gross profit as a percentage of revenue) remained relatively consistent and reflects our continued commitment to operational efficiencies and maintaining costs proportionate to revenue growth.

Sales and Marketing

On a quarterly basis throughout 2019 and the first quarter of 2020, sales and marketing expenses remained consistent at over 50% as a percentage of revenue as we continued to invest in our go-to-market strategy focused on acquiring new customers and driving continued use and increased usage of our solution for existing customers. Beginning in the second quarter of 2020, our sales and marketing costs decreased primarily due to a reduction in workforce, reduced travel and entertainment, and reduced marketing events, all of which related to our response to the COVID-19 pandemic. Sales and marketing expense increased on an absolute dollar basis beginning in the fourth quarter of 2020 as we began reinvesting in our go-to-market strategy.

 

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Research and Development

On a quarterly basis, our research and development expenses increased for the first three quarters of 2019 and the first quarter of 2020, primarily driven by personnel related expenses from increased headcount. The reduction in research and development expense in the fourth quarter relates to an increase in internal-use software development costs. Our research and development expenses decreased in the second quarter of 2020 due to decreased personnel related costs resulting from the reduction in workforce in response to the COVID-19 pandemic. Our research and development expense on an absolute dollar basis remained relatively consistent from the second quarter of 2020 through the first quarter of 2021.

General and Administrative

The first quarter of 2019 included $2.5 million of stock-based compensation expense related to secondary sales of common stock by certain current and former employees described in Note 10 of our consolidated financial statements included elsewhere in this prospectus. Excluding this expense, our general and administrative expenses increased in the first, second and fourth quarters of 2019 and the first quarter of 2020 on an absolute dollar basis driven by increased headcount and professional services fees to support the growth in our business. In response to the impact of the COVID-19 pandemic, we reduced non-essential expenditures and implemented a reduction in workforce, which decreased our general and administrative expense in the second and third quarters of 2020. General and administrative expenses increased the first quarter of 2021 as we began reinvesting in headcount and professional services needed to support the growth in our business.

Refund of Sales and Use Taxes

During the third quarter of 2020, we received a sales tax refund of $1.1 million related to sales tax paid in prior periods based on the resolution of a sales tax audit. There were no similar transactions in the periods presented.

Liquidity and Capital Resources

We have financed operations since our inception primarily through customer payments and net proceeds from sales of equity securities, as well as borrowings under our revolving credit facility. As of December 31, 2019 and 2020 and March 31, 2020 and 2021, our principal sources of liquidity were cash and cash equivalents, totaling $23.2 million, $58.6 million, $29.4 million, and $53.6 million, respectively. We have also entered into a senior secured revolving credit facility with an available borrowing capacity of $40.0 million. We believe our existing cash and cash equivalents and borrowing capacity will be sufficient to fund anticipated cash requirements for the next 12 months.

Our future capital requirements will depend on many factors, including our revenue growth rate, usage of our solution, billing frequency, the timing and extent of spending to support further sales and marketing and research and development efforts, the continuing market acceptance of our solution. 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.

Credit Facility

In December 2020, we entered into a Second Amended and Restated Loan and Security Agreement, or the Credit Agreement, with Comerica Bank, which provides a $40.0 million revolving credit facility with a maturity date of November 30, 2023. Our obligations under the Credit Agreement are secured by substantially all of our

 

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assets. The Credit Agreement contains certain customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures and affiliate transactions. We may use the proceeds of future borrowings under the Credit Agreement for refinancing other indebtedness, working capital, capital expenditures and other general corporate purposes, including permitted business acquisitions.

Borrowings under the Credit Agreement bear interest at a prime referenced rate, as defined in the Credit Agreement, plus a margin of 0.25%. The Credit Agreement is subject to customary fees for loan facilities of this type, including an ongoing commitment fee at a rate of 0.25% per annum payable on a quarterly basis on the average daily unused portion of the loan facility during each quarter. As of December 31, 2020 and March 31, 2021, we had no outstanding debt under the Credit Agreement and we were in compliance with our covenants thereunder.

Cash Flows

The following table summarizes our cash flows for the period indicated:

 

     Year Ended
December 31,
    Three Months Ended March 31,  
     2019     2020     2020     2021  
     (in thousands)  

Cash used in operating activities

   $ (27,299   $ (22,712   $ (10,114   $ (4,496

Cash used in investing activities

     (3,325     (1,904     (663     (586

Cash provided by financing activities

     44,104       59,961       16,951       145  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

   $ 13,480     $ 35,345     $ 6,174     $ (4,937
  

 

 

   

 

 

   

 

 

   

 

 

 

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 allocated 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 of $4.5 million for the three months ended March 31, 2021 was primarily due to a net loss of $2.9 million, partially offset by non-cash charges for stock-based compensation of $0.5 million, depreciation and amortization of $0.4 million and non-cash operating lease costs of $0.2 million. Changes in operating assets and liabilities resulted in a decrease to operating cash flow of $2.9 million primarily due to an increase in accounts receivable of $2.2 million from our increases in sales and $1.5 million decrease in accounts payable and accrued expenses, partially offset by increases in deferred revenue of $1.1 million due to our growth.

Net cash used in operating activities of $10.1 million for the three months ended March 31, 2020 was primarily due to a net loss of $11.2 million, partially offset by non-cash charges for stock-based compensation of $0.5 million, depreciation and amortization of $0.4 million and non-cash operating lease costs of $0.4 million. Changes in operating assets and liabilities resulted in a decrease to operating cash flow of $0.3 million primarily due to an increase in accounts receivable of $0.9 million partially offset by increases in accounts payable and accrued expenses of $0.7 million.

Net cash used in operating activities of $22.7 million for the year ended December 31, 2020 was primarily due to a net loss of $22.9 million, partially offset by non-cash charges for stock-based compensation of $2.0 million, depreciation and amortization of $1.6 million and non-cash operating lease costs of $1.3 million. Changes in operating assets and liabilities resulted in a decrease to operating cash flow of $5.3 million primarily due to an increase in accounts receivable of $6.0 million from our increases in sales partially offset by increases in accounts payable and accrued expenses of $1.9 million due to our growth and a decrease in operating lease liabilities of $1.4 million.

 

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Net cash used in operating activities of $27.3 million for the year ended December 31, 2019 was primarily due to a net loss of $29.8 million, partially offset by non-cash charges for stock-based compensation of $4.1 million and depreciation and amortization of $0.8 million. Changes in operating assets and liabilities were unfavorable to cash flows from operations by $2.8 million primarily due to increases in our accounts receivable of $4.6 million and an increase in accounts payable and accrued expenses of $1.5 million.

Investing Activities

Net cash used in investing activities for the three months ended March 31, 2020 and 2021 of $0.7 million and $0.6 million, respectively, was primarily related to purchases of property and equipment and the capitalization of internal-use software as we expanded our solution and increased our development efforts.

Net cash used in investing activities for the year ended December 31, 2020 of $1.9 million was primarily related to purchases of property and equipment and the capitalization of internal-use software as we expanded our solution and increased our development efforts.

Net cash used in investing activities for the year ended December 31, 2019 of $3.3 million related to purchases of property and equipment and the capitalization of internal-use software.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2021 of $0.1 million consisted of proceeds from the exercise of stock options.

Net cash provided by financing activities for the three months ended March 31, 2020 of $17.0 million consisted of net proceeds from our revolving credit facility.

Net cash provided by financing activities for the year ended December 31, 2020 of $60.0 million consisted of net proceeds of $59.9 million from the issuance of our Series F redeemable convertible preferred stock, $23.3 million from debt offset by the subsequent repayment of $23.3 million of debt.

Net cash provided by financing activities for the year ended December 31, 2019 of $44.1 million consisted of net proceeds of $49.8 million from the issuance of our Series E redeemable convertible preferred stock, $0.1 million in proceeds from the exercise of stock options, offset by $5.8 million from the repayment of long-term debt.

Contractual Obligations and Other Commitments

The following table summarizes our non-cancelable contractual obligations as of December 31, 2020:

 

     Payments Due by Period  
     Less than
1 Year
     1-3
Years
     Total  
     (in thousands)  

Operating lease commitments

   $ 1,094      $ 911      $ 2,005  

Finance lease commitments

     122        101        223  

Purchase commitments

     7,208        4,479        11,687  
  

 

 

    

 

 

    

 

 

 

Total

   $ 8,424      $ 5,491      $ 13,915  
  

 

 

    

 

 

    

 

 

 

Our non-cancelable contractual obligations do not extend beyond three years. The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty.

 

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During the three months ended March 31, 2021, there were no material changes to our contractual obligations and commitments.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is principally the result of fluctuations in interest rates and foreign currency exchange rates.

Interest Rate Risk

We had cash and cash equivalents of $58.6 million and $53.6 million as of December 31, 2020 and March 31, 2021, respectively, which consisted of bank deposits and money market funds. The cash and cash equivalents are held for working capital purposes. Such interest-earning instruments carry a degree of interest rate risk. The primary objective of our investment activities is to preserve principal while generating income without significantly increasing risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short-term nature of our investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. Under our Credit Agreement, we may borrow up to $40.0 million as of December 31, 2020 and March 31, 2021, respectively. A hypothetical 10% change in interest rates during the periods presented would not have had a material impact on our consolidated financial statements.

Foreign Currency Exchange Risk

Our revenue and expenses are primarily denominated in U.S. dollars. For our foreign operations, the majority of our revenues and expenses are denominated in other currencies, namely, British pound and Canadian dollar. Our subsidiary remeasures monetary assets and liabilities at period-end exchange rates, while non-monetary items are remeasured at historical rates. Revenue and expense accounts are remeasured at the average exchange rate in effect during the period. If there is a change in foreign currency exchange rates, the conversion of our foreign subsidiary’s financial statements into U.S. dollars would result in a realized gain or loss which is recorded in our consolidated statements of operations and comprehensive loss. We do not currently engage in any hedging activity to reduce our potential exposure to currency fluctuations, although we may choose to do so in the future. A hypothetical 10% change in foreign exchange rates during the periods presented would not have had a material impact on our consolidated financial statements.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of the 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions made in the accompanying consolidated financial statements include, but are not limited to, the fair value of stock-based awards, software costs eligible for capitalization, the valuation of deferred tax assets and the allowance for credit losses. 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.

 

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While our significant accounting policies are more fully described in Note 2 in the notes to our consolidated financial statements included elsewhere in this prospectus, 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.

Revenue Recognition

We recognize revenue from contracts with customers using the five-step method described in Note 3 of the notes to our consolidated financial statements included elsewhere in this prospectus.

Our performance obligations consist of usage-based and subscription solutions. Our usage-based revenue is generated from solutions that are billed on a monthly basis based on actual usage. Subscription revenue is derived from contracts where customers are contractually committed to a minimum data volume over a period of time. Usage amounts above the minimum data volume are considered usage-based revenue. Subscription arrangements are typically billed on a monthly, quarterly or annual basis with revenue recognized on a ratable basis over the contractual term. On a limited basis, we enter into contracts whereby the consideration payable is contingent upon the conclusion of the legal matter. We do not recognize the revenue related to these contracts until the legal matter is resolved. Such amounts recognized have been immaterial to date.

In general, we satisfy the majority of our performance obligations over time as we transfer the promised solutions to our customers. We review the contract terms and conditions to evaluate the timing and amount of revenue recognition, the related contract balances, and our remaining performance obligations. These evaluations may require significant judgment that could affect the timing and amount of revenue recognized. Usage-based revenue is recognized monthly based on actual usage and subscription revenue is recognized on a ratable basis over the contractual term which is generally one year.

Internal-Use Software Development

We capitalize certain costs related to the development of our solution and other software applications for internal use. In accordance with authoritative guidance, we begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and 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 product development expenses in our consolidated statements of operations and comprehensive loss. We 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 solution, assess the ongoing value of capitalized assets or determine the estimated useful lives over which the costs are amortized, the amount of internal-use software development costs we capitalize and amortize could change in future periods.

Stock-Based Compensation

We account for stock-based compensation in accordance with the authoritative guidance on stock compensation. Under the fair value recognition provisions of this guidance, stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, over the requisite service period, which is generally the vesting period of the respective award.

 

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Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options granted to our employees and directors. The grant date fair value of restricted stock units is determined using the fair value of our common stock on the date of grant. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair value of our common stock, our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends, which are estimated as follows:

 

   

Fair value of the common stock.    As our stock is not publicly traded, and is rarely traded privately, we estimate the fair value of common stock as discussed in “—Common Stock Valuations” below.

 

   

Expected term.    The expected term represents the period that the stock-based awards are expected to be outstanding. We use the simplified calculation of expected term, as we do not have sufficient historical data to use any other method to estimate expected term.

 

   

Expected volatility.    The expected volatility is derived from an average of the historical volatilities of the common stock of several entities with characteristics similar to ours, such as the size and operational and economic similarities to our principle business operations.

 

   

Risk-free interest rate.    The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term of the stock-based awards.

 

   

Expected dividend.    The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.

The following table summarizes the assumptions used in the Black-Scholes option-pricing model to determine the fair value of our stock options as follows:

 

     Year Ended December 31,      Three months ended March 31,  
     2019      2020      2020      2021  

Stock options:

           

Risk-free interest rate

     1.6% – 2.5%        0.4% – 1.7%        1.7%        —    

Weighted-average expected life of the options

     6.25 years        6.25 years        6.25 years        —    

Expected dividend rate

     —  %        —  %        —          —    

Expected volatility

     50% – 53%        49% – 52%        49%        —    

Common Stock Valuation

The fair value of the common stock underlying our stock options was determined by our board of directors. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:

 

   

contemporaneous valuations performed by third-party valuation firms;

 

   

the prices, rights, preferences and privileges of our redeemable convertible preferred stock relative to those of our common stock;

 

   

the prices of redeemable convertible preferred stock sold by us to third-party investors in arms-length transactions;

 

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the lack of marketability of our common stock;

 

   

our actual operating and financial performance;

 

   

current business conditions and projections;

 

   

our history and the timing of the introduction of new applications;

 

   

our stage of development;

 

   

the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our business given prevailing market conditions;

 

   

the market performance of comparable publicly-traded companies;

 

   

recent secondary stock sales transactions; and

 

   

U.S. and global capital market conditions.

In valuing our common stock, we utilized the income and company transaction approaches (considering within the company transaction approach both recent preferred stock financing transactions and secondary sales of our common stock), which are considered highly complex and subjective valuation methodologies. The income approach estimates the fair value of our business, or Enterprise Value, based on the present value of our future estimated cash flows and our residual value beyond the forecast period. These future cash flows, including the cash flows beyond the forecast period for the residual value, are discounted to their present values using an appropriate discount rate, to reflect the risks inherent in our achieving these estimated cash flows. The Enterprise Value determined was then adjusted to (i) add back cash on hand and (ii) remove certain long-term liabilities in order to determine an equity value, or Equity Value. The company transaction method estimates the Equity Value based on an assessment of recent transactions in our common stock as well as an assessment of recent preferred stock financing transactions.

For all approaches other than the market approach utilizing secondary transactions in our common stock, the Equity Value was allocated among the various classes of our equity securities to derive a per share value of our common stock. Through September 30, 2020, we performed this allocation using the option pricing method, or OPM, which treats the securities comprising our capital structure as call options with exercise prices based on the liquidation preferences of our various series of preferred stock and the exercise prices of our options and warrants. Beginning in January 2021, we performed this allocation using a probability weighted expected return method, or PWERM. The PWERM involves the estimation of the value of our company under multiple future potential outcomes for us and estimates of the probability of each potential outcome. The per share value of our common stock determined using the PWERM is ultimately based upon probability-weighted per share values resulting from the various future scenarios, which include an initial public offering, merger or sale or continued operation as a private company. Additionally, the PWERM was combined with the OPM to determine the value of the securities comprising our capital structure in certain of the scenarios considered in the PWERM.

After the Equity Value is determined and allocated to the various classes of shares, a discount for lack of marketability, or DLOM, is applied to arrive at the fair value of the common stock. A DLOM is meant to account for the lack of marketability of a stock that is not traded on public exchanges. For financial reporting purposes, we considered the amount of time between the valuation date and the grant date of our stock options to determine whether to use the latest common stock valuation or a straight-line interpolation between the two valuation dates. This determination included an evaluation of whether the subsequent valuation indicated that any significant change in valuation had occurred between the previous valuation and the grant date.

Once we are operating as a public company, we will rely on the closing price of our common stock as reported on the date of grant to determine the fair value of our common stock.

Based on the assumed initial public offering price of $30.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, the aggregate intrinsic value of our outstanding stock options as of March 31, 2021 was $83.4 million, of which $61.4 million related to vested stock option awards.

 

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Recent Accounting Pronouncements

See “Summary of Significant Accounting Policies” in Note 2 in the notes to our consolidated financial statements included elsewhere in this prospectus 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 shareholder approval of any golden parachute payments not previously approved. In addition, pursuant to Section 107 of the JOBS Act, as an emerging growth company, we have elected 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. If we cease to be an emerging growth company, we will no longer be able to take advantage of these exemptions or the extended transition period for complying with new or revised accounting standards.

 

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LETTER FROM KIWI CAMARA, OUR FOUNDER AND CEO

Law is the best solution we humans have found to the problem of human conflict.

We use law to resolve disputes. We use law to define the freedoms we enjoy and the duties we owe to each other. Law underlies the building blocks of our society, from property, to contracts, to marriages. Law structures the institutions in which we live our lives and achieve our dreams, from business partnerships, to multinational corporations, to civic groups, churches, and governments. Law is everywhere and touches every part of our lives.

Advances in civilization have been marked by advances in our laws, from the Code of Hammurabi’s “eye for an eye,” to the lex mercatoria that enabled medieval commerce, to the Magna Carta that enshrined the rights of individuals against kings, to the Constitution of the United States and its series of amendments, beginning with the Bill of Rights, that have steadily expanded and expounded on the idea of liberal democracy.

An effective rule of law is very much an aberration in history. The idea that we all should be equally subject to the same set of rules, neutrally applied based on what really happened, commands universal acclaim only until powerful people and powerful institutions find themselves on the wrong side of the law. In those moments, it falls to great lawyers to speak truth to power, to fight for the ideals of the law, to make those ideals a little bit more real every day, in every case, for every client. The stories of the law are stories of brave people fighting fearful odds for ideals that inspire.

Our mission at DISCO is to use technology to strengthen the rule of law. Technology will transform the law just as it has transformed every other area of life. This transformation creates a massive opportunity to build an iconic business: the category definer for the new category of legaltech.

Technology will help lawyers improve legal outcomes for their clients. It will improve the experience of practicing law by automating the parts of the practice that don’t require human legal judgment, so that lawyers can focus on doing the kinds of work that they went to law school to do. Automation and artificial intelligence will improve the efficiency and quality of existing legal services and will enable the creation of entirely new productized legal services. Legal professionals will partner with lawyers to make the most of this technology, building impactful and exciting careers for themselves in the law. Ultimately, technology will make law more effective at securing fairness and justice for all.

We have assembled an amazing team of people at DISCO: world-class software engineers, designers, and product managers who work hand-in-hand with lawyers to build magical product experiences; a go-to-market organization that has built a product-led growth engine powered by customers who quickly become fans and advocates; and people, finance, legal, and executive teams that are committed not only to winning in today’s market but to building an enduring institution.

We are committed to making DISCO the kind of place that we would like to tell other people we were involved in building, the kind of place where we would love for our kids to work. One of our values is “grit and grace.” Grit means we will put in the work that we need to win. Grace means that we can be kind while we do that: kind to each other, kind to our customers, kind to our partners, and kind to ourselves.

Our employee-led philanthropy program, DISCO Cares, is one example of how we live grace. More than half of our employees and every one of our executives participated in DISCO Cares activities in 2020, working with organizations on issues from housing to education to food insecurity. Our commitment to diversity, equity, and inclusion is another example of grace in action.

To spread our value of grace beyond DISCO, and inspired by the generosity of so many in tech and beyond, I intend to donate, from my personal holdings, approximately 1% of the common stock of DISCO outstanding immediately prior to this offering to support philanthropic causes following our IPO. I hope that everyone who contributes to our growth feels a part of this pledge. The more we grow, the more good we will be able to do.

 

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Great achievements come from aiming great people at big problems. I am humbled and delighted every day to lead DISCO — and, now, to invite you to join us on our mission.

Thank you to our early believers: to our first two engineers, who quit their jobs and moved to Texas to build software at a law firm; to every person who joined our team when your friends told you you were crazy; to every customer who trusts us every day with your most important legal matters; to the investors who believed in our vision when that was really all we had.

You’ll read about what we’ve built in this S-1. I’m proud of what we’ve built. And I believe that we’re just getting started.

Come with me — let’s make magic together!

LOGO

Kiwi Camara

Founder and CEO

 

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LETTER FROM KENT RADFORD, OUR FOUNDER

DISCO began with a legal team’s desire to address a very specific problem. We needed to review terabytes of data with a very small team of people. The technology available to address that problem was slow, expensive, and clunky. No technology existed that worked the way we needed it to in the time frame we needed. From that sprang the thought that “we can do it better.”

As we sat in a room working on the requirements for what would become DISCO Ediscovery, our goal was simply to solve our pain points. We continued our legal practice while using our new software on all of our matters. Very quickly, though, it became apparent that the software did something no other technology on the market did. It was fast; it was intuitive; and it made the fact finding process dramatically easier. It was also abundantly clear that other lawyers had similar pain points and could benefit from our solutions. That was the day DISCO was truly born.

From the beginning, we built DISCO to pursue a different path than others in the space. We looked to solve problems from first principles. We tasked the company to dream up what “great” would look like from the legal practitioner’s perspective and worked to turn that dream into reality. One can see that philosophy not just in the software we build but also the process we use to build that software; the focus is on thinking through issues and solving problems before writing any code.

Our willingness to be different can also be seen in our people. We have industry veterans, who swore they would leave the industry because it was technologically stagnant, excited to sell better offerings. We have engineers who could work at any world-class product company choosing to solve big, important problems at DISCO. We also have great lawyers choosing to join DISCO from private practice because DISCO provides them with a rare opportunity to change and better the practice of law. Across every department we have people who agree that we can do it better.

Our willingness to forge a different path can also be seen in how we invest in our people. In DISCO Cares, we have a corporate social responsibility program that lets our employees choose how we engage philanthropically with the world. In DISCO University, we are building a world-class learning environment where employees can acquire skills not only to help them in their current role but also their next. We truly want DISCO to be a place where people can spend their entire careers and are putting the programs in place to help make that vision a reality.

We think DISCO is a different kind of company. We think you will as well, and we hope you will join us in transforming the legal industry.

Kent Radford

Founder

 

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BUSINESS

Our Mission

Our mission is to use technology to strengthen the rule of law.

Overview

DISCO provides a cloud-native, artificial intelligence-powered legal solution that simplifies ediscovery, legal document review and case management for enterprises, law firms, legal services providers and governments. Our scalable, integrated solution enables 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 solution 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 solution. We provide legal departments with the ability to centralize legal data into a single solution, 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. As of March 2021, our solution held more than 10 billion files and 2.5 petabytes of data and we used more than 14 billion serverless compute calls in 2021 to process and enrich data for our customers. By automating the manual, time-consuming and error-prone parts of ediscovery, legal document review and case management, we empower legal departments to focus on delivering better legal outcomes.

Since our founding in 2013, and beginning with our founders, DISCO has assembled a team that combines strength in software engineering, cloud computing and AI, with deep legal expertise and a rich understanding of the problems that lawyers and legal professionals face and how they work. This combination of expertise means that our team is distinctly well-positioned to execute on our vision of building technology that powers the legal function across companies in every industry.

Lawyers and legal professionals love our solution, as demonstrated by our Net Promoter Score, or NPS, of 63 as of December 31, 2020. We calculate NPS based on the basis of a survey that asks, “How likely are you to recommend DISCO to a colleague?”. The survey respondent can choose an integer between zero and ten, with the percentage of users responding with a 6 or below subtracted from the percentage of users responding with a 9 or 10 to calculate the NPS. Our relentless focus on delivering a solution that legal professionals love is coupled with a simple and transparent usage-based business model. We believe this enables our customers to easily adopt our solution, realize rapid time-to-value, scale their usage within and across applications to match their changing needs and collaborate with others. This has allowed us to build a powerful product-led growth engine that efficiently expands the usage of our solution for more legal matters and use cases within organizations, spreads our solution across the legal ecosystem through collaboration and word-of-mouth and increases the value of our solution as we collect and process more data and lawyers do more legal work in our solution. The success of this growth model is underscored by our dollar-based net retention rate of 122% as of March 31, 2021, as well as by the fact that, in 2020, 171 law firms in the 2020 AmLaw 200, a ranking of the 200-highest grossing law firms in the United States, used DISCO in the course of legal work on behalf of their clients. As of March 31, 2021, we had over 909 enterprises, law firms, legal services providers and government organizations as DISCO customers.

Law affects everyone, from the largest multinational corporations to local mom-and-pop businesses, from the most powerful national governments to the smallest towns and from major civic organizations to individual citizens. The impact of law on the business world is only growing, with businesses today operating in more jurisdictions than ever before and increasingly exposed to a growing number of constantly changing laws and regulations that can materially damage a company’s brand and operations. This has turned the corporate legal function into a mission-critical, strategic component of the modern enterprise and contributed to the growth in

 

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global spend on legal services, which is forecasted by Statista to be $767 billion in 2021. But despite its enormous scale and attractive opportunities for automation and the application of AI to improve lawyer productivity and job satisfaction, the legal industry has lagged behind other industries in digitization and cloud technology adoption.

Legal work often requires lawyers to collect and review enterprise data to determine the facts. This process includes ediscovery, which refers to the process of collecting, searching and producing digital enterprise data that can constitute documentary evidence and legal document review, which refers to the substantive review of collected digital enterprise data by legal professionals to determine the facts and final evidence in a legal matter. Today, many legal departments rely on a complex and services-heavy network of law firms, legal services providers and legacy point solutions for ediscovery and legal document review. This fragmented, multi-vendor approach is extremely manual, difficult to use and ill-suited to handle the massive growth in the volume, variety and velocity of enterprise data that legal departments are experiencing, which ultimately limits the productivity of legal professionals and their ability to resolve legal matters quickly and on favorable terms. However, recent technological advances such as AI and cloud computing have reached a point of technological maturity where they can enable legal technology applications to transform legal work and automate much of the previously manual, time-consuming work done by legal professionals. At the same time, we believe rapid growth in use of consumer software and other consumer technology, including the proliferation of mobile devices, the generational shift of lawyers and the increasing career mobility of lawyers, are all contributing to a radical change in expectations for legal technology used in the workplace.

Since our inception, our principal goal has been to create experiences that feel “magical” to lawyers, by delivering intuitive, intelligent offerings that are well-tailored to lawyers’ workflows and a joy for legal professionals to use. Our solution is enabled by our deep investment in a modern, scalable cloud architecture that accelerates application development; makes our offerings robust, scalable and secure; and enables us to act as a secure single system of record and engagement for all legal data at enterprise scale. We have built our solution to incorporate the latest advances in automation and AI directly into existing lawyer workflows to multiply lawyer productivity across the ediscovery and legal document review lifecycle. Our cloud-native, AI-powered software is augmented with deep expertise, consultative professional services and flexible customer support that enables us to be a single-source provider and meet the diverse needs of customers in every industry. With our full-stack solution, legal departments no longer need to rely on a fragmented network of slow, antiquated processes and law firms and service providers manually collecting, searching and reviewing documents. We believe this reduces legal costs, increases lawyer productivity and improves legal outcomes. We intend to extend our solution and apply it to other kinds of legal work over time, enabling us to compete for an increasing share of global spend on legal services.

Our full-stack solution currently includes:

 

   

DISCO Ediscovery automates much of the ediscovery process, saving legal departments from costly and cumbersome manual tasks associated with collecting, processing, enriching, searching, reviewing, analyzing, producing and using enterprise data that is at issue in legal matters.

 

   

DISCO Review is AI-powered document review that consistently delivers legal document reviews that are high quality, on time and on budget.

 

   

DISCO Case Builder allows legal professionals to collaborate across teams to effectively build a compelling case by offering a single place to search, organize and review witness testimony and other important legal data.

Our approach has enabled us to serve 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 legal professionals use our solution is similar regardless of the specific industry in which each customer operates. This commonality has created efficiencies in our sales,

 

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marketing and research and development efforts because we do not need to tailor our solution to a wide range of industries. The broad applicability of our solution across a spectrum of industries has created a significant market opportunity for us, which we estimate to be $42 billion globally.

We believe that great achievements come from aiming great people at big problems, and that our employees, who we call “Discovians,” are the principal driver of our success. We strive to attract, retain, develop and promote humble, curious and empathetic Discovians across all areas of our business. We are committed to fostering a diverse and inclusive workplace that values input from every corner of our business and creating an environment where all people feel welcome and connected regardless of their background. Our culture is guided by the principles we set forth in our MAGIC core values: Meaningful impact, All-in, Grit and grace, Innovation and Craft. These principles shape our culture and guide the way we work, support each other and our communities and serve our customers. We believe that our culture and commitment to giving back to our community are critical to advancing our mission of using technology to strengthen the rule of law.

We have experienced rapid growth in recent periods. Since inception, we have raised $161.1 million of capital, and we had $53.6 million of cash and cash equivalents as of March 31, 2021. We generated revenue of $48.6 million and $68.4 million in 2019 and 2020, respectively, representing year-over-year growth of 41%. We generated revenue of $15.7 million and $21.1 million in the three months ended March 31, 2020 and 2021, respectively, representing period-over-period growth of 35%. Our net loss was $29.8 million, $22.9 million, $11.2 million and $2.9 million for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively. We generated Adjusted EBITDA of $(25.4) million, $(19.9) million, $(10.3) million and $(1.9) million for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—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.

Industry Background

Law is fundamental to society, affecting everyone from the largest multinational corporations to local mom-and-pop businesses, from the most powerful national governments to the smallest towns, from major civic organizations to individual citizens. Law is the infrastructure on which companies and governments are built. It defines institutions, facilitates business transactions and is the primary mechanism for both regulation and dispute resolution in the modern world. Legal obligations are created and changed every day, both by governments around the world and through agreements between private parties. The impact of law on business is only growing, with legal issues regularly creating headline news, from the opioids epidemic to litigation over national elections to the creation of new business models such as in the burgeoning gig economy.

Introduction to the Legal Industry and Key Industry Participants

The legal industry is characterized by a wide array of participants with varying objectives and levels of organization. Most large companies have a legal function and a legal department, headed by a general counsel or chief legal officer, just as they have departments focused on finance, human resources and information technology. These legal departments both employ lawyers and other legal professionals to perform legal work internally and engage law firms and other legal services providers to perform legal work externally. According to a study by Statista, the estimated global spend on legal services is forecasted to be $767 billion in 2021. The key participants in legal work include:

 

   

Client.    The client is the principal in a legal matter, such as the plaintiff or defendant in a lawsuit or the acquirer or target in a merger transaction.

 

   

Legal department.    Within a corporate client, the legal department is the team of lawyers and legal professionals that performs legal work internally and is responsible for coordinating legal work performed by outside law firms and legal services providers.

 

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Law firm.    Law firms are engaged by clients to act for them in specific legal matters. Law firms vary significantly in their size and areas of practice, ranging from solo practices to large, international law firms with thousands of lawyers and multiple specialties. Clients often use more than one law firm for their legal work and law firms generally represent many clients.

 

   

Legal services provider.    Legal services providers are engaged by legal departments or law firms to expand their capabilities or increase their capacity. Legal services providers often assist legal departments and law firms with ediscovery and legal document review. Like law firms, legal services providers vary significantly in their size and areas of work, ranging from small, local operations with a handful of employees to large, global enterprises focused on legal services, to the legal services divisions of major consultancies and accounting and audit firms.

 

   

Counterparty.    The counterparty is the other principal involved in a legal matter. Most legal matters involve parallel work by the client and the counterparty, multiplying the total legal work involved.

 

   

Legal decision maker.    The legal decision maker is typically a government official, such as a judge or regulatory agency, who is responsible for making legal determinations that affect the client and counterparty.

Key Components of a Legal Matter

Legal work generally begins with two steps: (1) determining what the law is; and (2) determining what the facts are, so that lawyers and other legal professionals can apply the law to the facts. Determining what the law is involves collecting, searching and reviewing applicable statutes, regulations or prior decisions of courts and regulators and can involve the laws of multiple jurisdictions, such as multiple states or countries. Determining the facts depends on the context of the legal matter, but often involves collecting, searching and reviewing the testimony of witnesses, physical evidence and documentary evidence, including all enterprise data, both paper and electronic.

All kinds of enterprise data can constitute documentary evidence, including documents, spreadsheets, presentations, email, chat and other messaging data, voicemail and other audio data and video. Lawyers must collect, search and review this data to find documentary evidence that is relevant in a legal matter, to determine what the facts are, to assemble proof of those facts, and, depending on the kind of legal matter, to produce or exchange documentary evidence with the counterparty or submit documentary evidence to the legal decision maker, such as a judge or regulator. The process of collecting, searching and producing data is called “ediscovery” in the Unit