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Item 7. Management’s Discussion and Analysis

2021-03-01 compared with 2020-03-02 · 217 added, 218 removed, 203 unchanged (68% of the section changed)

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This discussion and analysis contains forward-looking statements that are based on our current expectations and reflect our plans, estimates and anticipated future financial performance.

See the section of this Annual Report entitled “Cautionary Note Regarding Forward-Looking Statements” for additional information.

These statements involve numerous risks and uncertainties.

These statements involve numerous risks and uncertainties, including those related to the anticipated impact on our business from, and our response to, the COVID-19 pandemic.

Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the section of this Annual Report entitled "Risk Factors".

See the section of this Annual Report entitled “Cautionary Note Regarding Forward-Looking Statements” for additional information.

The following discussion and analysis of our financial condition and results of operations discusses 2020 and 2019 items and year-over-year comparisons between 2020 and 2019.

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“Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019.

Our mission is to revolutionize vertical industry businesses by providing great software and services.

To that end, today we offer industry-specific, cloud-based business software solutions, services and data analytics to the real estate market, which represents over 90% of our revenue, and, to a lesser extent, to the legal market.

Although specific functionality varies by product, our core solutions address common business operations and interactions of businesses in our targeted verticals.

In addition to our core solutions, we offer a range of optional, but often business-critical, Value+ services.

Our Value+ services are built to enhance, automate and streamline property management processes and support workflows essential to our customers' businesses.

Our real estate software solutions provide our property management customers (including third-party property managers and owner-operators who manage single- and mutli- family residences, community associations, commercial properties, and student housing, as well as mixed real estate portfolios) with a system of record to automate essential business processes, a system of engagement to enhance business interactions between our customers and their clients and other stakeholders, and a system of intelligence designed to leverage data to predict and optimize business workflows in order to enable superior customer experiences and increase efficiency across our customers' businesses.

We provide innovative software, services and data analytics to customers in the real estate industry.

Our industry-specific, cloud-based solutions are used primarily by property managers, and also by numerous other constituencies in the property management business ecosystem.

These other constituencies include property owners, rental prospects, tenants and service providers, whom we refer to collectively as "users".

Although specific functionality varies by product, our core solutions are designed to enable our customers to digitally transform their businesses, address critical business operations and enable exceptional customer service.

In addition to our core solutions, we offer an array of optional, but often business-critical, Value+ services that are designed to enhance, automate and streamline processes and workflows that are essential to our customers' businesses.

Our Value+ services are generally available on an as-needed basis and enable our customers to adapt our offerings to their specific operational requirements.

Our property management solutions and services provides our customers with a system of record to automate essential business processes, a system of engagement to enhance business interactions between our customers and a variety of users and a system of intelligence designed to leverage data to predict and optimize business workflows to increase efficiency across our customers' businesses.

Our mobile-optimized software solutions are designed for use across multiple devices and operating systems.

Our software solutions are all offered as a service for our customers and hosted using a

modern cloud-based architecture.

This architecture leads to rich data sets that have a consistent schema across our customer base and enables us to deploy data-powered products and services for our customers.

We also provide software solutions to the legal market that enable law firms to administer their practice and manage their caseloads more efficiently by centralizing case details in a single system of record and system of engagement.

We have focused on growing our revenue by increasing the size of our customer base in the markets we serve, increasing the number of units under management, introducing new or expanded Value+ services, retaining customers, and increasing the adoption and utilization of our Value+ services by new and existing customers.

We evaluate the success of our business during the periods presented based on factors such as the development and launch of new and innovative core functionality and Value+ services, enhancements to user experience, customer satisfaction, growth in our revenue and customer base, fluctuations in costs and operating expenses as a percentage of revenue, operating loss or income and cash flows from operating activities.

To date, we have experienced rapid revenue growth due to our investments in research and product development, sales and marketing, customer service and support, and infrastructure.

We intend to continue to invest in growth across our organization as we expand in our current and adjacent markets and into new verticals.

These investments to grow our business will continue to increase our costs and operating expenses on an absolute basis.

Many of these investments will occur in advance of our realization of revenue or any other benefit, which will make it difficult to determine if we are allocating our resources effectively and efficiently.

We expect our operating margins will improve over the long term, but this trend may be interrupted from time to time as a result of accelerated investment opportunities occurring in advance of realization of revenue.

We have managed, and plan to continue to manage, our business towards the achievement of long-term growth that we believe will positively impact long-term stockholder value, and not towards the realization of short-term financial or business metrics, or short-term stockholder value.

We have invested, and intend to continue to invest, in our business to capitalize on our market opportunity.

Accordingly, if opportunities arise that might cause us to sacrifice our performance with respect to short-term financial or business metrics, but that we believe are in the best interests of our stockholders in the long term, we will take those opportunities.

At December 31, 2019 , we had approximately 1,240 employees, and we consider our relationship with them to be very good.

We also hire temporary employees and consultants, and feel similarly about our relationships with them.

None of our employees is represented by a labor union or covered by a collective bargaining agreement.

Real Estate Overview

In 2008, we entered the real estate market with our first product, APM, a property management solution designed to address the unique operational and business requirements of property management companies.

Recognizing that our customers and their stakeholders would benefit from additional business critical services, we launched a series of Value+ services beginning in 2009.

Our first Value+ service assisted our customers in the marketing of their rental properties by offering property level website design and hosting services.

In 2010, we commenced the roll out of our electronic payment services, thereby facilitating the payment of rent via ACH by tenants.

In 2011, we launched tenant screening services, further assisting our customers with the leasing process.

In 2012, we introduced our legal liability to landlord insurance program, which protects property owners and managers from certain defined losses.

In 2013, we expanded our electronic payment services by allowing residents to pay rent by ECP and credit or debit card.

In 2014, we launched a tenant-facing contact center solution to assist our property managers with resolving incoming maintenance requests.

In 2015, we expanded the marketing services offered to our property management customers with a premium leads service built on technology acquired with our acquisition of RentLinx and expanded our electronic payment services to facilitate payments made between our customers and property owners and vendors.

In 2016, we introduced a tenant debt collection Value+ service to assist our property managers with running a more efficient business.

In 2017, we expanded our insurance services to enable tenants to purchase renters insurance from within APM, protecting both our property management customers and their tenants.

In 2018, we acquired substantially all of the assets of WegoWise, a provider of cloud-based utility analytics software solutions, and began offering AppFolio Utility Management as a Value+ service to our property management customers in mid-2019.

In 2018, we also released APM PLUS, a new tier of APM designed for larger businesses with more complex needs.

Our software solutions are offered as a service, are hosted using a modern cloud-based architecture, and in part, use artificial intelligence technologies.

This architecture leads to rich data sets that have a consistent schema across our customer and user base and enables us to deploy data-powered products and services for our customers and users.

In 2008, we introduced APM, a property management solution designed to address the unique operational and business requirements of property management companies and their business ecosystems.

Recognizing that our customers and their business ecosystems would benefit from additional business critical services, we launched a series of Value+ services beginning in 2009.

Our Value+ services are tailored to the specific workflows of property management businesses and generally fall into the categories of marketing and leasing, electronic payment services, business optimization and risk mitigation.

In 2018, we introduced APM PLUS, a tier of APM designed for larger businesses with more complex needs.

APM PLUS builds upon the functionality of APM and additionally offers data analytics, configurable workflows, and revenue management and optimization functionality for our customers.

In January 2019, we acquired Dynasty, a provider of advanced AI solutions for the real estate market, and began offering an AI Leasing Assistant, Lisa, as a Value+ service to our property management customers in mid-2019.

In April 2019, we launched AppFolio Investment Management, which enables real estate investment managers to better manage their investor relationships by increasing transparency and streamlining certain business processes.

Over 90% of our annual revenue is derived directly and indirectly from the software solutions, services and data analytics we offer to the real estate market.

The significant majority of our customers in the real estate market use our property management solutions.

We define our property management customer base as the number of customers subscribing to our property management core solutions.

Customer count and property management units under management are presented in the table below:

In April 2019, we launched AppFolio Investment Management, which is designed to enable real estate investment managers to better manage their investor relationships by increasing transparency and streamlining certain business processes.

We do not separately break out customer information at this time.

APM and APM PLUS serve our property management customers, including third-party property managers and owner operators, who typically manage single- and multi-family residential, and others who manage community association, and commercial properties.

Our solutions and services also serve other constituencies in the property management market, including property owners, rental prospects, tenants and service providers.

Revenue generated from each customer varies based on the type of property, the number of units under management, and the level of adoption and utilization of Value+ services by the customer and users.

Revenue per unit generated from each customer typically varies based on the type of property and the level of adoption and utilization of Value+ services by the customer and users.

For example, revenue generated per community association unit, which represent a growing percentage of our overall units, is lower than revenue generated per residential unit given the unique and complex needs of the residential rental lifecycle and resulting impact on the adoption and utilization of V+ services.

Property management customer count and property management units under management are presented in the table below.

We define property management customers as those paying for a subscription to our core solutions.

Quarter Ended

September 30,

December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,

Property management customers 15,724 15,352 15,011 14,729 14,385 14,034 13,737 13,409

Property management units under management (in millions) 5.36 5.12 4.94 4.8 4.64 4.41 4.23 4.08

Legal Overview

We entered the legal market with the acquisition of MyCase in 2012.

In 2013, we introduced website design and hosting services, our first Value+ service for our legal market customers, designed to assist smaller law firms and solo practitioners with the marketing of their practices, electronic storage of case information and communications.

In 2016, we launched electronic payments services for the legal market, which streamlined the billing and receivables process through MyCase.

Similar to our offerings in the real estate market, our software solutions and Value+ services in the legal market are subject to strict legal, regulatory and other requirements.

Please refer to Item 1A., "Risk Factors", for a more complete discussion of these and other risk-related issues.

Our legal customers directly and indirectly account for less than 10% of our annual revenue.

We define our legal customer base as the number of customers subscribing to MyCase core solutions, exclusive of free trial periods.

Legal customer count is summarized in the table below:

Quarter Ended

September 30,

Law firm customers

To date, we have experienced rapid revenue growth due to strong relationships with our customers, our investments in research and product development, sales and marketing, customer service and support, and infrastructure.

We have invested, and intend to continue to invest, in our business to capitalize on our market opportunity by working closely with our customers, prospects, partners and other industry participants to inform our product strategy.

Over the long-term, these investments are expected to continue to increase our costs and operating expenses on an absolute basis.

We expect our operating margins will improve over the long-term, but this trend may be interrupted from time to time as a result of accelerated investment opportunities occurring in advance of realization of revenue.

We rely heavily on our talented team of employees to execute our growth plans and achieve our long-term strategic objectives.

We believe our people are at the heart of our success and our customers' success, and we have worked hard not only to attract and retain talented individuals, but also to provide a challenging and rewarding environment to motivate and develop our valuable human capital.

Beginning in March 2020, in an effort to protect our employees and comply with applicable government orders, we transitioned our employees to a remote work environment and restricted non-essential employee travel.

We currently expect the majority of our employees will continue working remotely at least through the second quarter of 2021.

Our workforce has continued to effectively develop and support our software and services offerings notwithstanding the current environment.

We take the health and welfare of our people very seriously, and have encouraged safe practices designed to stem the infection and spread of COVID-19 within our workforce and beyond and to maintain the mental health and well-being of our employees.

However, if the COVID-19 pandemic requires remote working conditions for a prolonged period of time, it could have an adverse impact on the productivity of our employees, which would harm our business and impede our ability to achieve our strategic objectives.

For example, certain employees with younger children have been required to respond to ongoing school closures and adapt to a distance learning environment, and may be required to continue to do so for the foreseeable future.

Furthermore, we have a limited history of remote work and the long-term impact on, and the resulting types of continuing investments necessary for, our employee base is uncertain.

Moreover, the COVID-19 pandemic may have long-term effects on the nature of the office environment and remote working.

This may present operational and workplace culture challenges that may adversely affect our business.

However, we are committed to our employees returning to the workplace in the long-term, and have recently constructed a new office space in Santa Barbara, California, extended the lease for our office in Richardson, Texas and are seeking new office space to lease in San Diego, California to accommodate our employees' return to the workplace in the future.

We began fiscal year 2020 with healthy demand for our core solutions and Value+ services, many of which are designed to enable our customers to manage their businesses virtually.

During the twelve months ended December 31, 2020, we experienced some variability in demand for certain Value+ services after lock-down measures were implemented.

We expect demand variability could continue as a result of the COVID-19 pandemic, although it is presently unclear whether the cumulative impacts will be positive or negative.

During certain periods covered by this Annual Report, we also provided software solutions and services to the legal vertical.

As previously disclosed, we completed our divestiture of MyCase, Inc.

on September 30, 2020.

In connection with the MyCase Transaction, our Credit Agreement was terminated and all obligations outstanding under the Term Loan and Revolving Facility, including all guarantees and security interests granted with respect to such obligations, were satisfied in full with proceeds from the sale and extinguished.

For additional details, see Note 1, Nature of Business and Note 3, Divestitures and Business Combinations of our Consolidated Financial Statements in this Annual Report.

Key Components of Results of Operations

We charge our customers on a subscription basis for our core solutions and certain of our Value+ services.

Our subscription fees are designed to scale to the size of our customers’ businesses.

We recognize subscription revenue over time on a straight-line basis over the contract term beginning on the date that our service is made available to the customer.

We generally invoice our customers for subscription services in monthly or annual installments, typically in advance of the subscription period.

Revenue from subscription services is impacted by a number of factors, including the change in the number and type of our customers, the size and needs of our customers’ businesses, our customer renewal rates, pricing for our solutions, and the level of adoption of our Value+ subscription services by new and existing customers.

We also charge our customers usage-based fees for using certain Value+ services.

Certain of the usage-based fees are paid by either our customers or clients of our customers.

Our core solutions and certain of our Value+ services are offered on a subscription basis.

Our core solutions subscription fees vary by property type and are designed to scale to the size of our customers’ businesses.

We recognize revenue for subscription-based services over time on a straight-line basis over the contract term beginning on the date that our service is made available.

We generally invoice monthly or annually in advance of the subscription period.

We also offer Value+ services that are not covered by subscription fees on per use basis.

Usage-based fees are charged on a flat fee per transaction basis with no minimum usage commitments.

We recognize revenue for usage-based services in the period the service is rendered.

We generally invoice our customers for usage-based services on a monthly basis for services rendered in the preceding month.

Revenue from usage-based services is impacted by a number of factors, including the number of new and existing customers that adopt and utilize our Value+ services, the size and needs of our customers, and our customer renewal rates.

We experience limited seasonality in our Value+ services revenue, primarily with respect to certain leasing-related services we provide to our property management customers, including our tenant screening services and new tenant applications which impact electronic payment services revenue.

Our property management customers historically have processed fewer applications for new tenants during the fourth quarter.

As a result of this seasonal decline in activity, we have typically experienced overall slower sequential revenue growth or a sequential decline in revenue in the fourth quarter of each of our most recent fiscal years.

We expect this seasonality to continue in the foreseeable future.

We offer assistance to our customers with on-boarding to our core solutions, as well as website design services.

We generally invoice our customers for these other services in advance of the services being completed.

We recognize revenue for these other services upon completion of the related service.

We generate revenue from RentLinx, WegoWise, and Dynasty stand-alone customers by providing services outside of our property management core solution platform.

Revenue derived from customers using these services is recorded in Other revenue.

We generally invoice our usage-based services on a monthly basis or collect the fee at the time of service.

A significant majority of our Value+ services revenue comes directly and indirectly from the use of our electronic payment services, tenant screening services, and insurance services.

Usage-based fees are paid both by customers and users in our customers' business ecosystems.

We charge our customers for on-boarding assistance to our core solutions and certain other non-reoccurring services.

We generally invoice for these other services in advance of the services being completed and recognize revenue upon completion of the related service.

We generate revenue from RentLinx, WegoWise, and Dynasty standalone customers by providing services outside of our property management core solution platform.

Revenue derived from these services is recorded in Other revenue.

Costs and Operating Expenses

Cost of Revenue .

Cost of revenue consists of fees paid to third-party service providers associated with delivering certain of our Value+ services (including legal fees and costs associated with the delivery and provision of those services, as well as loss reserves and other costs associated with our legal liability to landlord insurance services), personnel-related costs (including salaries, incentive-based compensation, benefits, and stock-based compensation) for our employees focused on customer service and the support of our operations, platform infrastructure costs (such as data center operations and hosting-related costs), payment processing fees and allocated shared and other costs.

Many of our Value+ services are facilitated by third-party service providers.

Cost of revenue includes the fees paid to these third-party service providers (including legal fees and costs associated with the delivery and provision of those services, as well as loss reserves and other costs associated with our legal liability to landlord insurance services), which vary both in cost and as a percent of revenue for each Value+ service offering, personnel-related costs (including salaries, performance-based compensation, benefits, and stock-based compensation) for our employees focused on customer service and the support of our operations, platform infrastructure costs (such as data center operations and hosting-related costs), payment processing fees and allocated shared costs.

Cost of revenue excludes depreciation of property and equipment, and amortization of capitalized software development costs and intangible assets.

We intend to continue to invest in customer service and support, and the expansion of our technology infrastructure as we grow the number of our customers, enter new markets, and offer additional Value+ services.

These investments could impact cost of revenue both in absolute dollars and as an overall percentage of revenue.

Sales and Marketing .

Sales and marketing expense consists of personnel-related costs (including salaries, sales commissions, incentive-based compensation, benefits, and stock-based compensation) for our employees focused on sales and marketing, costs associated with sales and marketing activities, and allocated shared costs.

Sales and marketing expense consists of personnel-related costs (including salaries, sales commissions, performance-based compensation, benefits, and stock-based compensation) for our employees focused on sales and marketing, costs associated with sales and marketing activities, and allocated shared and other costs.

Marketing activities include advertising, online lead generation, lead nurturing, customer and industry events, and the creation of industry-related content and collateral.

Sales commissions and other incremental costs to acquire customers and grow adoption and utilization of our Value+ services by our new and existing customers are deferred and then amortized on a straight-line basis over a period of benefit, that we have determined to be three years.

We focus our sales and marketing efforts on generating awareness of our software solutions, creating sales leads, establishing and promoting our brands, and cultivating an educated community of successful and vocal customers.

We intend to continue to invest in sales and marketing to increase our customer base in new and existing markets, and increase the adoption and utilization of Value+ services by our new and existing customers.

Research and Product Development.

Research and product development expense consists of personnel-related costs (including salaries, incentive-based compensation, benefits, and stock-based compensation) for our employees focused on research and product development, fees for third-party development resources, and allocated shared costs.

Research and product development expense consists of personnel-related costs (including salaries, performance-based compensation, benefits, and stock-based compensation) for our employees focused on research and product development, fees for third-party development resources, and allocated shared and other costs.

Our research and product development efforts are focused on enhancing functionality and the ease of use of our existing software solutions by adding new core functionality, Value+ services and other improvements, as well as developing new products and services for new and existing markets.

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Amortization of capitalized software development costs is included in depreciation and amortization expense.

We intend to continue to invest in research and product development as we continue to introduce new core functionality, roll out new Value+ services, develop new products and services, and expand into adjacent markets, and new verticals.

General and Administrative.

General and administrative expense consists of personnel-related costs (including salaries, a majority of total incentive-based compensation, benefits, and stock-based compensation) for employees in our executive, finance, information technology, human resources, corporate development, legal, and administrative organizations.

In addition, general and administrative expense includes fees for third-party professional services (including audit, legal, tax, and consulting services), transaction costs related to business combinations, other corporate expenses, and allocated shared costs.

We intend to continue to incur incremental general and administrative costs associated with supporting the growth of our business.

General and administrative expense consists of personnel-related costs (including salaries, a majority of total performance-based compensation, benefits, and stock-based compensation) for employees in our executive, finance, information technology, human resources, legal, compliance, corporate development and administrative organizations.

In addition, general and administrative expense includes fees for third-party professional services (including audit, legal, compliance, tax, and consulting services), transaction costs related to business combinations and divestitures, regulatory fines and penalties, other corporate expenses, and allocated shared costs.

Depreciation and Amortization.

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We depreciate or amortize property and equipment, software development costs, and intangible assets over their expected useful lives on a straight-line basis, which approximates the pattern in which the economic benefits of the assets are consumed.

As we continue to invest in our research and product development organization and the development or acquisition of new technology, we expect to have increased capitalized software development costs and incremental amortization.

Further, we may incur additional amortization expense to the extent we enter into additional arrangements to acquire or invest in new technologies or markets adjacent to those we serve today or entirely new verticals.

Finally, as we expand our facilities footprint and increase our base of employees, we expect to have increased property and equipment expenditures and incremental depreciation expense.

Interest Income (Expense), Net .

Other Income (Expense), Net.

Other income (expense), net includes gains and losses associated with the sale of businesses, property and equipment and investment securities and income from certain post-closing transition services to be provided by us to MyCase in connection with the MyCase Transaction.

Interest Expense, Net .

Interest expense includes interest paid on any outstanding borrowings.

Interest income includes interest earned on investment securities, amortization and accretion of the premium and discounts paid from the purchase of investment securities, and interest earned on notes receivable and on cash deposited in our bank accounts.

Interest expense includes interest paid on outstanding borrowings under the credit agreement with Wells Fargo, as administrative agent, and the lenders that are parties thereto, ("the Credit Agreement").

Provision for (Benefit from) Income Taxes.

Provision for (benefit from) income taxes consists of federal and state income taxes in the United States and a non-cash benefit related to the release of the valuation allowance for our deferred tax assets.

Provision for (benefit from) income taxes consists of federal and state income taxes in the United States.

Results of Operations for the Years Ended December 31, 2020 and 2019

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Year Ended December 31,

Amount % Amount %

Consolidated Statements of Operations Data:

Revenue $ 310,056 100.0 % $ 256,012 100.0 %

Costs and operating expenses:

Cost of revenue (exclusive of depreciation and amortization) (1)

119,029 38.4 101,642 39.7

Sales and marketing (1)

58,445 18.8 51,528 20.1

Research and product development (1)

48,529 15.7 39,508 15.4

General and administrative (1)

47,480 15.3 34,478 13.5

Depreciation and amortization 26,790 8.6 22,395 8.7

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Income from operations 9,783 3.2 6,461 2.5

Other income (expense), net

Interest income (expense), net

Other income, net 188,897 60.9 16 —

Interest expense, net (1,849) (0.6) (1,654) (0.6)

Income before provision for (benefit from) income taxes 196,831 63.5 4,823 1.9

Provision for (benefit from) income taxes 38,428 12.4 (31,459) (12.3)

Net income $ 158,403 51.1 % $ 36,282 14.2 %

(1) The following table presents stock-based compensation expense included in each respective expense category:

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Total stock-based compensation expense $ 9,025 $ 7,309

Year Ended December 31,

2019 to 2018 % Change

Year Ended December 31, Change

2020 2019 Amount %

(dollars in thousands)

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Value+ services 195,146 153,994 41,152 27 %

Other 13,972 13,437 535 4 %

Total revenue $ 310,056 $ 256,012 $ 54,044 21 %

In each of the fiscal years presented above, we derived over 90% of our annual revenue directly and indirectly from the software solutions, services and data analytics we offer to our real estate market customers.

The significant majority of our customers in the real estate market use our property management solutions.

Total revenue was $256.0 million for fiscal 2019 , compared to $190.1 million for the fiscal year ended December 31, 2018 , or fiscal 2018 , an increase of $65.9 million , or 35% .

Core solutions revenue was $88.6 million for fiscal 2019 compared to $70.5 million for fiscal 2018 , an increase of $18.1 million , or 26% .

Value+ services revenue was $154.0 million for fiscal 2019 compared to $113.1 million for fiscal 2018 , an increase of $40.9 million , or 36% .

Other revenue was $13.4 million for fiscal 2019 , compared to $6.5 million for fiscal 2018 , an increase of $6.9 million or 108% .

The majority of our revenue is derived from our property management core solutions and Value+ services utilized by property managers, residents, applicants and owners.

The increase in core solutions and Value+ services revenue was mainly attributed to a growing base of property management customers.

During this period, we experienced a 19% year over year increase in the number of property management units under management resulting from a 10% year over year increase in the number of property management customers.

In addition, our property managers, residents, applicants and owners increased their usage of our Value+ services.

A significant majority of our Value+ services revenue comes directly and indirectly from our customers' use of our Electronic Payment Services, Tenant Screening Services, and Insurance Services.

During the period, we also introduced new Value+ services and expanded the functionality of others, which enables new revenue streams.

The increase in Other revenue was primarily attributed to revenue generated from our real estate-related acquisitions and from an increase in fees associated with our property management customers upgrading to a new website hosting platform.

Revenue derived from our software and solutions offered to the real estate vertical for the years ended December 31, 2020 and 2019 was $284.7 million and $231.1 million, respectively, an increase of $53.6 million, or 23%.

This increase was primarily attributable to the growth in the number of property management customers and units under management utilizing our software and services.

The remaining revenue was attributed to our legacy legal vertical.

Core solutions revenue derived from our real estate vertical for the years ended December 31, 2020 and 2019 was $86.5 million and $72.6 million, respectively, an increase of $13.9 million or 19%.

Value+ services revenue derived from our real estate vertical for the years ended December 31, 2020 and 2019 was $184.2 million and $145.2 million, respectively, an increase of $39.1 million or 27%.

The increase in core solutions and Value+ services revenue was mainly attributable to growth in our base of property management customers and growth in users of our subscription and usage-based services.

During this period we experienced growth of 17% in the average number of property management units under management resulting from 10% growth in the average number of property management customers during the period.

Our electronic payment services experienced increased demand during the current year as residents, property managers, owners and customers transacted more business online, which we attribute in part to the response to the COVID-19 pandemic.

It is unclear whether the trend will continue over the long-term.

During the comparative period, we also introduced new Value+ services and expanded the functionality of others, which resulted in incremental revenue.

A significant majority of our Value+ services revenue comes directly and indirectly from the use of our electronic payment services, tenant screening services, and the insurance services we make available to customers.

Cost of Revenue (Exclusive of Depreciation and Amortization)

Year Ended December 31,

2019 to 2018 % Change

Year Ended December 31, Change

2020 2019 Amount %

(dollars in thousands)

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Stock-based compensation, included above $ 1,506 $ 1,466 $ 40 3 %

Cost of revenue (exclusive of depreciation and amortization) was $101.6 million for fiscal 2019 , compared to $73.5 million for fiscal 2018 , an increase of $28.1 million , or 38% .

This increase in cost of revenue (exclusive of depreciation and amortization) was primarily attributed to the 35% increase in revenue over the same period.

Expenditures to third-party service providers, related to the delivery of our Value+ services, increased $13.1 million directly associated with the increased adoption and utilization of our Value+ services, as evidenced by the 36% increase in Value+ services revenue.

Our third-party service provider expenses include costs associated with the delivery and provision of Value+ services, as well as loss reserves, legal fees and other costs associated with our insurance services.

There was also an increase in personnel-related costs of $11.5 million, related to increased headcount to support the increased number of customers, including those acquired in our recent acquisitions and investments made for the future growth of our business.

Allocated and other costs increased by $3.5 million primarily driven by an increase in facilities, platform infrastructure, payment processing related to customer receivables and other costs incurred in support of our overall growth, as well as costs associated with the delivery and provision of our Value+ services.

This increase in allocated and other costs was partially offset by a decrease in legal fees and costs associated with settling a litigation matter, net of expected insurance proceeds of $1.1 million which was included in cost of revenue (exclusive of depreciation and amortization) in fiscal 2018 .

As a percentage of revenue, cost of revenue (exclusive of depreciation and amortization) fluctuates primarily based on the mix and prices of Value+ services in the period, and investments made in advance of expected revenue generation.

For fiscal 2019 compared to fiscal 2018 , cost of revenue (exclusive of depreciation and amortization), as a percentage of revenue, increased to 39.7% from 38.7% .

This increase in cost as a percentage of revenue was primarily due to increased personnel-related investments made in advance of expected revenue generation associated with growth initiatives.

Cost of revenue related to our software and solutions offered to the real estate vertical for the years ended December 31, 2020 and 2019 was $109.7 million and $93.0 million, respectively, an increase of $16.7 million, or 18%.

This increase was primarily attributable to increased costs associated with servicing the incremental $53.6 million in revenue over the same period, partially offset by third-party service provider incentives earned of $2.0 million.

The remaining cost of revenue was attributed to our legacy legal vertical.

Expenditures to third-party service providers related to the delivery of our Value+ services to the real estate vertical increased $6.9 million, which was directly associated with the increased adoption and utilization of our Value+ services, as evidenced by the $39.1 million increase in Value+ services revenue to the real estate vertical.

Partially offsetting this increase was $2.0 million of annual maximum incentives earned during the period from third-party service providers related to programs intended to increase adoption and utilization of online payments.

Personnel-related costs, including performance-based compensation, necessary to support growth and key investments, increased $7.8 million.

Allocated shared costs increased by $2.1 million primarily driven by an increase in platform infrastructure costs, partially offset by a reduction of allocated expenses attributed to a decrease in workplace-related and other expenditures in response to the impact of the COVID-19 pandemic.

As a percentage of revenue, cost of revenue (exclusive of depreciation and amortization) fluctuates primarily based on the mix of Value+ services revenue in the period, given the varying percentage of revenue we pay to third-party service providers, and investments made in advance of expected revenue generation.

Excluding the third-party service provider incentives earned during the period, cost of revenue (exclusive of depreciation and amortization), as a percentage of revenue decreased to 39.2% from 40.2%.

This decrease in cost as a percentage of revenue was primarily driven by the mix of Value+ services revenue with varying underlying costs.

Sales and Marketing

Year Ended December 31,

2019 to 2018 % Change

Year Ended December 31, Change

2020 2019 Amount %

(dollars in thousands)

2 unchanged sentences

Stock-based compensation, included above $ 1,415 $ 1,271 $ 144 11 %

Sales and marketing expense was $51.5 million for fiscal 2019 , compared to $33.3 million for fiscal 2018 , an increase of $18.2 million , or 55% .

This increase was primarily due to an increase in personnel-related costs of $13.0 million driven by an increase in the average headcount to support our growth, the impact of adoption of Accounting Standards Update ("ASU") No.

2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), and an increase in investments made in advance of expected revenue generation.

Under ASU 2014-09, sales commissions and other incremental costs to acquire customers are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be three years.

Given we are in the second year of adoption, we have higher expense associated with sales commissions when compared to the prior period.

There was also an increase in advertising and promotion costs of $2.4 million related to our new and expanding service offerings.

In addition, there was an increase in allocated and other costs of $2.8 million driven by an increase in consulting services, IT and other costs incurred in support of our overall growth in personnel.

As a percentage of revenue, sales and marketing expense increased to 20.1% from 17.5% for fiscal 2019 compared to fiscal 2018 .

This increase was primarily driven by personnel-related investments, the expense impact related to being in our second year of adoption of ASU 2014-09, and investments made in advance of expected revenue generation from growth initiatives in the business.

Sales and marketing expense related to our software and solutions offered to the real estate vertical for the years ended December 31, 2020 and 2019 was $52.5 million and $44.5 million, respectively, an increase of $8.0 million, or 18%.

This increase was primarily due to a $6.7 million increase in personnel-related costs, including performance-based compensation, necessary to support growth and key investments in the business.

Advertising and promotion costs increased by $2.4 million due to increased online advertising and virtual marketing events aimed at increasing revenue and supporting growth in the business.

In addition, there was a decrease in allocated and other costs of $1.1 million related to the elimination of event-related travel from cancelled or postponed events and the reduction of workplace-related and other non-essential expenditures in response to the impact of the COVID-19 pandemic.

As a percentage of revenue, sales and marketing expense decreased to 18.4% from 19.2% for fiscal 2020 compared to fiscal 2019.

This leverage in cost as a percentage of revenue was primarily driven by the reduction of event related travel and other non-essential expenditures as a result of the COVID-19 pandemic.

Notwithstanding the leverage in cost as a percentage of revenue, we intend to continue to invest in sales and marketing to increase our customer base and increase the adoption and utilization of Value+ services over time.

Research and Product Development

Year Ended December 31,

2019 to 2018 % Change

Year Ended December 31, Change

2020 2019 Amount %

(dollars in thousands)

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Stock-based compensation, included above $ 1,818 $ 1,411 $ 407 29 %

Research and product development expense was $39.5 million for fiscal 2019 , compared to $24.1 million for fiscal 2018 , an increase of $15.4 million , or 64% .

This increase was the result of an increase in personnel-related costs, net of capitalized software development costs, of $10.5 million due to investments in headcount growth within our research and product development organization, and an increase in allocated and other costs of $4.9 million driven by an increase in facilities, IT and other costs incurred in support of our overall growth in personnel.

We intend to continue to invest in research and product development as we continue to introduce additional functionality into our software solutions, services and data offerings, develop or integrate acquired Value+ services to attract new customers and expand offerings to existing customers, develop new products to serve new or existing customers and expand into adjacent markets or new verticals.

Research and product development expense related to our software and solutions offered to the real estate vertical for the years ended December 31, 2020 and 2019 was $43.8 million and $34.0 million, respectively, an increase of $9.8 million, or 29%.

This increase was the result of an increase in personnel-related costs, net of capitalized software development costs, of $11.3 million due to investments in headcount growth within our research and product development organization.

This increase was partially offset by a decrease in allocated and other costs of $1.4 million primarily related to the reduction of workplace-related and other non-essential expenditures in response to the impact of the COVID-19 pandemic.

General and Administrative

Year Ended December 31,

2019 to 2018 % Change

Year Ended December 31, Change

2020 2019 Amount %

(dollars in thousands)

2 unchanged sentences

Stock-based compensation, included above $ 4,286 $ 3,161 $ 1,125 36 %

General and administrative expense was $34.5 million for fiscal 2019 , compared to $24.9 million for fiscal 2018 , an increase of $9.6 million , or 39% .

This increase was primarily due to an increase in personnel-related costs of $6.9 million, and an increase in professional services fees and allocated and other costs of $2.6 million related to expanded audit services, legal and other services fees associated with compliance with Section 404(b) of SOX, increased leasing activities, due diligence and acquisition related activities, as well as other costs incurred to support our growth.

The increase in personnel-related costs was primarily due to headcount growth.

We expect equity denominated performance-based compensation will continue to decrease for certain executives with the introduction of a Long-Term Cash Bonus Plan, adopted in fiscal 2018.

No accrual has yet been made under this plan as a result of the high level of uncertainty regarding potential future payments under the plan.

General and administrative expense related to our software and solutions offered to the real estate vertical and general corporate overhead expenses for the years ended December 31, 2020 and 2019 was $46.1 million and $33.4 million, respectively, an increase of $12.7 million, or 38%.

The increase in general and administrative expense was primarily due to a $7.4 million increase in personnel-related costs, including performance-based compensation, due to investments in headcount growth within our general and administrative organizations.

In addition, there was a $4.3 million legal settlement expense recorded during the current period related to our compliance with certain regulations in our tenant screening business.

For additional information regarding this legal settlement, refer to Note 11, Commitments and Contingencies , of our Consolidated Financial Statements.

There was also an increase in professional services fees and other costs of $2.3 million related to the MyCase Transaction.

Allocated and other costs decreased $1.4 million primarily due to the reduction of workplace-related and other non-essential expenditures in response to the impact of the COVID-19 pandemic.

We expect stock-based compensation expense will continue to decrease for certain executives in light of our adoption of the Long-Term Cash Bonus Plan in 2018.

No accrual has yet been made under this plan as a result of the high degree of uncertainty regarding potential future payments under the plan.

Depreciation and Amortization

Year Ended December 31,

2019 to 2018 % Change

Year Ended December 31, Change

2020 2019 Amount %

(dollars in thousands)

1 unchanged sentence

Percentage of revenue 8.6 % 8.7 %

Depreciation and amortization expense was $22.4 million for fiscal 2019 , compared to $14.6 million for fiscal 2018 , an increase of $7.8 million , or 54% .

This increase was primarily due to increased amortization expense associated with intangible assets acquired from WegoWise and Dynasty, and increased amortization expense associated with higher accumulated capitalized software development balances.

Interest Income (Expense), net

Year Ended December 31,

2019 to 2018 % Change

Depreciation and amortization expense related to our software and solutions offered to the real estate vertical for the years ended December 31, 2020 and 2019 was $25.0 million and $20.0 million, respectively, an increase of $5.0 million, or 25%.

This increase in depreciation and amortization expense was primarily due to increased amortization expense associated with higher accumulated capitalized software development balances.

Other Income, net

Year Ended December 31, Change

2020 2019 Amount %

(dollars in thousands)

Interest income (expense), net

Other income, net $ 188,897 $ 16 $ 188,881 *

Percentage of revenue 60.9 % — %

Interest expense, net was $1.7 million for fiscal 2019 , compared to interest income, net of $0.8 million for fiscal 2018 , an increase of $2.5 million , due to an increase in interest expense associated with increased borrowings under the Credit Agreement and a decrease in interest income due to lower investment security balances in fiscal 2019.

*Percentage not meaningful

The increase in other income, net was primarily due to the gain of $187.7 million associated with the MyCase Transaction.

Additionally, there was $1.1 million in other income recorded during the fourth quarter of fiscal 2020 related to certain post-closing transition services provided to MyCase.

Provision for (Benefit from) Income Taxes

Year Ended December 31,

2019 to 2018 % Change

Year Ended December 31, Change

2020 2019 Amount %

(dollars in thousands)

1 unchanged sentence

Percentage of revenue 12.4 % (12.3) %

* Not meaningful

The benefit from income taxes was $31.5 million for fiscal 2019 , compared to a provision for income taxes of $0.4 million for fiscal 2018 .

The change in the provision for income taxes was primarily due to the release of the valuation allowance during the second quarter of 2019 as further described in Note 13, Income Taxes of our Consolidated Financial Statements.

*Percentage not meaningful

For the year ended December 31, 2020, we recorded income tax expense of $38.4 million.

The tax provision for the year ended December 31, 2020 includes tax expense of $51.3 million relating to the MyCase Transaction which includes $52.3 million of current tax expense on the gain on the sale of MyCase, less a $1.0 million benefit on the reversal of deferred tax liabilities relating to MyCase.

For tax purposes, we plan to file an election to treat the transaction as a sale of assets.

As such, the tax impact takes into consideration the tax basis of the assets on the date of sale and the availability of net operating losses and research and development tax credits.

The effective tax rate as compared to the U.S.

federal statutory rate of 21% differs primarily due to state income taxes and the benefits associated with stock-based compensation expense and research and development tax credits.

For the year ended December 31, 2019, we recorded an income tax benefit of $31.5 million.

During the second quarter of 2019, we evaluated all available positive and negative evidence, including our sustained profitability in 2018 and 2019, and the impact of recent acquisitions and future projections of profitability.

As a result, we determined that all of our deferred tax assets were more likely than not to be realized and reversed the valuation allowance against those deferred tax assets accordingly.

Quarterly Results of Operations

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Quarter Ended

September 30,

December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,

(in thousands, except per share data)

Consolidated Statements of Operations Data:

Revenue $ 72,432 $ 84,086 $ 81,043 $ 72,495 $ 67,362 $ 67,935 $ 63,624 $ 57,091

Costs and operating expenses:

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Total costs and operating expenses 75,184 80,726 74,698 69,665 67,273 63,801 61,328 57,149

Income (loss) from operations

(Loss) income from operations (2,752) 3,360 6,345 2,830 89 4,134 2,296 (58)

Other income (expense), net 1,138 187,747 (10) 22 84 (11) (56) (1)

Interest income (expense), net 60 (853) (562) (494) (330) (400) (427) (497)

Income (loss) before provision for (benefit from) income taxes

Provision for (benefit from) income taxes

Net income per common share:

(Loss) income before (benefit from) provision for income taxes (1,554) 190,254 5,773 2,358 (157) 3,723 1,813 (556)

(Benefit from) provision for income taxes (1,041) 52,578 (13,484) 375 (4,585) (1,255) (21,338) (4,281)

Net (loss) income $ (513) $ 137,676 $ 19,257 $ 1,983 $ 4,428 $ 4,978 $ 23,151 $ 3,725

Net (loss) income per common share:

Basic $ (0.01) $ 4.01 $ 0.56 $ 0.06 $ 0.13 $ 0.15 $ 0.68 $ 0.11

Diluted $ (0.01) $ 3.86 $ 0.54 $ 0.06 $ 0.12 $ 0.14 $ 0.65 $ 0.11

(1) The following table presents stock-based compensation expense included in each respective expense category:

Quarter Ended

September 30,

December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,

(in thousands)

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Quarter Ended

September 30,

December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,

Consolidated Statements of Operations Data:

Revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Costs and operating expenses:

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Total costs and operating expenses 103.8 96.0 92.2 96.1 99.9 93.9 96.4 100.1

Income (loss) from operations

(Loss) income from operations (3.8) 4.0 7.8 3.9 0.1 6.1 3.6 (0.1)

Other income (expense), net 1.6 223.3 — — 0.1 — (0.1) —

Interest income (expense), net 0.1 (1.0) (0.7) (0.7) (0.5) (0.6) (0.7) (0.9)

Income (loss) before provision for (benefit from) income taxes

Provision for (benefit from) income taxes

Our property management customers historically have processed fewer applications for new tenants during the fourth quarter.

(Loss) income before (benefit from) provision for income taxes (2.1) 226.3 7.1 3.3 (0.2) 5.5 2.8 (1.0)

(Benefit from) provision for income taxes (1.4) 62.5 (16.6) 0.5 (6.8) (1.8) (33.5) (7.5)

Net (loss) income (0.7) % 163.7 % 23.8 % 2.7 % 6.6 % 7.3 % 36.3 % 6.5 %

We experience limited seasonality in our Value+ services revenue, primarily with respect to certain leasing-related services we provide to our property management customers, including our tenant screening services for rental prospects which also impact electronic payment services revenue.

Our property management customers historically have processed fewer applications for rental prospects during the fourth quarter.

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Cash and Cash Equivalents

At December 31, 2019 , our principal sources of liquidity were cash and cash equivalents and investment securities, which had an aggregate balance of $50.8 million .

Our principal sources of liquidity continue to be comprised of our cash, cash equivalents, and investment securities, as well as cash flows generated from our operations.

At December 31, 2020, our cash and cash equivalents and investment securities had an aggregate balance of $175.3 million.

During the year ended December 31, 2020, our cash and cash equivalents increased primarily as a result of the proceeds from the MyCase Transaction.

Working Capital

At December 31, 2020, we had working capital of $149.5 million, compared to working capital of $14.3 million at December 31, 2019.

The decrease in our working capital was primarily due to a decrease in cash and cash equivalents related to the acquisition of Dynasty, an increase in other current liabilities due to the $6.0 million we retained to satisfy any adjustments including without limitation certain indemnification claims to the total purchase consideration for Dynasty, the recording of lease liabilities associated with the adoption of ASU No.

2016-02, Leases ("ASU 2016-02"), and increases in accrued employee expenses and accrued expenses.

The decrease in our working capital was partially offset by increases in investment securities-current and accounts receivable due to an increase in revenue from Value+ services.

Revolving Facility

As of December 31, 2019 , we had a $50.0 million Revolving Facility, under the terms of the Credit Agreement, as further described in Note 9, Long-Term Debt of our Consolidated Financial Statements included elsewhere in this Annual Report.

At both December 31, 2019 and 2018 , we had no outstanding balance under our Revolving Facility.

The increase in our working capital was primarily due to an increase in cash and cash equivalents as a result of the net proceeds from the MyCase Transaction, a decrease in other current liabilities due to the payment of contingent consideration related to the Dynasty acquisition, an increase in investment securities-current, an increase in accounts receivable primarily driven by increased usage of our Value+ services, and a decrease in deferred revenue.

The increase in our working capital was partially offset by an increase in income taxes payable related to the MyCase Transaction, and increases in accrued expenses, and accrued employee expenses.

Liquidity Requirements

We believe that our existing cash and cash equivalents, investment securities, available borrowing capacity of $50.0 million under our Revolving Facility, and cash generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

We have financed our operations primarily through cash generated from operations.

We believe that our existing cash and cash equivalents, investment securities, and cash generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.

Capital Requirements

Our future capital requirements will depend on many factors, including continued market acceptance of our software solutions, change in the number of our customers, adoption and utilization of our Value+ services by new and existing customers, the timing and extent of the introduction of new core functionality, products and Value+ services, timing and extent of our expansion into adjacent or new markets and timing and extent of our investments across our organization.

Our future capital requirements will depend on many factors, including continued market acceptance of our software solutions, changes in the number of our customers, adoption and utilization of our Value+ services by new and existing customers, the timing and extent of the introduction of new core functionality, products and Value+ services, the timing and extent of our expansion into adjacent or new markets, the timing and extent of our investments across our organization, and the impact of the COVID-19 pandemic on the customers we serve and on our business.

In addition, we have in the past entered into, and may in the future enter into, arrangements to acquire or invest in new technologies or markets adjacent to those we serve today or entirely new verticals.

Furthermore, our Board of Directors has authorized our management to repurchase up to $100.0 million of shares of our Class A common stock in open market transactions, privately negotiated transactions or otherwise.

For additional information regarding our share repurchase program, refer to Note 11, Stockholders' Equity of our Consolidated Financial Statements included elsewhere in this Annual Report.

Furthermore, our Board of Directors has authorized the repurchase of up to $100.0 million of shares of our Class A common stock from time to time, as directed by a committee consisting of three directors.

To date, we have repurchased $4.2 million of our Class A common stock under the Share Repurchase Program.

For additional information regarding our share repurchase program, refer to Note 12, Stockholders' Equity .

The following table presents our cash flows for the periods indicated (in thousands):

1 unchanged sentence

Net cash provided by operating activities $ 48,299 $ 38,887

Net cash used in investing activities

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net cash provided by (used in) investing activities 146,511 (89,874)

Net cash used in financing activities (70,358) (7,272)

Net increase (decrease) in cash and cash equivalents $ 124,452 $ (58,259)

Cash Provided by Operating Activities

1 unchanged sentence

Our primary uses of cash from operating activities are for personnel-related expenditures and third-party costs incurred to support the delivery of our software solutions.

For the year ended December 31, 2020, cash provided by operating activities was $48.3 million resulting from our net income of $158.4 million, adjusted by the gain related to the MyCase Transaction of $187.7 million, non-cash charges of $68.6 million and a net increase in our operating assets and liabilities of $8.9 million.

The non-cash charges primarily consist of a decrease in deferred taxes of $29.0 million, depreciation and amortization costs of $26.8 million, stock-based compensation expense of $9.0 million, and amortization of operating lease right-of-use assets of $3.7 million.

The net increase in our operating assets and liabilities was mostly attributable to a $9.4 million increase in other liabilities primarily driven by income taxes payable due to the MyCase Transaction, a $6.9 million increase in accrued expenses which includes a $4.3 million accrual related to legal loss reserves, a $2.8 million increase in accrued employee expenses related to an overall increase in personnel-related costs, and a $0.5 million increase in deferred revenue.

These increases were partially offset by a $2.8 million increase in accounts receivable primarily driven by growth of our Value+ services, an increase in prepaid expenses and other current assets of $5.9 million primarily driven by an increase in prepaid expenses to support the growth in our business, an increase in deposits held with a third party related to requirements to maintain collateral for our insurance services, and an increase in deferred costs, and a $0.9 million decrease in accounts payable due to timing of payments.

For the year ended December 31, 2019, cash provided by operating activities was $38.9 million resulting from our net income of $36.3 million, adjusted by non-cash charges of $2.4 million and a net increase in our operating assets and liabilities of $0.2 million.

The non-cash charges primarily consist of a one-time benefit of $31.5 million related to the release of the valuation allowance for our deferred tax assets, offset by $22.4 million of depreciation and amortization of our property and equipment, intangible assets, and capitalized software development costs, $7.3 million of stock-based compensation and $4.1 million of amortization of operating lease right-of-use ("ROU") assets in accordance with ASU 2016-02.

The net increase in our operating assets and liabilities was primarily attributable to an increase of $4.5 million in accrued employee expenses related to an overall increase in personnel-related costs, a $1.4 million decrease in other assets, a $1.2 million increase in other liabilities and a $1.2 million increase in deferred revenue.

The increase in our operating assets and liabilities was partially offset by a $4.0 million increase in prepaid expenses and other current assets, a $2.7 million decrease in operating lease liabilities, and a $2.0 million increase in accounts receivable primarily driven by the growth in sales of our Value+ services.

For the year ended December 31, 2018, cash provided by operating activities was $36.3 million resulting from our net income of $20.0 million, adjusted by non-cash charges of $21.1 million and a net decrease in our operating assets and liabilities of $4.8 million.

The non-cash charges primarily consisted of $14.6 million of depreciation and amortization of our property and equipment and capitalized software, and $6.3 million of stock-based compensation.

The net decrease in our operating assets and liabilities was primarily attributable to a $6.4 million increase in other assets due to the capitalization of deferred costs in accordance with the applicable accounting guidance, a $6.1 million increase in prepaid expenses and other current assets, a $4.6 million decrease in deferred revenue due to an increase in the number of customers invoiced monthly versus annually and a $0.9 million increase in accounts receivable primarily driven by growth in our Value+ services.

The decrease in our operating assets and liabilities was partially offset by a $6.1 million increase in other liabilities, a $3.3 million increase in accrued expenses and an increase of $1.2 million in accrued employee expenses related to an overall increase in personnel-related costs.

Cash Used in Investing Activities

Cash used in investing activities is generally comprised of purchases, maturities and sales of investment securities, additions to capitalized software development, cash paid for business acquisitions and capital expenditures.

Cash Provided by (Used in) Investing Activities

Cash provided by (used in) investing activities is generally comprised of proceeds from divestitures, purchases, maturities and sales of investment securities, purchases of property and equipment, additions to capitalized software development, and cash paid for business acquisitions.

For the year ended December 31, 2020, investing activities provided $146.5 million in cash primarily due to net proceeds from the MyCase Transaction of $191.4 million and the proceeds from maturities and sales of investment securities of $27.3 million and $16.7 million, respectively.

These sources of cash were partially offset by purchases of investment securities of $43.9 million, capitalized software development costs of $26.0 million, and capital expenditures of $19.0 million to purchase property and equipment primarily related to the growth and expansion of our headquarters in Santa Barbara, CA, a portion of which was reimbursed through tenant improvement allowances.

For the year ended December 31, 2019, investing activities used $89.9 million in cash primarily due to $54.0 million used to acquire Dynasty, as well as purchases of investment securities of $25.2 million, capitalized software development costs of $21.0 million for the continued investment in our software development, and capital expenditures of $8.1 million to purchase property, equipment and intangible assets for the continued growth and expansion of our business.

These uses were partially offset by sales and maturities of investment securities of $2.8 million and $15.7 million, respectively.

For the year ended December 31, 2018, investing activities used $4.6 million in cash primarily as a result of $29.5 million of investment securities purchased offset by $32.8 million of maturities and $20.9 million of sales of investment securities.

In addition, we used $14.4 million of cash to acquire WegoWise, incurred capitalized software development costs of $12.3 million for the continued investment in our software development, and made capital expenditures of $2.1 million to purchase property and equipment for the continued growth and expansion of our business.

Cash (Used in) Provided by Financing Activities

Cash (used in) provided by financing activities is generally comprised of proceeds from the exercise of stock options, net share settlements for employee tax withholdings associated with the vesting of RSUs and activities associated with the Credit Facility.

Cash Used in Financing Activities

Cash used in financing activities is generally comprised of proceeds from the exercise of stock options, net share settlements for employee tax withholdings associated with the vesting of RSUs, the payment of contingent consideration under acquisition arrangements, activities associated with our former Credit Facility, and activities related to the repurchase of our Class A common stock.

For the year ended December 31, 2020, financing activities used $70.4 million in cash primarily as a result of the payment of all outstanding amounts due under the Credit Facility of $99.6 million, net share settlements for employee tax withholdings associated with the vesting of RSUs of $12.2 million, payment of contingent consideration related to the Dynasty acquisition of $6.0 million, and the repurchase of outstanding shares of Class A common stock in the amount of $4.2 million.

These uses of cash were partially offset by net proceeds from the Revolving Facility of $50.8 million.

For the year ended December 31, 2019, financing activities used $7.3 million in cash primarily as a result of net share settlements for employee tax withholdings associated with the vesting of RSUs of $6.2 million, as well as principal payments on debt of $3.4 million, and payments of debt issuance costs of $0.4 million, partially offset by proceeds from issuance of debt of $2.2 million and proceeds from stock option exercises of $0.6 million.

For the year ended December 31, 2018, financing activities provided $26.3 million in cash primarily as a result of $50.0 million of proceeds from the issuance of the Term Loan, partially offset by $21.6 million used to repurchase our common stock and $3.1 million as a result of tax withholdings from RSU net settlements offset by proceeds from stock option exercises.

Off-Balance Sheet Arrangements

At December 31, 2020, we did not have any off-balance sheet arrangements.

Contractual Obligations and Other Commitments

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Payments Due by Period

Less than 1 year

More than 5 years

Total Less than 1 year (1)

1 to 3 years 3 to 5 years More than 5 years

(in thousands)

Debt principal and interest (1)

Operating lease obligations 52,692 (1,275) 9,327 10,172 34,468

(1) Interest payments were calculated using the applicable interest rate at December 31, 2019 .

(1) Operating lease obligations for the year ending December 31, 2021 are presented net of tenant improvement allowances of $5.2 million.

At December 31, 2020, liabilities for unrecognized tax benefits of $6.1 million were not included in our contractual obligations in the table above because, due to their nature, there is a high degree of uncertainty regarding the timing of future cash outflows and other events that would extinguish these liabilities.

For additional information regarding our contractual obligations, commitments and indemnification arrangements, refer to Note 9, Long-term Debt and Note 10, Commitments and Contingencies of our Consolidated Financial Statements included elsewhere in this Annual Report.

Off-Balance Sheet Arrangements

At December 31, 2019 , we did not have any off-balance sheet arrangements.

For additional information regarding our contractual obligations, commitments and indemnification arrangements, refer to Note 9, Leases and Note 11, Commitments and Contingencies of our Consolidated Financial Statements included elsewhere in this Annual Report.

Critical Accounting Policies and Estimates

6 unchanged sentences

Revenue Recognition

We generate revenue from our customers primarily for subscriptions to access our core solutions and Value+ services for our cloud-based software solutions.

We generate revenue from our customers primarily through subscriptions to access our core solutions and Value+ services for our cloud-based software solutions.

Revenue is recognized upon transfer of control of promised services in an amount that reflects the consideration we expect to receive in exchange for those services.

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Many of our contracts with customers contain multiple performance obligations.

For these contracts, the performance obligations include access to and use of our core solutions, implementation services, and customer support.

We account for individual performance obligations separately if they are distinct.

Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require judgment.

We account for individual performance obligations separately if they are distinct.

The performance obligations for these contracts include access and use of our core solutions, implementation services, and customer support.

Access and use of our core solutions and implementation services are considered distinct.

The transaction price is allocated to each performance obligation on a relative standalone selling price basis.

Judgment is required to determine the standalone selling price for each distinct performance obligation.

We typically have more than one

standalone selling price for individual products and services due to the stratification of those products and services by customers and circumstances.

We typically have more than one standalone selling price for individual products and services due to the stratification of those products and services by customers and circumstances.

In these instances, we determine the standalone selling price based on our overall pricing objectives, taking into consideration customer demographics and other factors.

1 unchanged sentence

Capitalized Software Development Costs

Software development costs consist of certain payroll and stock compensation costs incurred to develop functionality of our internal-use software solutions.

Software development cost consist of certain payroll and stock compensation costs incurred to develop functionality of our internal-use software solutions.

We capitalize certain software development costs for new offerings as well as significant upgrades and enhancements to our existing software solutions.

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Determining the fair value of assets acquired and liabilities assumed requires management to make significant judgments and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies.

The Company engages the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination.

We engage the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination.

Acquisition-related transaction costs are not included as a component of consideration transferred, but are accounted for as an operating expense in the period in which the costs are incurred.

4 unchanged sentences

In evaluating the need for a valuation allowance, management considers the weighting of all available positive and negative evidence, which includes, among other things, the nature, frequency and severity of current and cumulative taxable income or losses, future projections of profitability, and the duration of statutory carryforward periods.

Judgment is required to measure the amount of tax benefits that can be recognized associated with uncertain tax positions.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

2 unchanged sentences

We determine if an arrangement is a lease at inception.

Operating leases are included in prepaid expenses and other current assets, operating lease ROU assets, other current liabilities, and operating lease liabilities on our Consolidated Balance Sheets.

Operating leases are included in prepaid expenses and other current assets , operating lease right of use ("ROU") assets , other current liabilities , and operating lease liabilities on our Consolidated Balance Sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date.

As none of our leases provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.

The operating lease ROU assets also include any lease payments made and exclude lease incentives received and initial direct costs incurred.

The operating lease ROU assets also include any lease payments made to the lessor before or at the lease commencement date and excludes lease incentives received and initial direct costs incurred.

Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis