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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, 2021.
☐ 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)
| | | | | | | | | | | | | | |
| Delaware | | 26-0359894 |
| (State of incorporation or organization) | | (I.R.S. Employer Identification No.) |
|
| 50 Castilian Drive | | 93117 |
| 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 class | Trading Symbol | Name of each exchange on which registered |
| Class A Common Stock, $0.0001 par value | APPF | NASDAQ 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 November 1, 2021, the number of shares of the registrant’s Class A common stock outstanding was 19,214,570 and the number of shares of the registrant’s Class B common stock outstanding was 15,453,371.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2021 (this "Quarterly Report"), includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that are not statements of historical facts and can be identified by words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts," “projects,” “seeks,” “should,” “will,” “would” or similar expressions and the negatives of those expressions. Forward-looking statements also include the assumptions underlying or relating to such statements. In particular, forward-looking statements contained in this Quarterly Report relate to, among other things:
▪our future or assumed financial condition, results of operations and liquidity;
▪business forecasts and plans;
▪trends affecting our business and industry, and the economy as a whole;
▪capital needs and financing plans;
▪capital resource allocation plans;
▪share repurchase plans;
▪research and product development plans;
▪future products and Value+ services;
▪growth in the size of our business and number of customers;
▪strategic plans and objectives;
▪the impact of acquisitions, investments and divestitures;
▪performance-based compensation, whether cash- or equity-based;
▪changes in the competitive environment;
▪commitments and contingencies, including with respect to the outcome of legal proceedings or regulatory matters;
▪the application of accounting guidance, including the impact from adoption of recent accounting pronouncements; and
▪the impacts of, and our response to, the novel coronavirus ("COVID-19") pandemic.
The foregoing list may not include all of the forward-looking statements made in this Quarterly Report.
Our forward-looking statements are based on our management’s current beliefs, assumptions and expectations about future events and trends, which affect or may affect our business, strategy, operations, financial performance or liquidity. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to numerous known and unknown risks and uncertainties and are made in light of information currently available to us. Our actual financial condition and results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including those discussed in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (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.
Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time to time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual future results to be materially different from those expressed or implied by any forward-looking statements.
Forward-looking statements speak only as of the date they were made, and, except to the extent required by law or the rules of the NASDAQ Global Market, we undertake no obligation to update or review any forward-looking statement because of new information, future events or other factors.
We qualify all of our forward-looking statements by these cautionary statements.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
APPFOLIO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except par values)
| | | | | | | | | | | | | | |
| | | September 30,
2021 | | December 31,
2020 |
| Assets | | | | |
| Current assets | | | | |
| Cash and cash equivalents | | $ | 84,444 | | | $ | 140,263 | |
| Investment securities—current | | 76,034 | | | 28,256 | |
| Accounts receivable, net | | 12,184 | | | 10,057 | |
| Prepaid expenses and other current assets | | 24,714 | | | 20,777 | |
| Total current assets | | 197,376 | | | 199,353 | |
| Investment securities—noncurrent | | 9,287 | | | 6,770 | |
| Property and equipment, net | | 28,177 | | | 26,439 | |
| Operating lease right-of-use assets | | 42,597 | | | 30,561 | |
| Capitalized software development costs, net | | 40,711 | | | 35,459 | |
| Goodwill | | 56,147 | | | 56,147 | |
| Intangible assets, net | | 12,864 | | | 16,357 | |
| Deferred income taxes—noncurrent | | 12,834 | | | 12,181 | |
| Other long-term assets | | 7,394 | | | 6,213 | |
| Total assets | | $ | 407,387 | | | $ | 389,480 | |
| Liabilities and Stockholders’ Equity | | | | |
| Current liabilities | | | | |
| Accounts payable | | $ | 2,493 | | | $ | 1,040 | |
| Accrued employee expenses—current | | 25,785 | | | 18,888 | |
| Accrued expenses | | 13,090 | | | 14,069 | |
| Deferred revenue | | 2,738 | | | 2,262 | |
| Income tax payable | | 186 | | | 9,095 | |
| Other current liabilities | | 4,910 | | | 4,451 | |
| | | | |
| Total current liabilities | | 49,202 | | | 49,805 | |
| | | | |
| Accrued employee expenses—noncurrent | | 2,059 | | | — | |
| Operating lease liabilities | | 56,559 | | | 40,146 | |
| | | | |
| | | | |
| Deferred income taxes—noncurrent | | 7,868 | | | 13,609 | |
| Total liabilities | | 115,688 | | | 103,560 | |
| Commitments and contingencies (Note 9) | | | | |
| Stockholders’ equity: | | | | |
Preferred stock, $0.0001 par value, 25,000 shares authorized and no shares issued and outstanding as of September 30, 2021 and December 31, 2020 | | — | | | — | |
Class A common stock, $0.0001 par value, 250,000 shares authorized as of September 30, 2021 and December 31, 2020; 19,610 and 19,148 shares issued as of September 30, 2021 and December 31, 2020, respectively; 19,191 and 18,729 shares outstanding as of September 30, 2021 and December 31, 2020, respectively | | 2 | | | 2 | |
Class B common stock, $0.0001 par value, 50,000 shares authorized as of September 30, 2021 and December 31, 2020; 15,453 and 15,659 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | | 2 | | | 2 | |
| Additional paid-in capital | | 164,740 | | | 161,247 | |
| Accumulated other comprehensive (loss) income | | (17) | | | 56 | |
Treasury stock, at cost, 419 shares of Class A common stock as of September 30, 2021 and December 31, 2020 | | (25,756) | | | (25,756) | |
| Retained earnings | | 152,728 | | | 150,369 | |
| Total stockholders’ equity | | 291,699 | | | 285,920 | |
| Total liabilities and stockholders’ equity | | $ | 407,387 | | | $ | 389,480 | |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Revenue | $ | 95,809 | | | $ | 84,086 | | | $ | 263,770 | | | $ | 237,624 | |
| Costs and operating expenses: | | | | | | | |
| Cost of revenue (exclusive of depreciation and amortization) | 38,730 | | | 32,752 | | | 104,847 | | | 89,124 | |
| Sales and marketing | 19,362 | | | 14,894 | | | 53,255 | | | 43,117 | |
| Research and product development | 16,500 | | | 13,454 | | | 46,389 | | | 36,794 | |
| General and administrative | 13,404 | | | 12,946 | | | 40,971 | | | 36,303 | |
| Depreciation and amortization | 7,826 | | | 6,680 | | | 22,844 | | | 19,751 | |
| Total costs and operating expenses | 95,822 | | | 80,726 | | | 268,306 | | | 225,089 | |
| (Loss) income from operations | (13) | | | 3,360 | | | (4,536) | | | 12,535 | |
| Other (loss) income, net | (353) | | | 187,747 | | | 705 | | | 187,759 | |
| Interest income (expense), net | 65 | | | (853) | | | 173 | | | (1,909) | |
| (Loss) income before (benefit from) provision for income taxes | (301) | | | 190,254 | | | (3,658) | | | 198,385 | |
| (Benefit from) provision for income taxes | (160) | | | 52,578 | | | (6,017) | | | 39,469 | |
| Net (loss) income | $ | (141) | | | $ | 137,676 | | | $ | 2,359 | | | $ | 158,916 | |
| | | | | | | |
| Net (loss) income per common share: | | | | | | | |
| Basic | $ | — | | | $ | 4.01 | | | $ | 0.07 | | | $ | 4.64 | |
| Diluted | $ | — | | | $ | 3.86 | | | $ | 0.07 | | | $ | 4.46 | |
| Weighted average common shares outstanding: | | | | | | | |
| Basic | 34,614 | | | 34,296 | | | 34,525 | | | 34,241 | |
| Diluted | 34,614 | | | 35,665 | | | 35,695 | | | 35,662 | |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Net (loss) income | $ | (141) | | | $ | 137,676 | | | $ | 2,359 | | | $ | 158,916 | |
| Other comprehensive (loss) income: | | | | | | | |
| Changes in unrealized (losses) gains on investment securities | (7) | | | (41) | | | (73) | | | 57 | |
| Comprehensive (loss) income | $ | (148) | | | $ | 137,635 | | | $ | 2,286 | | | $ | 158,973 | |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated | | | | | | | | | | | |
| | | | | | | | | Additional | | Other | | | | | | | | | | | |
| Common Stock | | Common Stock | | Paid-in | | Comprehensive | | Treasury | | Retained | | | | | | | |
| Class A | | Class B | | Capital | | Income (Loss) | | Stock | | Earnings | | Total | | | | | |
| Shares | | Amount | | Shares | | Amount | | | | | | | | | | | | | | | |
| Balance at December 31, 2020 | 18,729 | | | $ | 2 | | | 15,659 | | | $ | 2 | | | $ | 161,247 | | | $ | 56 | | | $ | (25,756) | | | $ | 150,369 | | | $ | 285,920 | | | | | | |
| Exercise of stock options | 23 | | | — | | | — | | | — | | | 100 | | | — | | | — | | | — | | | 100 | | | | | | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 3,295 | | | — | | | — | | | — | | | 3,295 | | | | | | |
| Vesting of restricted stock units, net of shares withheld for taxes | 42 | | | — | | | — | | | — | | | (3,992) | | | — | | | — | | | — | | | (3,992) | | | | | | |
| Conversion of Class B stock to Class A stock | 108 | | | — | | | (108) | | | — | | | — | | | — | | | — | | | — | | | — | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (18) | | | — | | | — | | | (18) | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 479 | | | 479 | | | | | | |
| Balance at March 31, 2021 | 18,902 | | | $ | 2 | | | 15,551 | | | $ | 2 | | | $ | 160,650 | | | $ | 38 | | | $ | (25,756) | | | $ | 150,848 | | | $ | 285,784 | | | | | | |
| Exercise of stock options | 13 | | | — | | | 84 | | | — | | | 545 | | | — | | | — | | | — | | | 545 | | | | | | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 3,873 | | | — | | | — | | | — | | | 3,873 | | | | | | |
| Vesting of restricted stock units, net of shares withheld for taxes | 56 | | | — | | | — | | | — | | | (4,908) | | | — | | | — | | | — | | | (4,908) | | | | | | |
| Conversion of Class B stock to Class A stock | 14 | | | — | | | (14) | | | — | | | — | | | — | | | — | | | — | | | — | | | | | | |
| Issuance of restricted stock awards | 4 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (48) | | | — | | | — | | | (48) | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,021 | | | 2,021 | | | | | | |
| Balance at June 30, 2021 | 18,989 | | | $ | 2 | | | 15,621 | | | $ | 2 | | | $ | 160,160 | | | $ | (10) | | | $ | (25,756) | | | $ | 152,869 | | | $ | 287,267 | | | | | | |
| Exercise of stock options | 29 | | | — | | | — | | | — | | | 146 | | | — | | | — | | | — | | | 146 | | | | | | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 4,837 | | | — | | | — | | | — | | | 4,837 | | | | | | |
| Vesting of restricted stock units, net of shares withheld for taxes | 5 | | | — | | | — | | | — | | | (403) | | | — | | | — | | | — | | | (403) | | | | | | |
| Conversion of Class B stock to Class A stock | 168 | | | — | | | (168) | | | — | | | — | | | — | | | — | | | — | | | — | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (7) | | | — | | | — | | | (7) | | | | | | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (141) | | | (141) | | | | | | |
| Balance at September 30, 2021 | 19,191 | | | $ | 2 | | | 15,453 | | | $ | 2 | | | $ | 164,740 | | | $ | (17) | | | $ | (25,756) | | | $ | 152,728 | | | $ | 291,699 | | | | | | |
APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated | | | | (Accumulated | | |
| | | | | | | | | Additional | | Other | | | | Deficit)/ | | |
| Common Stock | | Common Stock | | Paid-in | | Comprehensive | | Treasury | | Retained | | |
| Class A | | Class B | | Capital | | Income | | Stock | | Earnings | | Total |
| Shares | | Amount | | Shares | | Amount | | | | | | | | | | |
| Balance at December 31, 2019 | 16,552 | | | $ | 2 | | | 17,594 | | | $ | 2 | | | $ | 161,509 | | | $ | 33 | | | $ | (21,562) | | | $ | (8,034) | | | $ | 131,950 | |
| Exercise of stock options | 17 | | | — | | | — | | | — | | | 97 | | | — | | | — | | | — | | | 97 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 1,365 | | | — | | | — | | | — | | | 1,365 | |
| Vesting of restricted stock units, net of shares withheld for taxes | 91 | | | — | | | — | | | — | | | (6,458) | | | — | | | — | | | — | | | (6,458) | |
| Conversion of Class B stock to Class A stock | 58 | | | — | | | (58) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 132 | | | — | | | — | | | 132 | |
| Repurchase of common stock | (48) | | | — | | | — | | | — | | | — | | | — | | | (4,194) | | | — | | | (4,194) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,983 | | | 1,983 | |
| Balance as of March 31, 2020 | 16,670 | | | $ | 2 | | | 17,536 | | | $ | 2 | | | $ | 156,513 | | | $ | 165 | | | $ | (25,756) | | | $ | (6,051) | | | $ | 124,875 | |
| Exercise of stock options | 32 | | | — | | | — | | | — | | | 232 | | | — | | | — | | | — | | | 232 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 3,406 | | | — | | | — | | | — | | | 3,406 | |
| Vesting of restricted stock units, net of shares withheld for taxes | 50 | | | — | | | — | | | — | | | (3,232) | | | — | | | — | | | — | | | (3,232) | |
| Conversion of Class B stock to Class A stock | 197 | | | — | | | (197) | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of restricted stock awards | 3 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (34) | | | — | | | — | | | (34) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 19,257 | | | 19,257 | |
| Balance as of June 30, 2020 | 16,952 | | | $ | 2 | | | 17,339 | | | $ | 2 | | | $ | 156,919 | | | $ | 131 | | | $ | (25,756) | | | $ | 13,206 | | | $ | 144,504 | |
| Exercise of stock options | 10 | | | — | | | — | | | — | | | 74 | | | — | | | — | | | — | | | 74 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 3,572 | | | — | | | — | | | — | | | 3,572 | |
| Vesting of restricted stock units, net of shares withheld for taxes | 12 | | | — | | | — | | | — | | | (1,269) | | | — | | | — | | | — | | | (1,269) | |
| Conversion of Class B stock to Class A stock | 1,057 | | | — | | | (1,057) | | | — | | | — | | | — | | | — | | | — | | | — | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (41) | | | — | | | — | | | (41) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 137,676 | | | 137,676 | |
| Balance as of September 30, 2020 | 18,031 | | | $ | 2 | | | 16,282 | | | $ | 2 | | | $ | 159,296 | | | $ | 90 | | | $ | (25,756) | | | $ | 150,882 | | | $ | 284,516 | |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
| | | | | | | | | | | | | | | |
APPFOLIO, INC. | | | | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | |
(UNAUDITED) | | | | |
(in thousands) | | | | |
| | | | | |
| | Nine Months Ended
September 30, | | | | |
| | 2021 | | 2020 | | | | |
| Cash from operating activities | | | | | | | |
| Net income | $ | 2,359 | | | $ | 158,916 | | | | | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
| Depreciation and amortization | 22,844 | | | 19,751 | | | | | |
| Amortization of operating lease right-of-use assets | 2,312 | | | 2,973 | | | | | |
| Deferred income taxes | (6,394) | | | 22,878 | | | | | |
| Stock-based compensation | 10,053 | | | 6,808 | | | | | |
| Gain on sale of business | (380) | | | (187,636) | | | | | |
| Other | 89 | | | 170 | | | | | |
| | | | | | | |
| Changes in operating assets and liabilities: | | | | | | | |
| Accounts receivable | (1,350) | | | (2,229) | | | | | |
| Prepaid expenses and other current assets | (3,558) | | | (859) | | | | | |
| Other assets | (1,181) | | | (320) | | | | | |
| Accounts payable | 1,384 | | | 695 | | | | | |
| Accrued employee expenses—current | 6,335 | | | 1,919 | | | | | |
| Accrued expenses | (1,426) | | | 5,931 | | | | | |
| Deferred revenue | (302) | | | 815 | | | | | |
| Income tax payable | (8,909) | | | — | | | | | |
| | | | | | | |
| Accrued employee expenses—noncurrent | 2,059 | | | — | | | | | |
| Operating lease liabilities | 1,995 | | | (1,135) | | | | | |
| Other liabilities | 529 | | | 16,539 | | | | | |
| Net cash provided by operating activities | 26,459 | | | 45,216 | | | | | |
| Cash from investing activities | | | | | | | |
| Purchases of available-for-sale investments | (167,041) | | | (29,879) | | | | | |
| Proceeds from sales of available-for-sale investments | 43,198 | | | 13,942 | | | | | |
| Proceeds from maturities of available-for-sale investments | 73,754 | | | 13,300 | | | | | |
| Purchases of property, equipment and intangible assets | (5,166) | | | (16,551) | | | | | |
| Capitalization of software development costs | (18,511) | | | (19,697) | | | | | |
| | | | | | | |
| Proceeds from sale of business, net of cash divested | — | | | 191,427 | | | | | |
| | | | | | | |
| Net cash (used in) provided by investing activities | (73,766) | | | 152,542 | | | | | |
| Cash from financing activities | | | | | | | |
| Proceeds from stock option exercises | 791 | | | 402 | | | | | |
| | | | | | | |
| | | | | | | |
| Tax withholding for net share settlement | (9,303) | | | (10,959) | | | | | |
| | | | | | | |
| Payment of contingent consideration | — | | | (5,977) | | | | | |
| Proceeds from issuance of debt | — | | | 50,752 | | | | | |
| Principal payments on debt | — | | | (99,565) | | | | | |
| | | | | | | |
| Purchase of treasury stock | — | | | (4,194) | | | | | |
| Net cash used in financing activities | (8,512) | | | (69,541) | | | | | |
| | | | | | | | | | | | | | | |
APPFOLIO, INC. | | | | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | |
(UNAUDITED) | | | | |
(in thousands) | | | | |
| | | | | |
| | Nine Months Ended
September 30, | | | | |
| | 2021 | | 2020 | | | | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (55,819) | | | 128,217 | | | | | |
| Cash, cash equivalents and restricted cash | | | | | | | |
| Beginning of period | 140,699 | | | 16,247 | | | | | |
| End of period | $ | 84,880 | | | $ | 144,464 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Noncash investing and financing activities | | | | | | | |
| Purchases of property and equipment included in accounts payable and accrued expenses | $ | 886 | | | $ | 1,748 | | | | | |
| Capitalization of software development costs included in accrued expenses and accrued employee expenses | 945 | | | 756 | | | | | |
| Stock-based compensation capitalized for software development | 1,952 | | | 1,535 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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, |
| 2021 | | 2020 |
| Cash and cash equivalents | $ | 84,444 | | | $ | 144,028 | |
| Restricted cash included in other assets | 436 | | | 436 | |
| Total cash, cash equivalents and restricted cash | $ | 84,880 | | | $ | 144,464 | |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
APPFOLIO, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Nature of Business
AppFolio, Inc. (the "Company," "we," "us" or "our") provides 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". Although specific functionality varies by product, our core solutions are designed to enable our customers to digitally transform their businesses, address critical business operations and enable exceptional customer service. In addition to our core solutions, we offer an array of optional, but often business-critical, Value+ services that are designed to enhance, automate and streamline processes and workflows that are essential to our customers' businesses. Our Value+ services are generally available on an as-needed basis and enable our customers to adapt our offerings to their specific operational requirements.
Our 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. Our software solutions are offered as a service, are hosted using a modern cloud-based architecture, and in part, use artificial intelligence technologies. This architecture leads to rich data sets that have a consistent schema across our customer and user base and enables us to deploy data-powered products and services for our customers and users.
During the nine months ended September 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. For additional details, see Note 3, Divestitures.
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 March 1, 2021. 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, 2021 are not necessarily indicative of the results expected for the full year ending December 31, 2021.
Changes in Accounting Policies
Except as described below under Recently Adopted Accounting Pronouncements, there have been no significant changes in our accounting policies from those disclosed in our annual consolidated financial statements and the related notes included in our Annual Report.
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 assets and liabilities assumed in business combinations, fair value of financial instruments, capitalized software 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 valuation and assumptions underlying stock-based compensation and other equity instruments.
In light of the unknown duration and severity of COVID-19, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of September 30, 2021 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for credit losses, the carrying value of goodwill and other long-lived assets, performance-based compensation and income taxes.
As of the date of our Condensed Consolidated Financial Statements, we are not aware of any specific event or circumstance that would require us to update our estimates or judgments or to revise the carrying value of our assets or liabilities. However, these estimates and judgments may change as new events occur and additional information is obtained, which may result in changes being recognized in our consolidated financial statements in future periods. While we considered the effects of COVID-19 in our estimates and assumptions, due to the level of uncertainty regarding the economic and operational impacts of COVID-19 on our business, there may be other judgments and assumptions that we have not considered. Such judgments and assumptions could result in a meaningful impact on our financial statements in future periods. Actual results could differ from those estimates and any such differences may have a material impact on our Condensed Consolidated Financial Statements.
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):
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| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 |
| Weighted average common shares outstanding | | 34,620 | | | 34,301 | | | 34,530 | | | 34,246 | |
| Less: Weighted average unvested restricted shares subject to repurchase | | 6 | | | 5 | | | 5 | | | 5 | |
| Weighted average common shares outstanding; basic | | 34,614 | | | 34,296 | | | 34,525 | | | 34,241 | |
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| Plus: Weighted average options, restricted stock units and restricted shares used to compute diluted net (loss) income per common share | | — | | | 1,369 | | | 1,170 | | | 1,421 | |
| Weighted average common shares outstanding; diluted | | 34,614 | | | 35,665 | | | 35,695 | | | 35,662 | |
For the three and nine months ended September 30, 2021 and 2020, an aggregate of 127,000 and 130,000 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 the satisfaction of predefined performance measures and their 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 three and nine months ended September 30, 2021 and 2020. Because we reported a net loss for the three months ended September 30, 2021, all potentially dilutive common shares are anti-dilutive for that period and have been excluded from the calculation of net loss per share.
Recent Accounting Pronouncements Adopted in 2020
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which amends the current accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions and reasonable and supportable forecasts. This guidance amends the accounting for credit losses for available-for-sale investment securities and purchased financial assets with credit deterioration. We adopted ASU 2016-13 on January 1, 2020. The adoption of this guidance did not have a material impact on our financial condition, results of operations, cash flows or disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"), a series of amendments which align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. We adopted ASU 2018-15 on January 1, 2020. The adoption of this guidance did not have a material impact on our financial condition, results of operations, cash flows or disclosures.
Recent Accounting Pronouncements Adopted in 2021
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). This amendment was issued to simplify the accounting for income taxes by removing certain exceptions for recognizing deferred taxes, performing intraperiod allocation, and calculating income taxes in interim periods. Further, ASU 2019-12 adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax basis goodwill and allocating taxes to members of a consolidated group. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. We adopted ASU 2019-12 on January 1, 2021. The adoption of this guidance did not have a material impact on our financial condition, results of operations, cash flows or disclosures.
3. Divestitures
Divestiture of MyCase
On September 30, 2020, we completed our divestiture of 100% of our issued and outstanding equity interests of MyCase, Inc. ("MyCase"), a former wholly owned subsidiary that provided legal practice and case management software solutions to our legal customers, for $193.0 million, consisting of $192.2 million of cash proceeds, plus a $2.2 million employee retention bonus pool funded by us, less cash divested of $0.8 million and a preliminary working capital adjustment of $0.6 million (the "MyCase Transaction"). The retention bonus pool was refundable to the Company to the extent that MyCase employees were terminated prior to the retention period, which was one year from the closing date of the MyCase Transaction.
We recognized a pre-tax gain on the sale of $188.0 million on the MyCase Transaction, consisting of cash proceeds of $192.2 million, less net assets divested of $4.6 million, plus an adjustment in the employee retention bonus pool of $0.4 million. Net assets divested is primarily comprised of capitalized software of $3.9 million, deferred revenue of $2.8 million and goodwill allocated to MyCase of $2.3 million. The gain on the sale was recorded within Other (loss) income, net in our Condensed Consolidated Statements of Operations during the three months ended September 30, 2020. No income was received during the three months ended September 30, 2021 in relation to the transition services provided by us to MyCase. Income received during the nine months ended September 30, 2021 in relation to the transition services provided by us to MyCase was $0.7 million, and is included within Other (loss) income, net in our Condensed Consolidated Statements of Operations.
4. Investment Securities and Fair Value Measurements
Investment Securities
Investment securities classified as available-for-sale consisted of the following as of September 30, 2021 and December 31, 2020 (in thousands):
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| September 30, 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| Corporate bonds | $ | 59,445 | | | $ | 4 | | | $ | (6) | | | $ | 59,443 | |
| Agency securities | 7,837 | | | 6 | | | — | | | 7,843 | |
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| Treasury securities | 18,037 | | | 8 | | | (10) | | | 18,035 | |
| Total available-for-sale investment securities | $ | 85,319 | | | $ | 18 | | | $ | (16) | | | $ | 85,321 | |
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| December 31, 2020 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| Agency securities | $ | 17,104 | | | $ | 29 | | | $ | (1) | | | $ | 17,132 | |
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| Treasury securities | 17,847 | | | 47 | | | — | | | 17,894 | |
| Total available-for-sale investment securities | $ | 34,951 | | | $ | 76 | | | $ | (1) | | | $ | 35,026 | |
For available-for-sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of these criteria is met, the security’s amortized cost basis is written down to fair value through income. For securities in an unrealized loss position that do not meet these criteria, we evaluate whether the decline in fair value has resulted from credit loss or other factors. If this assessment indicates a credit loss exists, the credit-related portion of the loss is recorded as an allowance for losses on the security. No allowance for credit losses for available-for-sale investment securities was recorded as of September 30, 2021 or December 31, 2020.
As of September 30, 2021 and December 31, 2020, the contractual maturities of our investments did not exceed 36 months. The fair values of available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands):
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| September 30, 2021 | | December 31, 2020 |
| Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| Due in one year or less | $ | 76,022 | | | $ | 76,034 | | | $ | 28,197 | | | $ | 28,256 | |
| Due after one year through three years | 9,297 | | | 9,287 | | | 6,754 | | | 6,770 | |
| Total available-for-sale investment securities | $ | 85,319 | | | $ | 85,321 | | | $ | 34,951 | | | $ | 35,026 | |
During the nine months ended September 30, 2021 and 2020, we had sales and maturities (which include calls) of investment securities, as follows (in thousands):
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| Nine Months Ended September 30, 2021 |
| Gross Realized Gains | | Gross Realized Losses | | Gross Proceeds from Sales | | Gross Proceeds from Maturities |
| Corporate bonds | $ | — | | | $ | — | | | $ | — | | | $ | 2,800 | |
| Agency securities | — | | | — | | | — | | | 9,250 | |
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| Treasury securities | 6 | | | — | | | 43,198 | | | 61,704 | |
| Total | $ | 6 | | | $ | — | | | $ | 43,198 | | | $ | 73,754 | |
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| Nine Months Ended September 30, 2020 |
| Gross Realized Gains | | Gross Realized Losses | | Gross Proceeds from Sales | | Gross Proceeds from Maturities |
| Corporate bonds | $ | 5 | | | $ | — | | | $ | 4,006 | | | $ | 5,600 | |
| Agency securities | 25 | | | — | | | 7,878 | | | 1,900 | |
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| Treasury securities | 4 | | | — | | | 2,058 | | | 5,800 | |
| Total | $ | 34 | | | $ | — | | | $ | 13,942 | | | $ | 13,300 | |
Interest income, net of the amortization and accretion of the premium and discount, was $0.1 million for each of the three months ended September 30, 2021 and 2020, and $0.2 million and $0.3 million for the nine months ended September 30, 2021 and 2020, respectively.
Fair Value Measurements
Recurring Fair Value Measurements
Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following tables summarize our financial assets measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 by level within the fair value hierarchy (in thousands):