What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-05-10 · 153 added, 107 removed, 184 unchanged (59% of the section changed)

5 unchanged sentences

Please also refer to the section of this Quarterly Report entitled "Cautionary Note Regarding Forward-Looking Statements" for additional information.

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.

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

Our cloud-based solutions are used primarily by property managers, but 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".

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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 provide 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 solutions and services are designed to be a system of record to automate essential business processes, a system of engagement to enhance business interactions between our customers and users and a system of intelligence to leverage data to predict and optimize business workflows in order to enable exceptional customer experiences and increase efficiency across our customers' businesses.

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

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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.

We do not separately break out customer information between APM, APM PLUS and AppFolio Investment Management 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 properties, 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.

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Quarter Ended

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

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

Property manager customers 16,532 16,178 15,724 15,352 15,011 14,729

Property manager units under management (in millions) 5.82 5.62 5.36 5.12 4.94 4.80

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.

To date, we have experienced rapid revenue growth due to strong relationships with our customers, as well as 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.

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

We expect to slowly transition employees back to the workplace throughout 2021;

We expect to slowly transition employees back to the workplace and resume employee travel throughout 2021;

however, employees will have the option to work remotely for the remainder of the year.

4 unchanged sentences

We recently constructed a new office space in Santa Barbara, California, extended the lease for our office in Richardson, Texas and leased new office space in San Diego, California.

During the three months ended March 31, 2020, we also provided software solutions and services to the legal vertical.

During the six months ended June 30, 2020, we also provided software solutions and services to the legal industry via MyCase, a software solution primarily designed for small and mid-sized law firms.

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.

on September 30, 2020 (the "MyCase Transaction").

In connection with the MyCase Transaction, our credit facility was terminated and all obligations outstanding under our term and revolving loans, 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 3, Divestitures of our Condensed Consolidated Financial Statements in this Quarterly Report.

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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 a per use basis.

We also offer Value+ services, which are not covered by our subscription fees, on a per use basis.

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

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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.

Usage-based fees are paid either by customers or by users.

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.

We generate revenue from the standalone customers of previously acquired businesses such as WegoWise and Dynasty, by providing services outside of our property management core solution platform.

Revenue derived from these services is recorded in Other revenue.

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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 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 for our employees focused on customer service and the support of our operations (including salaries, performance-based compensation, benefits, and stock-based compensation), 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.

Sales and Marketing.

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.

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

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Research and Product Development.

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.

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

2 unchanged sentences

General and Administrative.

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.

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

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.

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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.

Other Income, Net.

Other income, net includes gains and losses associated with the sale of 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.

Other Income (Loss), Net.

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

Interest Income (Expense), Net.

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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.

(Benefit from) Provision for Income Taxes.

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

Benefit from Income Taxes.

Benefit from income taxes consists of federal and state income taxes in the United States.

Results of Operations

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Three Months Ended

Amount % Amount %

June 30, Six Months Ended

2021 2020 2021 2020

Amount % Amount % Amount % Amount %

Consolidated Statements of Operations Data:

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Total costs and operating expenses 87,894 98.7 74,698 92.2 172,484 102.7 144,363 94.0

(Loss) income from operations (5,669) (7.2) 2,830 3.9

Other income, net 562 0.7 22 —

Income (loss) from operations 1,146 1.3 6,345 7.8 (4,523) (2.7) 9,175 6.0

Other income (loss), net 496 0.6 (10) — 1,058 0.6 12 —

Interest income (expense), net 55 0.1 (562) (0.7) 108 0.1 (1,056) (0.7)

(Loss) income before (benefit from) provision for income taxes (5,054) (6.4) 2,358 3.3

(Benefit from) provision for income taxes (5,533) (7.0) 375 0.5

Income (loss) before benefit from income taxes 1,697 1.9 5,773 7.1 (3,357) (2.0) 8,131 5.3

Benefit from income taxes (324) (0.4) (13,484) (16.6) (5,857) (3.5) (13,109) (8.5)

Net income $ 2,021 2.3 % $ 19,257 23.8 % $ 2,500 1.5 % $ 21,240 13.8 %

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Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Stock-based compensation expense included in costs and operating expenses:

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Total stock-based compensation expense $ 3,214 $ 2,753 $ 5,990 $ 3,712

Comparison of the Three Months Ended March 31, 2021 and 2020

Comparison of the Three and Six Months Ended June 30, 2021 and 2020

Three Months Ended

March 31, Change

2021 2020 Amount %

June 30, Change Six Months Ended

June 30, Change

2021 2020 Amount % 2021 2020 Amount %

(dollars in thousands)

3 unchanged sentences

Total revenue $ 89,040 $ 81,043 $ 7,997 10 % $ 167,961 $ 153,538 $ 14,423 9 %

Revenue derived from our software and solutions offered to the real estate vertical for the three months ended March 31, 2021 and 2020, was $78.9 million and $64.9 million, respectively, an increase of $14.0 million, or 22%.

Revenue derived from our software and solutions offered to the real estate vertical for the three months ended June 30, 2021 and 2020, was $89.0 million and $72.8 million, respectively, an increase of $16.2 million, or 22%.

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 three months ended March 31, 2021 and 2020 was $24.2 million and $20.5 million, respectively, an increase of $3.7 million or 18%.

Value+ services revenue derived from our real estate vertical for the three months ended March 31, 2021 and 2020 was $51.5 million and $40.9 million, respectively, an increase of $10.6 million or 26%.

This 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 16% 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 comparative period as residents, property managers, owners and customers transacted more business online, which we attribute in part to the response to the COVID-19 pandemic.

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

The remaining revenue in 2020 was attributed to our legacy legal vertical.

Revenue derived from our software and solutions offered to the real estate vertical for the six months ended June 30, 2021 and 2020, was $168.0 million and $137.7 million, respectively, an increase of $30.3 million, or 22%.

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 in 2020 was attributed to our legacy legal vertical.

Core solutions revenue derived from our real estate vertical for the three months ended June 30, 2021 and 2020 was $25.4 million and $21.2 million, respectively, an increase of $4.2 million or 20%.

Core solutions revenue derived from our real estate vertical for the six months ended June 30, 2021 and 2020 was $49.5 million and $41.7 million, respectively, an increase of $7.8 million or 19%.

Value+ services revenue derived from our real estate vertical for the three months ended June 30, 2021 and 2020 was $60.4 million and $48.2 million, respectively, an increase of $12.2 million or 25%.

Value+ services revenue derived from our real estate vertical for the six months ended June 30, 2021 and 2020 was $112.0 million and $89.1 million, respectively, an increase of $22.9 million or 26%.

These increases in core solutions and Value+ services revenue for the three and six months ended June 30, 2021 and 2020 were mainly attributable to growth in our base of property management customers and growth in users of our subscription and usage-based services.

During the three and six month periods we experienced growth of 17% and 17%, respectively, in the average number of property management units under management resulting from 10% and 10%, respectively, growth in the average number of property management customers during the periods.

Our electronic payment services experienced increased demand during the comparative periods as residents, property managers, owners and customers transacted more business online.

Our tenant screening and insurance services usage also increased during the comparative periods in line with the increase in units under management.

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.

1 unchanged sentence

Three Months Ended

March 31, Change

2021 2020 Amount %

June 30, Change Six Months Ended

June 30, Change

2021 2020 Amount % 2021 2020 Amount %

(dollars in thousands)

1 unchanged sentence

Percentage of revenue 36.9 % 33.8 % 39.4 % 36.7 %

Cost of revenue related to our software and solutions offered to the real estate vertical for the three months ended March 31, 2021 and 2020 was $33.1 million and $26.2 million, respectively, an increase of $6.9 million, or 26%.

Cost of revenue (exclusive of depreciation and amortization) related to our software and solutions offered to the real estate vertical for the three months ended June 30, 2021 and 2020 was $32.8 million and $24.5 million, respectively, an increase of $8.3 million, or 34%.

This increase was primarily attributable to increased costs associated with servicing the incremental $16.2 million in revenue over the same period.

The remaining cost of revenue was attributed to our legacy legal vertical and such costs were reimbursed through our ongoing Transition Services Agreement and recorded in other income, net .

Expenditures to third-party service providers related to the delivery of our Value+ services to the real estate vertical increased $3.8 million, which was directly associated with the increased adoption and utilization of our Value+ services, as evidenced by the $10.6 million increase in Value+ services revenue to the real estate vertical.

The remaining cost of revenue was attributed to our legacy legal vertical and such costs for 2021 were reimbursed through our ongoing Transition Services Agreement and recorded in Other income (loss), net .

For the three months ended June 30, 2021 and 2020, expenditures to third-party service providers related to the delivery of our Value+ services to the real estate vertical increased $5.6 million, which was directly associated with the increased adoption and utilization of our Value+ services, as evidenced by the $12.2 million increase in Value+ services revenue to the real estate vertical.

Personnel-related costs, including performance-based compensation, necessary to support growth and key investments, increased $2.0 million.

Allocated shared and other costs increased by $0.3 million primarily driven by a $0.8 million increase in hosting-related, payment processing and other costs incurred in support of our overall growth, partially offset by a $0.5 million reduction of allocated expenses attributed to a decrease in workplace-related and other expenditures in response to the impact of the COVID-19 pandemic.

Allocated shared and other costs increased by $0.8 million primarily driven by increases in software, payment processing and other costs incurred in support of our overall growth.

Cost of revenue (exclusive of depreciation and amortization) related to our software and solutions offered to the real estate vertical for the six months ended June 30, 2021 and 2020 was $65.9 million and $50.6 million, respectively, an increase of $15.3 million, or 30%.

This increase was primarily attributable to increased costs associated with servicing the incremental $30.3 million in revenue over the same period.

For the six months ended June 30, 2021 and 2020, expenditures to third-party service providers related to the delivery of our Value+ services to the real estate vertical increased $9.4 million, which was directly associated with the increased adoption and utilization of our Value+ services, as evidenced by the $22.9 million increase in Value+ services revenue to the real estate vertical.

Personnel-related costs, including performance-based compensation, necessary to support growth and key investments, increased $4.9 million.

Allocated shared and other costs increased by $1.0 million primarily driven by a $1.4 million increase in software, payment processing and other costs incurred in support of our overall growth, partially offset by a $0.4 million reduction of 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.

For the three months ended March 31, 2021, cost of revenue (exclusive of depreciation and amortization), as a percentage of revenue, increased to 42.0% from 40.4% for the three months ended March 31, 2020.

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

For the three months ended June 30, 2021, cost of revenue (exclusive of depreciation and amortization), as a percentage of revenue, increased to 36.8% from 33.6% for the three months ended June 30, 2020, and increased to 39.3% from 36.8% for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

These increases in cost as a percentage of revenue were primarily driven by the mix of Value+ services revenue with varying underlying third-party costs.

Sales and Marketing

Three Months Ended

March 31, Change

2021 2020 Amount %

June 30, Change Six Months Ended

June 30, Change

2021 2020 Amount % 2021 2020 Amount %

(dollars in thousands)

1 unchanged sentence

Percentage of revenue 19.9 % 16.9 % 20.2 % 18.4 %

Sales and marketing expense related to our software and solutions offered to the real estate vertical for the three months ended March 31, 2021 and 2020 was $16.1 million and $12.4 million, respectively, an increase of $3.7 million, or 30%.

Sales and marketing expense related to our software and solutions offered to the real estate vertical for the three months ended June 30, 2021 and 2020 was $17.7 million and $11.9 million, respectively, an increase of $5.8 million, or 49%.

This increase was primarily due to a $2.2 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 $1.3 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 shared and other costs of $0.3 million primarily related to a $0.5 million decrease in costs due to the elimination of event-related travel and the reduction of workplace-related and other non-essential expenditures in response to the impact of the COVID-19 pandemic, partially offset by an increase in other costs of $0.2 million in support of our overall growth.

The remaining sales and marketing expense was attributed to our legacy legal vertical and such costs were reimbursed through our ongoing Transition Services Agreement and recorded in other income, net .

As a percentage of revenue, sales and marketing expense increased to 20.4% from 19.1% for the three months ended March 31, 2021 compared to he three months ended March 31, 2020.

This increase was primarily driven by personnel-related investments made in advance of expected revenue generation associated with growth initiatives in the business.

Advertising and promotion costs increased by $3.0 million due in part from lower spending in 2020 from the cancellation or postponement of in person events and the reduction of online marketing spend as well as increased advertising and promotion spending in 2021 to support the growth and key investments in the business in 2021 and beyond.

In addition, there was an increase in allocated shared and other costs of $0.6 million primarily driven by increases in software and other costs incurred in support of our overall growth.

The remaining sales and marketing expense was attributed to our legacy legal vertical and such costs for 2021 were reimbursed through our ongoing Transition Services Agreement and recorded in Other income (loss), net .

Sales and marketing expense related to our software and solutions offered to the real estate vertical for the six months ended June 30, 2021 and 2020 was $33.8 million and $24.3 million, respectively, an increase of $9.5 million, or 39%.

This increase was primarily due to a $4.9 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 $4.3 million due in part to lower spending in 2020 due to the cancellation or postponement of in person events and the reduction of online marketing spend as well as increased advertising and promotion spending in 2021 to support the growth and key investments in the business in 2021 and beyond.

In addition, there was an increase in allocated shared and other costs of $0.7 million primarily related to software, offset by a $0.4 million decrease in costs due to the elimination of event-related travel and the reduction of workplace-related and other non-essential expenditures in response to the impact of the COVID-19 pandemic.

The remaining

sales and marketing expense was attributed to our legacy legal vertical and such costs for 2021 were reimbursed through our ongoing Transition Services Agreement and recorded in Other income (loss), net .

As a percentage of revenue, sales and marketing expense increased to 19.9% from 16.3% for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and increased to 20.1% from 17.6% for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The increase for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was due in part to lower advertising and promotion costs in 2020 as a result of fewer events and lower online marketing spend as well as increased spend in 2021 to support the growth of the business.

The increase for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was due to in part to lower advertising and promotion costs in 2020 as a result of fewer events and lower online marketing spend as well as increased spend in 2021 to support the growth of the business.

Research and Product Development

Three Months Ended

March 31, Change

2021 2020 Amount %

June 30, Change Six Months Ended

June 30, Change

2021 2020 Amount % 2021 2020 Amount %

(dollars in thousands)

1 unchanged sentence

Percentage of revenue 17.4 % 15.0 % 17.8 % 15.2 %

Research and product development expense related to our software and solutions offered to the real estate vertical for the three months ended March 31, 2021 and 2020 was $14.3 million and $9.9 million, respectively, an increase of $4.4 million, or 44%.

This increase was the result of an increase in personnel-related costs, net of capitalized software development costs, of $4.7 million due to investments in headcount growth within our research and product development organization.

This increase was partially offset by a decrease in allocated shared and other costs of $0.3 million primarily related to the reduction of workplace-related and other non-essential expenditures in response to the impact of the COVID-19 pandemic.

The remaining research and development expense was attributed to our legacy legal vertical and such costs were reimbursed through our ongoing Transition Services Agreement and recorded in other income, net .

Research and product development expense related to our software and solutions offered to the real estate vertical for the three months ended June 30, 2021 and 2020 was $15.5 million and $10.7 million, respectively, an increase of $4.8 million, or 45%.

This increase was the result of an increase in personnel-related costs, including performance based compensation, net of capitalized software development costs, of $4.5 million due to investments in headcount growth within our research and product development organization.

Allocated shared and other costs increased by $0.3 million primarily related to software and other costs to support our overall growth.

The remaining research and development expense was attributed to our legacy legal vertical and such costs for 2021 were reimbursed through our ongoing Transition Services Agreement and recorded in Other income (loss), net .

Research and product development expense related to our software and solutions offered to the real estate vertical for the six months ended June 30, 2021 and 2020 was $29.8 million and $20.6 million, respectively, an increase of $9.2 million, or 45%.

This increase was the result of an increase in personnel-related costs, including performance based compensation, net of capitalized software development costs, of $9.2 million due to investments in headcount growth within our research and product development organization.

Allocated shared and other costs increased $0.3 million primarily related to software costs, and were offset by a $0.3 million reduction of workplace-related and other non-essential expenditures in response to the impact of the COVID-19 pandemic.

General and Administrative

Three Months Ended

March 31, Change

2021 2020 Amount %

June 30, Change Six Months Ended

June 30, Change

2021 2020 Amount % 2021 2020 Amount %

(dollars in thousands)

1 unchanged sentence

Percentage of revenue 16.0 % 18.2 % 16.4 % 15.2 %

General and administrative expense related to our software and solutions offered to the real estate vertical and general corporate overhead expenses for three months ended March 31, 2021 and 2020 was $13.4 million and $8.5 million, respectively, an increase of $4.9 million, or 58%.

The increase in general and administrative expense was primarily due to a $1.2 million accrual made in connection with long-term executive cash incentive plans for certain executives and a $2.9 million increase in other personnel-related costs, including performance-based compensation, due to investments in headcount growth within our general and administrative organizations.

Allocated shared and other costs increased $0.8 million primarily due to an increase in professional services fees.

General and administrative expense related to our software and solutions offered to the real estate vertical and general corporate overhead expenses for the three months ended June 30, 2021 and 2020 was $14.2 million and $14.5 million, respectively, a decrease of $0.3 million, or 2%.

The decrease in general and administrative expense was primarily due to a one-time $4.3 million legal expense accrued during the three months ended June 30, 2020 and paid in the three months ended March 31, 2021 related to our previously disclosed settlement with the Federal Trade Commission (the "FTC").

This decrease was offset by an increase of $2.1 million in personnel related costs due to investments in headcount growth within our general and administrative organizations, a $1.0 million one-time expense related to separation pay in connection with the departure of our Chief Financial Officer ("CFO") during the three months ended June 30, 2021, and a $1.1 million increase in allocated shared and other costs to support our overall growth, all of which was partially offset by a net decrease of $0.2 million in connection with long-term executive cash incentive plans for certain executives, including certain of our named executive officers.

We expect to incur additional expense in future periods under the long-term executive cash incentive plans throughout the remaining service periods.

General and administrative expense related to our software and solutions offered to the real estate vertical and general corporate overhead expenses for the six months ended June 30, 2021 and 2020 was $27.6 million and $23.0 million, respectively, an increase of $4.6 million, or 20%.

The increase in general and administrative expense was primarily due to $5.0 million increase in personnel-related costs for investments in headcount, $1.0 million expense related to CFO separation pay, a $1.0 million expense in connection with long-term executive cash incentive plans for certain executives, and an increase of $1.9 million in allocated shared and other costs for professional and legal fees, education and training, insurance, software and other costs to support our overall growth.

These increases were offset by the $4.3 million legal expense accrued during the three months ended June 30, 2020 and paid in the three months ended March 31, 2021 related to our settlement with the FTC.

Depreciation and Amortization

Three Months Ended

March 31, Change

2021 2020 Amount %

June 30, Change Six Months Ended

June 30, Change

2021 2020 Amount % 2021 2020 Amount %

(dollars in thousands)

1 unchanged sentence

Percentage of revenue 8.6 % 8.2 % 8.9 % 8.5 %

Depreciation and amortization expense related to our software and solutions offered to the real estate vertical for the three months ended March 31, 2021 and 2020 was $7.4 million and $5.8 million, respectively, an increase of $1.6 million, or 28%.

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

Depreciation and amortization expense related to our software and solutions offered to the real estate vertical for the three months ended June 30, 2021 and 2020 was $7.6 million and $6.0 million, respectively, an increase of $1.6 million, or 28%.

Depreciation and amortization expense related to our software and solutions offered to the real estate vertical for the six months ended June 30, 2021 and 2020 was $15.0 million and $11.8 million, respectively, an increase of $3.2 million, or 27%.

These increases in depreciation and amortization expense were primarily due to increased amortization expense associated with higher accumulated capitalized software development balances.

Other Income (Loss), net

Three Months Ended

March 31, Change

2021 2020 Amount %

June 30, Change Six Months Ended

June 30, Change

2021 2020 Amount % 2021 2020 Amount %

(dollars in thousands)

Other income, net $ 562 $ 22 $ 540 *

Other income (loss), net $ 496 $ (10) $ 506 * $ 1,058 $ 12 $ 1,046 *

Percentage of revenue 0.6 % — % 0.6 % — %

*Percentage not meaningful

Other income, net related to our software and solutions offered to the real estate vertical for the three months ended March 31, 2021 and 2020 was $562 thousand and $22 thousand, respectively, an increase of $540 thousand.

The increase in other income, net was primarily due to $429 thousand in other income recorded during the three months ended March 31, 2021 related to certain post-closing transition services provided to MyCase.

(Benefit from) Provision for Income Taxes

*Percentage change not meaningful

Other income (loss), net related to our software and solutions offered to the real estate vertical for the three months ended June 30, 2021 and 2020 was $0.5 million and $(10) thousand, respectively, an increase of $0.5 million.

The increase in Other income (loss), net was primarily due to $0.3 million in other income recorded during the three months ended June 30, 2021 related to certain post-closing transition services provided to MyCase, and $0.2 million in other income recorded during the three months ended June 30, 2021 related to post-closing adjustments to the sales price of MyCase.

Other income (loss), net related to our software and solutions offered to the real estate vertical for the six months ended June 30, 2021 and 2020 was $1.1 million and $12 thousand, respectively, an increase of $1.0 million.

The increase in Other income (loss), net was primarily due to $0.7 million in other income recorded during the six months ended June 30, 2021 related to certain post-closing transition services provided to MyCase, and $0.4 million in other income recorded during the six months ended June 30, 2021 related to post-closing adjustments to the sales price of MyCase.

Benefit from Income Taxes

Three Months Ended

March 31, Change

2021 2020 Amount %

June 30, Change Six Months Ended

June 30, Change

2021 2020 Amount % 2021 2020 Amount %

(dollars in thousands)

(Benefit from) provision for income taxes $ (5,533) $ 375 $ (5,908) *

Benefit from income taxes $ (324) $ (13,484) $ 13,160 * $ (5,857) $ (13,109) $ 7,252 (55) %

Percentage of revenue (0.4) % (16.6) % (3.5) % (8.5) %

*Percentage not meaningful

For the three months ended March 31, 2021 and 2020, we recorded an income tax benefit of $5.5 million and income tax expense of $0.4 million, respectively.

We calculate our benefit from income taxes on a quarterly basis by applying an estimated annual effective tax rate to income from operations and by calculating the tax effect of discrete items recognized during the quarter.

For the three and six months ended June 30, 2021, we recorded an income tax benefit of $0.3 million and $5.9 million, respectively.

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

federal statutory rate of 21% differs primarily due to the significance of the benefits associated with stock-based compensation expense and research and development tax credits in relation to the forecasted pre-tax results for the year.

For the three and six months ended June 30, 2020, we recorded an income tax benefit of $13.5 million and $13.1 million, respectively.

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

Liquidity and Capital Resources

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

As of March 31, 2021, our cash, cash equivalents, and investment securities had an aggregate balance of $159.9 million.

As of June 30, 2021, our cash, cash equivalents, and investment securities had an aggregate balance of $163.1 million.

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.

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.

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

Three Months Ended

Net cash (used in) provided by operating activities $ (4,437) $ 3,083

Net cash (used in) provided by investing activities (87,190) 5,729

Six Months Ended

Net cash provided by operating activities $ 10,661 $ 27,376

Net cash used in investing activities (94,060) (18,712)

Net cash (used in) provided by financing activities (8,254) 28,840

Net (decrease) increase in cash, cash equivalents and restricted cash $ (91,653) $ 37,504

Cash (Used in) Provided by Operating Activities

Cash Provided by Operating Activities

Our primary source of operating cash inflows is cash collected from our customers in connection with their use of our core solutions and Value+ services.

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 three months ended March 31, 2021, net cash used in operating activities was $4.4 million resulting from income of $0.5 million, non-cash charges of $4.9 million and a net decrease in our operating assets and liabilities of $9.8 million.

The non-cash charges primarily consist of an increase in deferred taxes of $5.7 million, $7.4 million of depreciation and amortization costs, stock-based compensation expense of $2.8 million, and $0.7 million of amortization of operating lease right-of-use ("ROU") assets.

The net decrease in our operating assets and liabilities was mostly attributable to a $6.5 million decrease in income taxes payable primarily driven by income taxes paid due to the MyCase Transaction, a $3.8 million decrease in accrued expenses which was primarily due to a $4.3 million settlement paid during the current period related to the FTC Investigation, and a $1.9 million increase in accounts receivable primarily driven by growth of our Value+ services.

These decreases were partially offset by a $1.2 million increase in accrued employee expenses-noncurrent due to an increase in accrued long-term management bonuses made in connection with long-term executive cash incentive plans for certain executives, a $0.9 million increase in accounts payable, a $0.7 million increase in accrued employee expenses primarily due to an increase in other short-term accrued management bonuses, and a $0.3 million increase in deferred revenue driven by growth in the number of customers invoiced during the period.

For the three months ended March 31, 2020, net cash provided by operating activities was $3.1 million resulting from net income of $2.0 million, adjusted by non-cash charges of $8.8 million and a net decrease in our operating assets and liabilities of $7.7 million.

The non-cash charges primarily consist of $6.4 million of depreciation and amortization costs, $1.1 million of amortization of operating lease ROU assets, stock-based compensation expense of $1.0 million, and a decrease in deferred taxes of $0.4 million.

The net decrease in our operating assets and liabilities was mostly attributable to a $5.4 million decrease in accrued employee expenses primarily due to the payout of accrued employee bonuses and commissions, an increase of $2.8 million in prepaid expenses and other current assets, and a $1.6 million increase in accounts receivable primarily driven by growth of our Value+ services.

These decreases were partially offset by a $0.8 million increase in operating lease liabilities, a $0.7 million increase in accrued expenses and a $0.7 million increase in deferred revenue.

Cash (Used in) Provided by Investing Activities

Cash (used in) provided by investing activities is generally comprised of purchases of investment securities, maturities and sales of investment securities, purchases of property and equipment, and additions to capitalized software development.

For the three months ended March 31, 2021, investing activities used $87.2 million in cash primarily due to purchases of investment securities of $99.0 million, capitalized software development costs of $6.1 million, and capital expenditures of $0.9 million to purchase property and equipment for the continued growth and expansion of our business.

For the six months ended June 30, 2021, net cash provided by operating activities was $10.7 million resulting from income of $2.5 million, non-cash charges of $15.7 million and a net decrease in our operating assets and liabilities of $7.6 million.

The non-cash charges primarily consist of an increase in deferred taxes of $6.1 million, $15.0 million of depreciation and amortization costs, $1.4 million of amortization of operating lease right-of-use ("ROU") assets, and stock-based compensation expense of $6.0 million.

The net decrease in our operating assets and liabilities was mostly attributable to a $9.0 million decrease in income taxes payable primarily driven by income taxes paid due to the MyCase Transaction, a $3.0 million decrease in accrued expenses which was primarily due to a $4.3 million legal expense accrued during the three months ended June 30, 2020 and paid in the three months ended March 31, 2021 related to our settlement with the FTC, a $2.2 million increase in prepaid expenses and other current assets primarily attributable to an increase in tenant improvement allowance receivable, and a $4.0 million increase in accounts receivable primarily driven by growth of our Value+ services.

These decreases were partially offset by a $1.7 million increase in operating lease liabilities, a $1.0 million increase in accrued employee expenses-noncurrent due to an increase in accrued long-term management bonuses made in connection with long-term executive cash incentive plans for certain executives, a $7.6 million increase in accrued employee expenses-current primarily due to an increase in other short-term accrued management bonuses, and a $1.3 million increase in accounts payable.

For the six months ended June 30, 2020, net cash provided by operating activities was $27.4 million resulting from net income of $21.2 million, adjusted by non-cash charges of $5.7 million and a net increase in our operating assets and liabilities of $0.4 million.

The non-cash charges primarily consist of an increase in deferred taxes of $13.1 million, $13.1 million of depreciation and amortization costs, stock-based compensation expense of $3.7 million, and $2.1 million of amortization of operating lease right-of-use assets.

The net increase in our operating assets and liabilities was mostly attributable to a $5.1 million increase in accounts receivable primarily driven by growth of our Value+ services, partially offset by a $4.5 million increase in accrued expenses which was primarily due to a $4.3 million legal expense accrued during the three months ended June 30, 2020 and paid in the three months ended March 31, 2021 related to our settlement with the FTC, a $0.7 million increase in accrued employee expenses primarily due to an increase in accrued paid time off and partially offset by a decrease in accrued performance-based cash compensation and a $0.5 million increase in deferred revenue driven by growth in the number of customers invoiced during the period.

Cash Used in Investing Activities

Cash used in investing activities is generally comprised of purchases of investment securities, maturities and sales of investment securities, purchases of property and equipment, and additions to capitalized software development.

For the six months ended June 30, 2021, investing activities used $94.1 million in cash primarily due to purchases of investment securities of $148.3 million, capitalized software development costs of $11.9 million, and capital expenditures of $2.8 million to purchase property and equipment for the continued growth and expansion of our business.

These uses of cash were partially offset by sales and maturities of investment securities of $42.2 million and $26.8 million, respectively.

For the three months ended March 31, 2020, investing activities provided $5.7 million in cash primarily due to sales and maturities of investment securities of $13.9 million and $7.3 million, respectively.

These sources of cash were partially offset by capital expenditures of $8.0 million to purchase property and equipment for the continued growth and expansion of our business, capitalized software development costs of $6.8 million for the continued investment in our software development, and purchases of investment securities of $0.6 million.

For the six months ended June 30, 2020, investing activities used $18.7 million in cash primarily due to capital expenditures of $14.3 million to purchase property and equipment for the continued growth and expansion of our business, purchases of investment securities of $13.4 million, and capitalized software development costs of $12.7 million for the continued investment in our software development.

These uses of cash were partially offset by sales and maturities of investment securities of $13.9 million and $7.8 million, respectively.

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, activities associated with our former Credit Facility, and activities related to the repurchase of our Class A common stock.

For the three months ended March 31, 2021, financing activities used $3.9 million in cash primarily as a result of net share settlements for employee tax withholdings associated with the vesting of RSUs of $4.0 million.

For the three months ended March 31, 2020, financing activities provided $32.2 million in cash primarily as a result of proceeds from the Revolving Facility of $49.4 million, partially offset by net share settlements for employee tax withholdings associated with the vesting of RSUs of $6.5 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.

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, activities associated with our former credit facility, which was terminated in connection with the divestiture of MyCase Inc.

(For additional details, refer to Note 3.

Divestitures ), and activities related to the repurchase of our Class A common stock.

For the six months ended June 30, 2021, financing activities used $8.3 million in cash primarily as a result of net share settlements for employee tax withholdings associated with the vesting of RSUs of $8.9 million.

For the six months ended June 30, 2020, financing activities provided $28.8 million in cash primarily as a result of proceeds from our prior revolving credit facility of $50.2 million, partially offset by net share settlements for employee tax withholdings associated with the vesting of RSUs of $9.7 million, payment of contingent consideration related to the Dynasty acquisition completed in January 2019 of $6.0 million, the repurchase of outstanding shares of Class A common stock in the amount of $4.2 million, and principal payments on debt of $1.8 million.

Contractual Obligations and Other Commitments

1 unchanged sentence

Off-Balance Sheet Arrangements

As of March 31, 2021, we did not have any off-balance sheet arrangements.

As of June 30, 2021, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

7 unchanged sentences

Investment Securities

As of March 31, 2021, we had cash and cash equivalents of $44.7 million consisting of bank deposits, money market funds, and treasury securities, and $115.1 million of investment securities consisting of United States government agency securities and treasury securities.

As of June 30, 2021, we had cash and cash equivalents of $48.6 million consisting of bank deposits, money market funds, commercial paper, and treasury securities, and $114.5 million of investment securities consisting of United States government agency securities, corporate bonds, and treasury securities.

The primary objective of investing in securities is to support our liquidity and capital needs.

3 unchanged sentences

Since our investment securities are held as available for sale, all changes in fair value impact our other comprehensive income unless an investment security is considered impaired in which case changes in fair value are reported in other expense.

As of March 31, 2021, a hypothetical 100 basis point decrease in interest rates would not have resulted in a material change in the fair value of our investment securities and a hypothetical 100 basis point increase in interest rates would have resulted in a decrease in the fair value of our investment securities of approximately $0.6 million.

This estimate is based on a sensitivity model which measures an instant change in interest rates by 100 basis points at March 31, 2021.

As of June 30, 2021, a hypothetical 100 basis point decrease in interest rates would not have resulted in a material change in the fair value of our investment securities and a hypothetical 100 basis point increase in interest rates would have resulted in a decrease in the fair value of our investment securities of approximately $0.5 million.

This estimate is based on a sensitivity model which measures an instant change in interest rates by 100 basis points at June 30, 2021.

Inflation Risk

3 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-Q

Item 2. Management’s Discussion and Analysis