10-Q 1 appf-20220930.htm 10-Q appf-20220930
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 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.

Commission File Number 001-37468
AppFolio, Inc.
(Exact name of registrant as specified in its charter)
Delaware26-0359894
(State of incorporation or organization)(I.R.S. Employer Identification No.)
70 Castilian Drive93117
   Santa Barbara,California
(Address of principal executive offices) (Zip Code)
 (805) 364-6093
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Class A common stock, $0.0001 par valueAPPFNASDAQ Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
  
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of October 20, 2022, the number of shares of the registrant’s Class A common stock outstanding was 20,414,695 and the number of shares of the registrant’s Class B common stock outstanding was 14,746,432.


TABLE OF CONTENTS
 
Page No.
 



FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2022 (this "Quarterly Report"), contains forward-looking statements within the meaning of federal securities laws, which statements involve substantial risks and uncertainties. The forward-looking statements made in this Quarterly Report are based primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects and relate only to events as of the date on which the statements are made. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “might,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report and "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (our "Annual Report"), as well as in the other reports we file with the Securities and Exchange Commission (the "SEC"). You should read this Quarterly Report, and the other documents we file with the SEC, with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. As such, you should not rely upon forward-looking statements as predictions of future events. Examples of forward-looking statements include, among others, statements made regarding changes in the competitive environment, responding to customer needs, research and product development plans, future products and services, growth in the size of our business and number of customers, strategic plans and objectives, business forecasts and plans, our future or assumed financial condition, results of operations and liquidity, trends affecting our business and industry, capital needs and financing plans, capital resource allocation plans, share repurchase plans, and commitments and contingencies, including with respect to the outcome of legal proceedings or regulatory matters. Any forward-looking statement made by us in this Quarterly Report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law.


1

PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
2

APPFOLIO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except par values)
 September 30,
2022
December 31,
2021
Assets
Current assets
Cash and cash equivalents$67,232 $57,847 
Investment securities—current72,018 64,600 
Accounts receivable, net14,884 12,595 
Prepaid expenses and other current assets22,660 23,553 
Total current assets176,794 158,595 
Investment securities—noncurrent45,200 61,076 
Property and equipment, net27,633 30,479 
Operating lease right-of-use assets28,539 41,710 
Capitalized software development costs, net36,002 41,212 
Goodwill56,060 56,147 
Intangible assets, net5,810 11,711 
Other long-term assets8,844 7,087 
Total assets$384,882 $408,017 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$1,508 $1,704 
Accrued employee expenses—current29,496 30,065 
Accrued expenses16,161 13,284 
Other current liabilities10,600 7,589 
Total current liabilities57,765 52,642 
Operating lease liabilities53,256 55,733 
Other liabilities1,989 2,261 
Total liabilities113,010 110,636 
Commitments and contingencies (Note 8)
Stockholders’ equity:
Class A common stock2 2 
Class B common stock2 2 
Additional paid-in capital197,199 171,930 
Accumulated other comprehensive loss(2,553)(194)
Treasury stock(25,756)(25,756)
Retained earnings102,978 151,397 
Total stockholders’ equity271,872 297,381 
Total liabilities and stockholders’ equity$384,882 $408,017 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
3

APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
 
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2022202120222021
Revenue$125,079 $95,809 $347,825 $263,770 
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)(1)
50,707 38,730 141,484 104,847 
Sales and marketing(1)
25,644 19,362 77,558 53,255 
Research and product development(1)
28,959 16,500 79,966 46,389 
General and administrative(1)
19,347 13,404 76,258 40,971 
Depreciation and amortization8,241 7,826 24,977 22,844 
Total costs and operating expenses132,898 95,822 400,243 268,306 
Loss from operations(7,819)(13)(52,418)(4,536)
Other income (loss), net4,221 (353)4,256 705 
Interest income374 65 632 173 
Loss before provision for (benefit from) income taxes(3,224)(301)(47,530)(3,658)
Provision for (benefit from) income taxes938 (160)889 (6,017)
Net (loss) income$(4,162)$(141)$(48,419)$2,359 
Net (loss) income per common share:
Basic$(0.12)$ $(1.39)$0.07 
Diluted$(0.12)$ $(1.39)$0.07 
Weighted average common shares outstanding:
Basic35,043 34,614 34,936 34,525 
Diluted35,043 34,614 34,936 35,695 
(1) Includes stock-based compensation expense as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Stock-based compensation expense included in costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)$789 $575 $1,873 $1,509 
Sales and marketing2,023 738 5,496 1,587 
Research and product development4,330 1,451 11,160 3,522 
General and administrative3,688 1,299 9,680 3,435 
Total stock-based compensation expense$10,830 $4,063 $28,209 $10,053 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

4


APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
(in thousands)

 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2022202120222021
Net (loss) income$(4,162)$(141)$(48,419)$2,359 
Other comprehensive loss:
    Changes in unrealized losses on investment securities(614)(7)(2,359)(73)
Comprehensive (loss) income$(4,776)$(148)$(50,778)$2,286 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

5


APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
Accumulated
AdditionalOther
Common StockCommon StockPaid-inComprehensiveTreasuryRetained
Class AClass BCapitalLossStockEarningsTotal
SharesAmountSharesAmount
Balance at December 31, 202119,417 $2 15,408 $2 $171,930 $(194)$(25,756)$151,397 $297,381 
Exercise of stock options17 — — — 100 — — — 100 
Stock-based compensation— — — — 7,967 — — — 7,967 
Vesting of restricted stock units, net of shares withheld for taxes17 — — — (1,073)— — — (1,073)
Conversion of Class B common stock to Class A common stock572 — (572)— — — — — — 
Other comprehensive loss— — — — — (1,345)— — (1,345)
Net loss— — — — — — — (14,287)(14,287)
Balance at March 31, 202220,023 $2 14,836 $2 $178,924 $(1,539)$(25,756)$137,110 $288,743 
Exercise of stock options41 — 27 — 503 — — — 503 
Stock-based compensation— — — — 10,639 — — — 10,639 
Vesting of restricted stock units, net of shares withheld for taxes66 — — — (4,524)— — — (4,524)
Conversion of Class B common stock to Class A common stock37 — (37)— — — — — — 
Issuance of restricted stock awards6 — — — — — — — — 
Other comprehensive loss— — — — — (400)— — (400)
Net loss— — — — — — — (29,970)(29,970)
Balance June 30, 202220,173 $2 14,826 $2 $185,542 $(1,939)$(25,756)$107,140 $264,991 
Exercise of stock options102 — — — 1,976 — — — 1,976 
Stock-based compensation— — — — 11,665 — — — 11,665 
Vesting of restricted stock units, net of shares withheld for taxes32 — — — (1,984)— — — (1,984)
Conversion of Class B common stock to Class A common stock80 — (80)— — — — — — 
Other comprehensive loss— — — — — (614)— — (614)
Net loss— — — — — — — (4,162)(4,162)
Balance September 30, 202220,387 $2 14,746 $2 $197,199 $(2,553)$(25,756)$102,978 $271,872 



6

Accumulated
AdditionalOther
Common StockCommon StockPaid-inComprehensiveTreasuryRetained
Class AClass BCapitalIncome (Loss)StockEarningsTotal
SharesAmountSharesAmount
Balance at December 31, 202018,729 $2 15,659 $2 $161,247 $56 $(25,756)$150,369 $285,920 
Exercise of stock options23 — — — 100 — — — 100 
Stock-based compensation— — — — 3,295 — — — 3,295 
Vesting of restricted stock units, net of shares withheld for taxes42 — — — (3,992)— — — (3,992)
Conversion of Class B common stock to Class A common stock108 — (108)— — — — — — 
Other comprehensive loss— — — — — (18)— — (18)
Net income— — — — — — — 479 479 
Balance at March 31, 202118,902 $2 15,551 $2 $160,650 $38 $(25,756)$150,848 $285,784 
Exercise of stock options13 — 84 — 545 — — — 545 
Stock-based compensation— — — — 3,873 — — — 3,873 
Vesting of restricted stock units, net of shares withheld for taxes56 — — — (4,908)— — — (4,908)
Conversion of Class B common stock to Class A common stock14 — (14)— — — — — — 
Issuance of restricted stock awards4 — — — — — — — — 
Other comprehensive loss— — — — — (48)— — (48)
Net income— — — — — — — 2,021 2,021 
Balance at June 30, 202118,989 $2 15,621 $2 $160,160 $(10)$(25,756)$152,869 $287,267 
Exercise of stock options29 — — — 146 — — — 146 
Stock-based compensation— — — — 4,837 — — — 4,837 
Vesting of restricted stock units, net of shares withheld for taxes5 — — — (403)— — — (403)
Conversion of Class B common stock to Class A common stock168 — (168)— — — — — — 
Other comprehensive loss— — — — — (7)— — (7)
Net loss— — — — — — — (141)(141)
Balance at September 30, 202119,191 $2 15,453 $2 $164,740 $(17)$(25,756)$152,728 $291,699 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

7

APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Nine Months Ended
September 30,
 20222021
Cash from operating activities
Net (loss) income$(48,419)$2,359 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization23,295 21,545 
Amortization of operating lease right-of-use assets2,498 2,312 
Impairment19,792  
Deferred income taxes(1,392)(6,394)
Stock-based compensation, including as amortized29,891 11,352 
Gain on sale of business(4,156)(380)
Other(86)89 
Changes in operating assets and liabilities:
Accounts receivable(2,579)(1,350)
Prepaid expenses and other current assets(3,159)(3,558)
Other assets(1,629)(1,181)
Accounts payable231 1,384 
Accrued employee expenses—current(822)6,335 
Accrued expenses3,991 (1,426)
Operating lease liabilities(1,748)1,995 
Other liabilities3,576 (6,623)
Net cash provided by operating activities19,284 26,459 
Cash from investing activities
Purchases of available-for-sale investments(70,394)(167,041)
Proceeds from sales of available-for-sale investments 43,198 
Proceeds from maturities of available-for-sale investments76,598 73,754 
Purchases of property and equipment(5,943)(5,166)
Capitalization of software development costs(10,468)(18,511)
Proceeds from sale of business, net of cash divested5,124  
Net cash used in investing activities(5,083)(73,766)
Cash from financing activities
Proceeds from stock option exercises2,579 791 
Tax withholding for net share settlement(7,581)(9,303)
Net cash used in financing activities(5,002)(8,512)
Net increase (decrease) in cash, cash equivalents and restricted cash9,199 (55,819)
Cash, cash equivalents and restricted cash
Beginning of period58,283 140,699 
End of period$67,482 $84,880 
Noncash investing and financing activities
Purchases of property and equipment included in accounts payable and accrued expenses$219 $886 
Capitalization of software development costs included in accrued expenses and accrued employee expenses549 945 
Stock-based compensation capitalized for software development2,062 1,952 
8


The following table presents a reconciliation of cash, cash equivalents and restricted cash reported within our Condensed Consolidated Balance Sheets to the total of the same such amounts shown above (in thousands):
September 30,
20222021
Cash and cash equivalents$67,232 $84,444 
Restricted cash included in other assets250 436 
Total cash, cash equivalents and restricted cash$67,482 $84,880 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
9

APPFOLIO, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
 1. Nature of Business
AppFolio, Inc. ("we," "us" or "our") is 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. We were founded in 2006 with the vision of revolutionizing vertical industry businesses by providing great software and services. Our mission is even more relevant today, when digital transformation is effectively a requirement for business success in the modern world, and the way we work and live requires powerful software solutions to enable a more seamless experience.
 2. Summary of Significant Accounting Policies
Basis of Presentation and Significant Accounting Policies
The accompanying unaudited Condensed Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these Condensed Consolidated Financial Statements should be read in conjunction with our audited consolidated financial statements and the related notes included in our Annual Report, which was filed with the SEC on February 28, 2022. The year-end condensed balance sheet was derived from our audited consolidated financial statements. Our unaudited interim Condensed Consolidated Financial Statements include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of our Condensed Consolidated Financial Statements. The operating results for the nine months ended September 30, 2022 are not necessarily indicative of the results expected for the full year ending December 31, 2022.
Reclassification
We reclassified certain amounts in our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows within the cash flows from operating activities section in the prior year to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue, expenses, other income, and provision for income taxes during the reporting period. Assets and liabilities which are subject to judgment and use of estimates include the fair value of financial instruments, capitalized software development costs, period of benefit associated with deferred costs, incremental borrowing rate used to measure operating lease liabilities, the recoverability of goodwill and long-lived assets, income taxes, useful lives associated with property and equipment and intangible assets, contingencies, assumptions underlying performance-based compensation (whether cash or stock-based), and assumptions underlying stock-based compensation. Actual results could differ from those estimates and any such differences may have a material impact on our Condensed Consolidated Financial Statements.
10

Net (Loss) Income per Common Share
Net (loss) income per common share was the same for shares of our Class A and Class B common stock because they are entitled to the same liquidation and dividend rights and are therefore combined in the table below. The following table presents a reconciliation of the weighted average number of shares of our Class A and Class B common stock used to compute net (loss) income per common share (in thousands):
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2022202120222021
Weighted average common shares outstanding35,049 34,620 34,941 34,530 
Less: Weighted average unvested restricted shares subject to repurchase6 6 5 5 
Weighted average common shares outstanding; basic35,043 34,614 34,936 34,525 
Plus: Weighted average options, restricted stock units and restricted shares used to compute diluted net income per common share   1,170 
Weighted average common shares outstanding; diluted35,043 34,614 34,936 35,695 
For the three and nine months ended September 30, 2022 and 2021, an aggregate of 212,000 and 127,000 shares, respectively, underlying performance-based restricted stock units ("PSUs") were not included in the computations of diluted and anti-dilutive shares as they are considered contingently issuable upon satisfaction of pre-defined performance measures and their respective performance measures have not been met. Restricted stock units ("RSUs") with an anti-dilutive effect were excluded from the calculation of weighted average number of shares used to compute diluted net income per common share and they were not material for the nine months ended September 30, 2021. Because we reported a net loss for the three and nine months ended September 30, 2022, and the three months ended September 30, 2021, all potentially dilutive common shares are anti-dilutive for these periods and have been excluded from the calculation of net loss per share.
Recent Accounting Pronouncements Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers," as if the acquirer had originated the contracts. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We expect to adopt ASU 2021-08 on January 1, 2023.

 3. Sale of Subsidiary Business
Sale of WegoWise
In August 2022, we completed the sale of AppFolio Utility Management, Inc., dba WegoWise ("WegoWise"), a former wholly owned subsidiary of the Company that provided cloud-based utility analytics reporting software solutions to our customers. We sold WegoWise for $5.2 million (the “WegoWise Transaction”) and recognized a pre-tax gain on the sale of $4.2 million. Net assets divested are primarily comprised of intangible assets of $2.5 million and deferred revenue of $1.7 million. The gain on the sale is included within Other income (loss), net in our Condensed Consolidated Statements of Operations.
11

 4. Investment Securities and Fair Value Measurements
Investment Securities
Investment securities classified as available-for-sale consisted of the following as of September 30, 2022 and December 31, 2021 (in thousands):
September 30, 2022
Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Corporate bonds$17,483 $ $(163)$17,320 
Agency securities17,504  (596)16,908 
Treasury securities84,855 1 (1,866)82,990 
Total available-for-sale investment securities$119,842 $1 $(2,625)$117,218 
December 31, 2021
Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Corporate bonds$29,080 $ $(11)$29,069 
Agency securities19,753  (27)19,726 
Treasury securities77,108 2 (229)76,881 
Total available-for-sale investment securities$125,941 $2 $(267)$125,676 
As of September 30, 2022, the decline in fair value below amortized cost basis was not considered other than temporary as it is more likely than not we will hold the securities until maturity or recovery of the cost basis. No allowance for credit losses for available-for-sale investment securities was recorded as of September 30, 2022 or December 31, 2021.
The fair values of available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands):
September 30, 2022December 31, 2021
Amortized CostEstimated Fair ValueAmortized CostEstimated Fair Value
Due in one year or less$72,816 $72,018 $64,627 $64,600 
Due after one year through three years47,026 45,200 61,314 61,076 
Total available-for-sale investment securities$119,842 $117,218 $125,941 $125,676 
During the nine months ended September 30, 2022 and 2021, we had sales and maturities (which include calls) of investment securities, as follows (in thousands):
Nine Months Ended September 30, 2022
Gross Realized GainsGross Realized LossesGross Proceeds from Sales Gross Proceeds from Maturities
Corporate bonds$ $ $ $28,998 
Agency securities   2,250 
Treasury securities   45,350 
Total$ $ $ $76,598 
12

Nine Months Ended September 30, 2021
Gross Realized GainsGross Realized LossesGross Proceeds from SalesGross Proceeds from Maturities
Corporate bonds$ $ $ $2,800 
Agency securities   9,250 
Treasury securities6  43,198 61,704 
Total$6 $ $43,198 $73,754 
Fair Value Measurements
Recurring Fair Value Measurements
The following tables present our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 by level within the fair value hierarchy (in thousands):
September 30, 2022
Level 1Level 2Total Fair
Value
Cash equivalents:
Money market funds$5,570 $ $5,570 
Treasury securities7,030  7,030 
Available-for-sale investment securities:
Corporate bonds 17,320 17,320 
Agency securities 16,908 16,908 
  Treasury securities82,990  82,990 
Total$95,590 $34,228 $