Form 10-Q CS Disco, Inc. For: Jun 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 30, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 001-40624
(Exact name of registrant as specified in its charter)
| 7372 | ||||||||
| (State or other jurisdiction of incorporation or organization) | (Primary standard industrial classification code number) | (I.R.S. Employer Identification No.) | ||||||
| (Address of Principal Executive Offices) (Zip Code) | ||||||||
(833 ) 653-4726
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | o | Accelerated filer | o | ||||||||
☒ | Smaller reporting company | ||||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of July 31, 2022, the registrant had 58,693,197 shares of common stock, $0.005 par value per share, outstanding.
TABLE OF CONTENTS
| Page | ||||||||
1
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains express or implied forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions.
These forward-looking statements include, but are not limited to, statements concerning the following:
•our expectations regarding our revenue, expenses and other operating results;
•our ability to acquire new customers and successfully retain existing customers;
•our ability to increase usage of our solution;
•our ability to effectively manage our growth;
•our ability to achieve or sustain profitability;
•future investments in our business, our anticipated capital expenditures and our estimates regarding our capital requirements;
•the costs and success of our sales and marketing efforts and our ability to promote our brand;
•our growth strategies for our solution;
•the estimated addressable market opportunity for our solution;
•our reliance on key personnel and our ability to identify, recruit and retain skilled personnel;
•our ability to effectively manage our growth, including any international expansion;
•our ability to maintain, protect and enforce our intellectual property rights and any costs associated therewith;
•the effects of global events, such as the COVID-19 pandemic, including variants of COVID-19, or other public health crises and the Russian military operations in Ukraine, on our business and the global economy;
•our ability to compete effectively with existing competitors and new market entrants; and
•the growth rates of the markets in which we compete.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers,
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dispositions, joint ventures or investments.
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Part I - Financial Information
Item 1. Financial Statements
CS DISCO, INC.
Condensed Consolidated Balance Sheets
(in thousands, except par value amounts)
(unaudited)
| June 30, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Accrued salary and benefits | |||||||||||
| Deferred revenue | |||||||||||
| Operating leases | |||||||||||
| Finance leases | |||||||||||
| Total current liabilities | |||||||||||
| Operating leases, non-current | |||||||||||
| Finance leases, non-current | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 8) | |||||||||||
| Stockholders’ equity | |||||||||||
Preferred stock $ | |||||||||||
Common stock $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
4
CS DISCO, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share amounts)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Interest and other income | |||||||||||||||||||||||
| Interest and other expense | ( | ( | ( | ( | |||||||||||||||||||
| Loss from operations before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax provision | ( | ( | ( | ( | |||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Less accretion of redeemable convertible preferred stock | ( | ( | |||||||||||||||||||||
| Net loss attributable to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share attributable to common stockholders, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted | |||||||||||||||||||||||
5
CS DISCO, INC.
Condensed Consolidated Statements of Changes in Redeemable Convertible
Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands)
(unaudited)
| Common stock | Additional paid-in capital | Accumulated deficit | Total | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
Balance at December 31, 2021 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Exercise of stock options | — | ||||||||||||||||||||||||||||
| Repurchase of common stock related to net share settlement | ( | — | ( | — | ( | ||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Stock compensation expense | — | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Exercise of stock options | — | ||||||||||||||||||||||||||||
| Repurchase of common stock related to net share settlement | ( | — | ( | — | ( | ||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Stock compensation expense | — | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Redeemable convertible preferred stock | Common stock | Additional paid-in capital | Accumulated deficit | Total | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||
| Accretion to redemption value | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock related to net share settlement | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Stock compensation expense | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||
| Accretion to redemption value | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of RSAs | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock related to net share settlement | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Stock compensation expense | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||
6
CS DISCO, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flow from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to cash used in operations: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation | |||||||||||
| Charge to allowance for credit losses | |||||||||||
| Loss (Gain) on disposal of long-lived assets | ( | ||||||||||
| Unoccupied lease charges | |||||||||||
| Non-cash operating lease costs | |||||||||||
| Non-cash interest | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Other current assets | ( | ||||||||||
| Other long-term assets | ( | ||||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other | ( | ||||||||||
| Deferred revenue | ( | ||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Other liabilities | ( | ||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flow from investing activities: | |||||||||||
| Purchases of property, equipment and capitalized internal-use software development costs | ( | ( | |||||||||
| Cash paid for acquisitions | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flow from financing activities: | |||||||||||
| Proceeds from public offering, net of underwriting discounts and commissions and other offering costs | ( | ( | |||||||||
| Proceeds from exercise of stock options | |||||||||||
| Repurchase of common stock related to net share settlement | ( | ( | |||||||||
| Principal payments on finance lease obligations | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Net decrease in cash and cash equivalents: | ( | ( | |||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental disclosure: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for taxes | $ | $ | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Accretion of preferred stock to redemption value | $ | $ | |||||||||
| Property and equipment included in accounts payable and accrued liabilities | $ | $ | |||||||||
| Costs related to initial public offering included in accounts payable and accrued liabilities | $ | $ | |||||||||
| Acquisition holdback | $ | $ | |||||||||
| Contingent consideration related to acquisition | $ | $ | |||||||||
7
CS DISCO, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
1. Organization and Nature of Operations
Overview
CS Disco, Inc. (the “Company” or “DISCO”), has built a cloud-native, AI-powered software platform that enterprises, law firms, legal services providers, and governments use for ediscovery, legal document review, and case management in a wide variety of legal matters, ranging from litigation to investigations to compliance to diligence. The Company incorporated as a Delaware corporation on December 2, 2013. The Company’s headquarters are located in Austin, Texas.
2. Summary of Significant Accounting Policies
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, which allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. The Company has irrevocably opted not to use the extended transition period for complying with any new or revised financial accounting standards, and as such, the Company is required to adopt new or revised standards at the same time as other public companies.
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (“GAAP”) for interim financial information. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2021, and related disclosures, have been derived from the audited consolidated financial statements at that date but do not include all of the information required by GAAP for complete consolidated financial statements.
Unaudited Interim Condensed Consolidated Financial Statements
The unaudited interim condensed consolidated financial statements of the Company are presented in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and do not include all disclosures normally required in annual consolidated financial statements prepared in accordance with U.S. GAAP. In management’s opinion, the unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position, its results of operations, statements of changes in redeemable convertible preferred stock and stockholders equity (deficit) and cash flows for the interim periods presented. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year or any other future interim or annual period. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on February 25, 2022, as amended on April 29, 2022.
Risks and Uncertainties
The ongoing global COVID-19 pandemic has impacted many operational aspects of the Company’s business and may continue to do so in the future. Additionally, Russia’s military operations in Ukraine have not had a material impact on the Company’s operations, but could do so in the future. The Company assessed the impact these events had on its results of operations, including, but not limited to an assessment of its allowance for credit losses, the carrying value of other long-lived assets, and the impact to revenue recognition and cost of revenue. While these events have not had a material adverse impact on
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the Company’s financial operations to date, the future impacts are largely unknown. The Company will continue to actively monitor the impact that these events have on the results of the Company’s business operations, and may make decisions required by federal, state or local authorities, or that are determined to be in the best interests of the Company’s employees, customers, partners, and suppliers. As a result, the Company’s estimates and judgments may change materially as new events occur or additional information becomes available to them.
Net Loss Per Share Attributable to Common Stockholders
Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. The Company had six series of redeemable convertible preferred stock. Upon closing of the Company’s IPO, the outstanding redeemable convertible preferred stock was automatically converted into 35,793,483 shares of common stock. All series of the Company’s redeemable convertible preferred stock were considered to be participating securities because all holders were entitled to receive a non-cumulative dividend on a pari passu basis in the event that a dividend is paid on the common stock. The holders of the redeemable convertible preferred stock did not have a contractual obligation to share in the Company’s losses. As such, the Company’s net losses were not allocated to these participating securities.
Under the two-class method, basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period.
Accounts Receivable
Accounts receivable are recorded and carried at the original invoiced amount less an allowance for credit losses. The Company determines its trade accounts receivable allowances in line with (Topic 326): Measurement of Credit Losses on Financial Instruments (“Topic 326”), based upon the assessment of various factors, such as: historical experience, credit quality of its customers, geographic related risks, economic conditions, and other factors that may affect a customer’s ability to pay. Increases and decreases in the allowance for credit losses are included as a component of general and administrative expense in the condensed consolidated statements of operations and comprehensive loss. The Company does not have any off-balance sheet credit exposure related to its customers.
Due to the short-term nature of the Company’s receivables, the estimate of the amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. The Company has provisioned $0.2 million and $0.4 million for expected losses for the three and six months ended June 30, 2022 and $0.4
9
million and $0.6 million has been written off and charged against the allowance for the three and six months ended June 30, 2022. Recoveries made by the Company were nominal for the three months ended June 30, 2022 and were $0.1 million for the six months ended June 30, 2022. The allowance for credit losses related to accounts receivable was $0.9 million and $1.2 million as of June 30, 2022 and December 31, 2021, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and trade accounts receivable. The Company maintains its cash and cash equivalent balances in highly rated financial institutions, which at times may exceed federally insured limits or be held in foreign jurisdictions. The Company has not experienced any loss relating to cash and cash equivalents in these accounts. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral.
Fair Value of Financial Instruments
The Company groups its assets and liabilities measured at fair value in a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets, with valuations obtained from readily available pricing sources for market transactions involving identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The level of the fair value hierarchy in which the fair value measurement falls is determined by the lowest level input that is significant to the fair value measurement.
The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses are considered to approximate their respective fair values due to the short-term nature of such financial instruments. Cash equivalents, primarily consisting of investments in money market funds, are measured at fair value on a recurring basis, and are categorized as Level 1 based on quoted prices in active markets. The carrying value approximates the fair value for these assets and liabilities at June 30, 2022 and December 31, 2021.
| Furniture and fixtures | |||||
| Leasehold improvements | Shorter of lease term or | ||||
| Computer equipment | |||||
The Company periodically reviews the estimated useful lives of property and equipment and any changes to the estimated useful lives are recorded prospectively from the date of the change.
When property is retired or disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gains or losses are reflected in the condensed consolidated statements of operations and comprehensive loss in
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Capitalized Internal-Use Software Development Costs
Costs related to software acquired, developed, or modified solely to meet the Company’s internal requirements, with no plans to market such software at the time of development, are capitalized. Costs incurred during the preliminary planning and evaluation stage of the project and during the post implementation operational stage are expensed as incurred. The Company capitalizes qualifying internal-use software development costs that are incurred during the application development stage. Capitalization of costs begins when two criteria are met: (i) the preliminary project stage is completed and (ii) it is probable that the software will be completed and used for its intended function. Capitalization ceases when the software is substantially complete and ready for its intended use, including the completion of all significant testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Costs incurred for maintenance, minor upgrades and enhancements are expensed. Costs related to preliminary project activities and post-implementation operating activities are expensed as incurred.
Capitalized costs are included in property and equipment on the condensed consolidated balance sheets. These costs are amortized over the estimated useful life of the software, generally four years , on a straight-line basis. Management evaluates the useful life of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. The amortization of costs related to the platform applications is included in cost of revenue.
Purchase Price Allocation, Intangible Assets, and Goodwill
The purchase price allocation for business combinations and asset acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. The Company determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If this threshold is met, the single asset or group of assets, as applicable, is not a business. If it is not met, the Company determines whether the single asset or group of assets, as applicable, meets the definition of a business.
In connection with the Company’s acquisitions discussed in Note 9, “Acquisitions, Intangible Assets, and Goodwill,” the Company recorded certain intangible assets, including developed technology and customer relationships. Amounts allocated to the acquired intangible assets are being amortized on a straight-line basis over the estimated useful lives. The Company periodically reviews the estimated useful lives and fair values of its identifiable intangible assets, taking into consideration any events or circumstances which might result in a diminished fair value or revised useful life.
The excess purchase price over the fair value of assets acquired is recorded as goodwill. The Company tests goodwill for impairment annually during the fourth quarter, or whenever events or changes in circumstances indicate an impairment may have occurred. Goodwill impairment is recognized when the quantitative assessment results in the carrying value of the reporting unit exceeding its fair value, in which case an impairment charge is recorded to goodwill to the extent the carrying value exceeds the fair value, limited to the amount of goodwill. The Company did not recognize any impairment of goodwill for all periods presented.
Debt Issuance Costs
The Company records underwriting, legal, and other direct costs incurred related to the issuance of revolving line of credit within other current assets and amortizes these costs to interest expense over the term of the related debt on a straight-line basis, which approximates the effective interest rate method. Amortization of debt issuance costs was nominal for the six months ended June 30, 2021. Upon the extinguishment of the related debt in November 2021, all unamortized capitalized deferred financing costs were recorded to interest expense. There was no amortization expense related to debt issuance costs for the six months ended June 30, 2022.
Leases
The Company determines if an arrangement is or contains a lease at contract inception. The Company presents the operating leases in long-term assets and current and long-term liabilities. Finance lease assets are included in property and equipment, net, and finance lease liabilities are presented in current and long-term liabilities in the accompanying condensed consolidated balance sheets.
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Revenue Recognition
Refer to Note 3, “Revenue Recognition” for the Company’s revenue recognition policy.
Cost of Revenue
Cost of revenue consists primarily of third-party cloud infrastructure expenses incurred in connection with the Company’s customers’ use of its solutions. Cost of revenue also includes outsourced staffing costs, amortization of internal-use software and personnel costs from employees involved in the delivery of the Company’s solutions. Personnel costs include salaries, benefits, bonuses, stock-based compensation and allocated overhead costs.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related costs directly associated with the Company’s sales and marketing staff, including salaries, benefits, bonuses, commissions, stock-based compensation and allocated overhead costs. Sales and marketing expenses also include advertising costs and other expenses associated with the Company’s marketing and business development programs. In addition, sales and marketing expenses are comprised of travel-related expenses, software services dedicated for use by the Company’s sales and marketing organizations and outside services
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General and Administrative
General and administrative expenses consist of personnel-related costs associated with the Company’s 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, professional services fees, software services dedicated for use by the Company’s general and administrative functions, insurance, allowance for credit losses and other corporate expenses.
Sales Taxes
The Company recognizes sales and other taxes collected from customers and subsequently remits to government authorities. The Company relieves the sales tax payable balances from the condensed consolidated balance sheets as cash is collected from the customer and the taxes are remitted to the appropriate tax authority.
Contingent Consideration
On February 22, 2022, the Company acquired legal workflow solutions from Congruity360, LLC (“Congruity”). As part of the acquisition, the Company entered into a referral agreement in which the Company could be obligated to pay Congruity an additional $2.0 million in the aggregate over the next 2.51 years. As of June 30, 2022, the estimated fair value of the contingent consideration utilizing a probability weighted scenario analysis model under the scenario based method was $0.6 million. The short-term and long-term portions of this amount are recorded in accrued expenses and other liabilities, respectively, on the condensed consolidated balance sheet.
The fair value of the contingent consideration was determined using Level 3 inputs due to estimates for the number and size of referrals, the likelihood of shortfall and any credits that will offset the liability. These estimated inputs reflect management’s best estimate of future results, but these estimates are not observable inputs by a market participant and contain a high degree of uncertainty. The Company could experience significant fluctuations in the fair value of contingent consideration based on actual results. The fair value of this contingent consideration will continue to be revalued on a quarterly basis. Changes in the fair value of the contingent consideration will be recorded as operating expense in the condensed consolidated statements of operations and comprehensive loss.
Income Taxes
The Company accounts for income taxes in accordance with the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates that are expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. All deferred tax assets and liabilities are classified as non-current within the accompanying condensed consolidated balance sheets.
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3. Revenue Recognition
Revenue is recognized, in an amount that reflects the consideration the Company expects to be entitled to over the term of the agreement, when control of the Company’s solutions are transferred to customers.
The Company recognizes revenue through the following five-step framework in accordance with ASC Topic 606, Revenue from Contracts with Customers:
(1) Identification of the contract, or contracts, with the customer;
(2) Identification of performance obligations in the contract;
(3) Determination of the transaction price;
(4) Allocation of the transaction price to the performance obligations in the contract;
(5) Recognition of revenue when, or as, the Company satisfies a performance obligation.
A performance obligation is a promise in a contract to transfer a distinct solution to the customer. The Company identifies performance obligations in its contracts with customers, which primarily include usage-based and subscription solutions. Usage-based solutions include fees based on usage of the Company’s platform or professional services, incurred on a time and materials basis, while subscription solutions represent the purchase of a committed data volume on the Company’s platform over a period of time. The transaction price is determined based on the amount which the Company expects to be entitled to in exchange for providing the promised services to the customer. For contracts that include multiple performance obligations, the transaction price in the contract is allocated to each distinct performance obligation on a relative standalone selling price basis. Revenue is recognized over time as performance obligations are satisfied. Variable consideration is evaluated on a contract-by-contract basis, and a constraint is applied using the facts and circumstances of the contract when
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applicable. On a limited basis, the Company enters into contracts whereby the consideration payable is contingent upon the conclusion of the legal matter. The Company does not recognize the revenue related to these contracts until the legal matter is resolved. Such amounts recognized have been immaterial to date.
The Company’s software contracts do not allow the customer to take possession of the software supporting the cloud-based solution. Customers are not entitled to any refunds. The Company generally invoices its customers monthly, quarterly or annually in advance and recognizes revenue ratably over the life of the contract.
The Company’s arrangements do not contain general rights of return. However, credits may be issued on a case-by-case basis. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue depending on whether the revenue recognition criteria have been met.
Nature of Solutions
The Company’s revenue-generating activities directly relate to the sale and support of its legal solution within a single operating segment. The Company disaggregates revenue from contracts with customers based on how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The Company has two primary types of contractual arrangements: usage-based and subscription solutions. Usage-based revenue is generated from solutions that are typically billed on a monthly basis and can be canceled with one month’s notice or are incurred on a time and materials basis. Subscription revenue is derived from contracts where customers are contractually committed to a fixed data volume over a period of time. Usage amounts above the fixed data volume are considered usage-based revenue. Subscription arrangements are billed in advance, typically on a monthly, quarterly or annual basis.
In the three months ended June 30, 2022 and 2021, usage-based revenue represented 89 89 % and 88 % of total revenue, respectively. In the three months ended June 30, 2022 and 2021, subscription revenue fees represented 11 11 % and 12 % of total revenue, respectively.
No significant judgments are required in determining whether services are considered distinct performance obligations and should be accounted for separately versus together, or to determine the stand-alone selling price (“SSP”).
Deferred Revenue
Deferred revenue primarily consists of amounts that have been billed to or received from customers in advance of performing the associated services. Of the $2.2 million and $1.6 million of deferred revenue balance as of December 31, 2021 and 2020 respectively, the Company recognized $1.8 million and $1.4 million as revenue during the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022 and December 31, 2021 the Company recorded $2.7 million and $2.2 million of current deferred revenue, respectively. The Company recorded $0.1 million of non-current deferred revenue as of June 30, 2022 and no non-current deferred revenue as of December 31, 2021.
Contract Assets
Contract assets represent revenue recognized for contracts that have not yet been invoiced to customers, but are billed in arrears and for which the Company has an unconditional right to payment. Total contract assets were $2.6 million and $3.2 million as of June 30, 2022 and December 31, 2021, respectively, and were included within accounts receivable on the condensed consolidated balance sheets.
Remaining Performance Obligations
Remaining performance obligations (“RPO”) represent the amount of contracted future revenue that has not yet been recognized, including both deferred revenue and non-cancelable contracted amounts that will be invoiced and recognized as revenue in future periods. RPO exclude performance obligations from certain time and materials contracts that are billed in arrears. RPO are not necessarily indicative of future revenue growth because they do not account for consumption in excess of contracted capacity.
As of June 30, 2022, the Company expects to recognize approximately $22.1 million of revenue from remaining performance obligations. The Company expects to recognize revenue of approximately $12.5 million from these remaining performance obligations over the next 12 months, with the remaining balance recognized thereafter.
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Incremental Contract Costs
Incremental costs to obtain or fulfill a contract are recognized as an asset if the expected benefit is expected to be longer than one year. These assets are amortized over the expected period of benefit. For the three and six months ended June 30, 2022 and 2021, the Company identified no material incremental costs to obtain or fulfill a contract, primarily based on the nature and terms of the Company’s contracts, as well as the expected period of benefit.
4. Property and Equipment
Property and equipment consist of the following (in thousands):
| June 30, 2022 | December 31, 2021 | ||||||||||
| Computer equipment | $ | $ | |||||||||
| Capitalized internal-use software | |||||||||||
| Leasehold improvements | |||||||||||
| Furniture | |||||||||||
| Total property and equipment | |||||||||||
| Less: accumulated depreciation and amortization | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
As discussed in Note 2, “Summary of Significant Accounting Policies - Capitalized Internal-Use Software Development Costs”, the Company capitalizes costs related to the development of computer software for internal use and is included in capitalized software development costs within property and equipment, net.
5. Leases
The Company leases office space under non-cancellable operating leases for its corporate headquarters in Austin, Texas and its office space in New York, New York. Pursuant to the corporate headquarters lease in Austin, the initial term expires on July 31, 2028, and pursuant to the lease in New York, the initial term expires on May 15, 2023, with an option to extend the lease for an additional six months . The optional period for the New York lease has been included in the lease term in the determination of the operating lease right-of-use assets or operating lease liabilities associated with the lease as the Company considers it reasonably certain it will exercise the option. As of June 30, 2022, the Company had no leased properties classified as “short-term” leases. For each lease, the Company recognizes a right-of-use-asset and lease liability in accordance with Topic 842. The asset and liability are then amortized as payments are made.
During the three and six months ended June 30, 2022, the Company incurred $0.8 not
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The cost of leases recorded in the accompanying consolidated statements of operations and comprehensive loss were as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Operating lease expense | $ | $ | $ | $ | ||||||||||||||||||||||
Finance lease expense | ||||||||||||||||||||||||||
| Amortization expense | ||||||||||||||||||||||||||
Interest on lease liability | ||||||||||||||||||||||||||
| Short-term lease expense | ||||||||||||||||||||||||||
| Lease expense | ||||||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
The Company’s operating and finance right-of-use assets and lease liabilities are as follows (in thousands):
| Leases | Classification | June 30, 2022 | December 31, 2021 | |||||||||||||||||
Assets | ||||||||||||||||||||
Operating lease assets | Operating right-of-use asset, net of accumulated amortization | $ | $ | |||||||||||||||||
Finance lease assets | ||||||||||||||||||||
Total leased assets | $ | $ | ||||||||||||||||||
Liabilities | ||||||||||||||||||||
Current | ||||||||||||||||||||
Operating leases | Operating lease liability, current | $ | $ | |||||||||||||||||
Finance leases | Finance lease liability, current | |||||||||||||||||||
Non-current | ||||||||||||||||||||
Operating leases | Operating lease liability, non-current | |||||||||||||||||||
Finance leases | Finance lease liability, non-current | |||||||||||||||||||
Total lease liabilities | $ | $ | ||||||||||||||||||
The weighted average remaining lease term and discount rate as of June 30, 2022 were as follows:
Weighted Average Remaining Lease Term | |||||
Operating leases | |||||
Finance leases | |||||
Weighted Average Discount Rate | |||||
Operating leases | % | ||||
Finance leases | % | ||||
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Future minimum payments required under operating leases, by year and in aggregate, that have initial or remaining non-cancellable lease terms in excess of one year, are as follows (in thousands):
| As of June 30, 2022 | |||||||||||
| Operating Leases | Finance Leases | ||||||||||
2022 (remaining six months) | $ | $ | |||||||||
2023 | |||||||||||
2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
Thereafter | |||||||||||
| Total | $ | $ | |||||||||
As of June 30, 2022, the Company had no additional operating or finance leases with future commencement dates.
6. Operating Segment and Geographic Information
The Company’s Chief Executive Officer is the chief operating decision maker, who reviews the Company’s financial information presented on a consolidated basis for purposes of allocating resources and evaluating the Company’s financial performance. Accordingly, the Company has determined that it operates in a single reporting segment.
The Company determines the location of revenue using the billing address of each customer. The following table sets forth revenue by geographic area (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| All other countries | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
Long-lived assets outside of the United States are not significant.
7. Debt and Related Warrants
In July 2015, the Company entered into a revolving debt facility (“Loan and Security Agreement”). The Loan and Security Agreement was subsequently amended and restated, the First Amended and Restated Loan and Security Agreement, in November 2018 to increase the available borrowings to $18.0 million and extend the maturity date to April 2021.
In December 2020, the Company entered into the Second Amended and Restated Loan and Security Agreement, which provided a $40.0 million revolving credit facility with a maturity date of November 30, 2023. The Company’s obligations under the agreement contained certain customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures and affiliate transactions. The agreement also contained a liquidity covenant equal to the greater of (i) $5.0 million or (ii) total six-month adjusted EBITDA burn when the sum of the outstanding principal amounts are equal or in excess of $18.0 million. The revolving credit facility bore interest on outstanding borrowings as the sum of the Daily Adjusting LIBOR Rate for such day plus 2.50 % plus an applicable margin of 0.25 % per annum.
Additionally, the revolving debt facility included an unused facility fee equal to 0.25 % per annum of the difference between the total revolving credit facility and the average outstanding principal balance of the obligations under the revolving credit facility during each quarter.
Substantially all the Company’s assets were pledged as collateral for these loans. The Company was required to meet certain nonfinancial covenants.
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In connection with its amended and restated loan and security agreements, at various times, the Company granted warrants to purchase 49,869 shares of the Company’s common stock at exercise prices ranging from $0.525 per share to $10.80 per share. The warrants were exercisable for 10 years. At the time of issuance, the Company determined the estimated fair value of the warrants. As the warrants represent a freestanding equity instrument, the Company recorded the fair value of the warrants in additional paid-in capital. In October 2021, all outstanding warrants were exercised for a total of $0.1 million.
In November 2021, the Company extinguished the Loan and Security Agreement. The Company did not incur any early termination fees in connection with the termination of the agreement. The Company has no outstanding debt as of June 30, 2022.
The Company incurred nominal aggregate debt issuance costs in connection with its loan and security agreements. These costs were being amortized to non-cash interest expense over the terms of the related indebtedness using the straight-line method which approximates the effective interest method. In connection with the extinguishment of the Loan and Security Agreement in November 2021, the Company recognized the remaining debt issuance costs as interest expense. There was no amortization expense related to debt issuance costs for the six months ended June 30, 2022.
8. Commitments and Contingencies
Leases and Other Commitments
The Company leases office facilities under non-cancellable operating leases as well as furniture under a non-cancellable finance lease. During the three and six months ended June 30, 2022, the Company entered into two 5.86 years. See Note 5, “Leases,” to these condensed consolidated financial statements for additional detail on the Company’s operating and finance lease commitments arising from these new agreements. There were no material changes outside the ordinary course of business to the Company’s contractual obligations and commitments.
Litigation
9. Acquisitions, Intangible Assets and Goodwill
Congruity Acquisition
On February 22, 2022, the Company entered into an Asset Purchase Agreement whereby the Company acquired legal workflow solutions from Congruity in exchange for approximately $6.1 million of cash, including a holdback of $0.8 million to be paid in fiscal year 2023, and up to $2.0 million of contingent consideration. As of June 30, 2022, the estimated fair value of the contingent consideration was $0.6 million. The legal workflow solutions expanded the Company’s offerings to provide a modern, digital solution for legal hold obligations and legal request compliance. The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The resulting goodwill will be deductible for income tax purposes. Pro forma results of operations for this acquisition have not been presented because the acquisition was not material to the condensed consolidated results of operations and comprehensive loss. Transaction costs amounted to approximately $0.1 million and were expensed as incurred.
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The aggregate purchase consideration and estimated fair values of the assets acquired and liabilities assumed at the date of acquisition were as follows (in thousands):
| Fair Value | |||||
| Fair value of net assets acquired: | |||||
| Net tangible assets (liabilities) | $ | ( | |||
| Developed technology | |||||
| Customer relationships | |||||
| Goodwill | |||||
| Total fair value of net assets acquired | $ | ||||
The fair values of assets acquired and liabilities assumed, including valuations of intangible assets, may change as additional information is received during the measurement period. The measurement period will end no later than one year from the acquisition date.
Intangible Assets
Intangible assets, net consisted of the following (in thousands):
| June 30, 2022 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Amortization Period | ||||||||||||||||||||
| Developed technology | $ | $ | ( | $ | |||||||||||||||||||
| Customer relationships | ( | ||||||||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||||||||
Intangible amortization expense was $0.1
As of June 30, 2022, future amortization expense by year is expected to be as follows (in thousands):
| Amount | |||||
| Remainder of 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total | $ | ||||
Goodwill
The changes in the carrying amount of goodwill during the six months ended June 30, 2022 were as follows (in thousands):
| Amount | |||||
| Balance as of December 31, 2021 | $ | ||||
| 2022 acquisition | |||||
| Total | $ | ||||
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10. Stock-Based Compensation
Equity Incentive Plans
On December 17, 2013, the Company adopted the Long-Term Incentive Plan (“2013 Plan”). The 2013 Plan was terminated in July 2021 in connection with the adoption of the 2021 Equity Incentive Plan (“2021 Plan”), which became effective on July 20, 2021, and no further awards will be granted under the 2013 Plan. The 2021 Plan provides for the grant of incentive stock options (“ISOs”), within the meaning of Section 422 of the Code to employees, including employees of any parent or subsidiary, and for the grant of nonstatutory stock options (“NSOs”), stock appreciation rights, restricted stock awards (“RSAs”), performance-based restricted stock units (“PSUs”), restricted stock units (“RSUs”) and other forms of awards to the Company’s employees, directors and consultants, including employees and consultants of the Company’s affiliates. As of June 30, 2022, 6.7 million shares remained available for future issuance under the 2021 Plan. The Company recognized total stock-based compensation cost related to equity incentive awards of $8.7 million and $1.5 million for the six months ended June 30, 2022 and 2021, respectively.
Stock Options
Options under the 2021 Plan are granted at the estimated fair value of the shares on the date of grant. The maximum term of options granted under the plan is 10 years from the date of grant. Options normally vest according to a four-year vesting schedule, with 25 % of the shares vesting on the one-year anniversary and equal monthly vesting installments thereafter.
The following table summarizes the stock option activity under the 2013 Plan and 2021 Plan (in thousands except for per share amounts and years):
| Number of shares | Weighted average exercise price per share | Weighted average remaining contractual life (years) | Aggregate intrinsic value | ||||||||||||||||||||
Options outstanding as of December 31, 2021 | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Forfeited and cancelled | ( | ||||||||||||||||||||||
Options outstanding as of June 30, 2022 | $ | $ | |||||||||||||||||||||
Options vested and exercisable at June 30, 2022 | $ | $ | |||||||||||||||||||||
Aggregate intrinsic value represents the difference between the Company’s estimated fair value of its common stock and the exercise price of outstanding options. The aggregate intrinsic value of stock options exercised was $16.0 million and $8.1 million during the six months ended June 30, 2022 and 2021, respectively.
As of June 30, 2022, unrecognized stock-based compensation cost related to outstanding unvested stock options that are expected to vest was $2.2 million, which is expected to be recognized over a weighted average period of 1.95 years.
Restricted Stock Awards
The fair value of RSAs is determined using the fair value of the Company’s common stock on the date of grant. No RSAs were granted during the six months ended June 30, 2022. During the six months ended June 30, 2021, the Company granted 0.2 million RSAs. During the six months ended June 30, 2022 and 2021, 50,000 and 26,336 RSAs vested and were released from the Company’s right to repurchase, respectively, and no
As of June 30, 2022, the Company had $3.1 million of unrecognized stock-based compensation related to RSAs with a weighted average remaining requisite service period of 3.00 years.
Restricted Stock Units
The fair value of RSUs is determined using the closing market price of the Company’s common stock on the date of grant. The RSUs vest over the requisite service period, generally four years , subject to the continuous service of the individual.
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In March 2022, the Company granted 0.6 million PSUs. The PSUs vest on the satisfaction of both service-based and performance-based conditions. The PSUs have a one-year performance period based on a revenue goal for fiscal year 2022 that determines the total vestable shares. After the performance period, one-third of the vestable shares will vest, and the remaining vestable shares will vest over a two-year service period. As of June 30, 2022, none of the PSUs have vested or were released.
The following table summarizes the RSU activity under the 2021 Plan, including the PSUs (in thousands except for per share amounts):
| Number of shares | Weighted average fair value | Aggregate intrinsic value | |||||||||||||||
Unvested and outstanding as of December 31, 2021 | $ | $ | |||||||||||||||
| Granted | |||||||||||||||||
| Vested | ( | ||||||||||||||||
| Forfeited and cancelled | ( | ||||||||||||||||
Unvested and outstanding as of June 30, 2022 | $ | $ | |||||||||||||||
As of June 30, 2022, there was an estimated $50.5 million of total unrecognized stock-based compensation costs related to RSUs and PSUs. These costs will be recognized over a weighted average period of 3.26 years.
CEO Performance Award
On May 20, 2022, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) approved a grant to Kiwi Camara, the Company’s Co-Founder and Chief Executive Officer, for a 10-year CEO performance award (the “CEO Performance Award”), the vesting of which is tied solely to achieving stock price milestones (“Milestone Prices”), subject to the approval of the Company’s stockholders at the 2022 Annual Meeting of Stockholders. The CEO Performance Award consists of a 10-year option to purchase an aggregate of 4,366,966 shares of the Company’s common stock, representing approximately 7.5 % of the total outstanding shares of the Company’s common stock as of the grant date, and vests in six tranches. Each of the six tranches vests only if the Milestone Prices are met. The Milestone Prices are met when the average VWAP for any 90 -calendar day period during the performance period is equal to or greater than such Milestone Price. “VWAP” means the quotient of (i) the sum of the Daily Total Dollar Volume for the designated period of trading days divided by (ii) the sum of the total trading volume of the Company’s common stock as reported on the primary U.S. exchange on which the Company’s common stock trades for the designated period of trading days, with trading days being the days on which the primary U.S. exchange on which the Company’s common stock trades is open for trading. “Daily Total Dollar Volume” means the product of (i) the closing sales price of the Company’s common stock on a given trading day multiplied by (ii) the corresponding day’s trading volume of the Company’s common stock, in each case as reported on the primary U.S. exchange on which the Company’s common stock trades. For the first tranche to vest, the Company must achieve a Milestone Price of $150 per share, and the next five tranches will only vest if the Company achieves higher Milestone Prices that increase in $150 per share increments - up to a final Milestone Price of $900 per share. The exercise price per share subject to the CEO Performance Award is $32.00 , which is the greater of (i) the IPO Price ($32.00 per share) and (ii) the closing sales price of the Company’s common stock on the grant date. The grant date for accounting purposes of May 25, 2022 was the date on which two full trading sessions elapsed after the filing of the preliminary proxy statement with the SEC. The CEO Performance Award was approved by the Company’s stockholders at the Annual Meeting held on July 12, 2022.
Recognition of stock-based compensation expense of all the tranches commenced on the date of grant and is recognized ratably over the expected vesting period of each respective tranche. If the related Milestone Price is achieved earlier than its expected achievement period, then the stock-based compensation expense for that vesting tranche will be accelerated and recorded in the period in which the associated Milestone Price is achieved. The Milestone Price requirement is considered a market condition under Topic 718. The Company estimated the grant date fair value of the CEO Performance Award using Monte Carlo simulations based on the key assumptions for estimating the fair value of the award at the date of grant including volatility of the Company’s common stock price, post-vesting exercise behavior, and the derived service period.
As of June 30, 2022, no Milestone Prices have been achieved. Total stock-based compensation recorded as operating expense for the CEO Performance Award was $0.7 million for the six months ended June 30, 2022. As of June 30, 2022, the Company had approximately $43.7 million of total unrecognized stock-based compensation costs remaining under the CEO Performance Award, which will be recognized over a weighted average period of 6.37 years.
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Employee Stock Purchase Plan
In June 2022, the Compensation Committee approved the terms of the Company’s offerings under its 2021 Employee Stock Purchase Plan (“ESPP”). Under the terms of the offering, the Company’s employees can elect to have up to 15 % of their annual compensation, up to a maximum of $25,000 per year, withheld to purchase shares of the Company’s common stock for a purchase price equal to 85 % of the lesser of the closing fair market value per share of the Company’s common stock on (i) the commencement date of the six-month offering period, or (ii) the respective purchase date. The initial offering period commenced on August 1, 2022 and will end on January 31, 2023 with subsequent six-month offering periods commencing on February 1st and August 1st of each year.
11. Income Taxes
12. Defined Contribution Plan
13. Net Loss Per Share Attributable to Common Stockholders
The following table presents calculations for basic and diluted net loss per share (in thousands, except per share amounts):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Less accretion of redeemable convertible preferred stock | ( | ( | |||||||||||||||||||||
| Loss applicable to common stockholders basic and diluted | ( | ( | ( | ( | |||||||||||||||||||
| Weighted average shares used in computing net loss per share attributable to common shareholders, basic and diluted | |||||||||||||||||||||||
| Net loss per share attributable to ordinary shareholders, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
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The following outstanding shares of common stock equivalents as of the periods presented were excluded from the computation of diluted net loss per share for the periods presented because the impact of including them would have been anti-dilutive (in thousands):
As of June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Redeemable convertible preferred stock, as converted | |||||||||||
| Stock options | |||||||||||
| Unvested restricted stock awards | |||||||||||
| Unvested restricted stock units | |||||||||||
| Common stock warrants | |||||||||||
| Total | |||||||||||
14. Related-Party Transactions
15. Subsequent Events
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 25, 2022, as amended on April 29, 2022. This discussion, particularly information with respect to our financial results of operations or financial condition, business strategy, plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading “Risk Factors” in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview
DISCO provides 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. 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.
We generate substantially all of our revenue from 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 11% of our revenue for the three and six months ended June 30, 2022. 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.
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.
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.
As of June 30, 2022, we had $228.2 million of cash and cash equivalents. We generated revenue of $33.7 million and $29.5 million in the three months ended June 30, 2022 and 2021, respectively, representing a period-over-period growth of
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14%. We generated revenue of $68.2 million and $50.7 million in the six months ended June 30, 2022 and 2021, respectively, representing a period-over-period growth of 35%. Our net loss was $20.2 million and $3.1 million for the three months ended June 30, 2022 and 2021, respectively, and $32.0 million and $6.0 million for the six months ended June 30, 2022 and 2021, respectively. We generated Adjusted EBITDA of $(12.4) million and $(1.6) million for the three months ended June 30, 2022 and 2021, respectively, and $(20.2) million and $(3.5) million for the six months ended June 30, 2022 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.
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, including variants of COVID-19 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. 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, including variants 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. In June 2022, we opened our new headquarters to all employees. 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 and COVID-19 variants 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, including variants of COVID-19, 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 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
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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. Our ability to attract new customers will depend on a number of factors, including the effectiveness and pricing of our products, the offerings of our competitors and the effectiveness of our sales and marketing efforts. We will need to dedicate significant resources to further develop the market for our 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 current 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.
Expand Our Sales Coverage and Establish a Digital Sales Channel
We intend to continue to increase our sales force 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 the three and six months ended June 30, 2022, 8% and 6% of our revenue was generated by customers outside of the United States, respectively. 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 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.
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Pursue Strategic Acquisitions and Strategic Investments
In February 2022, we acquired legal workflow solutions from Congruity360, LLC (“Congruity”) in a purchase that expanded our offerings to provide a modern digital solution for legal hold obligations and legal request compliance. We intend to continue 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 typically billed monthly based on their usage of our offerings. Subscription revenue is derived from contracts where customers are contractually committed to a minimum data volume over a period of time. Revenue received from usage amounts above the fixed data volume in our subscription contracts is considered usage-based revenue.
In the three months ended June 30, 2022 and 2021, usage-based revenue represented 89% of total revenue. In the six months ended June 30, 2022 and 2021, usage-based revenue represented 89% and 88% of total revenue, respectively. In the three months ended June 30, 2022 and 2021, subscription revenue fees represented 11% of the total revenue. In the six months ended June 30, 2022 and 2021, subscription revenue fees represented 11% and 12% 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, stock-based compensation expenses 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, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation expenses and sales commissions. Operating expenses also include overhead costs for facilities and shared IT related expenses, including depreciation expense. During the six months ended June 30, 2021, certain operating expenses decreased as a result of the COVID-19 pandemic. Certain expenses impacted by COVID-19 resumed during the second half of 2021 and the six months ended June 30, 2022, although the magnitude of these expenses did not reach pre-pandemic levels.
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. 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. Our research and development expenses may fluctuate 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.
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Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related costs directly associated with our sales and marketing staff, including salaries, benefits, bonuses, commissions, stock-based compensation and allocated overhead costs. Sales and marketing expenses also include advertising costs and other expenses associated with our marketing and business development programs. In addition, sales and marketing expenses 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 six months ended June 30, 2021 due to the COVID-19 pandemic and resumed in second half of 2021 and the six months ended June 30, 2022, although the magnitude of these expenses did not reach pre-pandemic levels. 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. Our sales and marketing expenses may fluctuate as a percentage of our revenue over time.
General and Administrative
General and administrative expenses consist of personnel-related costs associated with our finance, legal, human resources and administrative personnel, including salaries, benefits, bonuses, stock-based compensation and allocated overhead costs. General and administrative expenses also include external legal, accounting and other professional services fees, software services dedicated for use by our general and administrative functions, insurance and other corporate expenses.
In the six months ended June 30, 2022, we incurred additional expenses as a result of operating as a public company in comparison to the six months ended June 30, 2021, 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 but may fluctuate as a percentage of total revenue from period to period.
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.
Income Tax Provision
Income tax provision consists primarily of income taxes related to foreign and state jurisdictions in which we conduct business. We maintain a valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred assets will be utilized.
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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.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Revenue | $ | 33,710 | $ | 29,547 | $ | 68,178 | $ | 50,678 | |||||||||||||||
Cost of revenue(1) | 8,489 | 8,695 | 17,458 | 14,483 | |||||||||||||||||||
| Gross profit | 25,221 | 20,852 | 50,720 | 36,195 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
Research and development(1) | 15,181 | 7,861 | 27,499 | 14,123 | |||||||||||||||||||
Sales and marketing(1) | 18,931 | 10,832 | 35,350 | 18,708 | |||||||||||||||||||
General and administrative(1) | 11,065 | 5,128 | 19,584 | 9,182 | |||||||||||||||||||
| Total operating expenses | 45,177 | 23,821 | 82,433 | 42,013 | |||||||||||||||||||
| Loss from operations | (19,956) | (2,969) | (31,713) | (5,818) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest and other income | 29 | 21 | 59 | 34 | |||||||||||||||||||
| Interest and other expense | (200) | (92) | (293) | (148) | |||||||||||||||||||
Total other income (expense) | (171) | (71) | (234) | (114) | |||||||||||||||||||
| Loss before income taxes | (20,127) | (3,040) | (31,947) | (5,932) | |||||||||||||||||||
| Income tax provision | (44) | (43) | (73) | (79) | |||||||||||||||||||
| Net loss | $ | (20,171) | $ | (3,083) | $ | (32,020) | $ | (6,011) | |||||||||||||||
| Accretion of redeemable convertible preferred stock | — | (25) | — | (51) | |||||||||||||||||||
| Net loss attributed to common stockholders | $ | (20,171) | $ | (3,108) | $ | (32,020) | $ | (6,062) | |||||||||||||||
_______________
(1)Includes stock-based compensation expense as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Cost of revenue | $ | 234 | $ | 10 | $ | 394 | $ | 18 | |||||||||||||||
| Research and development | 2,073 | 285 | 3,500 | 486 | |||||||||||||||||||
| Sales and marketing | 1,380 | 235 | 2,201 | 318 | |||||||||||||||||||
| General and administrative | 1,835 | 436 | 2,633 | 632 | |||||||||||||||||||
| Total | $ | 5,522 | $ | 966 | $ | 8,728 | $ | 1,454 | |||||||||||||||
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| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Condensed Consolidated Statement of Operations and Comprehensive Loss as a percentage of revenue:** | |||||||||||||||||||||||
| Revenue | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
| Cost of revenue | 25 | 29 | 26 | 29 | |||||||||||||||||||
| Gross profit | 75 | 71 | 74 | 71 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 45 | 27 | 40 | 28 | |||||||||||||||||||
| Sales and marketing | 56 | 37 | 52 | 37 | |||||||||||||||||||
| General and administrative | 33 | 17 | 29 | 18 | |||||||||||||||||||
| Total operating expenses | 134 | 81 | 121 | 83 | |||||||||||||||||||
| Loss from operations | (59) | (10) | (47) | (11) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest and other income | * | * | * | * | |||||||||||||||||||
| Interest and other expense | (1) | * | * | * | |||||||||||||||||||
| Total other income (expense) | (1) | * | * | * | |||||||||||||||||||
| Loss before income taxes | (60) | (10) | (47) | (12) | |||||||||||||||||||
Income tax provision | * | * | * | * | |||||||||||||||||||
| Net loss | (60) | % | (10) | % | (47) | % | (12) | % | |||||||||||||||
| Accretion of redeemable convertible preferred stock | — | * | — | * | |||||||||||||||||||
| Net loss attributed to common stockholders | (60) | % | (11) | % | (47) | % | (12) | % | |||||||||||||||
_______________
*Less than 0.5% of revenue.
**Columns may not add up to 100% due to rounding.
Comparison of the Three Months Ended June 30, 2022 and 2021
Revenue
| Three Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Revenue | $ | 33,710 | $ | 29,547 | $ | 4,163 | 14 | % | |||||||||||||||
Total revenue increased by $4.2 million, or 14%, for the three months ended June 30, 2022 compared to the same period in 2021. Revenue related to new customers added since June 30, 2021 contributed $5.4 million, which was offset by a $1.3 million decrease in revenue from customers that existed as of June 30, 2021. The change in revenue from existing customers was driven by decreases in usage of our solution by certain of our existing customers, including a customer that had a large matter that concluded in the latter half of 2021. When excluding the revenue attributable to this matter for the three months ended June 30, 2021, approximately 83% and 17% of the increase in revenue is related to new and existing customers, respectively.
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Cost of Revenue
| Three Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | 8,489 | $ | 8,695 | $ | (206) | (2) | % | |||||||||||||||
| Percentage of revenue | 25 | % | 29 | % | |||||||||||||||||||
Total cost of revenue decreased by $0.2 million, or 2%, for the three months ended June 30, 2022 compared to the same period in 2021. The decrease was primarily driven by a decrease in outsourced staffing vendors fees of $2.0 million. This decrease was partially offset by a $1.3 million increase in personnel costs, including stock-based compensation, as a result of increased headcount and a $0.1 million increase in costs for cloud hosting as a result of increased usage of our solution.
Operating Expenses
Research and Development
| Three Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 15,181 | $ | 7,861 | $ | 7,320 | 93 | % | |||||||||||||||
| Percentage of revenue | 45 | % | 27 | % | |||||||||||||||||||
Research and development expenses increased by $7.3 million, or 93%, for the three months ended June 30, 2022 compared to the same period in 2021. The increase was primarily due to an increase of $6.4 million in personnel costs, including stock-based compensation, as a result of increased headcount, additional software expense of $0.3 million related to the additional headcount, and a $0.5 million decrease in the capitalization of internal-use software.
Sales and Marketing
| Three Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Sales and marketing | $ | 18,931 | $ | 10,832 | $ | 8,099 | 75 | % | |||||||||||||||
| Percentage of revenue | 56 | % | 37 | % | |||||||||||||||||||
Sales and marketing expenses increased by $8.1 million, or 75%, for the three months ended June 30, 2022 compared to the same period in 2021. The increase was primarily related to an additional $6.0 million in personnel costs, including stock-based compensation, as a result of increased headcount and variable compensation for our sales personnel. Software expense also increased $0.2 million to support the additional headcount. Additionally, marketing expenses increased $0.7 million and professional services expense increased $0.6 million to support our continued growth. Travel and entertainment expenses also increased $0.6 million as in-person conferences and travel resumed.
General and Administrative
| Three Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| General and administrative | $ | 11,065 | $ | 5,128 | $ | 5,937 | 116 | % | |||||||||||||||
| Percentage of revenue | 33 | % | 17 | % | |||||||||||||||||||
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General and administrative expenses increased by $5.9 million, or 116%, for the three months ended June 30, 2022 compared to the same period in 2021. This increase was primarily attributable to a $2.9 million increase in personnel costs, including stock-based compensation, as a result of increased headcount and a $0.5 million increase in professional services related to additional compliance requirements of being a public company. Additionally, corporate insurance expense increased $1.1 million as a result of being a public company. We also incurred $0.9 million related to unoccupied lease charges and moving expenses when we opened our new headquarters in Austin, Texas. Travel and entertainment expenses also increased $0.1 million as travel related to in-person conferences, meetings and events resumed.
Comparison of the Six Months Ended June 30, 2022 and 2021
Revenue
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Revenue | $ | 68,178 | $ | 50,678 | $ | 17,500 | 35 | % | |||||||||||||||
Total revenue increased by $17.5 million, or 35%, for the six months ended June 30, 2022 compared to the same period in 2021. Approximately 50% of the increase is related to additional usage and adoption of our solution by our existing customers as of June 30, 2021. The remaining 50% increase in revenue is related to new customers added since June 30, 2021.
Cost of Revenue
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | 17,458 | $ | 14,483 | $ | 2,975 | 21 | % | |||||||||||||||
| Percentage of revenue | 26 | % | 29 | % | |||||||||||||||||||
Total cost of revenue increased by $3.0 million, or 21%, for the six months ended June 30, 2022 compared to the same period in 2021. The increase was primarily driven by an increase in outsourced staffing vendors fees of $2.7 million and costs for cloud hosting of $0.2 million related to increased usage of our solutions.
Operating Expenses
Research and Development
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 27,499 | $ | 14,123 | $ | 13,376 | 95 | % | |||||||||||||||
| Percentage of revenue | 40 | % | 28 | % | |||||||||||||||||||
Research and development expenses increased by $13.4 million, or 95%, for the six months ended June 30, 2022 compared to the same period in 2021. The increase was primarily driven by an additional $12.0 million in personnel costs, including stock-based compensation, as a result of increased headcount, additional software expense of $0.5 million related to the additional headcount, and a $0.4 million decrease in the capitalization of internal-use software.
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Sales and Marketing
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Sales and marketing | $ | 35,350 | $ | 18,708 | $ | 16,642 | 89 | % | |||||||||||||||
| Percentage of revenue | 52 | % | 37 | % | |||||||||||||||||||
Sales and marketing expenses increased by $16.6 million, or 89%, for the six months ended June 30, 2022 compared to the same period in 2021. The increase was primarily related to an additional $12.4 million in personnel costs, including stock-based compensation, as a result of increased headcount and variable compensation for our sales personnel. Software expense also increased $0.5 million to support the additional headcount. Additionally, marketing expenses increased $1.9 million and professional services expense increased $0.9 million to support our growth. Travel and entertainment expenses also increased $0.8 million as in-person conferences and travel resumed.
General and Administrative
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| General and administrative | $ | 19,584 | $ | 9,182 | $ | 10,402 | 113 | % | |||||||||||||||
| Percentage of revenue | 29 | % | 18 | % | |||||||||||||||||||
General and administrative expenses increased by $10.4 million, or 113%, for the six months ended June 30, 2022 compared to the same period in 2021. This increase was primarily attributable to an additional $5.0 million in personnel costs, including stock-based compensation, and $0.2 million in software as a result of increased headcount. Professional services expense increased $1.4 million related to additional compliance requirements of being a public company. Additionally, corporate insurance expense increased $2.3 million as a result of our recent initial public offering. We also incurred $0.9 million related to unoccupied lease charges and moving expenses when we opened our new headquarters in Austin, Texas. Travel and entertainment expenses also increased $0.2 million as travel related to in-person conferences, meetings and events resumed.
Non-GAAP Financial Measure
We report our financial results in accordance with generally accepted accounting principles, or GAAP. However, management believes that Adjusted EBITDA, a non-GAAP financial measure, provides investors with additional useful information in evaluating our performance. We define Adjusted EBITDA as net loss, adjusted to exclude: depreciation and amortization expense; income tax provision; interest and other, net; stock-based compensation expense; payroll tax expense on employee stock transactions; CEO Performance Award issuance expense; unoccupied lease expense; 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.
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Adjusted EBITDA is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Some of these limitations include that: (i) it does not properly reflect capital commitments to be paid in the future; (ii) although depreciation and amortization expense is a non-cash charge, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures; (iii) it does not consider the impact of stock-based compensation expense and payroll tax expense on employee stock transactions; (iv) it does not reflect other non-operating expenses, including interest expense; (v) it does not consider the impact of 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:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
| Net loss | $ | (20,171) | $ | (3,083) | $ | (32,020) | $ | (6,011) | |||||||||||||||
| Depreciation and amortization expense | 700 | 406 | 1,155 | 830 | |||||||||||||||||||
| Income tax provision | 44 | 43 | 73 | 79 | |||||||||||||||||||
| Interest and other, net | 171 | 71 | 234 | 114 | |||||||||||||||||||
| Stock-based compensation expense | 5,522 | 966 | 8,728 | 1,454 | |||||||||||||||||||
| Payroll tax expense on employee stock transactions | 135 | 19 | 409 | 23 | |||||||||||||||||||
| CEO Performance Award issuance expense | 386 | — | 386 | — | |||||||||||||||||||
| Unoccupied leases expenses | 798 | — | 798 | — | |||||||||||||||||||
| Adjusted EBITDA | $ | (12,415) | $ | (1,578) | $ | (20,237) | $ | (3,511) | |||||||||||||||
Liquidity and Capital Resources
We have financed operations since our inception primarily through customer payments and net proceeds from sales of equity securities, including our IPO in July 2021, as well as borrowings under our former revolving credit facility. As of June 30, 2022, our principal sources of liquidity was cash and cash equivalents, totaling $228.2 million. Cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. We believe our existing cash and cash equivalents will be sufficient to fund anticipated cash requirements for the next 12 months. We believe we will meet our longer-term expected future cash requirements primarily from a combination of cash flow from operating activities and available cash and cash equivalents. We may also engage in equity or debt financings to secure additional funds.
Our principal cash requirements consist of obligations under our operating lease and purchase commitments to our cloud hosting providers and other vendors. During the six months ended June 30, 2022, the Company entered into two new leases for a new headquarters in Austin, Texas and an office in New York, New York. See Note 5, “Leases,” to the condensed consolidated financial statements for additional detail on the operating and finance lease commitments arising from these new agreements. Other than the foregoing, there were no changes in our material cash requirements during the six months ended June 30, 2022 from the material cash requirements disclosed in our Annual Report on Form 10-K.
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, and the continuing market acceptance of our solution. Although the COVID-19 pandemic has not materially impacted our liquidity to date, we plan to continue to evaluate aspects of our spending, including capital expenditures, discretionary
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spending, and strategic investments throughout 2022. We have considered the impacts of the COVID-19 pandemic on our liquidity and capital resources to date, and we do not currently expect it to impact our ability to meet future liquidity needs.
We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| Six Months Ended June 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | |||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||
| Cash used in operating activities | $ | (22,178) | $ | (10,175) | $ | (12,003) | 118 | % | ||||||||||||||||||
| Cash used in investing activities | (7,178) | (1,447) | (5,731) | 396 | % | |||||||||||||||||||||
| Cash provided by financing activities | 2,066 | 79 | 1,987 | 2,515 | % | |||||||||||||||||||||
Net decrease in cash and cash equivalents | $ | (27,290) | $ | (11,543) | $ | (15,747) | 136 | % | ||||||||||||||||||
Operating Activities
Our largest source of operating cash is payments received from our customers. Our primary uses of cash from operating activities are for personnel-related expenses, marketing expenses, hosting expenses and overhead expenses. We have historically generated negative cash flows and have supplemented working capital requirements primarily through net proceeds from the sale of equity securities.
Net cash used in operating activities for the six months ended June 30, 2022 was $22.2 million, an increase of $12.0 million from net cash used in operating activities of $10.2 million for the six months ended June 30, 2021. The change in cash flow used in operations was primarily due to an increase in net loss of $26.0 million. Fluctuations in net loss are further explained in the “—Comparison of the Six Months Ended June 30, 2022 and 2021” section included elsewhere in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The increase in cash used in operating activities was also due to a decrease in accounts payable and accrued expenses of $1.5 million related to the growth of our operations. These increases in cash used in operating activities were partially offset by an increase in stock-based compensation of $7.3 million due to additional equity awards issued during the period with increased underlying share values, a decrease in accounts receivable of $4.6 million related to increased collections, a decrease in other current assets of $2.5 million related to a decrease in prepaid expenses, and an increase in unoccupied lease charges of $0.8 million caused by moving to our new headquarters in Austin, Texas.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2022 was $7.2 million, an increase of $5.7 million from net cash used in investing activities of $1.4 million for the three months ended June 30, 2021. The increase in cash used in investing activities was primarily related to $5.3 million cash paid for the acquisition of legal workflow solutions from Congruity as well as $0.4 million related to purchases of property and equipment to support the growth of our business and the capitalization of internal-use software associated with additional features in our solution.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2022 was $2.1 million, an increase of $2.0 million from net cash provided by financing activities of $0.1 million for the three months ended June 30, 2021. The change in cash flows was primarily related to an increase in proceeds from exercises of stock options of $1.8 million due to an increase in option exercise activity related to our stock being publicly traded and a decrease of $0.3 million related to the payments of IPO costs. This increase in cash was offset by an increase in the cost to repurchase common stock related to net share settlement of $0.2 million due to the increase in the value of our stock year-over-year.
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Critical Accounting Estimates
Our condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors and adjust those estimates and assumptions when facts and circumstances dictate. Actual results could differ materially from those estimates and assumptions.
While our significant accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies” in the notes to our condensed consolidated financial statements included elsewhere in this Form 10-Q, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the accounting policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition
We recognize revenue from contracts with customers using the five-step method described in Note 3, “Revenue Recognition” of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Our performance obligations consist of usage-based and subscription solutions. Our usage-based revenue is generated from solutions that are typically 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 involve uncertainty because they 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 condensed consolidated statements of operations and comprehensive loss. The capitalization of internal-use software development contains uncertainties because it requires management to exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our 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
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value of the award and is recognized as expense, over the requisite service period, which is generally the vesting period of the respective award.
Determining the fair value of stock-based awards at the grant date requires judgment. Prior to the completion of our IPO in July 2021, we used the Black-Scholes option-pricing model to determine the fair value of stock options granted to our employees and directors. Subsequent to the completion of our IPO, the grant date fair value of equity awards is determined using the fair value of our common stock on the date of grant. The determination of the grant date fair value of stock 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. Prior to our IPO, the fair value of common stock underlying the stock options had historically been determined by our Board of Directors, with input from our management. Our Board of Directors previously determined the fair value of the common stock at the time of grant of the options by considering a number of objective and subjective factors, including the results of contemporaneous independent third-party valuations of our common stock; 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; the lack of marketability of our common stock; actual operating and financial results; 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 company given prevailing market conditions; the market performance of comparable publicly-traded companies; recent secondary stock sales transactions; and U.S. and global market conditions. Subsequent to our IPO, the fair value of our underlying common stock is determined by the closing price of our common stock on the date of grant, as reported by the NYSE.
•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.
If any assumptions used in the Black-Scholes option-pricing model change significantly, stock-based compensation expense may differ.
On May 20, 2022, the Compensation Committee approved the CEO Performance Award to Kiwi Camara, subject to approval of our stockholders at the 2022 Annual Meeting of Stockholders. The CEO Performance Award is a 10-year nonstatutory stock option, the vesting of which is tied solely to achieving stock price milestones. The milestone price requirement is considered a market condition under FASB ASC Topic 718 Compensation - Stock Compensation. The grant date fair value of the CEO Performance Award was estimated using Monte Carlo simulations based on the following key assumptions:
•Fair value of the common stock. The fair value of our underlying common stock is determined by the closing price of our common stock on the date of grant, as reported by the NYSE.
•Expected volatility. The expected volatility is derived from a weighted average of DISCO’s volatility and 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 CEO Performance Award.
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•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.
•Exercise behavior. The exercise behavior is assumed to be the midpoint of (i) the later of the time-based vest date and performance hurdle achievement date, and (ii) the expiration date.
If any assumptions used in the Monte Carlo simulations change significantly, stock-based compensation expense may differ. We did not make any stock option grants outside of the CEO Performance Award during the six months ended June 30, 2022.
We have also granted restricted stock awards, or RSAs and restricted stock units, or RSUs. Commencing in 2022, we granted performance-based restricted stock units, or PSUs. The PSUs vest on the satisfaction of both a service-based and performance-based condition. The performance-based condition is based on the achievement of revenue targets for the period commencing on January 1, 2022 and ending on December 31, 2022. Each reporting period, the Company accrues stock-based compensation based on the assessed probability of achieving the revenue targets. Stock-based compensation related to RSAs, RSUs and PSUs is measured based on the fair value of the common stock on the grant date. Stock-based compensation is recognized in our condensed consolidated statements of operations over the period the recipient is required to perform services in exchange for the award, which is generally the vesting period.
Acquisitions
When we acquire a business, the purchase consideration is allocated to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated respective fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, useful lives and discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to operating expense in the condensed consolidated statements of operations and comprehensive loss.
Recent Accounting Pronouncements
See Recently Adopted Accounting Pronouncements in Note 2, “Summary of Significant Accounting Policies,” in our condensed consolidated financial statements of this Quarterly Report on Form 10-Q for more information.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and, for so long as we continue to be an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, pursuant to Section 107 of the JOBS Act, an emerging growth company may elect to take advantage of the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. However, we have irrevocably opted not to use the extended transition period for complying with any new or revised financial accounting standards, and as such, we are required to adopt new or revised standards at the same time as other public companies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company, as defined by Rule 12b-2 under the Securities and Exchange Act of 1934 and in Item 10(f)(1) of Regulation S-K, and are not required to provide the information under this item.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rule 12a-15(e) and Rule 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded and processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022. Based on the evaluation of our disclosure controls and procedures as of June 30, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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Part II - Other Information
Item 1. Legal Proceedings
From time to time, we are involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which, we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition. Defending such proceedings is costly and can impose a significant burden on management and employees. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described below. You should carefully consider the risks described below, together with the financial and other information contained in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below materialize, 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.
Risk Factors Summary
Our business operations are subject to numerous risks, factors and uncertainties, including those outside of our control, that could cause our actual results to be harmed, including risks regarding 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.
•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.
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•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 ongoing COVID-19 pandemic, including variants of COVID-19, or other similar outbreaks or pandemics.
•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.
•If our information technology systems or data, including the personal information and other sensitive information we process, or the information technology systems or data of third parties upon whom we rely, are or were compromised, we could experience adverse consequences, including, but not limited, to additional costs, loss of revenue, significant liabilities, harm to our brand, or material disruption of our operations.
•Insiders have substantial control over us and will be able to influence corporate matters.
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 $68.2 million, $50.7 million, $114.3 million and $68.4 million for the six months ended June 30, 2022 and 2021 and the years ended December 31, 2021 and 2020, 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 $32.0 million and $6.0 million for the six months ended June 30, 2022 and 2021, respectively. We generated net loss of $24.3 million and $22.9 million for the years ended December 31, 2021 and 2020, respectively. As of June 30, 2022, we had an accumulated deficit of $159.5 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, 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.
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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 herein. 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, including our IPO in July 2021, and borrowings under our former 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.
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.
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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.
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;
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•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 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
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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 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.
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.
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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;
•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.
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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.
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
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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 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.
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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;
•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 Quarterly Report on Form 10-Q. Our market is developing and may develop differently than we expect. Market opportunity estimates and growth forecasts included in this Quarterly Report on Form 10-Q and other filings we make from time to time with the SEC 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 Quarterly Report on Form 10-Q, 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, information regarding the size of our addressable market opportunity should not be taken as indicative of our future growth.
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. 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 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;
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•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 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
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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, which may 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.
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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, 2021, the percentage of revenue generated from customers outside the United States was less than 10% of our total revenue. Beyond the United States, we have operational presence in several international jurisdictions, including the United Kingdom where our subsidiary, CS Disco, Ltd., is located. 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.
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 as well as the impact of Russia’s military operations in Ukraine. 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
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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 ongoing COVID-19 pandemic, including variants of COVID-19, or other similar outbreaks or pandemics.
Our business could be materially adversely affected by the outbreak of a widespread health epidemic or pandemic, including the ongoing COVID-19 pandemic, variants of COVID-19 or other similar outbreaks or pandemics. The COVID-19 outbreak has reached across the globe, resulting in the implementation of significant governmental measures, including lockdowns, closures, quarantines, travel bans and occupancy limits intended to control the spread of the virus. Government authorities, including those in Austin, Texas, where our headquarters is located, previously instituted policies that required most of our employees in that area to work remotely. While strict shelter-in-place and similar orders have been lifted, limitations on indoor occupancy or other restrictions applicable to in-person operations have been and may in the future be re-instituted in some jurisdictions as rates of infection increase in those locations, including in light of the current spread of the Omicron variant and other potentially more contagious variants of the COVID-19 virus. 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 such restrictions are reinstated, 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 and COVID-19 variants, there 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 and COVID-19 variants will continue to develop, whether and to what extent government regulations or other restrictions may impact our operations or those of our customers, availability and rates of vaccination or whether or to what extent the COVID-19 pandemic and COVID-19 variants or the effects thereof may have longer-term unanticipated impacts on our business.
The extent of COVID-19 and COVID-19 variants’ effects 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 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 June 30, 2022, we had four U.S. granted patents and 10 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.
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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.
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
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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.
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 the 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.
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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 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.
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,
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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 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.
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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.
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.
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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 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 other non-regulatory obligations related to data privacy and security could lead to regulatory investigations or actions, litigation, fines and penalties, disruptions of our business operations, reputational harm or otherwise harm our business.
In the ordinary course of business, we process personal information and other sensitive information, including proprietary and confidential business information, trade secrets, intellectual property, and sensitive third-party data. As a result, we are, or may become, subject to numerous federal, state, local and foreign 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. We 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.
Outside the United States, an increasing number of laws, regulations, and industry standards apply to data privacy and security. For example, the collection, use, storage, disclosure, transfer or other processing of personal information regarding individuals located 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 European Union General Data Protection Regulation, or EU GDPR. The EU GDPR is wide-ranging in scope and imposes numerous requirements, including requiring that consent of individuals to whom the personal information 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 information, 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 EU GDPR permits data protection authorities to impose large penalties for violations of the EU GDPR, including potential fines of up to €20 million or 4% of annual global revenue, whichever is greater. The EU GDPR also provides individuals with various rights in respect of their personal information, 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 EU GDPR. The EU GDPR requirements may apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, including employee information. Additionally, the United Kingdom, or UK, following its exit from the EU, has implemented its own version of the EU GDPR which is known as the UK GDPR; it is currently substantially similar to the EU GDPR, but could diverge in the future, which could complicate our compliance efforts and increase the risk that we fail, or are perceived to have failed, to comply. Furthermore, there is a proposed regulation related
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to artificial intelligence, or AI, that, if adopted, could impose onerous obligations related to the use of AU related systems. Such regulations may require us to change our business practices.
Moreover, certain jurisdictions have enacted data localization laws and cross-border personal information transfer laws. For example, absent appropriate safeguards, the EU GDPR generally restricts the transfer of personal information to countries outside the EEA absent certain safeguards. The European Commission released a set of “Standard Contractual Clauses” that are designed to be a valid mechanism in which entities can transfer personal information out of the EEA to jurisdictions that the European Commission has not found to provide an adequate level of protection. The Standard Contractual Clauses require parties that rely upon them to comply with addition obligations, such as conducting transfer impact assessments to determine whether additional security measures are necessary to protect the at-issue personal information. Moreover, due to potential legal challenges, there is some uncertainty regarding whether the Standard Contractual Clauses will remain a valid legal mechanism for transfers of personal information out of the EEA.
Laws in Switzerland and the UK similarly restrict personal information transfers outside of those jurisdictions to countries such as the United States of America that do not provide an adequate level of protection for personal information. As such, our processing of personal information 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 information from Europe may also require us to increase our data processing capabilities in Europe at significant expense. 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.
Additionally, Brexit has created uncertainty with regard to the transfer of personal information from the EEA to the United Kingdom. On June 28, 2021, the European Commission issued an adequacy decision under the GDPR which allows transfers (other than those carried out for the purposes of United Kingdom immigration control) of personal information from the EEA to the United Kingdom to continue without restriction for a period of four years ending June 27, 2025. After that period, the adequacy decision may be renewed, however, only if the United Kingdom continues to ensure an adequate level of data protection. During these four years, the European Commission will continue to monitor the legal situation in the United Kingdom and could intervene at any point if the United Kingdom deviates from the level of data protection in place at the time of issuance of the adequacy decision. If the adequacy decision is withdrawn or not renewed, transfers of personal information from the EEA to the United Kingdom will require a valid ‘transfer mechanism,’ and we may be required to implement new processes and put new agreements in place, such as Standard Contractual Clauses, to enable transfers of personal information from the EEA to the United Kingdom to continue.
In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal information privacy laws, and consumer protection laws. For example, California enacted the California Consumer Privacy Act of 2018, or CCPA, which imposes obligations on businesses to which is applies. For example, the CCPA gives California residents 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 provides for civil penalties for violations (up to $7,500 per violation), as well as a private right of action for data breaches that may increase data breach litigation. Additionally, the California Privacy Rights Act, or CPRA, the majority of which becomes effective on January 1, 2023, will modify the CCPA, potentially resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply. Other states have also enacted data privacy laws. For example, in 2021, Virginia passed its Consumer Data Protection Act, and Colorado passed the Colorado Privacy Act, both of which differ from the CPRA and become effective in 2023. If we become subject to new data privacy laws, at the state level, the risk of enforcement action against us could increase because we may become subject to additional obligations and the number of individuals or entities that can initiate actions against us may increase (including individuals via a private right of action and state actors).
With laws and regulations worldwide imposing evolving 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 data privacy 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
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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 data privacy- or information security-related obligations to customers or other third parties or any of our other legal obligations relating to data privacy or information security may result in significant consequences. These consequences may include, but are not limited to, governmental investigations or enforcement actions (e.g., investigations, fines, penalties, audits, inspections), litigation, claims or public statements against us by consumer advocacy groups or others, which could result in significant liability or cause our customers to lose trust in us, additional reporting requirements and/or oversight, bans on processing personal information, or orders to destroy or not use personal information, any of 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.
If our information technology systems or data, including the personal information and other sensitive information we process, or the information technology systems or data of third parties upon whom we rely, are or were comprised, we could experience adverse consequences, including, but not limited, to additional costs, loss of revenue, significant liabilities, harm to our brand, or material disruption of our operations.
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 or other sensitive information our behalf.
Despite the implementation of security measures in an effort to protect our information and the systems on which it is stored, given their size and complexity and the increasing amounts of information maintained on our information technology systems and those of third parties upon whom we rely, 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. Cyberattacks and other malicious internet-based activity continue to increase and are increasingly difficult to detect. Other threats to our information systems and data include, but are not limited to, social engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware, denial-of-service attacks (such as credential stuffing), personnel misconduct or error, and supply-chain attacks. These threats come from a variety of sources. In addition to traditional computer “hackers,” threat actors, personnel (such as through theft or misuse), sophisticated nation-state and nation-state supported actors and organized criminals now engage in attacks. Ransomware attacks, including those perpetrated by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Additionally, 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 systems, networks and/or physical facilities in which data is stored or through which data is transmitted, or those of the third parties upon whom we rely, 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. Any of these threats may lead to significant adverse consequences, including compromise of our system infrastructure or the loss, destruction, alteration, denial of access to, disclosure or dissemination of, or damage or unauthorized access to, our information technology systems, 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.
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We are required to comply with laws, rules, regulations and other obligations that require us to maintain the security of personal information. A security breach may also 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.
We cannot guarantee that 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. We operate in an industry that is prone to cyber-attacks. Our solution, systems, networks and physical facilities, and those of our vendors, could be attacked and/or breached and personal information could be compromised. 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.
If we, or a third party upon whom we rely, experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences, which could include: government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing information (including personal information); litigation (including class action claims); indemnification obligations; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. Further, the cost 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. These adverse consequences could force us to spend money, 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, which could have an adverse effect on our business. Additionally, 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.
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 may have contractual and other legal obligations to notify relevant stakeholders of security breaches. 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.
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 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.
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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 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 and federal income tax legislation proposed by Congress (which has not yet been enacted);
•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.
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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.
U.S. GAAP is subject to interpretation by the Financial Accounting Standards Board, the 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 condensed 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 described in Note 2, “Summary of Significant Accounting Policies” in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. 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 condensed consolidated financial statements include those related to allowance for credit losses, fair value of financial instruments, valuation of stock-based compensation, 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 condensed 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 continue to 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 have and will continue to 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 New York Stock Exchange, or 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.
If 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 commenced the costly and challenging
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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.
We have in the past experienced material weaknesses in our internal controls over financial reporting, including in the course of preparing our audited consolidated financial statements for the year ended December 31, 2019. Management has concluded that our internal control over financial reporting was effective as of December 31, 2021. However, our testing, or the subsequent testing by our independent public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. If we or our accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, it could harm our operating results, adversely affect our reputation, or result in inaccurate financial reporting. Furthermore, should any such deficiencies arise, we could be subject to lawsuits, sanctions or investigations by regulatory authorities, including SEC enforcement actions and we could be required to restate our financial results, any of which would require additional financial and management resources.
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, an emerging growth company may elect to use the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. However, we have irrevocably opted not to use the extended transition period for complying with any new or revised financial accounting standards, and as such, we are required to adopt new or revised standards at the same time as other public companies. As a result, our consolidated financial statements may not be comparable to the financial statements of other emerging growth companies that elect to avail themselves of the exemption from new or revised accounting pronouncements as of public company effective dates.
We will remain an emerging growth company until the earliest of: (1) December 31, 2026; (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 are also currently a “smaller reporting company” and we may take advantage of certain of the scaled disclosures available to smaller reporting companies. However, based on the market value of our common stock held by non-affiliates as of June 30, 2022, we will no longer be eligible to rely on the scaled disclosure exemptions available to smaller reporting companies starting with our first quarterly report in 2023.
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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
Insiders have substantial control over us and will be able to influence corporate matters.
Based on the number of shares outstanding as of June 30, 2022, our officers, directors and their associated investment funds collectively beneficially owned a majority of our outstanding common stock. 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.
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;
•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.
An active public market for our common stock may not be sustained.
Prior to the closing of our IPO in July 2021, no public market for our common stock existed. An active public trading market for our common stock may not continue to develop or, if further developed, it may not be sustained. The lack of an active market may impair the ability of holders of our common stock to sell their shares at the time they wish to sell them or at a price that such holders consider reasonable. The lack of an active market may also reduce the fair value of shares of our common stock. 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.
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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, 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 equity holders have substantial unrecognized gains on the value of the equity they hold, 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.
In addition, there were 1.7 million shares of common stock issuable upon the exercise of options and 1.9 million shares of common stock issuable upon the vesting and settlement of restricted stock units and performance-based restricted stock units outstanding as of June 30, 2022. We have registered 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.
Further, as of June 30, 2022, holders of a substantial number of shares of our capital stock had 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.
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 is 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, holders of our common stock may need to rely on sales of their holdings of common stock after price appreciation, which may never occur, as the only way to realize any future gains on their 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 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 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;
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•prohibit cumulative voting in the election of directors;
•provide that our directors may be removed for cause only upon the vote of at least 66 2/3% 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 66 2/3% 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 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 provides 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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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Recent Sales of Unregistered Securities
None.
(b) Use of Proceeds
On July 23, 2021, we completed our IPO of 7,700,000 shares of our common stock at the IPO price of $32.00 per share, including the full exercise by the underwriters of their option to purchase up to an additional 500,000 shares of common stock from us and 200,000 shares of common stock from the selling stockholder named in the prospectus, resulting in net proceeds to us of approximately $223.2 million, after deducting underwriting discounts and commissions. We did not receive any of the proceeds from the sale of shares by the selling stockholder.
The offer and sale of all of the shares of our common stock in the IPO were registered under the Securities Act pursuant to our Registration Statement on Form S-1 (File No. 333-257435), which was declared effective by the SEC on July 20, 2021.
There has been no material change in the planned use of proceeds from our IPO from those disclosed in the prospectus.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
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Item 6. Exhibits
The following exhibits are included herein or incorporated herein by reference:
| Incorporated by Reference | ||||||||||||||||||||
| Exhibit number | Description | Schedule Form | File Number | Exhibit | Filing Date | |||||||||||||||
| 3.1 | 8-K | 001-40624 | 3.1 | July 23, 2021 | ||||||||||||||||
| 3.2 | 8-K | 001-40624 | 3.2 | July 23, 2021 | ||||||||||||||||
| 10.1*# | ||||||||||||||||||||
| 10.2+ | DEF 14A | 001-406024 | N/A | May 31, 2022 | ||||||||||||||||
| 31.1* | ||||||||||||||||||||
| 31.2* | ||||||||||||||||||||
| 32.1† | ||||||||||||||||||||
| 101.INS | XBRL Instance Document. | |||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||||||||||||||
________
* Filed herewith
† This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
+ Indicates management contract or compensatory plan.
# Certain schedules and exhibits to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CS DISCO, INC. | ||||||||
| August 12, 2022 | By: | /s/ Kiwi Camara | ||||||
| Name: | Kiwi Camara | |||||||
| Title: | Chief Executive Officer | |||||||
| (Principal Executive Officer) | ||||||||
| August 12, 2022 | By: | /s/ Michael S. Lafair | ||||||
| Name: | Michael S. Lafair | |||||||
| Title: | Chief Financial Officer | |||||||
| (Principal Financial and Accounting Officer) | ||||||||
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Exhibit 10.1
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT (“Sublease”) is made and entered into on the 23 day of April, by and between Workrise Technologies Inc., a Delaware corporation (“Sublessor” or “Sublandlord”), and CS Disco, Inc. a Delaware corporation (“Sublessee” or “Subtenant”).
RECITALS
WHEREAS, Sublandlord and Cousins – One Congress Plaza LLC (“Landlord” or “Master Landlord”) entered in a lease (“Lease”) on August 20, 2018.
WHEREAS, The Lease has been amended by that certain First Amendment dated December 5, 2018 (the “First Amendment”), by that certain Second Amendment dated June 21, 2019 (the “Second Amendment”), and by that certain Third Amendment dated June 21, 2019 (the “Third Amendment”), hereinafter collectively referred to as the “Master Lease” or “Lease”, and as attached hereto as Exhibit “A”.
WHEREAS, Pursuant to the Lease, Landlord has leased to Tenant space currently containing approximately 23,108 square feet of Rentable Floor Area (the “6th Floor Space”) (being Suite Number 600) located on the entire 6th floor of the Building commonly known as One Eleven located at 111 Congress Avenue, Austin Texas 78701.
WHEREAS, Pursuant to the Lease, Landlord has leased to Tenant space currently containing approximately 23,142 square feet of Rentable Floor Area (the “9th Floor Space”) (being Suite Number 900) located on the entire 9th floor of the Building commonly known as One Eleven located at 111 Congress Avenue, Austin Texas 78701.
WHEREAS, Sublessee desires to sublet from Sublessor, and Sublessor has agreed to sublet to Sublessee, a portion of the Premises included in the Lease, specifically the 6th Floor Space and the 9th Floor Space (the “Subleased Premises”), upon the terms and conditions set forth in this Sublease.
NOW THEREFORE, for good and valuable consideration and on the terms and upon the conditions set forth herein, Sublessor and Sublessee hereby agree as follows:
1. Demise of Subleased Premises. Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor the Subleased Premises consisting of a total of 46,250 rentable square feet (the “Subleased Premises”) on the 6th and 9th floors of the Building, as generally depicted on the floor plans attached hereto as Exhibit “B” and incorporated by this reference.
2. Master Lease.
2.1 Relationship of Sublease to Master Lease. Sublessee acknowledges that this Sublease is subject and subordinate to the Master Lease and to all the terms, covenants and conditions contained therein. To the extent that the Master Lease is also subject and
subordinate to such instruments, this Sublease is also subject and subordinate to all ground and underlying leases and all mortgages which might now or hereafter affect such leases, the leasehold estate or estates thereby created or real property of which the Subleased Premises form a part, and to any and all renewals, modifications, consolidations, replacements and extensions thereof. Sublessee covenants and agrees that: (a) Sublessee shall perform and observe all of the terms, covenants, conditions and agreements of the Master Lease on the part of Sublessor as Tenant to be performed with respect to the Subleased Premises during the term of this Sublease to the extent that the same are not modified or amended by this Sublease, and (b) with respect to the Subleased Premises, Sublessee shall not knowingly do or suffer or permit anything to be done which would constitute a default under the Master Lease. Sublessor shall fully perform all of its obligations under the Master Lease to the extent Sublessee has not expressly agreed to perform such obligations under this Sublease and shall not knowingly do or suffer or permit anything to be done which would constitute a default under the Master Lease. Notwithstanding anything herein to the contrary, Sublessor shall not terminate or take any actions giving rise to a termination right under the Master Lease, amend or waive any provisions under the Master Lease or make any elections, exercise any right or remedy or give any consent or approval under the Master Lease, directly related to the Sublessee continued use of the Sublease, without, in each instance, Sublessee’s prior written consent.
2.2 Utilization of Master Lease Provisions as Part of Sublease. Except as the terms and conditions set forth in this Sublease modify or contradict the terms and conditions of the Master Lease or any exhibits or attachments thereto, all of the terms and conditions contained in the Master Lease are hereby made a part of this Sublease and are deemed to constitute a portion of the agreement between Sublessor and Sublessee concerning the leasing of the Subleased Premises; provided, however, that to the extent any of the terms and provisions of the Master Lease are inappropriate or inapplicable to this Sublease, such terms and provisions shall not be made a part hereof. Where reference is made in the Master Lease to the “Leased Premises” or the “Premises”, the same shall be deemed to refer to the Subleased Premises. It is further understood that (i) where reference is made in the Master Lease to the “Commencement Date” the same shall be deemed to refer to the Commencement Date hereunder, (ii) where reference is made to the “Landlord” the same shall be deemed to refer to Sublessor hereunder and (iii) where references are made in the Master Lease to “this Lease” the same shall be deemed to refer to this Sublease. It is understood by Sublessee that the services, repairs and alterations referred to herein to be furnished in accordance with the provisions of the Master Lease herein by reference incorporated will in fact be furnished by Master Landlord and not by Sublessor. Sublessor shall in no event be liable to Sublessee nor shall Sublessee’s obligations hereunder be impaired or the performance thereof excused because of any failure or delay on the Master Landlord’s part in furnishing any such service or in making any of such repairs or alterations; provided that promptly upon notice thereof from Sublessee, Sublessor shall use commercially reasonable efforts to enforce the Master Lease and cause Master Landlord to furnish such service, make such repair or alteration and otherwise comply with the obligations of Master Landlord under the Master Lease and Sublessee shall be entitled to participate with Sublessor in the enforcement of Sublessor’s rights against Master Landlord.
2.3 Master Lease in Full Force and Effect. Sublessor represents, covenants and agrees that the (a) Master Lease is in full force and effect, and there exists under the Master Lease no default by Sublessor or, to Sublessor’s knowledge, Master Landlord, nor has
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there occurred any event which, with the giving of notice or passage of time or both, could constitute such a default by Sublessor or, to Sublessor’s knowledge, Master Landlord and (b) the copy of the Master Lease attached hereto as Exhibit A is a true, correct and complete copy of the Master Lease.
3. Effectiveness of Sublease. This Sublease shall not be in full effect unless and until Master Landlord shall have executed and delivered a Consent to Sublease (the “Master Landlord Consent”). The date of Sublessee’s receipt of the Master Landlord Consent, executed by Master Landlord, shall be the “Effective Date” of this Sublease.
4. Term; Possession and Condition of Subleased Premises.
4.1 Term. The Term (as defined herein) will commence on the later of the Effective Date and the date by which the Subleased Premises are delivered by Sublessor to Sublessee in the condition required herein (such date herein the “Commencement Date”), and shall continue on through the Master Lease expiration of July 31, 2028 (the “Expiration Date”) unless sooner terminated pursuant to the terms of this Sublease. Notwithstanding anything herein to the contrary, Sublessor shall deliver possession of the Subleased Premises to Sublessee in good, vacant, broom clean condition with any broken items such as doors or door systems fixed, all appliances therein in a clean condition, all personal belongings (including, without limitation, files and papers) removed therefrom and all Sublessor-branded signs removed therefrom. With regard to the known broken door system shown in Exhibit “E”, Sublessor agrees to the following: Sublessor shall provide Sublessee a contractor’s pricing bid to perform the work shown in Exhibit “E”. Within two (2) business days of receiving said bid, Sublessee shall provide notice to Sublessor that (i) they elect to have Sublessor perform the work, or (ii) they elect to receive an allowance equal to the amount of the bid, in which case Sublessor shall no longer be responsible for said work. If Sublessee elects option (i), Sublessor shall perform the work shown on Exhibit “E”. If Sublessee elects option (ii), then Sublessor shall pay the allowance to Sublessee within ten (10) days after Sublessee delivers either (at Sublessee’s option) (x) an invoice from a contractor or (y) certificate of substantial completion from an architect. Sublessor shall also deliver to Sublessee all keys and/or access codes needed for access to the Subleased Premises and/or the Building on the Commencement Date other than those to be provided by the Master Landlord, which Sublessor shall assist Sublessee in obtaining.
4.2 Possession. Full possession of the Subleased Premises shall be delivered to Sublessee two (2) weeks following Sublessor’s receipt of the Master Landlord Consent. If Sublessor is delayed in delivering possession of the Subleased Premises to Sublessee in the condition required herein beyond July 1, 2022, Sublessee shall be entitled to a resulting 1.0 day abatement of Basic Rental and Additional Rental due and payable with respect to the Subleased Premises for each day occurring between July 1, 2022 and the date that the Subleased Premises are delivered to Sublessee in the condition required herein.
4.3 Sublessee’s Access. Notwithstanding anything to the contrary in Section 4.2 of this Sublease, Sublessee shall be permitted access to the Subleased Premises beginning on the Commencement Date. Sublessee’s access shall be subject to all the terms and conditions of this Sublease, inclusive of Sublessee’s obligation to pay Other Charges (defined below) to the extent incurred following the Commencement Date with respect to Sublessee’s use
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and occupancy of the Subleased Premises. Prior to Sublessee’s access, Sublessee shall procure and deliver to Sublessor and Master Landlord duly executed originals of evidence of the insurance coverage required by the Master Lease as to the Subleased Premises. Such evidence of insurance coverage, as the case may be (i) shall name Sublessor, Master Landlord and any other party required by Master Landlord, as additional insureds thereunder, and (ii) shall be delivered to Sublessor at the address set forth in Section 12 below and to Master Landlord.
4.4 Condition of Subleased Premises. Sublessee acknowledges and agrees that (i) it accepts the Subleased Premises in “AS-IS WHERE IS” condition, and (ii) Sublessor shall have no obligation with respect to alteration to, or refurbishment of, the Subleased Premises, except as otherwise provided herein. Sublessee shall return the Subleased Premises to Sublessee at the expiration of the Sublease in the same condition found on the Commencement Date, normal wear and tear, repairs not Sublessee’s responsibility under this Sublease and alterations (provided Master Landlord does not require their removal), excepted. If required by Master Landlord under the Lease), Sublessor shall be responsible for removal of the current cabling, furniture and FFE (defined below) upon the end of this Sublease. To the extent that the Subleased Premises were not in compliance with the requirements of the Master Lease as of the Effective Date, Sublessor shall cause the Subleased Premises to comply with such requirements within a reasonable period after receipt of notice thereof from Master Landlord; provided, however, that the foregoing shall not apply to any failure of the Subleased Premises to be in compliance with the Master Lease as a result of Sublessee’s modifications to the Subleased Premises or Sublessee’s use of and/or business conducted in the Subleased Premises.
5. Rent. The term “Rent” shall mean individually or collectively the Basic Rental, Forecast Additional Rental, Additional Rental, or Other Charges or Late Charges described below.
5.1 Basic Rental. Sublessee shall pay to Sublessor basic rental (“Basic Rental”) for each portion of the Subleased Premises per table below, payable in monthly installments on the first day of each month in advance during the Term per table below:
| Term | Size (per rsf) | Basic Rental Rate Per Year | Monthly Basic Rent | |||||||||||||||||
| Commencement - 10/31/23* | 46,250 | $43.50 | $167,657.67 | |||||||||||||||||
| 11/01/23 - 10/31/24 | 46,250 | $44.81 | $172,687.40 | |||||||||||||||||
| 11/01/24 - 10/31/25 | 46,250 | $46.15 | $177,868.02 | |||||||||||||||||
| 11/01/25 - 10/31/26 | 46,250 | $47.53 | $183,204.06 | |||||||||||||||||
| 11/01/26 - 10/31/27 | 46,250 | $48.96 | $188,700.18 | |||||||||||||||||
| 11/01/27 - 07/31/28 | 46,250 | $50.43 | $194,361.18 | |||||||||||||||||
*Provided no event of default occurs during the term of the Sublease (subject to Sublessee’s ability to cure said default per terms of the Sublease and Master Lease), Sublessee’s obligation to pay Basic Rental with respect to the entire Subleased Premises shall be abated from the Commencement Date through 10/31/2022 (hereafter “Abatement Term”), following the expiration of which, Sublessee’s obligation to pay Rent shall commence.
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Such abatement shall in no event limit Sublessor’s rights and remedies herein and as incorporated by the Lease. Basic Rental for any portion of a month which is included within the term of this Sublease shall be prorated at the rate of 1/30th of the applicable monthly rent per day. Rent shall be payable to Sublessor without notice, demand, deduction, offset or abatement (except as may expressly be provided for herein) in lawful money of the United States of America at the address set forth in Section 12 below or to such other person or at such other address as Sublessor may designate in writing, or electronically if requested by Sublessor. The parties acknowledge and agree that the foregoing Abatement Term has been granted to Sublessee as additional consideration for entering into this Sublease.
5.2 Forecast Additional Rental or Additional Rental or Operating Expenses. In addition to monthly installments of Basic Rental, Sublessee shall pay to Sublessor monthly payments (based on the sizes in the rental chart above) equal to its prorata share of the monthly estimated Forecast Additional Rental or Additional Rental or Operating Expenses charged by Master Landlord pursuant to the Master Lease (the “Estimated Additional Rent”). Sublessee’s share of the monthly Estimated Additional Rent for the calendar year 2022 is $29.15 per RSF or $112,348.95 per month. The parties both acknowledge and agree that this is the most up to date and accurate estimate provided by Landlord, provided that such Estimated Additional Rent is subject to change. Sublessee shall pre-pay the first month of Rent (Basic Rental and Estimated Additional Rent) at Sublease execution as prepaid rent for the first full month of rent due under the Sublease. Provided no event of default occurs during the term of the Sublease (subject to Sublessee’s ability to cure said default per terms of the Sublease and Master Lease), Sublessee’s obligation to pay the aforementioned Estimated Additional Rent shall be abated for the duration of the Abatement Term, as defined herein.
5.3 Other Charges and Late Charges. If, under the provisions of the Master Lease, any additional payments for services or other charges (e.g., late charges, additional cleaning, separately metered server room, after hours air conditioning charged at Landlord’s then quoted rate, etc) allocable in whole or in part to the Subleased Premises (such additional payments for services and other charges being hereafter collectively referred to as “Other Charges”) shall be payable by Sublessor because of Sublessee’s default hereunder or use of the Subleased Premises, Sublessee shall pay to Sublessor an amount equal to such portion of the Other Charges as may be properly attributable or allocable to Sublessee’s use and occupancy of the Subleased Premises. In addition, any payment of Basic Rent or other amount from Sublessee to Sublessor or Master Landlord under this Sublease which is not paid on the date due shall accrue interest from the date due until the date paid at the amounts prescribed in the Master Lease.
5.4 Abatement. Notwithstanding anything to the contrary set forth in this Sublease, if, as a result of casualty, condemnation or Master Lessor’s failure to provide services or perform any other obligation as required under the Master Lease to the Subleased Premises, Sublessor receives an abatement of rent for the Subleased Premises under the Master Lease or governing law, then Sublessee shall receive a corresponding abatement of the Basic Rent and Additional Rent due under this Sublease.
6. Security Deposit. Concurrently with the execution of this Sublease, Sublessee shall pay to Sublessor a security deposit in the amount of $306,714.58, in the form of cash (the “Security Deposit”) for Sublessee’s faithful performance of Sublessee’s obligations
5
hereunder. If Sublessee fails to pay any amount due to be paid by Sublessee under this Sublease, Sublessor may use, apply or retain all or any portion of the Security Deposit for the payment of any Rent or other amount due and payable from Sublessee to Sublessor pursuant to the terms and conditions set forth in this Sublease. If Sublessor uses or applies all or any portion of the Security Deposit in accordance with the preceding sentence, Sublessee shall deposit cash in an amount sufficient to restore the Security Deposit to the full amount first set forth above within thirty (30) days after Sublessee’s receipt of written demand from Sublessor. Sublessee’s failure to do so shall constitute a material breach of this Sublease. Sublessor shall not be required to keep the Security Deposit separate from its general funds. Provided Sublessee is not in Default and following application of the Security Deposit against any amounts due and payable from Sublessee to Sublessor in accordance with this Sublease, the Security Deposit or any remaining portion thereof shall be returned to Sublessee within thirty (30) days after the expiration of the term of this Sublease or any extensions thereof.
7. Use. The Subleased Premises may be used and occupied during the term of this Sublease only for general office purposes. Sublessee shall, to the extent required under the Master Lease, at Sublessee’s expense, comply promptly in all material respects with all applicable statutes, ordinances, rules, regulations, orders, restrictions of record and requirements in effect during the Term or any part of the Term hereof regulating the use by Sublessee of the Subleased Premises.
8. Sublessee’s Indemnification. Sublessee shall hold Sublessor free and harmless from any and all, actual and anticipated, claims, liabilities, losses, suit, penalty, demand, and damages (including without limitation, reasonable attorneys’ fees) (collectively, “Claims and Losses”) to the extent arising out of, by reason of, or resulting from (a) Sublessee’s failure to comply with any terms or perform any of the obligations contained in this Sublease; (b) Sublessee’s use of the Subleased Premises; and/or (c) any other act or omission of Sublessee, it’s successors and assigns, it’s employees, agents, contractors, visitors, or licensees, in or about the Subleased Premises; Provided that such indemnification obligations shall exclude any Claims and Losses arising solely from Sublessor’s negligence, or willful acts or omissions.
9. Default. If one or more of the following events (“Event of Default”) occurs, such occurrence constitutes a breach of this Sublease by Sublessee:
9.1 Sublessee fails to pay when due any Rent due hereunder and such failure shall continue for five (5) days after Sublessee’s receipt of written notice thereof from Sublessor, except that Sublessor or Landlord shall not be required to give such notice more than once in any twelve (12) month period;
9.2 Sublessee fails to comply with any other provision of this Sublease in the manner and within the time required, and such failure continues for twenty-seven (27) days after Sublessee’s receipt of written notice thereof from Sublessor, provided that if such failure cannot be cured within such twenty-seven (27) day period, an Event of Default shall not be deemed to have occurred so long as Sublessee commences such cure within such twenty-seven (27) day period and diligently pursues such cure to completion within fifty-seven (57) days after such notice;
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9.3 the occurrence of default by Sublessor under the Master Lease which is the result of Sublessee’s default under this Sublease;
9.4 any purported or attempted Transfer of this Sublease or the Subleased Premises in contravention of this Sublease or the Master Lease; or
9.5 Sublessee (i) files or consents by answer or otherwise to the filing against it of a petition for relief or reorganization or arrangement or any other petition in bankruptcy or liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction; (ii) makes an assignment for the benefit of its creditors; (iii) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers of itself or of any substantial part of its property; or (iv) takes action for the purpose of any of the foregoing;
9.6 A court or governmental authority of competent jurisdiction, without consent by Sublessee, enters an order appointing a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial portion of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding up or liquidation of Sublessee, or if any such petition is filed against Sublessee and such petition is not dismissed within sixty (60) days; or
9.7 Sublessee creates or permits anything to be done that creates a lien upon the Subleased Premises and such lien is not removed within twenty (20) days after the filing thereof.
Upon the occurrence of an Event of Default, Sublessor shall have, in addition to any other rights and remedies available to it under this Sublease and/or at law and/or in equity, any and all rights and remedies of Master Landlord set forth in the Master Lease as incorporated herein. All rights and remedies of Sublessor herein shall be cumulative and none shall exclude any other right allowed by law or in equity and said rights and remedies may be exercised and enforced concurrently and whenever and as often as occasion therefor arises. If Sublessee shall have committed an Event of Default, then Sublessor shall have the right, but not the obligation, without waiving or releasing Sublessee from any obligations hereunder, to cure such Event of Default in such manner and to such extent as Sublessor shall deem necessary, and in exercising any such right, to pay or incur any reasonable costs and expenses (including, without limitation, attorneys’ fees and costs) required in connection therewith which Sublessee shall promptly pay to Sublessor upon receipt of a request therefor.
10. Transfer of Subleased Premises.
10.1 Consent Required. Neither this Sublease nor the term and estate hereby granted, or any part hereof or thereof, shall be assigned, mortgaged, pledged, encumbered or sublet (each, a “Transfer), without obtaining the express written consent of Sublessor and Master Landlord to any such assignment or subletting (which consent Sublessor will not unreasonably withhold or delay, and Master Landlord’s obligations shall be per the Master Lease), mortgage, pledge, or encumbrance. For purposes of the foregoing, it is agreed that any transaction pursuant to which a controlling interest in Sublessee shall be transferred, directly or
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indirectly, by operation of law or otherwise, shall be deemed an assignment; provided, however, that the foregoing shall not apply as long as Sublessee is a publicly-traded company.
10.2 Sublessee’s Notice. Any request for Sublessor’s or Master Landlord’s consent to a proposed Transfer of the Subleased Premises or any portion thereof shall be in writing (hereinafter referred to as “Sublessee’s Notice”) and shall set forth the proposed sub-sublessee’s or assignee’s name, address, nature or character of business, a then-current financial statement or other satisfactory evidence of financial responsibility commensurate with the responsibilities to be undertaken by such proposed Sublessee or assignee, the terms and conditions of the proposed subletting and any other additional information in which the Landlord has the right to request per the Master Lease. Any consent to subletting which may be given by Sublessor shall not constitute a waiver by Sublessor of the provisions of this Section 10, or a release of Sublessee from the full performance by it of the covenants on the part of Sublessee herein contained. Any violation of any provision of this Sublease by any Sublessee shall be deemed a violation of such provision by Sublessee.
10.3 Profits. If, for any proposed Transfer, Sublessee receives rent or other consideration, either initially or over the term of the assignment or sublease, in excess of the Rent called for hereunder or, in case of the sub-sublease of a portion of the Subleased Premises, in excess of such Rent fairly attributable to such portion, Sublessee shall pay to Sublessor, as additional rent hereunder, a portion of said net profit realized by Sublessee promptly after its receipt thereof, all in accordance with the terms and conditions of Section 10 of the Lease, as if Sublessor was the Master Landlord and Sublessee was the Tenant thereunder.
11. Parking. Sublessee shall be obligated to rent 68 of Sublessor’s unreserved parking permit and 2 of Sublessor’s reserved parking permit, subject to the terms and conditions of the Master Lease regarding parking, at the rate charged by Master Landlord or Master Landlord’s parking operator. Sublessee’s obligation to rent such parking spaces shall begin at the earlier of the time requested by Sublessee, or the Commencement Date. Notwithstanding the foregoing, Sublessee may at any time on thirty (30) days prior written notice to Sublessor relinquish its rights to, collectively with any previous relinquishment, up to half of the foregoing parking permits back to Sublessor.
12. Notices. Any notice required or permitted to be given hereunder shall be in writing and shall be effective only when (a) delivered in person to the recipient at the address set forth below or (b) three (3) days after deposit in a sealed envelope in the United States mail, postage pre- paid, by registered or certified mail, return receipt requested, addressed to the recipient at the address set forth below, whichever is earlier. Notices to Sublessee prior to the Commencement Date shall be addressed to: 3700 North Capital of Texas Highway, Suite 150, Austin, Texas 78746, Attention: General Counsel, and notices to Sublessee after the Commencement Date shall be addressed to CS Disco, Inc., Attention: General Counsel Notices to Sublessor shall be addressed to: Workrise Technologies Inc., 111 Congress Ave. Suite 1200, Austin, Texas 78701, Attention: Legal Dept.
13. Intentionally deleted.
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14. Signage. Subject to compliance with the terms of this Sublease and the Master Lease, Sublessee shall have the right, at its sole cost and expense, to install building standard suite identification signage at each entry to the Premises, subject to Master Landlord’s sign criteria and Master Landlord’s prior written approval. Sublessee shall have the right to place Sublessee building standard signage on the standard lobby directory at its sole cost and expense, subject to Master Landlord’s sign criteria and Master Landlord’s prior written approval.
15. Intentionally Deleted.
16. Alterations. During the Term, Sublessee shall not make or suffer to be made any alterations, additions, or improvements to the Subleased Premises or any part thereof without complying with the provisions of the Master Lease and without obtaining the prior written consent of Sublessor and Landlord, which consent shall not be unreasonably withheld by Sublessor; provided, in the event that Landlord does not give its consent to such a request, Sublessee acknowledges and agrees that it shall be reasonable for Sublessor to withhold its consent to such a request. In the event that Landlord provides its consent to such alterations, additions, or improvements to the Subleased Premises, Sublessor acknowledges and agrees that it shall be reasonable for Sublessor to provide its consent to such alterations, additions, or improvements provided that if such alterations, additions, or improvements increase Sublessor’s financial obligations under the Master Lease, Sublessee shall be responsible for any additional costs associated with such. Sublessee acknowledges and agrees that in the event it does make any improvement(s) to the Subleased Premises which are not approved in writing by Sublessor and Landlord prior to the installation or construction of such improvement(s), or in which at the time of said improvement(s) Sublessor or Master Landlord provides notice that such improvement(s) shall need to be removed/restored, Sublessee shall be required to remove such improvement(s) at Sublessee’s sole cost and expense and repair all damage caused by the installation or removal of such improvements prior to the expiration of the Term of this Sublease unless Landlord expressly waives in writing this requirement. All improvements or alterations must be performed in conformance with the Lease. In addition, Sublessee shall be responsible for any separately metered electric service or maintenance fees charged by Landlord to Sublessor as a result of such alterations and shall be responsible for any Alterations or Construction Management fee charged by Landlord under the Master Lease.
17. Attorney Fees. If Sublessor or Sublessee shall commence an action against the other arising out of or in connection with this Sublease, the prevailing party shall be entitled to recover its costs of suit and reasonable attorneys’ fees and expenses from the non-prevailing party. Prevailing Party shall be defined as the party which obtains the closest award to the principal relief sought, whether achieved by settlement, dismissal, or judgment.
18. Holding Over. If Sublessee holds over after the expiration of the Term or earlier termination of this Sublease, with or without the express or implied consent of Sublessor, then Sublessee will become and be only a tenant at sufferance and shall be responsible for payment
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of all holdover Rent (including any consequential damages) assessed to Sublessor pursuant to the Master Lease. Notwithstanding any provision to the contrary contained herein, (i) Sublessor expressly reserves the right to require Sublessee to surrender possession of the Subleased Premises upon the expiration of Term or upon the earlier termination of this Sublease and the right to assert any remedy at law or in equity to evict Sublessee and/or collect damages in connection with any holding over, and (ii) Sublessee will indemnify, defend and hold Sublessor harmless from and against any and all liabilities, claims, demands, actions, losses, damages, obligations, costs and expenses, including, without limitation, attorneys’ fees incurred or suffered by Sublessor by reason of Sublessee’s failure to surrender the Subleased Premises on the expiration of the Term or earlier termination of this Sublease.
19. Early Termination of Master Lease. To the extent that the Master Lease grants Sublessor any discretionary right to terminate the Master Lease, due to casualty or condemnation, Sublessor will be entitled to exercise or refrain from exercising such right in its complete and absolute discretion following advance notice thereof to Sublessee, but will not have any liability to Sublessee as a result of such exercise.
20. Broker’s Commissions. Sublessee hereby represents and warrants that it has not entered into any agreement with any broker, agent, finder or other party for the payment of a broker’s or agent’s commission, finder’s fee or like compensation payable in connection with Sublessee entering into this Sublease, other than HPI, whom shall be compensated by Sublessor per a separate written agreement. Sublessor hereby represents and warrants that it has not entered into any agreement with any broker, agent, finder or other party for the payment of a broker’s or agent’s commission, finder’s fee or like compensation payable in connection with this Sublease, other than Colliers International, whom shall be compensated by Sublessor per a separate written agreement.
21. Entire Agreement. This Sublease, including the terms of the Master Lease which are incorporated herein by reference, contains the entire agreement between the parties concerning the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings, terms, warranties and representations, whether oral or written, made by the parties concerning the matters covered by this Sublease.
22. Severability. The illegality, invalidity or unenforceability of any term, condition or provision of this Sublease shall in no way impair or invalidate any other term, condition or provision of this Sublease, and all such other terms, conditions and provisions shall remain in full force and effect.
23. Intentionally Deleted.
24. Successors and Assigns. This Sublease shall be binding upon the parties hereto and upon their respective successors and assigns.
25. Counterparts. This Sublease may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
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26. Density. Sublessee shall be responsible to abide by all terms of the Master Lease with respect to density restrictions, and shall reimburse Sublessor for any additional expenses caused by Sublessee’s violation of such density requirements in the Subleased Premises, including those instances where excess power consumption or density triggers Landlord’s ability to: 1) Sub-meter the Premises, 2) Cause Tenant to pay a greater share of operating expenses, or (3) Charge for additional janitorial services.
27. Computer Cabling. Sublessee shall have the right to use all existing cabling and to add additional cabling to the Subleased Premises if necessary.
28. Right of First Refusal. Should Sublessor elect to offer for sublease any additional portion of the Master Premises (the “ROFR Space”) during the Term, Sublessee shall have a first right of refusal to sublease such ROFR Space. In the event Sublessor receives or extends a bonafide offer or term sheet from another party with respect to the ROFR Space, Sublessor shall present such offer or term sheet to Sublessee. Sublessee shall have five (5) business days to provide notice to Sublessor of its election to lease such ROFR Space. The terms of the Sublessee’s sublease of the ROFR Space shall match the offer or term sheet as it relates to commencement dates, rental rate, any improvement allowance, and parking rights, however that the length of the ROFR Space term shall be coterminous with the existing Sublease through the end of the Term. Both parties agreed that Sublessee’s right to sublease the additional space shall be subject to Master Landlord approval.
29. Renewal. Sublessee shall have no right to renew the Term.
30. Telecom. Sublessee shall be responsible to determine availability of any internet or phone service providers, and shall responsible for the installation and payment of said services in the Subleased Premises.
31. Landlord Consent. Sublessor shall be responsible for all fees payable to Landlord in conjunction with the Master Landlord Consent. Both parties agree that full execution of this Sublease is binding on both Sublessor and Sublessee, however shall not be in full effect until such time as Master Landlord provides Master Landlord Consent to said Sublease. Both parties agree to use commercially reasonable efforts to supply reasonably requested information to Master Landlord in a commercial timely manner.
32. Furniture, FFE. Both parties acknowledge that the furniture, fixtures and equipment set forth in Exhibit “C” attached (the “FFE”) in the Subleased Premises shall remain in the Subleased Premises and is being sold to Sublessee. On or within ten (10) days of the Effective Date, Sublessee shall purchase the FFE from Sublessor by making payment to Sublessor in an amount equal to $10.00. Upon receipt of such payment, Sublessor shall deliver to Sublessee a Bill of Sale (in the form attached hereto as Exhibit “D”) conveying title of such FFE to Sublessee. Upon transfer of ownership, Sublessor shall have a first lien on all furniture in the Subleased Premises during the Term. No furniture shown on the 9th floor inventory shall be removed from the Premises without Sublessor consent. Sublessor shall not unreasonably withhold such consent so long as (i) Such removed furniture is replaced with equal quality furniture, and (ii) Sublessor is provided a first lien on such replacement furniture.
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33. Negotiation By Counsel. The parties acknowledge that each party has had the opportunity to be represented by legal counsel of its independent choosing and to have such legal counsel write or review this Sublease.
34. Counterparts, Electronic Signatures. Both parties agree that the submission of this Sublease in multiple counterparts shall be binding, and if (either separately or together) this Sublease is signed electronically via DocuSign it shall also be binding.
35. Intentionally Deleted
IN WITNESS WHEREOF, the parties have executed this Sublease as of the day and year first above written.
SUBLESSOR
Workrise Technologies Inc., a Delaware corporation
By: /s/ Mike Witte | ||
Name: Mike Witte | ||
Title: CEO | ||
Date: April 23, 2022 | ||
SUBLESSEE
CS Disco, Inc. a Delaware corporation
By: /s/ Michael Lafair | ||
Name: Michael Lafair | ||
Title: CFO | ||
Date: April 23, 2022 | ||
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Exhibit “A”
COPY OF MASTER LEASE
LEASE AGREEMENT
by and between
Cousins - Once Congress Plaza LLC (“Landlord”)
and
RigUp, Inc.
(“Tenant”)
dated
August 20, 2018
for
Suite Number 900
containing approximately
23,142 square feet of Rentable Floor Area
One Eleven
111 Congress Avenue, August, Texas 78701
Term: 96 months
TABLE OF CONTENTS
| PAGE | |||||
1. Basic Lease Information | 1 | ||||
| 2. Lease Grant | 3 | ||||
| 3. Lease Term; Acceptance of Demised Premises | 3 | ||||
| 4. Rent Payments; Tenant Taxes | 4 | ||||
| 5. Tenant’s Us of Demised Premises | 5 | ||||
| 6. Security Deposit | 6 | ||||
| 7. Services by Landlord | 6 | ||||
| 8. Repairs and Alterations | 7 | ||||
| 9. Entry by Landlord | 8 | ||||
| 10. Assignment and Subletting | 8 | ||||
| 11. Tenant’s Insurance | 10 | ||||
| 12. Landlord’s Insurance | 11 | ||||
| 13. Mutual Waiver of Subrogation | 11 | ||||
| 14. Liability of Tenant | 12 | ||||
| 15. Casualty | 12 | ||||
| 16. Eminent Domain | 14 | ||||
| 17. Default | 15 | ||||
| 18. Landlord’s Lien | 18 | ||||
| 19. Landlord’s Liability | 18 | ||||
| 20. Waiver of Breach | 18 | ||||
| 21. Landlord’s Covenant of Quiet Enjoyment | 18 | ||||
| 22. Intentionally deleted | 18 | ||||
| 23. Holding Over | 18 | ||||
| 24. Subordination, Non-Disturbance and Attornment; Estoppel Certificate | 18 | ||||
| 25. Attorney’s Fees | 19 | ||||
| 26. Notices | 19 | ||||
| 27. Surrender of Demised Premises | 20 | ||||
| 28. Hazardous Substances | 20 | ||||
| 29. Miscellaneous | 21 | ||||
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| Exhibit “A” | Legal Description of the Project | ||||
| Exhibit “B” | Floor Plan | ||||
| Exhibit “C” | Supplemental Notice | ||||
| Exhibit “D” | Operating Expenses | ||||
| Exhibit “E” | Tenant Work Letter | ||||
| Exhibit “F” | Building Standard Services | ||||
| Exhibit “G” | Rules and Regulations | ||||
| Exhibit “H” | Intentionally Deleted | ||||
| Exhibit “P” | Parking | ||||
| Exhibit “J” | Special Stipulations | ||||
3
LEASE AGREEMENT
THIS LEASE AGREEMENT (the "Lease"), is made and entered into this 20th day of August, 2018 (the “Effective Date”), by and between Landlord and Tenant.
WITNESSETH:
1.Basic Lease Information. For purposes of this Lease, the following terms have the meanings hereinafter ascribed thereto:
(a)Landlord: Cousins - One Congress Plaza LLC, a Delaware limited liability company
(b)Tenant: RigUp, Inc., a Delaware corporation
(c)Building: Means the office building located at 111 Congress Avenue, Austin, Texas 78701, commonly known as One Eleven. The "Rentable Floor Area of the Building" shall mean 503,344 square feet.
(d)Demised Premises: Means the area shown on Exhibit "B" to this Lease. The Demised Premises are located on the 9th floor of the Building and known as Suite Number 900. The Rentable Floor Area of the Demised Premises is 23,142 square feet.
(e)Rental Commencement Date: The earlier of (x) February 1, 2019, or (y) the date upon which Tenant occupies the Demised Premises for the purpose of conducting business therein.
(f)Lease Term: Ninety six (96) full calendar months, commencing on the Rental Commencement Date and expiring on the ninety-sixth (96th) full calendar month after the Rental Commencement Date.
(g)Base Rental Rate:
Full Calendar Months of Lease Term (together with any partial calendar months at the beginning or end of the Lease Term, as indicate | Annual Base Rental Rat Per Square Foot | Monthly Base Rental | ||||||
(Rental Commencement Date) - (Last day of 12th full calendar month of Lease Term)* | $37.00 | $71,354.50 | ||||||
13-24 | $38.11 | $73,495.14 | ||||||
25-36 | $39.25 | $75,693.63 | ||||||
37-48 | $40.43 | $77,969.26 | ||||||
49-60 | $41.64 | $80,302.74 | ||||||
61-72 | $42.89 | $82,713.37 | ||||||
73-84 | $44.18 | $85,201.13 | ||||||
85-96 | $45.51 | $87,766.04 | ||||||
* The first three (3) full calendar months after the Rental Commencement Date are subject to Article 4(d) below.
(h)Construction Allowance: $55.00 per square foot of Rentable Floor Area of Demised Premises (see Exhibit "E").
(i)Landlord's Work: Means the work, if any, that Landlord is obligated to perform in the Demised Premises pursuant to Exhibit "E" of this Lease.
(j)Prepaid Rent: $119,702.00 payable not later than January 1, 2019. (Article 4[a])
(k)Security Deposit; Letter of Credit: $500,000.00. (Article 6; Section 4 of Exhibit "J")
(l)Guarantor: NIA
(m)Brokers: Colliers International, representing Tenant, and Jones Lang LaSalle Brokerage, Inc., representing Landlord.
(n)Notice Addresses:
Tenant: On or after the Rental Commencement Date, notices shall be sent to Tenant at the Demised Premises. Prior to the Rental Commencement Date, notices shall be sent to Tenant at the following address:
RigUp, Inc.
98 San Jacinto Boulevard, Suite 550
Austin, Texas 78701
| Landlord: | With a copy to: | |||||||
| Cousins - One Congress Plaza LLC | Cousins - One Congress Plaza LLC | |||||||
| c/o/ Cousins Properties | c/o/ Cousins Properties | |||||||
| 3344 Peachtree Road, NE | 111 Congress Plaza | |||||||
| Suite 1800 | Suite 590 | |||||||
| Atlanta, GA 30326 | Austin, Texas 78701 | |||||||
| Attn: Corporate Secretary | Attn: Senior Property Manager | |||||||
| Landlord’s Address for Rent: | ||||||||
| if by check, mail to: | ||||||||
| Cousins Properties LP | ||||||||
| c/o Cousins - San Jacinto Center LLC | ||||||||
| P.O. Box 207479 | ||||||||
| Dallas, Texas 75320-7479 | ||||||||
| if overnight delivery, send to: | ||||||||
| Lockbox Services - Cousins Properties LP | ||||||||
| c/o Cousins - San Jacinto Center LLC | ||||||||
| 2975 Regent Blvd | ||||||||
| Lockbox #207479 | ||||||||
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| Irving, Texas 75063 | ||||||||
| if by wire transfer or ACH: | ||||||||
| Account #4447759374 | ||||||||
| ACH Routing Number: 121 000 248 | ||||||||
| Wire Routing Number: 221 000 248 | ||||||||
| Swift Code (International Wires): WFBIUS6S | ||||||||
| Wire Bank Address: San Francisco, CA | ||||||||
| Wire Bank Name: Wells Fargo | ||||||||
(o)Affiliate: Any Person which directly or indirectly controls a party hereto or which is directly or indirectly controlled by or under common control with a party hereto, including any parent or subsidiary of a party hereto (the term "control" for these purposes means the ability through agreement of the parties in interest of the ownership of shares, membership interests or partnership interests, as the case may be, to elect a majority of the directors of a corporation or to make management decisions on behalf of, or to independently select the managing partner or member of, a partnership or limited liability company).
(p)Business Day: Means each day from Monday through Friday, exclusive of Holidays (as that term is defined in Exhibit "F"). Wherever the term "day" or “days” is used herein (as distinguished from "Business Day" or "Business Days"), such term will mean and refer to calendar days,
(q)Person: Any individual, or a corporation, limited liability company, partnership (whether general or limited), joint venture, trust (including a business trust or real estate investment trust), unincorporated organization, joint stock company, association or other entity, or any government, or any agency or subdivision thereof.
(r)BOMA Standard: Means the American National Standard Method for Measuring Floor Area in Office Buildings, ANSI/BOMA 265.1-1996 published by the Building Owners and Managers Association International. As a point of clarification, the floor area within the elevator lobby on any floor of the Building fully leased by Tenant will be included in the calculation of Usable Area on such floor, and the BOMA Standard will be so construed.
2.Lease Grant. Landlord leases the Demised Premises to Tenant, and Tenant leases the Demised Premises from Landlord, together with the right to use any portions of the Project that are designated by Landlord for the common use of tenants and others (the "Common Areas"). No easement for light, view or air is included in the Demised Premises or is being granted hereunder. The "Project" is comprised of that certain tract of land (the "Land") described on Exhibit "A", the office buildings, including the Building, and the appurtenant parking garage(s) (the "Parking Facility"), landscaping. fixtures, Common Areas, service buildings and related improvements now or hereafter constructed thereon or on the Land and added to the Project from time to time.
3.Lease Term; Acceptance of Demised Premises.
(a)This Lease is effective as of the Effective Date through the last day of the Lease Term specified in Article l(f) above. and, unless extended or sooner terminated as provided in this Lease. Promptly after the Rental Commencement Date Landlord shall send to Tenant a Supplemental Notice in the form of Exhibit "C" attached hereto and by this reference made a part hereof, specifying the Rental
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Commencement Date, the date of expiration of the Lease Term in accordance with Article l(f) above and certain other matters as therein set forth. The Commencement Date shall be extended one day for each day that completion of construction of Tenant's Work is delayed directly due to Landlord Delay (defined below).
"Landlord Delay" means any negligent act or omission of Landlord or its agents, employees or contractors that actually delays the substantial completion of the Tenant's Work, including Landlord's failure to furnish information or approvals with respect to Tenant's Work within any time period specified in this Lease, including the failure to approve or object to preliminary or final Plans by any applicable due date pursuant to Exhibit "E" attached hereto. A Landlord Delay shall not exist unless Tenant delivers written notice thereof to Landlord within three (3) Business Days after Tenant becomes aware of the negligent act or omission creating such delay and identifying the nature of such delay.
(b)The Demised Premises are accepted by Tenant in "as is" condition and configuration, and there are no representations or warranties of any kind, express or implied, by Landlord regarding the Demised Premises, the Building or the Project. Tenant hereby agrees that the Demised Premises are in good order and satisfactory condition. By taking possession of the Demised Premises, Tenant waives (i) all claims due to defects in the Demised Premises, the Building and/or the Project except (x) minor finish adjustments in the Landlord's Work, if any, specified in reasonable detail in writing by Tenant contemporaneously with talking possession, and (y) latent defects in Landlord's Work (other than work performed by Tenant's Agents) of which Tenant notifies Landlord in writing within 180 days after taking possession; and (ii) all warranties of any kind, express or implied, including, without limitation, those of suitability, habitability and fitness for any particular purpose.
(c)Access to the Demised Premises prior to the Rental Commencement Date shall be subject to the terms and conditions of this Lease and Tenant shall pay Rent to Landlord for each day of such early access. However, if such early access to the Demised Premises is for the sole purpose of performing improvements or installing furniture, equipment or other personal property, Tenant shall not be required to pay Base Rental and Tenant's Additional Rental for any days of such access; provided however, Tenant shall pay for the cost of any other Building services requested by Tenant.
4.Rent Payments: Tenant Taxes.
(a)Tenant shall pay Landlord, without any setoff or deduction, unless expressly set forth in this Lease, all Base Rental, Tenant's Forecast Additional Rental, Tenant's Additional Rental, and any other amounts that Tenant assumes or agrees to pay under the provisions of this Lease that are owed to Landlord, including without limitation any and all other sums that may become due by reason of any default of Tenant or failure on Tenant's part to comply with the agreements, terms, covenants and conditions of this Lease to be performed by Tenant (collectively referred to as "Rent"). The monthly Base Rental and Tenant1s Forecast Additional Rental shall be due and payable in advance on the first day of each calendar month without notice or demand, provided that the installment of Base Rental and Tenant's Forecast Additional Rental for the first one (I) full calendar month(s) of the Lease Term shall be payable not later than January 1, 2019 and shall be applied to the first payment of Base Rental and Tenant's Forecast Additional Rental after the Rent Abatement Period (as defined below). All other items of Rent shall be due and payable by Tenant on or before thirty (30) days after billing by Landlord. Rent shall be made payable to the entity, and sent to the address, Landlord designates and shall be made by good and sufficient check or by other means acceptable to Landlord. Rent for any partial month during the Term shall be prorated. No endorsement or statement on a check or letter accompanying payment shall be considered an accord and satisfaction. Tenant's covenant to pay Rent is independent of every other covenant in this Lease.
(b)From and after the Rental Commencement Date, Tenant shall pay to Landlord Tenant's Forecast Additional Rental and Tenant's Additional Rental as set forth in Exhibit "D" to this Lease. Payment of Tenant's Forecast Additional Rental will be made as set forth in subparagraph (a) above.
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(c)Tenant shall pay and be liable for Tenant's allocable portion of all rental, gross receipts, sales and use, or other taxes, if any, imposed upon or measured by rents, receipts or income attributable to ownership, use, occupancy, rental, leasing, operation or possession of the Project. Tenant also shall pay promptly when due all taxes directly or indirectly imposed or assessed upon Tenant's gross sales, business operations, machinery, equipment, trade fixtures and other personal property or assets, whether such taxes are assessed against Tenant, Landlord or the Building. In the event that such taxes are imposed or assessed against Landlord or the Building, Landlord shall furnish Tenant with all applicable tax bills, public charges and other assessments or impositions and Tenant shall forthwith pay the same either directly to the taxing authority or, at Landlord's option, to Landlord. Tenant shall additionally pay and be liable for Tenant's pro rata share of all taxes, assessments and governmental charges, including any interest and/or penalty thereon (collectively "Taxes") whether or not directly paid by Landlord, asserted due by federal, state, county, municipal or any other taxing districts or taxing authorities (collectively "Taxing Authorities") and irrespective of whether such Taxes are due to Taxing Authorities presently taxing the Project or by other Taxing Authorities subsequently created or otherwise obtaining authority to impose any other Taxes attributable to the Project or its operation (and the costs of contesting any of the same}, including (without limitation) community improvement district taxes and business license taxes and fees and any Taxes payable by Landlord pursuant to V.T.C.A., Texas Tax Code, Chapter 171, Section 171.001, et seq. (the "Texas Margin Tax"), as such statute may be amended or recodified from time to time (but only to the extent such amendment or recodification does not alter the fundamental premise of the Texas Margin Tax as a tax created and imposed in lieu of ad valorem taxes or is otherwise a non-substantive amendment or recodification) allocable to the Project, excluding, however, taxes and assessments imposed on the personal property of the tenants of the Project, federal and state taxes on income, death taxes, franchise taxes imposed or measured on or by the net income, and any taxes (other than business license taxes and fees and the Texas Margin Tax) imposed or measured on or by the net income of Landlord from the operation of the Project.
(d)Notwithstanding anything in this Lease to the contrary, for so long as no event of default has occurred, Tenant shall be entitled to an abatement of the Base Rental, Tenant's Forecast Additional Rental, and Tenant's Additional Rental for the first three (3) full calendar months of the Lease Term (said period is herein referred to as the "Rent Abatement Period"). All Base Rental, Tenant's Forecast Additional Rental, and Tenant's Additional Rental abated during the Rent Abatement Period in accordance with this Article 4(d) is herein collectively referred to as "Abated Rent."Tenant acknowledges that Tenant will be required to pay on the Rental Commencement Date any Rent due for the partial month during which the Rental Commencement Date occurs if the Rental Commencement Date is other than the first day of a full calendar month. Only Base Rental, Tenant's Forecast Additional Rental, and Tenant's Additional Rental shall be abated during the Rent Abatement Period; all other Rent, including, without limitation, overtime HVAC charges and parking charges, shall continue to be due and payable pursuant to the provisions of this Lease. Further, the right to receive an abatement of the Abated Rent pursuant to this Article 4(d) is personal to RigUp, Inc., and may not be assigned, transferred or conveyed to any individual, entity, successor or assign; upon any sublease, assignment or other transfer described in Article 10 below, the right of Tenant to receive an abatement of the Abated Rent shall automatically terminate and be of no further force or effect. Notwithstanding the foregoing to the contrary, if there occurs an event of default beyond applicable notice and cure periods at any time during the Term, all unamortized Abated Rent shall immediately become due and payable by Tenant, and there shall be no further abatement pursuant to this section after such event of default if the event of default occurs during the Rent Abatement Period. The unamortized amount of Abated Rent is calculated by amortizing the aggregate amount of the Abated Rent over the number of months of the Term during which Tenant is required to pay Base Rental at the Default Rate per annum on a monthly basis and multiplying the monthly amortized amount by the number of months remaining in the Term after the applicable event of default. The payment by Tenant of the Abated Rent pursuant to the foregoing after an event of default shall not limit or affect any of Landlord's other rights or remedies pursuant to this Lease, at law or in equity.
5.Tenant's Use of Demised Premises. The Demised Premises may be used for executive, general administrative and office space purposes and no other purposes and in accordance with all applicable laws, ordinances, rules and regulations of governmental authorities and the Rules and Regulations attached hereto as Exhibit "G” and made a part hereof. The occupancy rate of the Demised Premises
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may not exceed one (1) person per 150 square feet of Rentable Floor Area within the Demised Premises. Notwithstanding anything contained in this Article 5 to the contrary, in no event shall the Demised Premises be used for (i) an employment agency, (ii) a dental, medical or chiropractic office, or medical marijuana dispensary or clinic, (iii) a governmental office, subdivision or agency, or (iv) any other purpose which would, in Landlord's reasonable opinion, impair the reputation or quality of the Building, overburden any of the Building systems, Common Areas or parking facilities (including any use which would create a population density in the Premises which is in excess of the density which is standard for the Building), impair Landlord's efforts to lease space or otherwise interfere with the operation of the Project. Tenant covenants and agrees to abide by the Rules and Regulations in all respects as now set forth and attached hereto or as hereafter promulgated by Landlord. Landlord may at all times during the Lease Term publish and promulgate and thereafter enforce such rules and regulations or changes in the existing Rules and Regulations as it may reasonably deem necessary in its sole discretion to protect the tenantability, safety, operation, and welfare of the Demised Premises and the Project.
6.Security Deposit. As security for the faithful performance by Tenant throughout the Lease Term, and any extensions or renewals thereof, of all the terms and conditions of this Lease on the part of Tenant to be performed, Tenant shall deposit with Landlord the sum set forth in Section 4 of Exhibit "J" above upon the execution of this Lease by Tenant. Such amount will be returned to Tenant, without interest, within thirty (30) days after the day set for the expiration of the Lease Term, or any extension or renewal thereof, provided Tenant has fully and faithfully observed and performed all of the terms, covenants, agreements, warranties and conditions hereof on its part to be observed and performed. Landlord will have the right, at any time, to apply all or any part of said deposit toward the cure of any default of Tenant, the repair of any damage to the Demised Premises or otherwise caused by Tenant, or the amount of any Rent owing under this Lease. No application of the security deposit should be construed to limit Landlord's right under applicable law to recover additional sums from Tenant for damages to the Demised Premises. If all or any part of said security deposit is so applied by Landlord, then Tenant shall immediately pay to Landlord an amount sufficient to return said security deposit to the balance on deposit with Landlord prior to said application. In no event will Tenant be entitled to apply the security deposit to any Rent due hereunder. In the event of an act of bankruptcy by or insolvency of Tenant, or the appointment of a receiver for Tenant or a general assignment for the benefit of Tenant's creditors, then the security deposit will be deemed immediately assigned to Landlord. The right to retain the security deposit will be in addition and not alternative to Landlord's other remedies under this Lease or as may be provided by law and will not be affected by summary proceedings or other proceedings to recover possession of the Demised Premises. In the event of a sale or transfer of Landlord's interest in the Demised Premises or the Building or a lease by Landlord of the Building, Landlord will have the right to transfer the within described security deposit to the purchaser or lessee, as the case may be, and Landlord will be relieved of all liability to Tenant for the return of such security deposit. Tenant shall look solely to the new owner or lessee for the return of said security deposit. The security deposit may not be mortgaged, assigned or encumbered by Tenant. Landlord is not required to keep the security deposit separate from its general accounts.
7.Services by Landlord. Landlord shall provide the Building Standard Services described on Exhibit “F" attached hereto and by reference made a part hereof. Services requested or required to be supplied to Tenant in excess of the Building Standard Services will be at Tenant's sole cost and expense and will be paid for by Tenant promptly upon invoice therefor, which invoice may include Landlord's administrative fee. Except as expressly provided elsewhere in this Lease, nothing in this Lease will be deemed to require Landlord to provide to Tenant services in excess of the Building Standard Services.
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8.Repairs and Alterations.
(a)Landlord shall maintain in good order and repair, subject to normal wear and tear and subject to casualty and condemnation, (i) the structural elements of the Building; (ii) standard mechanical (including HVAC), electrical, plumbing and fire/life safety systems serving the Building in general; (iii) the Common Areas; (iv) the roof of the Building; (v) the exterior windows of the Building; and (vi) the elevators serving the Building. Notwithstanding the foregoing obligation, the cost of any repairs or maintenance to the foregoing necessitated by the intentional acts or negligence of Tenant or its directors, officers, partners, members, shareholders, representatives, agents, contractors, employees, servants, invitees, patrons, guests, visitors, licensees, subtenants, assignees, and any other party for whom Tenant is or may become liable or responsible (each and together herein referred to as "Tenant's Agents”), will be borne solely by Tenant and will be deemed Rent hereunder and must be reimbursed by Tenant to Landlord upon demand.
(b)Tenant covenants and agrees that it will take good care of the Demised Premises and all alterations, additions and improvements thereto and will keep and maintain the same in good condition and repair, except for normal wear and tear. Tenant shall periodically inspect the Demised Premises to identify any conditions that are dangerous or in need of maintenance or repair and shall promptly provide Landlord with notice of any such conditions. To the fullest extent permitted by law, Tenant hereby waives all rights to make repairs at the expense of Landlord or in lieu thereof to vacate the Demised Premises as may be provided by any law, statute or ordinance now or hereafter in effect. Landlord has no obligation and has made no promise to alter, remodel, improve, repair, decorate or paint the Demised Premises or any part thereof, except as specifically and expressly herein set forth.
(c)Tenant will be responsible for stopped up drains where such stoppage is caused by the introduction from within the Demised Premises of foreign objects not intended for disposal in such drains. If Landlord repairs such drains, Tenant shall reimburse Landlord, as additional Rent, for the costs of such repairs, together with the costs of any repairs or damage to the Demised Premises or the Building and to the property of other tenants or Landlord which results from such stoppage.
(d)After the initial improvements to the Demised Premises as provided in Exhibit "E" attached hereto, Tenant may not make, suffer or permit to be made any alterations, additions or improvements to or of the Demised Premises or any part thereof, or attach any fixtures or equipment thereto (collectively, "Alterations"), without first obtaining Landlord's written consent, which consent may not be unreasonably withheld or delayed. However, Landlord's consent shall not be required for any Alteration that satisfies all of the following criteria (a "Permitted Alterations"): (i) is of a cosmetic nature such as painting, wallpapering, hanging pictures and installing carpeting; (ii) is not visible from outside the Demised Premises or Building; (iii) will not affect the systems or structure of the Building; (d) does not require work to be performed inside the walls or above the ceiling of the Demised Premises; and (e) does not require securing a building permit from the local authority having jurisdiction over such alterations, additions or improvements. For all alterations, additions or improvements other than Permitted Alterations, complete architectural and engineering drawings must be submitted for Landlord's approval. Tenant shall reimburse Landlord within thirty (30) days after receipt of an invoice for reasonable out-of-pocket sums paid by Landlord for third party examination of Tenant's plans for Alterations. In addition, within thirty (30) days after receipt of an invoice from Landlord, Tenant shall pay to Landlord a fee equal to five percent (5%) of the total cost of such Alterations for Landlord's oversight and coordination of any Alterations, however, only in the event the project scope exceeds $20,000. All Alterations will become Landlord1s property at the expiration or earlier termination of the Lease Term and will remain on the Demised Premises without compensation to Tenant unless, Landlord elects by written notice to Tenant, such written notice to be provided at the time Landlord consents to such Alteration, to have Tenant remove such Alteration, in which event, notwithstanding any contrary provisions respecting such alterations, additions and improvements contained in Article 27 hereof, Tenant shall remove such Alteration on or prior to the expiration or earlier termination of
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the Lease Term and repair any damage to the Demised Premises resulting from the removal of same.
9.Entry by Landlord. Landlord may retain duplicate keys to all doors of the Demised Premises and Landlord and its agents, employees and independent contractors will have the right to enter the Demised Premises at reasonable hours to inspect or show the same, to make repairs, additions, alterations, and improvements to any portion of the Building, including other tenants' premises, all without being liable to Tenant in any manner whatsoever for any damages arising therefrom; provided, however, that Landlord shall, except in case of emergency, afford Tenant such prior notification of an entry into the Demised Premises as may be reasonably practicable under the circumstances. Landlord will be allowed to take into and through the Demised Premises any and all materials that may be required to make such repairs, additions, alterations or improvements. During such time as such work is being carried on in or about the Demised Premises, the Rent provided herein will not abate, and Tenant waives any claim or cause of action against Landlord for damages by reason of interruption of Tenant's business or loss of profits therefrom because of the prosecution of any such work or any part thereof. Landlord does hereby agree to use all reasonable efforts to minimize any interference with Tenant's business caused by any such entry.
10.Assignment and Subletting.
(a)Except as expressly provided herein, Tenant agrees that Tenant will not, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed so long as Tenant complies with this Article 10, assign this Lease or any interest herein or in the Demised Premises, or mortgage, pledge, encumber, hypothecate or grant any license or concession or otherwise transfer or sublet the Demised Premises or any part thereof or permit the use of the Demised Premises by any party other than Tenant. Consent by Landlord to one or more such transfers or subleases will not destroy or waive this provision, and all subsequent transfers and subleases may likewise be made only upon obtaining the prior written consent of Landlord which also may not be unreasonably withheld, conditioned or delayed so long as Tenant complies with this Article 10. Without limiting the foregoing prohibition, in no event may Tenant assign this Lease or any interest herein, whether directly, indirectly or by operation of law, or sublet the Demised Premises or any part thereof or permit the use of the Demised Premises or any part thereof by any party, (i) if the proposed assignee or subtenant is a party who would (or whose use would) detract from the character of the Building as a first-class building, such as, without limitation, an employment agency, a dental, medical or chiropractic office, a medical marijuana dispensary or clinic, or a governmental office, (ii) if the proposed use of the Demised Premises would involve an occupancy rate of more than one (I) person per 150 square feet of Rentable Floor Area of the Demised Premises, (iii) if the proposed assignment or subletting would be to a governmental subdivision or agency or any Person who enjoys diplomatic or sovereign immunity, (iv) if such proposed assignee or subtenant is an existing tenant of the Building, (v) if such proposed assignment, subletting or use would contravene any restrictive covenant (including any exclusive use) granted to any other tenant of the Building or (vi) if (I) Tenant advertised or asked for an effective rental rate for such assignment or subletting that is less than the effective rental rate then being offered by Landlord for vacant space in the Building or (2) the effective rental rate accepted by Tenant under such assignment or subletting would be less than ninety percent (90%) of the effective rental rate then being offered by Landlord for vacant space in the Building. Sublessees or transferees of the Demised Premises for the balance of the Lease Term will become directly liable to Landlord for all obligations of Tenant hereunder, without relieving Tenant (or any guarantor of Tenant's obligations hereunder) of any liability therefor, and Tenant will remain obligated for all liability to Landlord arising under this Lease during the entire remaining Lease Term including any extensions thereof, whether or not authorized herein. If Tenant is a partnership, professional association or a limited liability company, a withdrawal or change, whether voluntary, involuntary or by operation of law, of partners or members owning a controlling interest in the Tenant or having the power to manage the business of Tenant will be deemed a voluntary assignment of this Lease and subject to the foregoing provisions. If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or the sale or transfer of a controlling interest in the capital stock of Tenant, will be deemed a voluntary assignment of this Lease and subject to the foregoing provisions.
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(b)As a condition to considering any request for consent to an assignment or sublease, Tenant must submit a written request ("Request to Assign") to Landlord at least thirty (30) days in advance of the date Tenant desires to make such an assignment or sublease. Tenant's Request to Assign must specify the terms of said proposed sublease or assignment, including the proposed effective date thereof, and the name and address of each proposed subtenant or assignee. Landlord may require Tenant to obtain and submit current financial statements of any proposed assignee (including, without limitation, current financial statements of any prospective guarantor). Landlord will then have a period of fifteen (15) Business Days following receipt of Tenant's Request to Assign within which to notify Tenant in writing whether Landlord elects to: (i) cancel and terminate this Lease as to the space so affected as of the proposed effective date so specified by Tenant in its notice, in which event Tenant will be relieved of all obligations hereunder as to such space (provided however, if Landlord so elects to cancel and terminate this Lease, Tenant may withdraw its Request to Assign by giving Landlord written notice thereof within ten (10) days after receipt of Landlord's election, in which case Landlord will be deemed to have rejected Tenant's proposed assignment or sublease and this Lease will remain in full force and effect with respect to such space); (ii) permit Tenant to assign this Lease or sublet such space for the duration specified by Tenant in its notice; or (iii) reject the proposed assignment or sublease. If Landlord fails to notify Tenant in writing of its election within the fifteen (15) Business Day period, Landlord will be deemed to elect option (iii). If Landlord consents to an assignment or sublease, Tenant shall pay to Landlord a $2,500 fee to cover Landlord's administrative costs and accounting and legal costs (whether provided by Landlord's employees or by third parties) in connection with reviewing and approving the assignment or sublease. Landlord may require an additional security deposit or other form of credit enhancement acceptable to Landlord (including, by way of example and not in limitation, an irrevocable letter of credit, personal guaranties or other collateral in such form and amounts as may be acceptable to Landlord) as a condition of its consent. No assignment of this Lease consented to by Landlord will be effective unless and until Landlord receives an original assignment and assumption agreement, in form and substance satisfactory to Landlord, signed by Tenant and Tenant's proposed assignee, whereby the assignee assumes due performance of this Lease to be done and performed for the balance of the then remaining Lease Term of this Lease. No subletting of the Demised Premises, or any part thereof, will be effective unless Tenant delivers to Landlord an agreement, in form and substance satisfactory to Landlord, signed by Tenant and the proposed sublessee, whereby the sublessee acknowledges the right of Landlord to continue or terminate any sublease, in Landlord's sole discretion, upon termination of this Lease, and such sublessee agrees to recognize and attorn to Landlord in the event that Landlord elects under such circumstances to continue such sublease.
(c)If Landlord exercises its right as of the effective date of such assignment, sublease or other transaction to cancel and terminate this Lease as set forth in subparagraph (b) above, Landlord will not be obligated to pay any consideration to effect such cancellation as to the portion of the Demised Premises and Lease Term with respect to which Landlord has been requested to permit such assignment, sublease or other transaction; and if Landlord elects to cancel and terminate this Lease as to the aforesaid portion of the Demised Premises and for the term proposed to be assigned or subleased, then the Base Rental and other charges payable hereunder will thereafter be proportionally reduced.
(d)If an assignment or sublease is consented to by Landlord under this Article, Tenant and Landlord agree that fifty percent (50%) of all Net Profit actually received by Tenant from such sublease or assignment will be paid by Tenant to Landlord as an additional Rent hereunder as and when received by Tenant. For purposes hereof, the term "Net Profit" means the gross revenue received from the assignee or sublessee, less (i) the Rent paid to Landlord by Tenant with respect to the subleased space during the period of the sublease term or attributable to the period from and after the effective date of the assignment; (ii) the Rent paid to Landlord by Tenant with respect to the subleased space or the space subject to such assignment during the period between the date Tenant ceased all business operations in such space and the commencement of the sublease term or the effective date of the assignment; (iii) any improvement allowance or other economic concession (planning allowance, moving expenses, etc.) actually paid by Tenant to the sublessee or assignee, (iv) reasonable brokerage commissions or attorney's fees actually paid in connection with such sublease or assignment; (v) lease takeover payments and reasonable costs of advertising the space for sublease or assignment actually paid by Tenant; and (vi) the unamortized cost of initial and subsequent improvements to the Demised Premises made by Tenant at Tenant's expense (and without reimbursement from the Construction Allowance or otherwise). When a
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portion of the Demised Premises is sublet, in calculating Net Profit from such sublease, the cost under clause (vi) of the preceding sentence will be allocated on a fair and equitable basis.
(e)Notwithstanding anything contained in this Lease to the contrary, if Tenant assigns this Lease or sublets the Demised Premises in contravention of this Article 10, or if Tenant otherwise, by operation of law, ceases to be the sole occupant of the Demised Premises without the consent of Landlord, the same will be deemed a material default of Tenant, and, in addition to any other rights or remedies Landlord may have with respect to such default, Landlord may also charge and collect from Tenant (and/or the occupant of the Demised Premises) as Rent, an amount equal to 150% of the Rent otherwise reserved and payable under this Lease until such time as Tenant has caused compliance with the terms of this Lease. Occupancy or possession of the Demised Premises will cause said unapproved assignee, sublessee or occupant to be liable directly to Landlord for all amounts chargeable under this Lease, without the granting thereto of right of possession of the Demised Premises. Acceptance by Landlord of any Rent payable hereunder made by anyone other than Tenant as named herein will under no circumstances in and of itself be deemed an approval by Landlord of any assignment or subletting that may be effected without compliance with this Article 10.
(f)Tenant may assign its entire interest under this Lease to its Affiliate or to a successor to Tenant by purchase, merger, consolidation or reorganization without the consent of Landlord, provided that all of the following conditions are satisfied in Landlord's reasonable discretion (a "Permitted Transfer"): (1) no uncured event of default exists under this Lease; (2) Tenant's successor shall own all or substantially all of the assets of Tenant; (3) such Affiliate or Tenant's successor shall have a tangible net worth which is at least equal to the greater of Tenant's tangible net worth at the date of this Lease or Tenant's tangible net worth as of the day prior to the proposed purchase, merger, consolidation or reorganization; (4) no portion of the Building or Demised Premises would likely become subject to additional or different laws as a consequence of the proposed Transfer; (5) such Affiliate's or Tenant's successor's use of the Demised Premises shall not conflict with the permitted use or any exclusive usage rights granted to any other tenant in the Building; (6) such Affiliate or Tenant's successor is not and has not been involved in litigation with Landlord or any of Landlord's Affiliates; (7) Tenant will not be released if Tenant exists as a separate legal entity following the transfer; and (8) Tenant shall give Landlord written notice at least 30 days prior to the effective date of the proposed transfer, along with all applicable documentation and other information necessary for Landlord to determine that the requirements of this Article 10(f) have been satisfied, including if applicable, the qualification of such proposed transferee as an Affiliate of Tenant.
11.Tenant's Insurance. Tenant shall procure at its expense and maintain throughout the Lease Term the following insurance: (a) commercial general liability insurance, insuring Tenant, Landlord and any other Person designated by Landlord, against any and all liability for injury to or death of a person or persons and for damage to property occasioned by or arising out of any construction work being done on the Demised Premises, or arising out of the condition, use, or occupancy of the Demised Premises, or in any way occasioned by or arising out of the activities of Tenant or any of Tenant's Agents in the Demised Premises, or other portions of the Building or the Project, the limits of such policy or policies to be in combined single limits for both damage to property and personal injury and in amounts not less than Three Million Dollars ($3,000,000) for each occurrence (an umbrella policy can be used to satisfy this limit requirement); (b) special form/all-risk insurance insuring the full replacement cost of its furniture, fixtures, equipment, supplies, and other property owned, leased, held or possessed by it and contained in the Demised Premises, together with the excess value of the improvements to the Demised Premises over the Construction Allowance (with a replacement cost endorsement sufficient to prevent Tenant from becoming a co-insurer); (c) business income (formerly "business interruption") insurance written on an actual loss sustained form or with sufficient limits to address reasonably anticipated business interruption losses; and (d) worker's compensation insurance as required by applicable law. Tenant shall also carry such other types of insurance in form and amount which Landlord reasonably deems to be prudent for Tenant to carry, should the circumstances or conditions so merit Tenant carrying such type of insurance. All insurance policies procured and maintained by Tenant pursuant to this Article 11 must name Landlord and any additional parties designated by Landlord as additional insureds, be carried with companies licensed to do business in the state in which the Project is located having a rating from Best's Insurance Reports of not less than A-/VIII, and be non-cancelable and not subject to material change
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except after thirty (30) days' written notice to Landlord (which written notice may be provided by Tenant's insurance carrier or by Tenant). Such policies or duly executed certificates of insurance with respect thereto, accompanied by proof of payment of the premium therefor, must be delivered to Landlord prior to the Rental Commencement Date, and renewals of such policies must be delivered to Landlord at least thirty (30) days prior to the expiration of each respective policy term (which written notice may be provided by Tenant's insurance carrier or by Tenant).
12.Landlord's Insurance. Landlord shall procure and maintain at its expense (but with the expense to be included in Operating Expenses) throughout the Lease Term a policy or policies of special form/all-risk (including rent loss coverage) real and personal property insurance covering the Project (including the leasehold improvements in the Demised Premises up to the amount of the Construction Allowance, but excluding Tenant's personal property and equipment), in an amount equal to the full insurable replacement cost thereof as such may increase from time to time (but such insurance may provide for a commercially reasonable deductible), and in an amount sufficient to comply with any co-insurance requirements in such policy, and a policy of workers' compensation insurance, if any, as required by applicable law. In addition, Landlord shall procure and maintain at its expense (but with the expense to be included in Operating Expenses) and shall thereafter maintain throughout the Lease Term, a commercial general liability insurance policy covering the Project with combined single limits for both damage to property and personal injury of not less than Three Million Dollars ($3,000,000) per occurrence, subject to annual aggregate limits of not less than Five Million Dollars ($5,000,000). Landlord may also carry such other types of insurance in form and amounts which Landlord determines to be appropriate from time to time, and the cost thereof will be included in Operating Expenses. All such policies procured and maintained by Landlord pursuant to this Article 12 must be carried with companies licensed to do business in the state of in which the Project is located. Any insurance required to be carried by Landlord hereunder may be carried under blanket policies covering other properties of Landlord and/or its partners and/or their respective related or affiliated corporations so long as such blanket policies provide insurance at all times for the Project as required by this Lease.
13.Mutual Waiver of Subrogation. Landlord and Tenant shall each have included in all policies of fire, extended coverage, general liability, business income and loss of rents insurance respectively obtained by them covering the Demised Premises, the Building and contents therein, a waiver by the insurer of all right of subrogation against the other in connection with any loss or damage thereby insured against. Any additional premium for such waiver will be paid by the primary insured. To the full extent permitted by law, Landlord and Tenant each waives all right of recovery against the other for, and agrees to release the other from liability for, loss or damage to the extent such loss or damage is covered by valid and collectible insurance in effect at the time of such loss or damage or would be covered by the insurance required to be maintained under this Lease by the party seeking recovery.
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14.Liability of Tenant. Subject to Article 13 hereof, Tenant hereby indemnifies Landlord from and agrees to hold Landlord harmless against, any and all liability, loss, cost, damage or expense, including, without limitation, court costs and reasonable attorney's fees, imposed on Landlord by any Person whomsoever, (a) caused in whole or in part by, due to, occasioned by, or directly or indirectly related to any act or omission of Tenant, or any of Tenant's Agents, (b) resulting or arising from or connected with injury or damage to person or property that occurs in or about the Demised Premises, (c) otherwise occurring in connection with any use of the Demised Premises by Tenant or any of Tenant's Agents or any breach, default, violation or non-performance of any term, provision, covenant or condition on the part of Tenant or any of Tenant's Agents hereunder, or (d) any violation by Tenant or Tenant's Agents of any law, ordinance or governmental order of any kind or of any of the Rules and Regulations. Except as may be provided in Article 13 above, the provisions of this Article 14 shall not apply to damages arising out of bodily injury to persons or damage to property caused by or resulting from the negligence or willful misconduct of Landlord, its agents, employees or contractors acting within the scope of their agency or employment. The provisions of this Article 14 will survive any termination of this Lease.
15.Casualty.
(a)Landlord's Termination Rights.
(i) If the Project or any portion thereof is substantially damaged by fire, storm, wind, water, any act of nature or God, or any other matter beyond the control of Landlord (a “Casualty") not required to be insured against by Landlord hereunder or if the Project or any portion thereof is substantially damaged by Casualty required to be insured against by Landlord but the insurance company is insolvent and financially unable to pay the proceeds which are due (through no fault of Landlord), Landlord will have the right to terminate this Lease by notice to Tenant given within ninety (90) days after the date of such Casualty (the “Damage Date"), provided, however, Landlord will not terminate this Lease pursuant to this subparagraph (a) unless Landlord terminates the leases of all tenants of the Building whose premises (or access thereto) are similarly affected by such Casualty. As used in this Article, the term "substantially damaged" means such damage that the cost of repair and restoration thereof is reasonably estimated by Landlord's architect to exceed Three Million Dollars ($3,000,000).
(ii)If the entire Building or a substantial portion thereof (which may or may not include all or a part of the Demised Premises), or the Building systems or structural components of the Building (whether or not the Demised Premises are directly affected) are substantially damaged or destroyed and such damage or destruction is to the extent that in the reasonable opinion of Landlord's architect delivered in writing to both parties within sixty (60) days after the Damage Date, the damage cannot be repaired or restored within three hundred sixty-five (365) days after the Damage Date, Landlord may terminate this Lease by giving Tenant notice within eighty (80) days after the Damage Date; provided, however, Landlord agrees that it will not terminate this Lease pursuant to this subparagraph (b) unless Landlord terminates the leases of all tenants of the Building whose premises (or access thereto) are similarly affected by such Casualty.
(iii)Notwithstanding anything contained in this Article to the contrary, if Landlord is obligated to restore the Demised Premises or any part of the Project as a result of a Casualty, and (A) if the cost of performing such restoration exceeds the actual proceeds of insurance paid or payable to Landlord on account of such Casualty by more than Three Million Dollars ($3,000,000) ("Landlord's Required Contribution"), or (B) if Landlord's mortgagee or the lessor under a ground or underlying lease requires that any insurance proceeds from a Casualty be paid to it and the cost of such restoration exceeds the actual proceeds of insurance received by Landlord and not paid to such mortgagee or lessor by more than Landlord's Required Contribution, Landlord may terminate this Lease unless Tenant, within twenty (20) days after demand therefor, deposits with Landlord a sum of money sufficient to pay the difference between (Y) the cost of restoration and (Z) the sum of Landlord's Contribution and the proceeds of the insurance received by and available to Landlord for such restoration. In the event Tenant makes such deposit pursuant to the preceding sentence in order to avoid the termination of this Lease, Tenant will have the right to
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set off up to One Million Dollars ($1,000,000.00) of the amount so deposited by Tenant against the Rent next thereafter coming due under this Lease. Landlord agrees that Landlord will not terminate this Lease pursuant to this subparagraph (c) unless Landlord terminates the leases of all tenants of the Building whose premises (or access thereto) is similarly affected by such Casualty.
(b)Tenant's Termination Rights. If the Demised Premises are damaged or destroyed by Casualty, or if any portion of the Project other than the Demised Premises (including, without limitation, the Building or the Parking Facility) is damaged by Casualty such that Tenant's use or enjoyment of or access to the Demised Premises or the Project is materially adversely affected and if, in the reasonable opinion of Landlord's architect, given in writing to both parties within sixty (60) days after the Damage Date, the Demised Premises and such other portions of the Project cannot be repaired or restored to the condition in all material respects that existed prior to the Casualty within three hundred sixty-five (365) days after the Damage Date, Tenant may terminate this Lease by giving notice to Landlord within ninety (90) days after the Damage Date. In addition to the termination right granted to Tenant under the preceding sentence, if the Demised Premises are damaged or destroyed by Casualty, or if any portion of the Project other than the Demised Premises is damaged by Casualty such that Tenant's use or enjoyment of or access to the Demised Premises or the Project is materially adversely affected, and if the Demised Premises and/or such portion of the Project are not materially restored by Landlord to the extent required of Landlord hereunder on or before the date which is fourteen (14) months after the Damage Date, Tenant will have the right to terminate this Lease by giving written notice thereof to Landlord on or before the earlier to occur of (i) the date which is sixteen (16) months after the Damage Date, or (ii) the date Landlord has substantially completed the restoration of the Demised Premises and any portion of the Building required for access to the Demised Premises, as the case may be; provided, however, if construction or reconstruction is delayed because of changes, deletions or additions in construction requested by Tenant, or because of delays caused by force majeure, the fourteen (14) month period for restoration, repair or rebuilding will be extended for the amount of time Landlord is so delayed, but unless the delay is caused by Tenant or its employees or by Tenant's agents or contractors (acting within the scope of their agency or contract), the extension under this proviso will not exceed an additional two (2) months.
If Landlord's architect determines that the Demised Premises and/or Project cannot be repaired or restored to the condition in all material respects that existed prior to the Casualty within three hundred sixty-five (365) days after the Damage Date, Landlord's architect shall specify in its opinion the additional time reasonably required for such repairs or restoration. In the event Tenant has the right in such circumstance to terminate this Lease pursuant to the preceding grammatical paragraph, but Tenant does not elect to so terminate this Lease, the fourteen (14) and sixteen (16)-month periods described in the preceding paragraph will each be extended by such additional time so specified in the opinion of Landlord's architect.
(c)Termination Rights During Last Two (2) Years. Notwithstanding anything in this Article to the contrary, if the Building is substantially damaged or destroyed by Casualty at any time during the last two (2) years of the Lease Term, and Landlord elects not to rebuild and restore the leasehold improvements in the Demised Premises for Tenant, then Landlord may terminate this Lease upon notice to Tenant within sixty (60) days after the Damage Date provided that if Landlord exercises such election to terminate and Tenant has any unexercised option to extend the Lease Term, then Tenant may nullify Landlord's asserted termination of this Lease by exercising Tenant's right to extend the Lease Term, for the Extended Term within thirty (30) days after receipt of Landlord's notice of termination. Also, notwithstanding anything in this Article 15 to the contrary, if either the Demised Premises is materially damaged or destroyed by Casualty, or if any portion of the Building or Project other than the Demised Premises (including the Parking Facility) is damaged or destroyed by Casualty so that Tenant's use or enjoyment of or access to the Demised Premises is materially adversely affected, and such Casualty occurs during the last two (2) years of the Lease Term, Tenant may terminate this Lease upon notice to Landlord within thirty (30) days after the Damage Date, provided that Tenant reasonably determines that the continuation of this Lease is impracticable giving due consideration to the Lease Term which would remain after restoration.
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(d)Landlord's Restoration Obligations. If neither Landlord nor Tenant has the right to terminate this Lease pursuant to the foregoing provisions of this Article, or if the party or parties that have the right to terminate this Lease do not exercise such right as hereinabove provided, Landlord shall have the property damaged by such Casualty repaired or restored to the condition in all material respects that existed prior to the Casualty at the sole expense of Landlord but Landlord's repair obligations as to the leasehold improvements will be limited to the insurance proceeds actually received by Landlord for such repairs. Tenant shall pay all other costs of repairing the leasehold improvements in the Demised Premises. An equitable abatement in Rent will be allowed from the Damage Date for Tenant's loss of use or access until such time that the damage has been repaired or restored in all material respects to its condition prior to the Casualty. Landlord's architect will deliver a notice to both parties within sixty (60) days after the Damage Date stating the time required to repair and restore the damage caused by any Casualty and if Landlord is obligated hereunder to repair and restore such damage, Landlord shall use all reasonable efforts in good faith to repair and restore such damage within the estimated time period, subject to Tenant's rights under Article l5(b) hereof.
(e)Landlord's Architect; Termination Conditions. The opinions of and notices from Landlord's architect contemplated in Articles l5(a), l5(b) and l5(d) hereof will be rendered or given, as the case may be, by a reputable, qualified, licensed architect selected by Landlord. In the event of any termination of this Lease by either party pursuant to this Article, Base Rental, Tenant's Forecast Additional Rental, and Tenant's Additional Rental and any other payments due hereunder will be apportioned and paid to the date of termination and Tenant shall vacate the Demised Premises as soon as reasonably possible following the date of such termination (but in no event later than thirty [30] days after Tenant is permitted access to the Demised Premises following termination); provided, however, that those matters of this Lease which are designated to cover matters of termination and the period thereafter will survive the termination hereof.
(f)Reaffirmation of Lease. Upon the occurrence of any damage to, or destruction of the Demised Premises or any portion of the Project other than the Demised Premises which materially, adversely affects Tenant's use or enjoyment of, or access to, the Demised Premises, and provided that either Tenant does not have the right hereunder to terminate this Lease as a result of such damage or Tenant does have the right hereunder to terminate this Lease but has elected not to (or has failed to) terminate this Lease as provided herein, Tenant shall, within fifteen (15) Business Days after receipt by Tenant of a written request therefor from Landlord and the receipt by Tenant from Landlord or Landlord's architect, as the case may be, of all notices, elections and other information Tenant may reasonably require in order to make any election permitted under this Article, provide Landlord with a written reaffirmation of this Lease, including an acknowledgment that Tenant does not have the right to terminate this Lease as a result of such damage or that Tenant had the right to terminate this Lease but has elected not to (or has failed to) terminate this Lease as herein provided.
16.Eminent Domain. Either party may terminate this Lease if the whole or any material part of the Demised Premises are taken or condemned for any public or quasi-public use under applicable law, by eminent domain or private purchase in lieu thereof, such that Tenant's use or enjoyment of or access to the Demised Premises or the Project is materially adversely affected (a "Taking"). Landlord shall also have the right to terminate this Lease if there is a Taking of any portion of the Building or Project which would leave the remainder of the Building unsuitable for use as an office building in a manner comparable to the Building's use prior to the Taking. In order to exercise its right to terminate this Lease under this Article 16, Landlord or Tenant, as the case may be, must provide written notice of termination to the other within 45 days after the terminating party first receives notice of the Taking. Any such termination shall be effective as of the date the physical taking of the Demised Premises or the portion of the Building or Project occurs. If this Lease is not terminated, the Rentable Floor Area of the Demised Premises and the Building and Tenant's pro rata share shall, if applicable, be appropriately adjusted by Landlord. In addition, Base Rent for any portion of the Demised Premises taken or condemned shall be abated during the unexpired Lease Term effective when the physical taking of the portion of the Demised Premises occurs. All compensation awarded for a Taking, or sale proceeds, shall be the property of Landlord, any right to receive compensation or proceeds being expressly waived by Tenant. However, Tenant may file a
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separate claim at its sole cost and expense for Tenant's trade fixtures, equipment, furniture and other personal property within the Demised Premises (excluding above building standard leasehold improvements) and Tenant's reasonable relocation expenses, provided the filing of such claim does not diminish the award which would otherwise be receivable by Landlord.
17.Default.
(a)The following acts, events or conditions will be deemed to be events of default by Tenant under this Lease:
(i)Tenant fails to pay any installment of Rent or any other charge or assessment against Tenant after the due date thereof and such failure continues for ten (10) days after notice of such failure of payment; provided, however, such notice and such grace period will be required of Landlord only one (1) time during any calendar year, and an event of default will immediately occur upon the second (2nd) failure by Tenant to make a timely payment as aforesaid within that calendar year;
(ii)the failure by Tenant to cease any conduct prohibited by this Lease within three (3) days after receipt of written notice from Landlord requesting cessation thereof, or the failure of Tenant to cease any conduct or eliminate any condition which poses a danger to person or property within twelve (12) hours of receipt of written notice from Landlord requesting cessation of such conduct or elimination of such conditions;
(iii)Tenant or any Guarantor becomes insolvent, files a petition for protection under the U.S. Bankruptcy Code (or similar law) or a petition is filed against Tenant or any Guarantor under such laws and is not dismissed within sixty (60) days after the date of such filing, makes a transfer in fraud of creditors or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts when due;
(iv)a receiver or trustee is appointed for the Demised Premises or for all or substantially all of the assets of Tenant or of any guarantor of this Lease;
(v)Tenant creates or permits anything to be done that creates a lien upon the Demised Premises or the Project and such lien is not removed or discharged within twenty (20) days after the filing thereof;
(vi)Tenant fails to return a properly executed instrument(s) to Landlord in accordance with the provisions of Article 24 hereof within the time period provided for such return following Landlord1s request for same as provided in Article 24;
(vii)Tenant fails to comply with any other term, provision, covenant or warranty made under this Lease by Tenant, other than the payment of the Rent or any other charge or assessment payable by Tenant, and does not cure such failure within thirty (30) days after notice thereof to Tenant; provided, however, that if any such failure is curable but not capable of being cured within such thirty (30) day period, no event of default will have occurred if Tenant commences its efforts to cure such failure within such thirty (30) day period and diligently and continuously pursues such cure to completion within sixty (60) days after such notice; and
(b)Upon the occurrence of any of the aforesaid events of default, Landlord will have the option to pursue any one or more of the following remedies without any notice or demand whatsoever:
(i)terminate this Lease, in which event Tenant is required to immediately surrender the Demised Premises to Landlord and if Tenant fails to do so, Landlord may, without further notice and without prejudice to any other remedy Landlord may have for possession or arrearages in Rent, enter upon and take possession of the Demised Premises and expel or remove Tenant and any other Person who may be occupying said Demised Premises or any part thereof, and its and their effects, without being liable for prosecution or any claim of damages therefor; Tenant hereby agreeing to pay to Landlord on
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demand the amount of all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Demised Premises on satisfactory terms or otherwise;
(ii)terminate Tenant's right of possession, without terminating this Lease, and enter upon and take possession of the Demised Premises as Tenant's agent and expel or remove Tenant and any other Person who may be occupying said Demised Premises or any part thereof, and its and their effects, by entry, dispossessory suit or otherwise, without thereby releasing Tenant from any liability hereunder, without terminating this Lease, and without being liable for prosecution or any claim of damages therefor and, if Landlord so elects, make such alterations, redecorations and repairs as, in Landlord's reasonable judgment, may be necessary or desired to relet the Demised Premises, and Landlord may, but will be under no obligation to do so (except to the extent required by applicable laws), relet the Demised Premises or any portion thereof in Landlord's or Tenant's name, but for the account of Tenant, for such term or terms (which may be for a term extending beyond the Lease Term) and at such rental or rentals and upon such other terms as Landlord may deem advisable, with or without advertisement, and by private negotiations, and receive the rent therefor, Tenant hereby agreeing to pay to Landlord the deficiency, if any, between all Rent reserved hereunder and the total rental applicable to the Lease Term hereof obtained by Landlord upon reletting, and Tenant will be liable for Landlord's damages and expenses in redecorating and restoring the Demised Premises and all actual costs incident to such reletting, including broker's commissions and lease assumptions. In no event will Tenant be entitled to any rentals received by Landlord in excess of the amounts due by Tenant hereunder. Any such demand, reentry and taking of possession of the Demised Premises by Landlord will not of itself constitute an acceptance by Landlord of a surrender of the Lease or of the Demised Premises by Tenant and will not of itself constitute a termination of this Lease by Landlord. Landlord's failure to relet the Demised Premises or to make such alterations, redecorations and repairs as set forth in this paragraph will not release or affect Tenant's liability for Rent or for damages;
(iii)enter upon the Demised Premises without being liable for prosecution or any claim of damages therefor, and do whatever Tenant is obligated to do under the terms of this Lease; and Tenant agrees to reimburse Landlord on demand for any actual expenses including, without limitation, reasonable attorney's fees which Landlord may incur in thus effecting compliance with Tenant's obligations under this Lease. TENANT AGREES THAT LANDLORD SHALL NOT BE LIABLE FOR ANY DAMAGES RESULTING TO TENANT FROM SUCH ACTION AND ACKNOWLEDGES THAT ITS RELEASE OBLIGATIONS HEREUNDER COVER AND RELATE TO, WITHOUT LIMITATION, ANY NEGLIGENT ACTION OR OMISSION OF LANDLORD OR THE LANDLORD PARTIES); or
(iv)without notice, alter the locks and any other security device or devices which allow Tenant access to the Demised Premises or the Building, and Landlord shall not be required to provide a new key or right of access to Tenant, and restrict or terminate any right to use parking facilities associated with the Building as well as Building services to the Demised Premises. This Article 17(b)(iv) is intended to and shall supersede the provisions of Section 93.002 of the Texas Property Code.
(c)If this Lease is terminated by Landlord as a result of the occurrence of an event of default, Landlord may declare to be due and payable immediately, the present value (calculated with a discount factor of eight percent [8%] per annum) of the difference between (x) the entire amount of Rent and other charges and assessments which in Landlord's reasonable determination would become due and payable during the remainder of the Lease Term determined as though this Lease had not been terminated (including, but not limited to, increases in Rent pursuant to Article l(g) hereof), and (y) the then fair market rental value of the Demised Premises for the remainder of the Lease Term. Upon the acceleration of such amounts, Tenant agrees to pay the same at once, together with all Rent and other charges and assessments theretofore due, at Landlord's address as provided herein, it being agreed that such payment does not constitute a penalty or forfeiture but constitutes liquidated damages for Tenant's failure to comply with the terms and provisions of this Lease (Landlord and Tenant agreeing that Landlord's actual damages in such event are impossible to ascertain and that the amount set forth above is a reasonable estimate thereof).
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(d)Pursuit of any of the foregoing remedies will not preclude pursuit of any other remedy herein provided or any other remedy provided by law or at equity, nor will pursuit of any remedy herein provided constitute an election of remedies thereby excluding the later election of an alternate remedy, or a forfeiture or waiver of any Rent or other charges and assessments payable by Tenant and due to Landlord hereunder or of any damages accruing to Landlord by reason of violation of any of the terms, covenants, warranties and provisions herein contained. No reentry or taking possession of the Demised Premises by Landlord or any other action taken by or on behalf of Landlord should be construed to be an acceptance of a surrender of this Lease or an election by Landlord to terminate this Lease unless written notice of such intention is given to Tenant. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default should not be deemed or construed to constitute a waiver of such default. In determining the amount of loss or damage which Landlord may suffer by reason of termination of this Lease or the deficiency arising by reason of any reletting of the Demised Premises by Landlord as above provided, allowance will be made for the expense of repossession. Tenant agrees to pay to Landlord all actual costs and expenses incurred by Landlord in the enforcement of this Lease.
(e)Upon the occurrence of any event of default by Tenant, Tenant shall pay to Landlord all actual costs incurred by Landlord (including court costs and reasonable attorney's fees and expenses) in (i) obtaining possession of the Demised Premises, (ii) removing and storing Tenant's or any other occupant's property, (iii) repairing, restoring, renovating or otherwise putting the Demised Premises into condition acceptable to a new tenant, (iv) if Tenant is dispossessed of, or vacates or abandons, the Demised Premises and this Lease is not terminated, reletting all or any part of the Demised Premises (including, but not limited to, brokerage commissions, cost of tenant finish work, advertising and promotional expenses, and other costs incidental to such reletting), (v) performing Tenant's obligations which Tenant failed to perform, and (vi) enforcing its rights, remedies, and recourses arising out of the default. Landlord's rights and remedies under this Article 17(e) are in addition to the rights and remedies of Landlord set forth in this Article 17 or elsewhere in this Lease, and/or which may otherwise be available to Landlord at law or in equity.
(f)If Tenant does not pay any Rent when due hereunder, Tenant shall pay Landlord an administration fee in the amount of $250.00. In addition, past due Rent shall accrue interest at the lesser of 18% per annum or the highest lawful rate allowed under applicable law (the "Default Rate"), and Tenant shall pay Landlord a reasonable fee for any checks returned by Tenant's bank for any reason.
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18.Landlord's Lien. Landlord waives all contractual, statutory and constitutional liens held by Landlord on Tenant's personal property, goods, equipment, inventory, furnishings, chattels, accounts and assets to secure the obligations of Tenant under this Lease until such time as Landlord may obtain an enforceable judgment against Tenant from a court with jurisdiction of Tenant, at which time Landlord shall have such lien rights at law and in equity to enforce and collect such judgment and Tenant's obligations under this Lease.
19.Landlord's Liability. Landlord will have no personal liability with respect to any of the provisions of this Lease. If Landlord is in default with respect to its obligations under this Lease, Tenant will look solely to the equity of Landlord in and to the Building for satisfaction of Tenant's remedies, if any. It is expressly understood and agreed that Landlord's liability under the terms of this Lease will in no event exceed the amount of its interest in and to said Building. In no event will any partner of Landlord nor any member or joint venturer in Landlord, nor any officer, director or shareholder of Landlord or any such partner, member or joint venturer of Landlord be personally liable with respect to any of the provisions of this Lease. In no event shall Landlord, Cousins Properties LP, CPI Services LLC or Cousins Realty Services, LLC, or their directors, officers, shareholders, partners, members, employees, or agents be liable
in any manner for incidental, consequential or punitive damages, loss of profits, or business interruption.
20.Waiver of Breach. No waiver of any breach of the covenants, warranties, agreements, provisions, or conditions contained in this Lease should be construed as a waiver of said covenant, warranty, provision, agreement or condition or of any subsequent breach thereof, and if any breach occurs and afterwards is compromised, settled or adjusted, this Lease will continue in full force and effect as if no breach had occurred.
21.Landlord's Covenant of Quiet Enjoyment. Provided no event of default exists beyond applicable notice and cure periods and subject to the terms and provisions hereof, Landlord covenants and agrees to take all necessary steps to secure and to maintain for the benefit of Tenant the quiet and peaceful possession of the Demised Premises, for the Lease Term, without hindrance, claim or molestation by Landlord or any other Person lawfully claiming under Landlord.
22.Intentionally deleted.
23.Holding Over. If Tenant remains in possession after expiration or termination of the Lease Term without Landlord's written consent, Tenant will become a tenant-at-sufferance, and there will be no renewal of this Lease by operation of law. During the period of any such holding over, all provisions of this Lease will be and remain in effect except that the monthly rental will be I 50% of the amount of Rent (including any adjustments as provided herein) payable for the last full calendar month of the Lease Term, including renewals or extensions. The inclusion of the preceding sentence in this Lease should not be construed as Landlord's consent for Tenant to hold over. Tenant shall be liable to Landlord for, and shall protect Landlord from and indemnify and defend Landlord against, all claims, including any claims made by any succeeding tenant resulting from such failure to vacate, and any all damages (including, without limitation, consequential damages) that Landlord suffers from the holding over.
24.Subordination, Non-Disturbance and Attornrnent: Estoppel Certificate. Tenant accepts this Lease subject and subordinate to any mortgage(s), deed(s) of trust, ground lease(s) or other lien(s) now or subsequently affecting the Demised Premises, the Building or the Project, and to renewals, modifications, refinancings and extensions thereof (collectively, a "Mortgage"). The party having the benefit of a Mortgage shall be referred to as a "Mortgagee." This clause shall be self-operative, but upon request from a Mortgagee, Tenant shall execute a commercially reasonable subordination and non-disturbance agreement in favor of the Mortgagee. In lieu of having the Mortgage be superior to this Lease, a Mortgagee shall have the right at any time to subordinate its Mortgage to this Lease. If requested by a successor-in-interest to all or a part of Landlord's interest in this Lease, Tenant shall, without charge, attorn to the successor-in-interest. Tenant shall, within ten (10) days after receipt of a written request from Landlord, execute and deliver an estoppel certificate to those parties as are reasonably requested by Landlord (including a Mortgagee or prospective purchaser). The estoppel certificate shall include a
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statement certifying that this Lease is unmodified (except as identified in the estoppel certificate) and in full force and effect, describing the dates to which Rent and other charges have been paid, representing that, to the best of Tenant's knowledge, there is no default (or stating with specificity the nature of the alleged default) and certifying other matters with respect to this Lease that may reasonably be requested. Tenant's failure to provide any estoppel certificate within the ten (10) day period specified above, and the continuation of such failure for a period of five (5) days after Landlord delivers a second written notice requesting same, shall constitute an event of default under this Lease.
Upon Tenant's written request, Landlord shall use commercially reasonable efforts to secure from the Mortgagee under any Mortgage now or hereafter encumbering the Demised Premises a non-disturbance agreement ("SNDA") on the standard form of the Landlord's Mortgagee with or for the benefit of Tenant whereby the Landlord's Mortgagee agrees not to disturb Tenant's possession of the Demised Premises provided Tenant is not in default beyond applicable notice and cure periods; provided, however, Landlord shall have no liability if Landlord's Mortgagee does not agree to provide an SNDA notwithstanding Landlord's commercially reasonable efforts to secure the same. Tenant shall be responsible for any charges, fees or costs assessed by any Landlord's Mortgagee in providing an SNDA. "Commercially reasonable efforts" of Landlord shall not require Landlord to incur any cost, expense or liability to obtain an SNDA.
25.Attorneys' Fees. If either party institutes a suit against the other for violation of or to enforce any covenant or condition of this Lease, or if either party intervenes in any suit in which the other is a party to enforce or protect its interest in or rights under this Lease, then the Prevailing Party shall be entitled to all of its costs and expenses, including reasonable attorneys' fees. The term "Prevailing Party" means the party, either Landlord or Tenant, that establishes a breach of this Lease by the other party or otherwise establishes liability of the other party for wrongful conduct, regardless of whether actual damages are awarded. In the case where both parties prevail on different claims, the Prevailing Party shall be the party that is awarded the greater amount of damages.
26.Notices. If a demand, request, approval, consent or notice (collectively, a "notice") shall or may be given to either party by the other, the notice shall be in writing and delivered by hand or sent by registered or certified mail with return receipt requested, or sent by overnight or same day courier service, at the party's respective Notice Address(es) set forth in Article 1, except that if Tenant has vacated the Demised Premises (or if the Notice Address for Tenant is other than the Demised Premises, and Tenant has vacated such address) without providing Landlord a new Notice Address, Landlord may serve notice in any manner described in this Article or in any other manner permitted by Law. Each notice shall be deemed to have been received or given on the earlier to occur of actual delivery or the date on which delivery is first refused, or, if Tenant has vacated the Demised Premises or the other Notice Address of Tenant without providing a new Notice Address, three (3) days after notice is deposited in the U.S. mail or with a courier service in the manner described above. Either party may, at any time, change its Notice Address by giving the other party written notice of the new address in the manner described in this Article.
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27.Surrender of Demised Premises. Upon the expiration or other termination of this Lease, Tenant shall quit and surrender to Landlord the Demised Premises and every part thereof and all alterations, additions and improvements thereto, broom clean and in good condition and state of repair, reasonable wear and tear only excepted. If Tenant is not then in default, Tenant shall remove all personalty and equipment not attached to the Demised Premises which it has placed upon the Demised Premises, and Tenant shall restore the Demised Premises to the condition immediately preceding the time of placement thereof. Tenant will not be responsible for removing wires and cables installed by Tenant in the Demised Premises and other portions of the Building to serve Tenant's telecommunications and computer systems in the Demised Premises ("Cabling") provided the same are properly mapped and tagged by Tenant, including identification of each data junction box and the centrally located patch panel. Tenant will be responsible for removing all other Cabling, and the removal of such Cabling will be effected by Tenant without damage to the Building and without interference with the business or operations of Landlord or any other tenant of the Building. If Tenant fails or refuses to remove all of Tenant's effects, personalty and equipment from the Demised Premises and the Building upon the expiration or termination of this Lease for any cause whatsoever or upon the Tenant being dispossessed by process of law or otherwise, such effects, personalty and equipment will be deemed conclusively to be abandoned and may be appropriated, sold, stored, destroyed or otherwise disposed of by Landlord without written notice to Tenant or any other party and without obligation to account for them. Tenant shall pay Landlord on demand any and all expenses incurred by Landlord in the removal of such property, including, without limitation, the cost of repairing any damage to the Building or Project caused by the removal of such property and storage charges (if Landlord elects to store such property). The covenants and conditions of this Article 27 will survive any expiration or termination of this Lease.
28.Hazardous Substances. Tenant hereby covenants and agrees that Tenant will not cause or permit any "Hazardous Substances" (as hereinafter defined) to be generated, placed, held, stored, used, located or disposed of at the Project or any part thereof, except for Hazardous Substances as are commonly and legally used or stored as a consequence of using the Demised Premises for general office and administrative purposes, but only so long as the quantities thereof do not pose a threat to public health or to the environment or would necessitate a "response action", as that term is defined in CERCLA (as hereinafter defined), and so long as Tenant strictly complies or causes compliance with all applicable governmental rules and regulations concerning the use, storage, production, transportation and disposal of such Hazardous Substances. Promptly upon receipt of Landlord1s request, Tenant shall submit to Landlord true and correct copies of any reports filed by Tenant with any governmental or quasi-governmental authority regarding the generation, placement, storage, use, treatment or disposal of Hazardous Substances on or about the Demised Premises. Tenant also agrees to cooperate with Landlord and to provide access by Landlord and Landlord's representatives to any Tenant's records with respect to the Demised Premises relating to any assessment of the environmental condition of the Demised Premises and the generation, placement, storage, use, treatment or disposal of Hazardous Substances on or about the Demised Premises. For purposes of this Article 28, “Hazardous Substances" means and includes those elements or compounds which are contained in the list of Hazardous Substances adopted by the United States Environmental Protection Agency (EPA) or in any list of toxic pollutants designated by Congress or the EPA or which are defined as hazardous, toxic, pollutant, infectious or radioactive by any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to or imposing liability (including, without limitation, strict liability) or standards of conduct concerning, any hazardous, toxic or dangerous waste, substance or material, as now or at any time hereinafter in effect (collectively "Environmental Laws"). Tenant hereby agrees to indemnify Landlord and hold Landlord harmless from and against any and all losses, liabilities, including strict liability, damages, injuries, expenses, including reasonable attorney's fees, costs of settlement or judgment and claims of any and every kind whatsoever paid, incurred or suffered by, or asserted against, Landlord by any Person for, with respect to, or as a direct or indirect result of, the presence in, or the escape, leakage, spillage, discharge, emission or release from, the Demised Premises of any Hazardous Substances (including, without limitation, any losses, liabilities, including strict liability, damages, injuries, expenses, including reasonable attorney's fees, costs of any settlement or judgment or claims asserted or arising under the Comprehensive Environmental Response, Compensation and Liability Act ["CERCLA"], any so called federal, state or local "Superfund" or “Superlien” laws or any other Environmental Law); provided, however, that the foregoing indemnity is limited to matters arising solely from Tenant's
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violation of the covenant contained in this Article. The obligations of Tenant under this Article will survive any expiration or termination of this Lease.
29.Miscellaneous.
(a)Governing Law; Jurisdiction and Venue: Severability: Paragraph Headings. This Lease and the rights and obligations of the parties shall be interpreted, construed and enforced in accordance with the laws of the State in which the Project is located. All obligations under this Lease are performable in the county or other jurisdiction where the Project is located, which shall be venue for all legal actions. If any term or provision of this Lease shall be invalid or unenforceable, then such term or provision shall be automatically reformed to the extent necessary to render such term or provision enforceable, without the necessity of execution of any amendment or new document. The remainder of this Lease shall not be affected, and each remaining and reformed provision of this Lease shall be valid and enforced to the fullest extent permitted by law. The headings and titles to the Articles and Sections of this Lease are for convenience only and shall have no effect on the interpretation of any part of this Lease. The words "include", "including'' and similar words will not be construed restrictively to limit or exclude other items not listed.
(b)Cumulative Rights. All rights, powers and privileges conferred hereunder upon the parties hereto are cumulative to, but not restrictive of, or in lieu of those conferred by law.
(c)Recording. Tenant shall not record this Lease or any memorandum without Landlord's prior written consent.
(d)Force Majeure. Whenever a period of time is prescribed for the taking of an action by Landlord or Tenant, the period of time for the performance of such action shall be extended by the number of days that the performance is actually delayed due to strikes, acts of God, shortages of labor or materials, war, terrorist attacks (including bio-chemical attacks), civil disturbances and other causes beyond the reasonable control of the performing party (''force majeure"). However, events of force majeure shall not extend any period of time for the payment of Rent or other sums payable by either party or any period of time for the written exercise of an option or right by either party.
(e)Transferability: Release of Landlord. Landlord shall have the right to transfer and assign, in whole or in part, all of its rights and obligations under this Lease and in the Building and/or Project, and upon such transfer Landlord shall be released from any further obligations hereunder, and Tenant agrees to look solely to the successor in interest of Landlord for the performance of such obligations.
(f)Brokers. Tenant represents that it has dealt directly with and only with Colliers International (whose commission shall be paid by Landlord pursuant to a separate written agreement) in connection with this Lease. TENANT AND LANDLORD SHALL EACH INDEMNIFY THE OTHER AGAINST ALL COSTS, EXPENSES, ATTORNEYS' FEES, LIENS AND OTHER LIABILITY' FOR COMMISSIONS OR OTHER COMPENSATION CLAIMED BY ANY BROKER OR AGENT CLAIMING THE SAME BY, THROUGH OR UNDER THE INDEMNIFYING PARTY OTHER THAN THE BROKER(S) SPECIFICALLY IDENTIFIED ABOVE.
(g)Authority; Joint and Several Liability. Landlord covenants, warrants and represents that each individual executing, attesting and/or delivering this Lease on behalf of Landlord is authorized to do so on behalf of Landlord, this Lease is binding upon and enforceable against Landlord, and Landlord is duly organized and legally existing in the state of its organization and is qualified to do business in the state in which the Premises are located. Similarly, Tenant covenants, warrants and represents that each individual executing, attesting and/or delivering this Lease on behalf of Tenant is authorized to do so on behalf of Tenant, this Lease is binding upon and enforceable against Tenant; and Tenant is duly organized
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and legally existing in the state of its organization and is qualified to do business in the state in which the Premises are located. If there is more than one Tenant, or if Tenant is comprised of more than one party or entity, the obligations imposed upon Tenant shall be joint and several obligations of all the parties and entities. Notices, payments and agreements given or made by, with or to any one person or entity shall be deemed to have been given or made by, with and to all of them.
(h)Time is of the Essence: Relationship: No Estate: Successors and Assigns. Time is of the essence with respect to Tenant's performance of its obligations and the exercise of any refusal, offer, expansion, renewal or extension rights or other options granted to Tenant. This Lease shall create only the relationship of landlord and tenant between the parties, and not a partnership, joint venture or any other relationship. This Lease creates the relationship of landlord and tenant only between Landlord and Tenant and no estate will pass out of Landlord. Tenant has only a usufruct, not subject to levy and sale and not assignable in whole or in part by Tenant except as herein provided. This Lease and the covenants and conditions in this Lease shall inure only to the benefit of and be binding only upon Landlord and Tenant and their permitted successors and assigns.
(i)Survival of Obligations. The expiration of the Term, whether by lapse of time or otherwise, shall not relieve either party of any obligations which accrued prior to or which may continue to accrue after the expiration or early termination of this Lease.
(j)Binding Effect. Landlord has delivered a copy of this Lease to Tenant for Tenant's review only, and the delivery of it does not constitute an offer to Tenant or an option. This Lease shall not be effective against any party hereto until an original copy of this Lease has been signed by such party and delivered to the other party and, if required, upon approval by Landlord's Mortgagee.
(k)Full Agreement: Amendments. This Lease contains the parties' entire agreement regarding the subject matter hereof. All understandings, discussions, and agreements previously made between the parties, written or oral, are superseded by this Lease, and neither party is relying upon any warranty, statement or representation not contained in this Lease. This Lease may be modified only by a written agreement signed by Landlord and Tenant. The exhibits, schedules and riders attached hereto are incorporated herein and made a part of this Lease for all purposes.
(l)Financial Statements. Upon Landlord's written request therefor, but not more often than once per year (unless Tenant is in default of this Lease beyond any applicable notice and cure period), Tenant shalt promptly furnish to Landlord a financial statement with respect to Tenant for its most recent fiscal year prepared in accordance with generally accepted accounting principles and certified to be true and correct by Tenant, which statement Landlord agrees to keep confidential and not disclose to unaffiliated third parties (other than Landlord's partners, attorneys, accountants and Building manager) except in connection with proposed sale or loan transactions.
(m)Patriot Act. Each party hereto represents and warrants to the other that such party is not, and is not acting, directly or indirectly, for or on behalf of, any Person named as a “specially designated national and blocked person” (as defined in Presidential Executive Order 13224) on the most current list published by the U.S. Treasury Department Office of Foreign Assets Control, and that such party is not engaged in this transaction, directly or indirectly, on behalf of, and is not facilitating this transaction, directly or indirectly, on behalf of, any such Person. Each party also represents and warrants to the other that neither such party nor its constituents or Affiliates are in violation of any laws relating to terrorism or money laundering, including the aforesaid Executive Order and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law 107-56), as amended. Each party hereby agrees to defend, indemnify and hold harmless the other party from and against any and all claims, damages, losses, risks, liabilities and expenses (including reasonable
22
attorney's fees and costs} arising from or related to any breach of the foregoing representations and warranties by the indemnifying party.
(n)Texas Tax Code Provisions. Tenant hereby waives any right it may have under Section 41.413 of the Texas Tax Code to protest (and Tenant hereby agrees that it shall not protest) the appraised value of all or any portion of the Demised Premises, the Building or the Project, and Tenant further waives any right it may have under Section 42.015 of the Texas Tax Code to appeal an order of the appraisal review board with respect to all or any portion of the Demised Premises, the Building and/or the Project. Tenant agrees that Landlord shall have the sole right to protest any appraisals of the Demised Premises, the Building and the Project. Tenant also hereby waives any right it may have to receive a copy of any notice received by Landlord of reappraisal of all or any portion of the Demised Premises, the Building and/or the Project, including without limitation any notice required under Section 4l.413(d) of the Texas Tax Code. Tenant agrees that Landlord shall not be liable to Tenant for any damages for Landlord's failure to send to Tenant a copy of any notice of reappraisal concerning the Demised Premises, the Building and/or the Project, irrespective of any obligation under applicable laws of Landlord to provide such notice. Notwithstanding the foregoing, if Tenant protests, challenges or appeals any valuation for property tax purposes of all or any portion of the Demised Premises, the Building and/or the Project, and such valuation increases from the value protested, appealed or challenged, Tenant agrees to indemnify Landlord on an after-tax basis for any property taxes due as a result of such increase and for all other costs and expenses incurred by Landlord as a result thereby.
(o)Texas DTPA Provisions. TENANT HEREBY WAIVES ALL ITS RIGHTS UNDER THE TEXAS DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT, SECTION 17.41 ET. SEQ. OF THE TEXAS BUSINESS AND COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF TENANT'S OWN SELECTION, TENANT VOLUNTARILY CONSENTS TO THIS WAIVER.
(p)Confidentiality. Tenant acknowledges that the terms and conditions of this Lease are to remain confidential for Landlord's benefit, and may not be disclosed by Tenant to anyone, by any manner or means, directly or indirectly, without Landlord's prior written consent; provided, however, that any of such information may be disclosed to Tenant's representatives who need to know such information for the purposes of fulfilling the obligations under this Lease and utilizing the Demised Premises (it being understood that such representatives shall be informed of (i) the confidential nature of such information and (ii) the obligation of confidentiality undertaken under this Lease, and shall be directed to treat such information confidentially). The consent by Landlord to any disclosures shall not be deemed to be a waiver on the part of Landlord of any prohibition against any future disclosure. Tenant agrees to be responsible for any breach of this section by any third party to whom Tenant has provided confidential information, or any portion thereof. If Tenant or any third party to whom Tenant has provided information regarding the terms and conditions of this Lease becomes legally compelled (by oral question, deposition, interrogatory, request for documents, subpoena, civil investigative demand or similar process or by rule, regulation or other applicable law) to disclose any information, Tenant shall promptly notify Landlord of such requirement before any disclosure is made so that Landlord (at its own expense) may seek a protective order or other appropriate remedy or may waive compliance with the terms of this section. If such protective order or other remedy is not obtained, or if Landlord waives compliance with the provisions of this section, Tenant agrees that only that portion of the information regarding the terms and conditions of this Lease which it is legally required to disclose (as advised by a written opinion of counsel) will be disclosed, and Tenant agrees to exercise its best efforts to obtain assurance that the information will be treated confidentially upon disclosure. Landlord and Tenant agree that disclosure of any of the terms and conditions of this Lease could irreparably injure Landlord and Landlord's relationships with other tenants in the Building, and Landlord shall be entitled to equitable relief
23
in the event of any breach or threatened breach of this section. Such remedies shall not be exclusive. The provisions of this section shall survive any expiration or termination of this Lease.
[Signature Page Attached]
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IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the day, month and year first above written
| “LANDLORD” | |||||
| COUSINS - ONE CONGRESS PLAZA LLC, | |||||
| a Delaware limited liability company | |||||
| By: | /s/ Tim Hendricks | ||||
| Tim Hendricks | |||||
| Senior Vice President & Managing Director | |||||
| “TENANT” | |||||
| RIGUP, INC., | |||||
| a Delaware corporation | |||||
| By: | /s/ John Mark Warren | ||||
| John Mark Warren | |||||
| VP Finance | |||||
25
Schedules/Exhibits Omitted from Sublease Agreement
Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. CS Disco, Inc. agrees to furnish a copy of any omitted schedules to the Securities and Exchange Commission upon request.
List of Omitted Schedules/Exhibits:
Exhibit B. Copy of Floor Plan(s) of Subleased Premises
Exhibit C. Office Furniture List
Exhibit D. Form of Bill of Sale
Exhibit E. Planned Door System Repair
Exhibit 31.1
CERTIFICATION PURSUANT TO RULES 13a-14(a) UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kiwi Camara, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of CS Disco, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows for the registrant as of, and for the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: August 12, 2022 | By: | /s/ Kiwi Camara | |||||||||
| Name: | Kiwi Camara | ||||||||||
| Title: | Chief Executive Officer | ||||||||||
| (Principal Executive Officer) | |||||||||||
Exhibit 31.2
CERTIFICATION PURSUANT TO RULES 13a-14(a) UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael Lafair, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of CS Disco, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows for the registrant as of, and for the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: August 12, 2022 | By: | /s/ Michael Lafair | |||||||||
| Name: | Michael Lafair | ||||||||||
| Title: | Chief Financial Officer | ||||||||||
| (Principal Financial and Accounting Officer) | |||||||||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of CS Disco, Inc. (the “Company”) for the period ended June 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: August 12, 2022 | By: | /s/ Kiwi Camara | ||||||||||||
| Name: | Kiwi Camara | |||||||||||||
| Title: | Chief Executive Officer | |||||||||||||
| (Principal Executive Officer) | ||||||||||||||
| Date: August 12, 2022 | By: | /s/ Michael Lafair | ||||||||||||
| Name: | Michael Lafair | |||||||||||||
| Title: | Chief Financial Officer | |||||||||||||
| (Principal Accounting and Financial Officer) | ||||||||||||||
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