What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-09 compared with 2022-02-28 · 77 added, 133 removed, 165 unchanged (56% of the section changed)

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We are a leading provider of cloud business management solutions for the real estate industry.

Our solutions enable our customers to digitally transform their businesses, automate and streamline critical business operations and deliver a better customer experience.

Our products assist an interconnected and growing ecosystem of users, including property managers, property owners, real estate investment managers, rental prospects, residents, and service providers with critical transactions across the real estate lifecycle, including screening potential tenants, sending and receiving payments and even providing insurance-related risk mitigation services.

AppFolio’s intuitive interface, coupled with streamlined and automated workflows, make it easier for our customers to eliminate redundant and manual processes so they can deliver a great experience for their users while improving financial and operational performance.

Our solutions are designed to enable our property manager customers to digitally transform their businesses, address critical business operations and deliver a better customer experience.

Our products assist our customers with an interconnected and growing network of stakeholders in their business ecosystems, including property owners, real estate investment managers, rental prospects, residents, and service providers, and provide key functionality related to critical transactions across the real estate lifecycle, including screening potential tenants, sending and receiving payments and even providing insurance-related risk mitigation services.

AppFolio’s intuitive interface, coupled with streamlined and automated workflows, make it easier for our customers to eliminate redundant and manual processes so they can deliver a great experience for their network of stakeholders while improving financial and operational performance.

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.

In March 2020, in an effort to protect our employees and comply with applicable government orders in response to the COVID-19 pandemic, we transitioned our employees to a remote work environment.

We began transitioning our employees back to the office in 2021;

however, our employees have the option to work remotely until further notice.

During certain periods covered by this Annual Report, 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.

We completed our divestiture of MyCase, Inc.

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

For additional details, see Note 3, Divestitures, of our Consolidated Financial Statements in this Annual Report.

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 work environment to motivate and develop our valuable human capital.

As we navigate the challenges of increased competition for talent, we continue to evolve our compensation and employee reward practices.

Key Business Metric

Property management units under management .

We believe that our ability to increase our number of property management units under management is an indicator of our market penetration, the growth of our business, and our potential future business opportunities.

We define property management units under management as the number of active units on our core solutions.

We believe that our ability to increase our number of property management units under management is an indicator of our market penetration, growth, and potential future business opportunities.

We define property management units under management as active or committed units under management at the period end date.

We had 7.3 million and 6.3 million property management units under management as of December 31, 2022 and 2021, respectively.

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Our core solutions and certain of our Value Added 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.

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

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

We generally invoice monthly or, to a lesser extent, annually in advance of the subscription period.

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

Usage-based fees are charged either as a percentage of the transaction amount (e.g., for certain of our electronic payment services) or on a flat fee per transaction basis with no minimum usage commitments (e.g., for our tenant screening and risk mitigation services).

We also offer certain Value Added Services, which are not covered by our subscription fees, on a per-use basis.

Usage-based fees are charged either as a percentage of the transaction amount (e.g., for certain of our payment services) or on a flat fee per transaction basis with no minimum usage commitments (e.g., for our tenant screening and risk mitigation services).

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

Our electronic payments services fees are recorded gross of the interchange and payment processing related fees.

Our payments services fees are recorded gross of the interchange and payment processing related fees.

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 Added Services revenue comes

directly and indirectly from the use of our electronic payment services, tenant screening services, and risk mitigation services.

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-recurring services.

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

A significant majority of our Value Added Services revenue comes from the use of our payment services, tenant screening services, and risk mitigation services.

We charge our customers for onboarding assistance to our core solutions and certain other non-recurring services.

We generally invoice for these other services in advance of the services being completed and recognize revenue in the period the service is rendered.

We generate revenue from the legacy customers of previously acquired businesses by providing services outside of our property management core solution platform.

Revenue derived from these services is recorded in Other revenue.

As of December 31, 2022 and 2021, we had 18,441 and 17,215 property management customers, respectively.

Costs and Operating Expenses

Cost of Revenue.

Cost of Revenue (Exclusive of Depreciation and Amortization).

Many of our Value Added Services are facilitated by third-party service providers.

Cost of revenue paid to these third-party service providers includes the cost of electronic interchange and payment processing related services to support our electronic payments services, the cost of credit reporting services for our tenant screening services, and various costs associated with our risk mitigation service providers.

Cost of revenue paid to these third-party service providers includes the cost of electronic interchange and payment processing-related services to support our payments services, the cost of credit reporting services for our tenant screening services, and various costs associated with our risk mitigation service providers.

These third-party costs vary both in amount and as a percent of revenue for each Value Added Service offering.

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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 Added Services by our new and existing customers are deferred and then amortized on a straight-line basis over a period of benefit, which 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.

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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 Added Services and other improvements, as well as developing new products and services for existing and adjacent markets.

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

We capitalize our software development costs that meet the criteria for capitalization.

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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, 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 and other costs.

In addition, general and administrative expense includes fees for third-party professional services (including audit, legal, compliance, and tax services), transaction costs related to sales of subsidiary businesses, regulatory fees, other corporate expenses, impairment of long-lived assets, and allocated shared and other costs.

Depreciation and Amortization.

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Other Income, Net.

Other income, net includes the gain on sale of MyCase during fiscal year 2020, gain on sale of our equity-method investments, and gains and losses associated with the sale of property and equipment and investment securities.

Other income, net includes gain on sale of our equity-method investments, gains and losses associated with the sale of businesses and property and equipment, and income from certain post-closing transition services provided by us to MyCase, Inc.

during fiscal year 2021.

Interest Income (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 any outstanding borrowings during the year ended December 31, 2020.

Provision for Income Taxes.

Provision for income taxes consists of federal and state income taxes in the United States.

Results of Operations for the Years Ended December 31, 2021 and 2020

The following table presents our results of operations for the periods presented in dollars (in thousands) and as a percentage of revenue:

Year Ended December 31,

Amount % Amount %

Consolidated Statements of Operations Data:

Revenue $ 359,370 100.0 % $ 310,056 100.0 %

Costs and operating expenses:

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

143,944 40.1 119,029 38.4

Sales and marketing (1)

73,200 20.4 58,445 18.8

Research and product development (1)

65,980 18.4 48,529 15.7

General and administrative (1)

57,279 15.9 47,480 15.3

Depreciation and amortization 30,845 8.6 26,790 8.6

Total costs and operating expenses 371,248 103.3 300,273 96.8

(Loss) income from operations (11,878) (3.3) 9,783 3.2

Other income, net 13,111 3.6 188,897 60.9

Interest income (expense), net 501 0.1 (1,849) (0.6)

Income before provision for income taxes 1,734 0.5 196,831 63.5

Provision for income taxes 706 0.2 38,428 12.4

Net income $ 1,028 0.3 % $ 158,403 51.1 %

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

Year Ended December 31,

Amount % Amount %

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

Cost of revenue (exclusive of depreciation and amortization) $ 2,024 0.6 % $ 1,506 0.5 %

Sales and marketing 2,329 0.6 1,415 0.5

Research and product development 5,457 1.5 1,818 0.6

General and administrative 5,531 1.5 4,286 1.4

Total stock-based compensation expense $ 15,341 4.3 % $ 9,025 2.9 %

Results of Operations

Year Ended December 31, Change

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Total revenue $ 471,883 $ 359,370 $ 112,513 31 %

Revenue for the years ended December 31, 2021 and 2020, was $359.4 million and $310.1 million, respectively, an increase of $49.3 million, or 16%.

This increase was primarily attributable to the growth in the number of property management customers and units under management utilizing our core solutions and Value Added Services.

Revenue in 2020 includes $25.4 million attributable to MyCase.

Excluding this amount, revenue derived from the real estate industry for the years ended December 31, 2021 and 2020 increased $74.7 million, or 26%.

Core solutions revenue derived from the real estate industry for the years ended December 31, 2021 and 2020 was $105.1 million and $86.5 million, respectively, an increase of $18.6 million or 22%.

Value Added Services revenue derived from the real estate industry for the years ended December 31, 2021 and 2020 was $241.3 million and $184.2 million, respectively, an increase of $57.1 million or 31%.

These increases in core solutions and Value Added Services revenue for the years ended December 31, 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 twelve month period ended December 31, 2021, we experienced growth of 17% in the average number of property management units under management resulting from 9% growth in the average number of property management customers.

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

The increase in revenue for the year ended December 31, 2022, compared to the prior year, was primarily attributable to growth in our base of property management customers driving an increase in the number of property management units under management, and growth in users of our subscription and usage-based services.

During the year ended December 31, 2022, we experienced growth of 15% in the number of property management units under management resulting from 7% growth in the number of property management customers, compared to the prior year.

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

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

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

A significant majority of our Value Added Services revenue comes from the use of our payment services, tenant screening services, and the risk mitigation services we make available to customers.

Cost of Revenue (Exclusive of Depreciation and Amortization)

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Percentage of revenue 0.6 % 0.6 %

Cost of revenue (exclusive of depreciation and amortization) related to the real estate industry for the years ended December 31, 2021 and 2020 was $143.8 million and $109.7 million, respectively, an increase of $34.1 million, or 31%.

For the years ended December 31, 2021 and 2020, expenditures to third-party service providers related to the delivery of our Value Added Services to the real estate industry increased $21.6 million, which was directly associated with the increased adoption and utilization of our Value Added Services, as evidenced by the $57.1 million increase in Value Added Services revenue to the real estate industry.

Personnel-related costs, including performance-based compensation, necessary to support growth and key investments, increased $9.3 million.

Allocated shared and other costs increased by $3.1 million primarily driven by an increase in software and other costs incurred in support of our overall growth.

Cost of revenue (exclusive of depreciation and amortization) for the year ended December 31, 2022, increased primarily due to increases in expenditures to third-party service providers related to the delivery of our Value Added Services of $34.1 million compared to the prior year.

This increase was directly associated with the increased adoption and utilization of our Value Added Services.

Personnel-related costs, including performance-based compensation, necessary to support growth and key investments, increased $12.5 million for the year ended December 31, 2022, compared to the prior year.

Allocated shared and other costs increased by $1.2 million for the year ended December 31, 2022, compared to the prior year, primarily related to platform infrastructure, software and other costs incurred in support of our overall growth.

As a percentage of revenue, cost of revenue (exclusive of depreciation and amortization) fluctuates primarily based on the mix of Value Added Services revenue in the period, given the varying percentage of revenue we pay to third-party service providers.

For the year ended December 31, 2021, cost of revenue (exclusive of depreciation and amortization), as a percentage of revenue, increased to 40.0% from 38.5% for the year ended December 31, 2020.

We expect the cost of revenues (exclusive of depreciation and amortization) for the year ending December 31, 2022, to increase as a percentage of revenue, as we expect expenditures to third-party service providers related to the delivery of our Value Added Services revenues to increase at a faster rate than total revenues as a result of a higher growth rate related to our Value Added Services revenues.

We expect cost of revenue (exclusive of depreciation and amortization) for the year ending December 31, 2023 to decrease as a percentage of revenue compared to the year ended December 31, 2022, as we expect to leverage headcount efficiencies to offset an increase in expenditures to third-party service providers related to the delivery of our Value Added Services.

Sales and Marketing

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Percentage of revenue 1.8 % 0.6 %

Sales and marketing expense related to the real estate industry for the years ended December 31, 2021 and 2020 was $73.1 million and $52.5 million, respectively, an increase of $20.6 million, or 39%.

This increase was primarily due to a $12.6 million increase in personnel-related costs, including performance-based compensation, necessary to support growth and key investments in the business.

Sales and marketing expense for the year ended December 31, 2022 increased primarily due to increases in personnel-related costs, including performance-based compensation, necessary to support growth in the business of $23.9 million compared to the prior year.

Advertising and promotion costs increased by $2.1 million primarily due to increased advertising and promotion spending to support the growth and key investments in the business.

In addition, there was an increase in allocated shared and other costs of $1.7 million primarily related to software and other costs incurred in support of our overall growth.

As a percentage of revenue, sales and marketing expense increased to 20.3% from 18.4% for the year ended December 31, 2021 compared to the year ended December 31, 2020.

This increase 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 our growth.

Allocated shared and other costs increased by $8.2 million year ended December 31, 2022 compared to the prior year, primarily related to software and other costs incurred in support of our overall growth.

We expect sales and marketing expense for the year ending December 31, 2023 to decrease as a percentage of revenue compared to the year ended December 31, 2022, as we continue to leverage headcount efficiencies.

Research and Product Development

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Percentage of revenue 3.4 % 1.5 %

Research and product development expense related to the real estate industry for the years ended December 31, 2021 and 2020 was $65.9 million and $43.8 million, respectively, an increase of $22.1 million, or 50%.

This increase was the result of an increase in personnel-related costs, including performance based compensation, net of capitalized software development costs, of $20.5 million due to investments in headcount growth within our research and product development organization.

Allocated shared and other costs increased $1.6 million primarily related to software and other costs to support our growth.

Research and product development expense for the year ended December 31, 2022 increased primarily due to an increase in personnel-related costs including performance-based compensation, net of capitalized software development costs, of $42.8 million, compared to the prior year.

Allocated shared and other costs increased by $2.3 million year ended December 31, 2022 compared to the prior year, primarily related to software and other costs incurred in support of our overall growth.

We expect research and product development expenses for the year ending December 31, 2023 to increase as a percentage of revenue compared to the year ended December 31, 2022, as we continue to invest in our research and product development organization to support our strategy to expand the use cases of our product capabilities to the larger customer segment.

General and Administrative

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Percentage of revenue 2.9 % 1.5 %

General and administrative expense related to the real estate industry and general corporate overhead expenses for the years ended December 31, 2021 and 2020 was $57.3 million and $46.1 million, respectively, an increase of $11.2 million, or 24%.

The increase in general and administrative expense was primarily due to a $14.3 million increase in personnel-related costs for investments in headcount and an increase of $4.1 million in allocated shared and other costs for professional fees, education and training, insurance, software and other costs to support our growth.

These increases were offset by a $1.9 million insurance recovery related to our previously disclosed settlement with the Federal Trade Commission (the "FTC") and a decrease in legal costs of $5.3 million related to our $4.3 million settlement with the FTC and a decrease in legal fees of $1.0 million related to the MyCase Transaction during the year ended December 31, 2020.

General and administrative expense for the year ended December 31, 2022 increased primarily due to a net ROU and other lease-related asset impairment of $22.0 million.

Personnel-related costs, including performance-based compensation, increased $15.7 million for the year ended December 31, 2022, compared to the prior year.

Allocated shared and other costs increased $3.9 million for the year ended December 31, 2022, compared to the prior year, for professional fees, education and training, insurance, software and other costs to support our growth.

Additionally, offsetting general and administrative expense for the year ended December 31, 2021 was a $1.9 million insurance recovery related to our previously disclosed settlement with the Federal Trade Commission (the "FTC").

Excluding the impairment charge, we expect general and administrative expenses for the year ending December 31, 2023 to remain flat as a percentage of revenue compared to the year ended December 31, 2022.

Depreciation and Amortization

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Percentage of revenue 7.0 % 8.6 %

Depreciation and amortization expense related to the real estate industry for the years ended December 31, 2021 and 2020 was $30.8 million and $25.0 million, respectively, an increase of $5.8 million, or 23%.

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

Depreciation and amortization expense for the year ended December 31, 2022 increased, compared to the prior year, primarily due to increased amortization expense associated with accumulated capitalized software development balances.

We expect depreciation and amortization expenses for the year ending December 31, 2023 to decrease as a percentage of revenue compared to the year ended December 31, 2022 due to a decrease in amortization of accumulated capitalized software development balances.

Other Income, net

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Percentage of revenue 0.9 % 3.6 %

*Percentage not meaningful

Other income, net for the years ended December 31, 2021 and 2020 was $13.1 million and $188.9 million, respectively, a decrease of $175.8 million.

The decrease in other income, net was primarily due to the gain of $187.6 million associated with the MyCase Transaction in September 2020.

The decrease was offset by a gain of $12.8 million related to the sale of our investment in SecureDocs, a portion of which relates to the recovery of a $2.0 million note receivable which had been previously reserved.

Other income, net for the year ended December 31, 2022 decreased, compared to the prior year, primarily due to a gain of $12.8 million related to the sale of our investment in SecureDocs during the year ended December 31, 2021.

The decrease was offset by a gain of $4.2 million associated with the WegoWise Transaction during the year ended December 31, 2022.

For additional information regarding the WegoWise Transaction, refer to Note 3, Sale of Subsidiary Businesses .

Provision for Income Taxes

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Percentage of revenue 0.3 % 0.2 %

*Percentage not meaningful

For the year ended December 31, 2021, we recorded income tax expense of $0.7 million.

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, research and development tax credits, and the change in the valuation allowance against deferred taxes.

For the year ended December 31, 2020 we recorded an 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 filed 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.

federal statutory rate of 21% differs primarily due to change in valuation allowance against deferred taxes and non-deductible expenses, partially offset by state income taxes and tax benefits associated with stock-based compensation expense and research and development tax credits.

Liquidity and Capital Resources

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

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

At December 31, 2022, our cash and cash equivalents and investment securities had an aggregate balance of $185.2 million.

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Capital Requirements

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 Added Services by new and existing customers, the timing and extent of the introduction of new core functionality, products and Value Added Services, the timing and extent of our expansion into new or adjacent markets, the timing and extent of our investments across our organization, and the impact of the COVID-19 pandemic (and other actual or potential events outside of our control) on the customers we serve and on our business.

Non-cancelable purchase commitments for business operations total $13.2 million as of December 31, 2021, due primarily over the next 3 years.

Non-cancelable purchase commitments for business operations total $23.4 million as of December 31, 2022, due primarily over the next three years.

Operating lease obligations totaling $65.1 million associated with leased facilities and have varying maturities with $30.1 million due over the next five years.

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.

Furthermore, our Board of Directors has authorized our management to repurchase up to $100.0 million of shares of our Class A common stock from time to time.

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Net cash provided by operating activities $ 25,365 $ 35,391

Net cash (used in) provided by investing activities (110,459) 146,511

Net cash used in investing activities (6,466) (110,459)

Net cash used in financing activities (6,163) (7,348)

Net (decrease) increase in cash and cash equivalents $ (82,416) $ 124,452

Net increase (decrease) in cash and cash equivalents $ 12,736 $ (82,416)

Cash Provided by Operating Activities

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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, 2021, cash provided by operating activities was $35.4 million resulting from income of $1.0 million, non-cash charges of $36.7 million and a net decrease in our operating assets and liabilities of $2.4 million.

The non-cash charges primarily consist of $29.0 million of depreciation and amortization costs, stock-based compensation expense, including as amortized, of $17.2 million, a decrease in deferred taxes of $0.3 million, and $3.2 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 $9.0 million decrease in income taxes payable primarily driven by income taxes paid due to the MyCase Transaction, a $2.2

million increase in prepaid expenses and other current assets primarily attributable to increases in tenant improvement allowance receivable, deferred commission costs and prepaid expenses to support our overall growth, a $2.1 million increase in accounts receivable primarily driven by growth of our Value Added Services, and a $1.8 million decrease in accrued expenses which was primarily due to a $4.3 million legal expense accrued during the year ended December 31, 2020 and paid in the three months ended March 31, 2021 related to our settlement with the FTC.

These decreases were partially offset by an $11.3 million increase in accrued employee expenses-current primarily due to an increase in short-term incentive compensation, an increase in payroll expense and accrued paid time off due to an increase in headcount, a $1.3 million increase in operating lease liabilities, a $0.6 million increase in accrued employee expenses-noncurrent due to an increase in accrued long-term management bonuses, and a $0.5 million increase in accounts payable.

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 $25.5 million, stock-based compensation expense, including as amortized, of $10.3 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 Added 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 risk mitigation services, and an increase in deferred costs, and a $0.9 million decrease in accounts payable due to timing of payments.

Cash (Used in) Provided by Investing Activities

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

For the year ended December 31, 2021, investing activities used $110.5 million in cash primarily due to purchases of investment securities of $241.2 million, capitalized software development costs of $24.6 million and capital expenditures of $8.1 million to purchase property and equipment for the continued growth and expansion of our business.

These uses of cash were partially offset by maturities and sales of investment securities of $107.4 million and $43.2 million, respectively, and proceeds from the sale of our equity-method investment of $12.5 million.

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.

Net cash provided by operating activities was $25.4 million for the year ended December 31, 2022 compared to net cash provided by operating activities of $35.4 million for the year ended December 31, 2021.

The net decrease in cash provided by operating activities was primarily due to an increase in employee related costs and the settlement of accounts payable offset by an increase in cash collections from customers due to higher revenue growth and a decrease in income taxes paid related to the sale of MyCase, Inc.

during the year ended December 31, 2021.

Cash Used in Investing Activities

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

Net cash used in investing activities for the year ended December 31, 2022 was $6.5 million compared to $110.5 million for the year ended December 31, 2021.

The net decrease in cash used in investing activities was primarily due to decreases in purchases of available-for-sale investment securities and capitalization of software development costs, offset by a decrease in proceeds from sales of available-for-sale investment securities and decrease in proceeds from sales of business and equity method investments.

Cash Used in Financing Activities

Cash used in financing activities is generally comprised of net share settlements for employee tax withholdings associated with the vesting of restricted stock units ("RSUs"), the payment of contingent consideration under acquisition arrangements, activities associated with our former credit facility, activities related to the repurchase of our Class A common stock offset by proceeds from the exercise of stock options.

For the year ended December 31, 2021, 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 $10.0 million, offset by proceeds from stock option exercises of $2.6 million.

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 former 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 2019 acquisition of Dynasty Marketplace, Inc.

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 proceeds from the Revolving Facility of $50.8 million.

Cash used in financing activities is generally composed of net share settlements for employee tax withholdings associated with the vesting of equity awards offset by proceeds from the exercise of stock options.

Net cash used in financing activities for the year ended December 31, 2022 was $6.2 million compared to $7.3 million for the year ended December 31, 2021.

The decrease in cash used in financing activities was primarily due to an increase in proceeds from stock option exercises.

Off-Balance Sheet Arrangements

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A significant change in the time spent on each project could have a material impact on the amount capitalized and related amortization expense in subsequent periods.

Impairment of long-lived assets

We assess the recoverability of our long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable or that the useful lives of those assets are no longer appropriate.

An impairment charge would be recognized when the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value.

The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group.

Any impairments to operating lease right of use ("ROU") assets, leasehold improvements, or other assets as a result of a sublease, abandonment, or other similar factor are assessed for impairment when a decision to do so is made and recorded as an operating expense.

Similar to other long-lived assets, management tests ROU assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

For ROU and other lease-related assets, such circumstances would include subleases that do not fully recover the costs of the associated leases or a decision to abandon the use of all or part of a leased asset.

We recorded a net impairment of $22.0 million consisting of $17.6 million related to ROU assets and $4.4 million related to property and equipment associated with our leased office spaces as described further in Note 9, Leases.

Significant judgment and estimates are required in assessing impairment of long-lived assets, including identifying whether events or changes in circumstances require an impairment assessment, estimating future cash flows, uncertainty associated with the time period it will take to obtain a sublessee, the anticipated sublease income and determining appropriate discount rates.

Our estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

We recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.

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A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.

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.

In evaluating the need for a valuation allowance, we consider 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.

The tax benefits recognized in our Consolidated Financial Statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized.

We recognize interest and penalties accrued with respect to uncertain tax positions, if any, in our provision for income taxes in the Consolidated Statements of Operations.

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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