UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20192020
☐ 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
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AppFolio, Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | 26-0359894 | |||||||||||||
| (State of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| 50 Castilian Drive | ||||||||||||||
| Santa Barbara, | California | 93117 | ||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||||||||||||
| Class A common stock, par value $0.0001 per share | APPF | The NASDAQ Stock Market LLC | ||||||||||||
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 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 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. (Check one):
| 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price of the registrant’s Class A common stock on June 28, 201930, 2020 (the last business day of the registrant’s mostly recently completed second fiscal quarter), as reported on the NASDAQ Global Market on such date, was approximately $1.786$2.870 billion. Shares of the registrant’s Class A common stock and Class B common stock held by each executive officer, director and holder of 10% or more of the registrant’s outstanding Class A common stock and Class B common stock have been excluded from this calculation as such persons may be deemed to be affiliates. The determination of affiliate status for this purpose does not reflect a determination that any of such persons shall be deemed to be an affiliate of the registrant for any other purpose.
At February 14, 2020,15, 2021, the number of shares of the registrant’s Class A common stock outstanding was 16,591,62318,747,460 and the number of shares of the registrant’s Class B common stock outstanding was 17,566,442.15,650,311.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 20202021 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed with the Securities and Exchange Commission (the “SEC”) pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K (this “Annual Report”), are incorporated by reference in Part III, Items 10-14 of this Annual Report. Except for the portions of the Proxy Statement specifically incorporated by reference in this Annual Report, the Proxy Statement shall not be deemed to be filed as part hereof.
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APPFOLIO, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20192020
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this "Annual Report") for the fiscal year ended December 31, 20192020 (fiscal 2019)2020), 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 included in or incorporated by reference in this Annual Report that are not statements of historical facts whichand can generally be identified by words such as “anticipates,” “believes,” “seeks,“could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,“seeks,” “could,“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 Annual Report relate to, among other things, things:
▪our future or assumed financial condition, results of operations and liquidity, liquidity;
▪business forecasts and plans, certain plans;
▪trends affecting our business and industry, and the economy as a whole;
▪capital needs and financing plans, plans;
▪capital resource allocation plans, potentialplans;
▪share repurchase of our shares, plans;
▪research and product development plans, plans;
▪future products and Value+ services, services;
▪growth in the size of our business and number of customers, customers;
▪strategic plans and objectives, objectives;
▪the impact of acquisitions, investments and investments, divestitures;
▪changes in the competitive environment,environment;
▪commitments and contingencies, including with respect to the outcome of legal proceedings or regulatory matters, and matters;
▪the application of accounting guidance. We caution you thatguidance, 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 Annual 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 or financial performance. 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 anticipated inexpressed or implied by these forward-looking statements as a result of various factors, including those set forth below under the caption “Risk Factors” in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7, and elsewhere in this Annual Report, as well as in the other reports we file with the Securities and Exchange Commission (the "SEC"). You should read this Annual Report 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.
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PART I
ITEM 1. BUSINESS
Unless otherwise stated in this Annual Report, references to "AppFolio," "we," "us," and "our" refer to AppFolio, Inc. and its consolidated subsidiaries.
Overview
Our real estate software solutions provide our property management customers (including third-party property managers and owner-operators who manage single- and mutli- family residences, community associations, commercial properties, and student housing, as well as mixed real estate portfolios) withservices 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 their clients and other stakeholders,business ecosystems and a system of intelligence designed to leverage data to predict and optimize business workflows in order to enable superiorexceptional 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 all offered as a service, for our customers andare hosted using a modern cloud-based architecture.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. We also provide software solutions to the legal market that enable law firms to administer their practicecustomers and manage their caseloads more efficiently by centralizing case details in a single system of record and system of engagement.
For the years ended December 31, 2020, 2019 2018 and 2017,2018, our revenue was $310.1 million, $256.0 million and $190.1 million, respectively, of which $284.7 million, $231.1 million and $143.8$172.4 million, respectively. During each of these years we haverespectively, were derived more than 90% of our revenue from our solutions servingsoftware services and data analytics offered to the real estate market, primarily property management companies. Our revenue has limited seasonality as discussed invertical. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report, within the section entitled "Quarterly Revenue and Cost Trends."Results of Operations" for additional details regarding seasonality of revenue.
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The Challenges We Address
We believe that many companies face a common set of challenges that divert limited time and resources away from serving their customers and growing their businesses. Customers who adoptSignificant administrative burdens from inefficient manual processes and the use of disparate technologies or loosely integrated solutions only exacerbate those challenges. This is particularly evident in businesses that involve unique workflows, relationships among multiple users, significant data inputs and management, and compliance or regulatory requirements. Our platform is designed to provide our Value+customers an intuitive, reliable and integrated solution that brings innovative technology and services pay either subscription fees or usage-based fees, dependingto their specific workflows, meets their key operational requirements and enables delivery of exceptional customer experiences. We rely on partners and third party service providers to deliver certain aspects of our solutions, and we strive to provide a seamlessly integrated experience for our customers. We believe our customer-centric culture fosters a focus on customer satisfaction which leads to long-term customer retention and our long-term success. We believe our solutions and services offer customers the ability to capitalize on the Value+ service.power of fully integrated business management software to interact with their business ecosystems, and to mine the data and insights gleaned from these relationships, which is integral to our customers' ability to grow their businesses and compete effectively.
Growth Strategy
Our growth strategy is to provide increasingly valuable industry-specific business management software, services and data analytics to new and existing customers and their business ecosystems. We do not separately chargebelieve our customer-centric culture and market validation techniques that direct our product strategy are key to our success. Key components of our growth strategy include:
Maintain Product and Technology Leadership. We have made, and will continue to make, significant investments in research and new product development to expand our platform capabilities as we deem appropriate in our target markets. We intend to continue using our market validation techniques and close relationships with our customers for ongoing training and support,users as a key source of feedback to inform and direct our product strategy. We may also choose to acquire rather than build certain technology capabilities, or to partner with third parties to deliver key functionality to serve the needs of our customers and their business ecosystems.
Keep Our Existing Customers and Users Happy. We believe customer success is essential to our long-term success. We place significant emphasis on customer service, which we believe isleads to long-term customer relationships, to differentiate our software, services and data analytics from competing products. This emphasis will continue to be a critical component of our growth strategy in the future. We believe that maintaining our focus on customer success will lead to retainingnew product innovation, the referral of new customers from existing satisfied customers, and increasinggreater adoption and utilization of our solutions and services.
Acquire New Customers. We believe new customer acquisition is essential to our long-term success. We expect to continue to grow our base of customers with our investments in the development of increasingly valuable business management capabilities for our target markets, sales and marketing programs, including evolving industry thought leadership and education, and the referral power of satisfied customers.
Expand Adoption and Use By Existing Customers. We have made, and will continue to make, significant investments in our solutions and services that expand functionality and enhance or add new capabilities to meet the current and evolving needs of our customers. We expect our satisfied customers will expand their usage of our Value+ services.services to adapt our platform to their specific operational requirements. In addition, as our customers grow, we expect they will continue to use our solutions and services to manage their larger businesses.
Enter New Adjacent Markets. We expect to continue to evaluate and expand into adjacent markets based on our market validation strategy and targeted customer feedback in a manner consistent with our strategic plan. We believe that, while we are continuously developing our solutions and services within one market, we can apply certain relevant product enhancements and key learnings from that market as we extend our solutions and services into successive adjacent markets.
Expand into New Verticals. We expect to continue to review potential opportunities to expand into additional vertical markets in a manner consistent with our strategic plan. We believe our expansion into and success from adjacent markets may present opportunities to enter new verticals. Any new vertical must also charge one-time fees in connection with certain services.fit within our overall business strategy, including our management team's assessment of available alternatives, such as the number and size of potential adjacent market opportunities, and the relative risk and return of these opportunities.
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The growth strategy that our management and board of directors have developed reflects our customer-centric and long-term growth view of our business, during the periods presented based on factors such as the development and launch of new and innovative core functionality and Value+ services, enhancements to user experience, customer satisfaction, growth in our revenue and customer base, fluctuations in costs and operating expenses as a percentage of revenue, operating loss or income and cash flows from operating activities. We have managed, and plan to continue to manage, our business towards the achievement of long-term growth that we believe will positively impact long-term stockholder value, and not towardsrather than the realization of short-term financial or business metrics, or short-term stockholder value. We have invested, and intendIf opportunities arise that might cause us to continuesacrifice our performance with respect to invest,short-term financial or business metrics, but that we believe are in the best interests of our stockholders in the long term, we will take those opportunities. The technology surrounding our business to capitalize onmanagement solutions and services is constantly evolving, and our market opportunity.
We believe our people are at the heart of our success and our customers’ success, and we have worked hardsuccess. We endeavor to not only to attract and hire quality individualsretain talented employees, but also to nurtureprovide a challenging and rewarding environment to motivate and develop our valuable human resources.capital. We believe in the stronglook to our talented employees to lead and foster various initiatives that support our company culture including those related to diversity, equity and inclusion. In addition, we rely heavily on our talented team we have cultivated, particularly in our deep bench of leaders who continue to execute our strategicgrowth plans and encourage innovation across the organization. achieve our long-term strategic objectives.
We further believe that our company culture, driven by a dedication to the following six core values, provides us with a significant competitive advantage:
•Great, Place to Work as Best Workplace for Women and Parents, Best Place to Work in Texas, and Best Innovative Products Are Key To A Great Business
•Great People Make A Great Company
•Listening To Customers Is In Our DNA
•Small, & Medium Workplace for 2019.Focused Teams Keep Us Agile
•We Do The Right Thing; It’s Good For Business
At December 31, 2019,2020, we had 1,2401,335 full-time employees and wealso routinely engage temporary employees and consultants. We consider our relationship with them to be very good. We also hire temporaryour employees and consultants and we feel similarly about our relationships with them.to be strong. None of our employees isare represented by a labor union or covered by a collective bargaining agreement. We must continue to attract and retain highly qualified and motivated personnel across our organization to execute our growth plan and achieve our strategic objectives. If we fail to do so, our business and operating results may suffer. Please refer to Item 1A., "Risk Factors", for a more complete discussion of these and other risk-related issues.
Compensation and Benefits
We provide competitive compensation and benefits for our employees. Our compensation packages may include base salary, commission or annual performance-based bonuses, and stock-based compensation. We also offer general employee medical, dental, and vision insurance, health savings and flexible spending accounts, mental health resources, paid time off, paid family leave, life and disability insurance, and 401(k) plan matching contributions. These programs and our overall compensation packages seek to attract and retain talented employees.
Health, Safety and Wellness
We take the health and welfare of our employees very seriously, and have managed,encouraged safe practices designed to stem the infection and planspread of COVID-19 within our workforce and beyond and to maintain the mental health and well-being of our employees. Beginning in March 2020, in an effort to protect our employees and comply with applicable government orders, we restricted non-essential employee travel and transitioned our employees to a remote work environment. We currently expect the majority of our employees will continue working remotely at least through the second quarter of 2021. We are committed to manage, our employees returning to the workplace in the long-term, and have recently constructed a new office space in Santa Barbara, California, extended the lease for our office in Richardson, Texas and are seeking new office space to lease in San Diego, California to accommodate our employees' return to the workplace in the future.
Workplace Awards
By attracting and retaining a team of people who are inspired by these values, focusing on building an outstanding culture, and offering opportunities for professional and personal growth, AppFolio has been recognized as a 2020 Best Place to Work and Highest Rated Company for Work-Life Balance During COVID-19 by Glassdoor, a 2020 Best Workplace for Women by Fortune, and a 2020 Best Workplace for Parents by Great Place to Work.
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Property Management Market
In 2008, we introduced AppFolio Property Manager ("APM"), a property management solution designed to address the unique operational and business towards the achievementrequirements of long-term growthproperty management companies and their business ecosystems. Recognizing that we believe will positively impact long-term stockholder value, rather than the realization of short-term financial or business metrics, or short-term stockholder value. Our growth strategy is to provide increasingly valuable business management software solutions, services and analytics to our customers and their business ecosystems would benefit from additional business critical services, we launched a series of Value+ services beginning in 2009. Our Value+ services are tailored to the specific workflows of property management businesses and generally fall into the categories of marketing and leasing, electronic payment services, business optimization and risk mitigation. In 2018, we introduced AppFolio Property Manager PLUS, ("APM PLUS"), a tier of APM designed for larger businesses with more complex needs. APM PLUS builds upon the functionality of APM and additionally offers data analytics, configurable workflows, and revenue management and optimization functionality for our customers.
APM and APM PLUS serve our property management customers, including third-party property managers and owner operators, who typically manage single- and multi-family residential, and others who manage community association, and commercial properties. Our solutions and services also serve other constituencies in the property management market, including property owners, rental prospects, tenants and service providers.
Our Property Management Solutions
AppFolio Property Manager - Core Solutions
Core functionality addresses key operational issues, including accounting and business analytics and management, marketing and leasing functionality, and communications with key stakeholders. The technology surroundingAPM PLUS builds upon the functionality of APM and additionally offers data analytics, configurable workflows, and revenue management and optimization functionality for our larger and more complex property management customers.
AppFolio Property Manager - Value+ Services
Our Value+ services build on functionality and workflows in our core solutions and generally fall into the categories of marketing and leasing, electronic payment services, business management software solutions,optimization and risk mitigation. Although many of our Value+ services are enabled by third party partners, we prioritize a seamless experience for our customers and analyticsusers which increases their efficiency and ease of use of APM and APM PLUS. Utilization and adoption of our Value+ services is typically higher for residential properties than community association or commercial properties because of the unique and complex needs of the residential rental lifecycle. We have generally organized our Value+ services below in the manner in which they are constantly evolving,experienced throughout the rental lifecycle.
We deliver and maintain professionally designed and architected Websites that showcase our growth strategy is thus subjectcustomers’ businesses. Our websites are fully integrated with our property manager functionality, including vacancy postings, electronic payment services, owner portals, tenant portals and maintenance requests. Property managers can track and analyze site traffic and lead generation by evaluating completed guest cards from rental prospects who visit the websites in connection with posted vacancies. Features include search engine optimized content, integrations with leading 3D tour providers, professional photography sourcing, and logo creation.
Our Premium Leads functionality allow customers to upgrade property listings to premium status and syndicate them to dozens of pay-to-list websites, including featured placement on many sites. Customers also receive advance call tracking and pay only for the verified leads they receive through the Value+ service.
Our Artificial Intelligence Leasing Assistant works 24/7 as part of a customers' leasing team to provide tailored text message or email responses to rental prospects in real-time, and leverages integrated reporting to track leasing performance with accurate data to drive increased occupancy rates and operational efficiency.
Our Tenant Screening Services include background screening, credit checks, and income verification for use in connection with the rental application process. In addition to obtaining an applicant's credit history, property managers have the option of leveraging an automated nationwide eviction and criminal records search, as well as accessing and/or contributing to rental payments history data, to better identify qualified tenants and reduce risk.
Our accounting features include Electronic Payment Services that allow property managers to streamline their payables and receivables through a variety of risksonline payment options. Customers can collect funds through a secure online portal, mobile application and uncertainties.via electronic cash payments from various users, including: rental application fees, security deposits, rent payments and other tenant charges; contributions from property owners; and periodic dues from those living in community associations. Customers can also electronically send funds to various users, including: distributions to property owners; payments to service providers; and payment to their own management company. Customers can also use our automated accounts payable solution to automate their accounts payable and expense recording process with smart bill entry, powered in part by artificial intelligence technology.
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Through partnerships and wholly-owned subsidiaries, we make available two insurance options, Liability to Landlord Insurance and Renters Insurance, that can be tailored to help property managers protect their properties and meet renters’ needs. Property managers can instantly enroll residents in liability to landlord insurance, which offers owners and investors increased protection against tenant-caused damage. Renters have the option of purchasing renters insurance through an online portal to protect their personal belongings, as well as the property itself, from certain unexpected damages.
With our Utility Management functionality, our customers are able to automate utility bill processing and resident billing, and manage utility-related operating and capital expenditures.
Our Maintenance Contact Center functionality is built into our customers maintenance workflow and is staffed 24/7/365 by trained agents, each acting as an extension of our property management customers’ teams to resolve or route incoming maintenance requests. Contact center agents are able to enter non-emergency work orders directly into APM’s property maintenance software for a property manager’s approval, and to dispatch vendors immediately in case of an emergency.
With our Tenant Debt Collections functionality, our customers can electronically send past due tenant debt from their APM database to a national fully-licensed third party debt collection agency to attempt to recover uncollected revenue. This Value+ service also includes reporting unpaid balances to three major credit bureaus.
With our Mailing Services functionality, our customers with community association units can streamline the mailing of required home owner association documentation.
Investment Management Market
In April 2019, we launched AppFolio Investment Management, which is designed to enable real estate investment managers to better manage their investor relationships by increasing transparency and streamlining certain business processes.
AppFolio Investment Management - Core Solutions
AppFolio Investment Management is a cloud-based software solution for real estate investment managers of various sizes that provides innovative tools and services designed to streamline their real estate investment management businesses. Core functionality addresses key operational issues, including management of investor relationships by increasing transparency and streamlining communications with key stakeholders.
AppFolio Investment Management - Value+ Solutions
We deliver and maintain professionally designed and architected Websites tailored to fit our customers’ businesses. Investment managers can track and analyze site traffic and lead generation. Features include search engine optimized content and logo creation.
Regulatory Environment
Our software, services, and data analytics are subject to certain legal, regulatory and other requirements. These laws are complex and evolving. Various U.S. federal and state laws govern many of our business activities, including, without limitation, the processing of payments, tenant screening, the sale and solicitation of insurance, and handling of consumer information. Despite our significant efforts to comply with all applicable requirements, there can be no guarantee that our efforts will be sufficient or that existing laws, rules or other requirements will not be interpreted, revised, augmented or rewritten in a way that adversely affects our regulated business activities, which comprise a significant majority of our overall business. Please refer to Item 1A., "Risk Factors", for a more complete discussion of these and other risk-related issues. Notwithstanding
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Our Customers
We believe our customer-centric culture fosters a focus on customer satisfaction which leads to long-term customer retention and our long-term success. We define customers as those riskspaying for a subscription to our core solutions. Our solutions and uncertainties, key componentsservices are primarily used by our customers, and also by numerous other constituencies in the business ecosystems we serve. In the property management market, these other constituencies include property owners, rental prospects, tenants, and service providers. We generate a portion of our growth strategy include:revenue from these users.
Sales and Technology Leadership.Marketing
We have made,leverage a modern and will continuescalable marketing approach along with marketing automation technology to make, significant investmentsattract and engage prospects, build brand recognition and our reputation as an industry leader. We participate in research and new product developmentdrive industry thought leadership and education with both online and offline activities, and we use a variety of inbound and outbound marketing techniques to expandpromote our business software solutions, services and data analyticsanalytics.
Our business development team acts in partnership with our marketing and sales teams to reach potential customers, generate sales opportunities and accelerate the time from evaluation to close. Our sales representatives assist prospective customers as they evaluate our software solutions. Our interactive sales methodology allows our sales team to quickly build relationships, assess our customers’ business challenges, and demonstrate the benefits of our core functionality and, where applicable, Value+ services. Throughout the customer relationship, we continue to promote adoption and usage of our Value+ services by customers and users through a variety of channels, including email, webinars, training, sales outreach and from within our software solution via in-app messaging. As we serve larger and more complex real estate customers, we have invested in additional headcount to manage and grow these customer relationships over time.
Customer Service
We believe our success is tied to long-term customer relationships, not a one-time sale. We pride ourselves on being customer-centric and strive to educate our customers on the solutions and services capabilities asthey can use to improve business efficiency and productivity. Our solutions are designed to be easy to use and manage, and we deem appropriate inoffer training and support at no extra charge.
Our dedicated onboarding team works to ensure that customers are prepared to run their businesses on our target markets. We intendplatform and provide a seamless onboarding experience. As a result of our assistance with data migration matters, we are able to continue using our market validation techniquesprovide valuable insights into data integrity and close relationshipswork with our customers as a key source of feedback to inform and direct our product roadmap.help resolve any issues in their underlying business processes. We may also choose to acquire rather than build certain technology solutions, or to partner with third parties to deliver key functionality to serve our existing or prospective customers.
solutions from competing products. This emphasis will continuefor particular property types or investment structures as appropriate. We share insights on best practices for the markets we serve and dedicate resources to be a critical component of our business strategy in the future. We believe that maintaining our focus onguide our customers will drive product innovation, leading to greaterthrough the adoption and utilization of our Value+ services.
Technology and Operations
Our software solutions are powered by a highly scalable computing platform, and are designed with a strong focus on data security and availability. We use Ruby-on-Rails as our primary web application framework, and we take great care to keep this application framework and the rest of our software stack current in order to mitigate known security vulnerabilities. Our computing platform and cloud infrastructure are primarily powered by Amazon Web Service’ Elastic Compute Cloud (EC2) platform. In order to ensure that data is not lost and that customer requests can be satisfied, production assets are securely replicated and regularly backed up to multiple geographic regions.
Our operators monitor our production infrastructure to ensure high performance and availability, and our architecture allows our operators significant flexibility in achieving these goals. In particular, our operators have fine-grained control over time.the specific server and region on which each customer's data resides, and can move customer data between different geographic regions in order to avoid service disruption or to increase service performance.
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Sensitive customer data, including passwords, Social Security, and Use By Existing Customers.tax identification numbers, is encrypted during transmission, and before being written to disk. We have made,regularly evaluate our product and infrastructure security, including through third-party penetration testing. In addition, our software solutions allow our customers to define roles that provide different levels of access to users, allowing them to view and modify specific items depending on their role. Supervisors can distribute work to on-site staff in a secure and controlled environment, while leadership retains visibility across the entire system. Some sensitive customer actions require secondary verification via two-factor authentication, and any customer can enable two-factor authentication for logging into their account. Notwithstanding the foregoing, there can be no assurance that the significant data security measures we employ will continueprevent malicious or unauthorized access to make, significant investments that expand our core functionality and/or add new Value+ servicessystems and information. Please refer to meet the currentItem 1A., "Risk Factors", for a more complete discussion of these and evolving needsother risk-related issues.
Research and requirements ofProduct Development
We rely heavily on input from our customers and prospective customers in developing products that meet their key stakeholders. We expectneeds and in anticipating developments in their businesses. Our product management team leads our research and market validation efforts and provides guidance to management and our engineering team based on our collective domain expertise and in-depth knowledge and understanding of our customers. As a result, our product management team engages regularly with customers, will continue to use our technology to manage their businessespartners, and increasingly adopt and use additional Value+ services.
We entrust product design, development and testing to our engineering and product teams, who coordinate closely to launch new capabilities and services. Our engineers work in small teams generally aligned with specific customer segments or product capabilities to foster agility and continued innovation in responding to the evolving industry thought leadershipneeds of our customers. We leverage a collaborative, team-based and education, and the referral power of satisfied customers.
Competition
The overall market for business management software is global, highly competitive and continually evolving to respond to changes in technology, operational requirements, and ever-changing laws and regulations. We believe our competitors primarily fall into the following categories:
•On-premise or cloud-based vertical market business management software providers that serve companies of all sizes in our markets; and
•On-premise or cloud-based horizontal business management software providers that offer broad solutions across multiple verticals.
We also seeexperience competition from numerous cloud-based solutions providers that focus almost exclusively on one or more point solutions. For example, in the real estate vertical, we compete with payment solutions providers, listing services, tenant screening applications and specialists in lease forms. In the legal vertical, we compete with time tracking, legal billing and payment services. Continued consolidation among cloud-based solution providers could lead to significantly increasedincrease competition.
We believe the principal competitive factors in each of our vertical markets include the following:
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We believe that we compete favorably on the factors described above. However, some of our competitors may have greater financial, technical and other resources, greater name recognition and larger sales and marketing budgets; therefore, we may not always compare favorably with respect to some or all of the foregoing factors.
Intellectual Property
We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality procedures and contractual restrictions to establish and protect our proprietary rights in our core solutions and Value+ services. At January 31, 2020, we had twelve issuedWe hold eleven United States patents that directly relate to our technology and expire between 2026 and 2033. We also maintain one issued United States patent that relates directly to web-based legal workflow software, which was exclusively licensed to MyCase, Inc. in connection with our divestiture from the legal vertical in September 2020. For additional details regarding our divestiture, see Note 1, Nature of Business and Note 3, Divestitures and Acquisitions of our Consolidated Financial Statements in this Annual Report. We may pursue additional patent protection to the extent we believe it would be beneficial and cost effective.
We have registered “AppFolio” and "MyCase" and certain other marks as trademarks in the United States and several other jurisdictions. We have also acquired certain marks and filed trademark applications and renewals in the United States and certain other jurisdictions, and will pursue additional trademark registrations to the extent we believe it would be beneficial and cost effective. We are the registered holder of a variety of domestic and international domain names that include “appfolioinc.com,” “appfolio.com,” “mycase.com”“appfolioinvestmentmanagement.com” and similar variations. We also license software from third parties for use in our solutions, including open source software and other software available on standard commercial terms.
We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with third parties. Despite our precautions, it may be possible for unauthorized third parties to copy our software solutions and use information that we regard as proprietary to create products and services that compete with ours.
Trends and Uncertainties Related to the COVID-19 Pandemic
The COVID-19 pandemic has created and may continue to create significant uncertainty and volatility in a wide variety of industries and markets, including the global real estate market, and has prompted many federal, state, local, and foreign governments to implement various lock-down measures in an attempt to contain the spread and mitigate the impact of the disease. The initial implementation of such lock-down measures, and their re-introduction in response to a nation-wide resurgence of COVID-19 cases in late-2020, resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and the cancellation or postponement of events.
Despite recent approval and initial distribution of vaccines, both the pandemic and the containment and mitigation measures have had and are likely to continue to have an adverse impact on the global and U.S. economies, the severity and duration of which are uncertain. It is likely that government stabilization efforts will only partially mitigate the consequences to the economy. As such, both the pandemic and containment and mitigation measures may adversely affect our business, operations and financial condition by, among other things, reducing demand for our core solutions and/or Value+ services, impairing the productivity of our workforce, and reducing our access to capital. The extent to which the COVID-19 pandemic will impact our business, financial conditions, and results of operations in the future is highly uncertain and will be affected by a number of factors. These include the duration and extent of the pandemic, the duration and extent of imposed or recommended containment and mitigation measures, the extent, duration, and effective execution of government stabilization and recovery efforts, including those from the successful distribution of effective vaccines.
Beginning in March 2020, in an effort to protect our employees and comply with applicable government orders, we restricted non-essential employee travel and transitioned our employees to a remote work environment. We currently expect the majority of our employees will continue working remotely at least through the second quarter of 2021. Our workforce has continued to effectively develop and support our product and service offerings notwithstanding the current environment. We take the health and welfare of our people very seriously, and have encouraged safe practices designed to stem the infection and spread of COVID-19 within our workforce and beyond and to maintain the mental health and well-being of our employees. However, if the COVID-19 pandemic requires remote working conditions for a prolonged period of time, it could have an adverse impact on the productivity of our employees, which would harm our business and impede our ability to achieve our strategic plan. For example, certain of our employees with younger children have been required to respond to ongoing school closures and adapt to a distance learning environment, and may be required to continue to do so for the foreseeable future. Further, we have a limited history of remote work and the long-term impact on, and the resulting types of continuing investments necessary for, our employee base is uncertain.
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Moreover, the COVID-19 pandemic may have long-term effects on the nature of the office environment and remote working. This may present operational and workplace culture challenges that may adversely affect our business. However, we are committed to our employees returning to the workplace in the long-term, and have recently constructed a new office space in Santa Barbara, California, extended the lease for our office in Richardson, Texas and are seeking new office space to lease in San Diego, California to accommodate our employees' return to the workplace in the future.
We began fiscal year 2020 with healthy demand for our products and services, many of which are designed to enable our customers to manage their businesses virtually. During the twelve months ended December 31, 2020, we experienced some variability in demand for certain Value+ services after lock-down measures were implemented. We expect demand variability for our products and services could continue as a result of the COVID-19 pandemic, although it is presently unclear whether the cumulative impacts will be positive or negative. For example, the economic downturn resulting from the COVID-19 pandemic caused an increase in residential rental defaults and deferrals. Together with eviction moratoriums in some jurisdictions, this adversely affected the rental income of certain customers. Although the impact has not been material to date, a prolonged downturn in economic conditions could have a material adverse effect on our customers and demand for our services.
We continue to actively communicate with and listen to our customers to best ensure that we are responding to their needs in the current environment with innovative solutions that will not only be beneficial now but also over the long-term as well. However, our ability to interact with customers has been impacted by the current environment. We believe that our inability to meet in-person with current or prospective customers, as well as the cancellation or postponement of Company-sponsored events or third-party events at which our products are featured, may have a negative impact on our business.
We continue to monitor developments related to COVID-19 and remain flexible in our response to the challenges presented by the pandemic. To mitigate the adverse impact COVID-19 may have on our business and operations, we have implemented a number of measures to protect the health and safety of our employees, as well as to strengthen our financial position. These efforts include eliminating, reducing, or deferring non-essential expenditures, as well as complying with local and state government recommendations to protect our workforce.
The impact of the COVID-19 pandemic may also exacerbate other risks discussed in this Annual Report. Refer to Item 1A. "Risk Factors" in this Annual Report for a complete description of the material risks that we currently face.
Corporate Information
We were formed in 2006 as a Delaware limited liability company and converted to a Delaware corporation in 2007. Our principal executive offices are located at 50 Castilian Drive, Santa Barbara, California 93117, and our telephone number is (805) 364-6093. Our corporate website is www.appfolioinc.com. The information contained on or accessed through our website does not constitute part of, and is not incorporated by reference into this Annual Report. References to our website address in this Annual Report are inactive textual references only.
“AppFolio,” “MyCase,” the AppFolio logo, the MyCase logo,, and other trademarks and trade names of AppFolio and MyCase appearing in this Annual Report are our property. All other trademarks or trade names appearing in this report are the property of their respective owners. Solely for convenience, the trademarks and trade names in this report are referred to without the ® and ™ symbols. We do not intend our use or display of the trademarks, trade names or service marks of other parties to imply a relationship with, or endorsement or sponsorship of us, by such other parties.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, as well as amendments to those reports pursuant to Sections 13(a) and 15(d) of the Exchange Act. We also file proxy statements and information statements pursuant to Section 14 of the Exchange Act. The SEC maintains a website at www.sec.gov that contains the reports, proxy and information statements, and other information that we file with or furnish to the SEC electronically. Copies of the reports, proxy statements and other information may also be obtained, free of charge, electronically through our corporate website, at www.appfolioinc.com, as soon as reasonably practical after we file such material with, or furnish it to, the SEC.
ITEM 1A. RISK FACTORS
Please be advised that certain of the risks and uncertainties described below contain “forward-looking statements.” See the section of this Annual Report entitled “Cautionary“Cautionary Note Regarding Forward-Looking Statements”Statements” for additional information.
Risks Related to Our Business and Our Industry
Health epidemics, including the COVID-19 pandemic, have had, and could in the future have, a material adverse impact on our operations, the operations of our customers and other business partners, and the markets and communities in which we and our customers and partners operate.
In December 2019, a novel coronavirus disease, referred to as COVID-19, was reported and has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States government declared a national emergency with respect to COVID-19. The COVID-19 pandemic has had, and another public health crisis or epidemic in the future could have, repercussions across local, regional and global economies and financial markets. The outbreak of COVID-19 in many countries, including the United States, has adversely impacted global economic activity and has contributed to volatility in and negative pressure on financial markets. In response to the COVID-19 pandemic, many state, local, and foreign governments have put in place, and others in the future may put in place, travel restrictions, quarantines, shelter-in-place orders, and similar government orders and restrictions, in an attempt to control the spread of the disease. Such restrictions or orders, or the perception that such restrictions or orders could be implemented, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, and cancellation or postponement of events, among other effects that could negatively impact our operations, as well as the operations of our customers and business partners. These potential impacts are only amplified by the length of time they remain in place, as the cumulative effect upon our customers and their businesses may exacerbate the potential harm to our business and results of operations.
Beginning in March 2020, in an effort to protect our employees and comply with applicable government orders, we restricted non-essential employee travel and transitioned our employees to a remote work environment. We currently expect the majority of our employees will continue working remotely at least through the second quarter of 2021. Our workforce has continued to effectively develop and support our product and service offerings notwithstanding the current environment. We take the health and welfare of our people very seriously, and have encouraged safe practices designed to stem the infection and spread of COVID-19 within our workforce and beyond and to maintain the mental health and well-being of our employees. However, if the COVID-19 pandemic requires remote working conditions for a prolonged period of time, it could have an adverse impact on the productivity of our employees, which would harm our business and impede our ability to achieve our strategic plan. For example, certain of our employees with younger children have been required to respond to ongoing school closures and adapt to a distance learning environment, and may be required to continue to do so for the foreseeable future. Further, we have a limited history of remote work and the long-term impact on, and the resulting types of continuing investments necessary for, our employee base is uncertain.
The COVID-19 pandemic has resulted in a rapid rise in unemployment and a sudden decrease in global economic activity, and many businesses have experienced, or are anticipating that they may experience, a significant negative impact on their operating results. Our inability to meet in-person with current or prospective customers, or the cancellation or postponement of Company-sponsored events or third-party events at which our products are featured, could have a negative impact on our customer engagement efforts, which could further impact demand in future periods. Furthermore, the demand for our products and services, as well as our operating results, could be adversely impacted due to a number of other factors, including the following:
▪customers delaying decisions to adopt our core products, or expand the use of our Value+ services, as they seek to reduce or delay spending in response to the impacts of COVID-19 on their own businesses;
▪a complete or partial closure of, or other operational issues at, properties owned by our customers resulting from government restrictions or orders;
▪a deterioration in our ability, or the ability of our customers, to operate in affected geographic areas;
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▪bankruptcies or other financial difficulties facing our customers, which could cause them to delay making payments to us, or result in them terminating or reducing their use of our core products or Value+ services;
▪the inability of tenants to meet their obligations to our customers, resulting in tenant evictions or the sale of properties;
▪the failure of key business partners to provide services needed for our efficient operations, including with respect to electronic payments and tenant screening;
▪a decrease in the reliability or availability of our core products or Value+ services as a result of errors, defects or service interruptions caused by the remote work environment;
▪an increase in risks related to cyber-attacks or fraud designed to exploit perceived or actual gaps in security as a result of the remote work environment; and
▪a decrease in the availability or utility of our customer service organization caused by the remote work environment.
Any of the factors described above, or any number of other risks related to the COVID-19 pandemic, could disrupt our business, which could have a material adverse impact on our business, operations and financial results. Despite recent approval and initial distribution of vaccines, both the pandemic and the containment and mitigation measures have had and are likely to continue to have an adverse impact on the global and U.S. economies, the severity and duration of which are uncertain. It is likely that government stabilization efforts will only partially mitigate the consequences to the economy. As such, both the pandemic and containment and mitigation measures may adversely affect our business, operations and financial condition by, among other things, reducing demand for our core solutions and/or Value+ services, impairing the productivity of our workforce, and reducing our access to capital. The extent to which the COVID-19 pandemic will impact our business, financial conditions, and results of operations in the future is highly uncertain and will be affected by a number of factors. These include the duration and extent of the pandemic, the duration and extent of imposed or recommended containment and mitigation measures, the extent, duration, and effective execution of government stabilization and recovery efforts, including those from the successful distribution of effective vaccines.
We manage our business towards the achievement ofto achieve long-term growth, which may not be consistent with the short-term expectations of some investors.
We plan to continue to manage our business towards the achievement of long-term growth that we believe willto positively impact long-term stockholder value, and not towards the realization of short-term financial or business metrics or short-term stockholder value. If opportunities arise that might cause us to sacrifice our performance with respect to short-term financial or business metrics, but that we believe are in the best interests of our stockholders, we will take those opportunities.
Our principal stockholders, some of whom also serve as our directors and executive officers, directors and principal stockholders control a majority of the combined voting power of our outstanding capital stock. As a result, they are able to exercise significant influence and control over the establishment and implementationelection of a majority of our future business plansdirectors and thereby have the power to control our affairs and policies, including the appointment of management and strategic objectives,decisions, as well as control all matters that are submitted to a vote by our stockholders for approval. These persons may manageholders of our business in ways with which you disagree and whichcommon stock. The interests of our principal stockholders may be inconsistent with or adverse to your interests.those of holders our Class A common stock.
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We have experienced significant growth since our formation in 2006, and we anticipate that we will continue to experience growth and expansion of our operations. This growth in the size, complexity and diversity of our business has placed, and we expect it will continue to place, a significant strain on our management, administrative, operational and financial resources, as well as our company culture. Our future success will depend, in part, on our ability to manage this growth effectively.effectively, which we expect to be more challenging in the current environment as we seek to respond to the uncertainty and disruption caused by the COVID-19 pandemic. To manage the expected growth of our operations, we will need to continue to develop and improve our operational and financial controls and our reporting systems and procedures, continue to attract and retain highly qualified and motivated personnel across our organization, and continue to nurture and build on our company culture. Failure to effectively manage growth could adversely impact our business, including by resulting in errors or delays in deploying new core functionality to our customers, delays or difficulties in introducing new Value+ services or other products, consistent with our strategic plan, declines in the quality or responsiveness of our customer service organization, exposure to legal, regulatory and operational risks inherent in our existing business and inresulting from any new products or services we provide to our customers or to our customers’ customers, increases in costs and operating expenses, and other operational difficulties. We expect these risks will only be increased as a result of any future products or services we develop and bring to market, as well as acquisitions or adjacent markets we may pursue. If any of these risks actually occur, it could adversely affect our operating results, and preclude us from achieving our strategic objectives.
In order to implement our business and growth strategy, we have made and will continue to make substantial investments across our organization and, as a result, we expect our financial results may fluctuateexpenses to increase significantly from period to period and we may not sustain profitability.
| our research and product development organization to enhance the ease of use and functionality |
| the expansion of our existing facilities, including leasing and building out additional office space, to support our growth and strategic development. |
Our quarterly results may fluctuate significantly and period-to-period comparisons of our results may not be meaningful.
Our quarterly results, including the levels of our revenue, costs, operating expenses, and operating margins, may fluctuate significantly in the future, and period-to-period comparisons of our results may not be meaningful. Accordingly, the results of any one quarter should not be relied upon as an indication of our future performance. In addition, our quarterly results may not fully reflect the underlying performance of our business. Factors that may cause fluctuations in our quarterly results include, but are not limited to:
Our focus on managing our business towards the achievement of long-term growth, rather than the realization of short-term financial or business metrics, may serve toalso exacerbate the fluctuations in our quarterly results, which could result in downward pressure on the market price of our Class A common stock. In addition, fluctuations in quarterly results may negatively impact the value of our Class A common stock, regardlessstock. We may incur significant losses in a particular period for a number of whether they impact or reflectreasons, and may experience significant fluctuations in our operating results from period to period. These and other factors, including the overall performance ofsignificant disruption and uncertainty caused by the COVID-19 pandemic, combine to make it difficult for us to accurately forecast our business.future operating results, which in turn makes it difficult for us to prepare accurate budgets and implement strategic plans. Furthermore, if our quarterly results fall below the expectations of investors or any securities analysts who follow our stock, or below any financial guidance we may provide, the price of our Class A common stock could decline substantially.
Our estimates of market opportunity are subject to significant uncertainty and, even if the markets in which we compete meet or exceed our size estimates, we could fail to increase our revenue or market share.
We determine the level of our investment in various aspects of the business, in part, based on our market opportunity estimates. Market opportunity estimates are subject to significant uncertainty and are based on assumptions and estimates, including our internal analysis and industry experience. Assessing the market for industry-specific, cloud-based business management software is particularly difficult due to a number of factors, including limited available information and rapid evolution of the market. Further, market opportunity estimates sometimes change based on relevant macro-trends and market conditions, or evolving assessment methodologies. We determineThe disruptions and impacts caused by the level of our investment in various aspects of the business, in part, based on our market opportunity estimates. If we had made different assumptions,COVID‑19 pandemic may ultimately require us to significantly reduce our estimates of the market opportunity, and/opportunities in certain markets or industry verticals, which could negatively impact our related investment determinations, could be materially different.long-term growth prospects.
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We have acquired, and may in the future acquire, other companies or technologies to complement or expand our software solutions, optimize our technical capabilities, enhance our ability to compete in our targeted verticals,vertical, provide an opportunity to expand into an adjacent market or new vertical, or otherwise offer growth or strategic opportunities. For example, in ourthe real estate vertical, we acquired substantially all of the assets of WegoWise in 2018 and completed the acquisition of Dynasty in 2019. The pursuitidentification, investigation and negotiation of acquisitions may divert the attention of management and cause us to incur various expenses, in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.
We have limited experience acquiring other businesses. Webusinesses and we may not be able to effectively integrate acquired assets, technologies, personnel and operations successfully or achieve the anticipated synergies or other benefits from the acquired business due to a number ofthe inherent risks associated with acquisitions, including:
acquisitions. If an acquisition fails to meet our expectations in terms of its contribution to our overall business strategy or operating results, or if the costs of acquiring or integrating the acquired business exceed our estimates, our business, operating results and financial condition may suffer. In addition, acquisitions
Acquisitions could also subject us to related financing risks. We cannot guarantee that additional financing will be available to us on favorable terms when required, or at all. Acquisitions could result in the issuance of equity securities, which would result in immediate dilution to our stockholders and those securities may have powers, preferences or rights senior to the incurrencerights of our Class A common stock. We may incur debt to finance acquisitions, which could impose debt service obligations and restrictions on our ability to operate our business. Our ability to obtain additional capital for acquisitions will depend on numerous factors, including investor and lender demand, our compliance with debt obligations, our historical and forecasted financial and operating performance, our liquidity position, the overall condition of the capital markets, and the global economy as a whole. If we raise funds in the form of debt, we may incur interest expense or other costs to service the debt, we may be required to encumber certain assets, and we may become subject to restrictions on our ability to conduct business, any of which could negatively impact our operating results. Furthermore, a significant portion of the purchase price of companies we may acquire could be allocated to goodwill and other intangible assets, which must be assessed for impairment. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our operating results.
Security vulnerabilities in our software solutions or a breach of our security controls could result in the loss, theft, misuse, unauthorized disclosure, or unauthorized access tocustomer or employee data, or other confidential andor sensitive information, which could harm our relationships with customers customer and/or employees,employee relationships, expose us to litigation or regulatory proceedings, or harm our reputation, any of which could materially harm our business and operating results.
Our business involves the storage and transmission of a significant amount of confidential and sensitive information, including the personal information of our employees and other individuals, customer data, and our proprietary financial, operational and strategic information. In providing our software solutions, we store and transmit large amounts of our customers’ data, including sensitive and proprietary data and personal information collected by or on behalf of our customers. Our software solutions are
typically the system of record, system of engagement and, increasingly, the system of intelligence for all or a portion of our customers’ businesses, and the data processed through our software solutions is critical to their businesses. Cyber attacks and other malicious Internet-based activities continue on a regular basis, as evidenced by the recent targeting of a number of high profile companies and organizations. Like many other businesses, we have experienced, and are continually at risk of being subject to, cyber attacks and data security incidents. As our business grows, the number of users of our software solutions, as well as the amount of information we collect and store, is increasing, and our brands are becoming more widely recognized. We believe these factors combine to makerecognized which makes us an even greater target for this type of malicious activity. Although we take data security seriously, thereThere can be no assurance that the security measures we employ will prevent malicious or unauthorized access to our systems and information. Techniques used to sabotage, or to obtain unauthorized access to, systems or networks change frequently and may not be recognized until launched against a target. Furthermore, no security program can entirely eliminate entirely the risk of non-malicious human error, such as an employee or contractor’s failure to follow one or more security protocols. Therefore, despite our significant efforts to keep our systems, products and networks protected and up to date, we may be unable to anticipate cyber attacks, detect security incidents or react to them in a timely manner, or implement adequate preventive measures, any of which may expose us to a risk of loss, litigation and potential liability. In addition, some of our third-party service providers also collect and/or store our sensitive information and our customers’ data on our behalf, and these service providers are subject to similar threats of cyber attacks and other malicious Internet-based activities.
If our security measures, or the security measures of our third-party service providers, are breached as a result of wrongdoing or malicious activity on the part of our employees, our partners’ employees, our customers’ employees, or any third party, or as a result of any human error or neglect, product defect or otherwise, and this results in the loss, theft, misuse, unauthorized disclosure, or unauthorized access to customer data or other sensitive information, we could incur liability to our customers and to individuals or organizations whose information was being stored by us or our customers, as well as for example, fines from payment processing networks and/orand regulatory action by governmental bodies. If we experience a widespread security breach, we cannot be certain that our insurance coverage will be sufficient to compensate us for liabilities actually incurred or that insurance will continue to be available to us on reasonable terms, or at all. In addition, any security breaches could result in reputational damage, adversely affect our ability to attract new customers and cause existing customers to reduce or discontinue the use of our software solutions, any of which could harm our business and operating results.solutions. Furthermore, the perception by our current or potential customers that our software solutions could be vulnerable to exploitation or that our security measures are inadequate, even in the absence of a particular problem or threat, could reduce market acceptance of our software solutions and cause us to lose customers. The legal and regulatory
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environment around data security and governance is significantly evolving, and tightening, and both regulators and consumers are increasingly taking action on data-related matters, which may contribute to increased reputational, economic and other harm in the event of a data security incident.
Service outages due to malicious activities orand other infrastructure performance problems associated with our technology infrastructure could harm our reputation and adversely affect our ability to attract new customers and cause us to lose existingretain customers.
We have experienced, and may in the future experience, website disruptions, service outages and other performance problems with our technology infrastructure. These problems may be caused by a variety of factors, including infrastructure changes, power or network outages, fire, flood or other natural disasters affecting our data centers,cloud computing platform providers, human or software errors, viruses, security breaches, fraud or other malicious activity, spikes in customer usage and distributed denial of service attacks. In some instances, we may not be able to identify the cause or causes of these service outages and performance problems within an acceptable period of time. If our technology infrastructure fails to keep pace with the increased number of users and amount of data, or if we are unable to avoid service outages and performance problems, or to resolve them quickly, this could adversely affect our ability to attract new customers, result in the loss of existing customers and harm our reputation, any or all of which could adversely affect our business and operating results.
Errors, defects or other disruptions in our software solutions could harm our reputation, cause us to lose customers, and result in significant expenditures to correct the problem.
Our customers use our software solutions to manage critical aspects of their businesses, and any errors, defects or other disruptions in the performance of our software solutions, including with respect to third party partners upon which certain of our software solutions are dependent, may result in loss of or damage to our customers’ data and disruption to our customers’ businesses, which could harm our reputation. We provide continuous updates to our software solutions and while our software updates undergo
Privacy and data security laws and regulations could impose additional costs on us and reduce the demand for our software solutions.
We store and transmit personal information relating to our employees and other individuals, and our customers use our technology platform to store and transmit a significant amount of personal information relating to their clients,customers, vendors, employees and other industry participants. Privacy and data security have become significant issues in the United States and in other jurisdictions where we may operate or offer our software solutions. The regulatory framework relating to privacy and data security worldwide is rapidly evolving and tightening, and is likely to remain uncertain for the foreseeable future. Federal, state and foreign government bodies and agencies have in the past adopted, and may in the future adopt, laws and regulations regarding the collection, use, processing, storage and disclosure of personal or identifying information obtained from customers and other individuals. For instance, the California Consumer Privacy Act which went into effect on January 1, 2020, createscreated new data privacy and security rights for California residents. Similarly, there are a number of existing and proposed laws and regulations in the European Union and the United States at both the federal and state level, as well as other jurisdictions that could impose new obligations in areas affecting our business. These new obligations could increase the cost and complexity of delivering our services, and divert our managements’ attention from pursuing strategic objectives.
In addition to government regulation, privacy advocates and industry groups may propose various self-regulatory standards that may legally or contractually apply to our business. Because the interpretation and application of many privacy and data security laws, regulations and applicable industry standards are uncertain, it is possible that these laws, regulations and standards may be interpreted and applied in a manner inconsistent with our existing privacy and data management practices. As new laws, regulations and industry standards take effect, and as we expand into new jurisdictions, adjacent markets or, potentially, verticals consistent with our strategic plan, we will need to understand and comply with various new requirements, which may result in significant additional costs.
reduce overall demand for them. Even the perception of privacy and data security concerns, whether or not valid, may inhibit market acceptance of our software solutions. Furthermore, privacy and data security concerns may cause our customers’ clients, vendors, employees and other industry participants to resist providing the personal information necessary to allow our customers to use our applications effectively. Any of these outcomes could adversely affect our business and operating results.
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We face a number of risks in our electronic payment services business that could adversely affect our business and/or operating results.
In our electronic payments services business, we facilitate the processing of both inbound and outbound payments for our customers. These payments are settled through our sponsoring clearing bank, card payment processors, and other third-party electronic payment services providers that we may contract with from time to time. Our electronic payment services subject us to a number of risks, including, but not limited to:
| to, liability for customer costs related to disputed or fraudulent transactions |
| incidences of fraud in |
Additionally, with respect to the processing of electronic payment transactions by our third-party electronic payment services providers, we are exposed to financial risk. Electronic payment transactions between our customer and another user may be returned for various reasons such as insufficient funds, fraud or stop payment orders. If we or our electronic payment services provider is unable to collect such amounts from the customer’s account, (such as if the customer is illegitimate, or if the customer refuses or is unable to reimburse us for the amounts charged back), we bear the ultimate risk of loss for the transaction amount. While we have not experienced material losses resulting from amounts charged back in the past, there can be no assurance that we will not experience these types of significant losses in the future.
Evolution and expansion of our electronic payment services may subject us to additional risks and regulatory requirements.
The evolution and expansion of our electronic payment services may subject us to additional risks and regulatory requirements, including, without limitation, laws and regulations governing money transmission and anti-money laundering. These requirements vary throughout the markets in which we operate, and several jurisdictions lack clarity with respect to the application and interpretation of these rules. Our efforts to comply with these rules could require significant management time and effort, as well as significant expenditures, and will not guarantee our compliance with all regulatory requirements, especially given that the applicable regulatory frameworks are constantly changing and subject to evolving interpretation. While we maintain a compliance program focused on applicable laws and regulations throughout our applicable industries, there is no guarantee that we will not be subject to fines, penalties or other regulatory actions in one or more jurisdictions, or be required to adjust our business practices to accommodate future regulatory requirements.
We face a number of risks in our tenant screening services business that could adversely affect our business and/or operating results.
Our tenant screening services business is subject to a number of complex laws that are subject to varying interpretations, including without limitation the Fair Credit Reporting Act (the "FCRA")FCRA and related regulations. The FCRA has recently been the subject of multiple class-based litigation proceedings, as well as numerous regulatory inquiries and enforcement actions. In addition, entities such as the Federal Trade Commission (the "FTC")FTC and the Consumer Financial Protection Bureau ("CFPB") have the authority to promulgate rules and regulations that may impact our customers and our business. Although we attempt to structure and adapt our tenant screening services to comply with these and otherthe relevant laws and regulations, we may from time to time be found to be in violation of them. Further, regardless of our compliance with applicable lawsthem and regulations, we may from time to time be subject to routine regulatory inquiries, enforcement actions, class-based litigation or indemnity demands.
As we have discussed, we completed the settlement of a class action lawsuit related to alleged violations of the FCRA in 2019. In addition, and as previously announced,disclosed, we received a Civil Investigative Demand from the FTC in December 2018 requesting certain information relating to our compliance with the FCRA in connection with our tenant screening services business. Further,business (the "FTC Investigation"). On April 30, 2020, the FTC staff informed us of its belief that there is a reasonable basis for asserting claims against us for our alleged failure to comply with certain sections of the FCRA that could result in monetary penalty and injunctive relief. Notwithstanding our disagreement with the FTC's position and vigorous defense of our position, and primarily in an effort to avoid protracted litigation and potential distraction to our business, we entered into settlement negotiations with the FTC in an effort to resolve all claims and allegations arising out of or relating to the FTC Investigation. Those settlement negotiations resulted in a final agreement between the parties that is memorialized in a Stipulated Order for Permanent Injunction and Civil Penalty Judgment filed in the United States District Court for the District of Columbia on January 12, 2021. We admitted no wrongdoing in connection with the settlement.
In the second quarter of 2020, we determined that a loss stemming from the FTC Investigation was probable and that a reasonable estimate of the loss was approximately $4.3 million. Accordingly, an accrual of $4.3 million is included within accrued expenses on our Consolidated Balance Sheet as of December 31, 2020. The ultimate settlement amount of approximately $4.3 million was paid in January 2021.
In addition, we received a Request for Information from the Civil Rights Division (Housing and Civil Enforcement Section) of the U.S. Department of JusticeDOJ in July 2019 requesting certain information relating to our compliance with the Servicemembers Civil Relief ActSCRA in connection with our tenant screening services business. For additional information regarding legal proceedings, referOn November 6, 2020, the DOJ issued a no action letter, declining to Note 10, Commitmentstake any action against us and Contingenciesclosing its investigation.
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Due to the large number of tenant screening transactions in which we participate, our potential liability in anany enforcement action or a class action lawsuit could be significant,have a material impact on our business, especially given that certain applicable laws and regulations provide for fines or penalties on a per occurrence basis. The existence of any such enforcement action or class action lawsuit, whether meritorious or not, may adversely affect our ability to attract customers, result in the loss of existing customers, harm our reputation and cause us to incur defense costs or other expenses. Any of the foregoing events may negatively affect our business, financial condition, operating results and, ultimately, our stock price.
We use third-party service providers for important electronic payment and tenant screening services, and their failure to fulfill their contractual obligations could harm our reputation, disrupt our business and adversely affect our operating results.
We use third-party electronic payment services providers to enable us to provide electronic payment services, to our customers, and third-party tenant screening services providers to enable us to provide tenant screening services such as background and credit checks to our customers. We rely on these service providers to provide us with accurate and timely information, and therefore have significantly less control over our electronic payment and tenant screening services than if we were to maintain and operate them ourselves. In some cases, functions necessary to our business are performed on proprietary third-party systems and software to which we have no access. We also generally do not have long-term contracts with these service providers. In addition, some of these service providers compete with us directly or indirectly in the markets we serve. The failure of these service providers to provide us with accurate and timely information, to fulfill their contractual obligations to us, or to renew their contracts with us, could result in direct liability to us, harm our reputation, result in significant disruptions to our business, and adversely affect our operating results.
Our corporate culture has contributed to our success and, if we cannot continue to foster this culture as we grow, we could lose the passion, creativity, teamwork, focus and innovation fostered by our culture.
We believe that our culture has been and will continue to be a key contributor to our success. If we do not continue to develop our corporate culture or maintain our core values as we grow and evolve, we may be unable to foster the passion, creativity, teamwork, focus and innovation we believe we need to support our growth. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and to effectively focus on and pursue our strategic objectives. Moreover, liquidity available to our employee security holders could lead to disparities of wealth among our employees, which could adversely impact
relations among employees and our culture in general. As we grow and mature as a public company, we may find it difficult to maintain our corporate culture. This difficulty iswill only be exacerbated by our rapidly growing number ofthe COVID-19 pandemic, which has resulted in travel restrictions, quarantines, shelter-in-place orders and similar government orders and restrictions that collectively make it more difficult for employees to interact, communicate and our geographic expansion.innovate.
Our success and future growth depend, in part, upon the continued services of our executive officers and other key employees. From time to time, thereThere may be changes in our executive officers or other key employees resulting from the hiring or departure of these personnel, which may disrupt our business. Our executive officers and other key employees are generally employed on an at-will basis, which means that these personnel could terminate their employment with us at any time. Additionally, the equity awards held by many of our executive officers and other key employees are close to fully vested, and these employees may not have sufficient financial incentive to stay with us. The loss of one or more of our executive officers or other key employees or the failure by our executive team to work effectively with our employees and lead our company, could have an adverse effect on our business.
Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. In addition, our headquarters are located in Santa Barbara, California, which is not generally recognized as a prominent commercial center, and it is challenging to attract qualified professionals due to our geographic location. As a result, we may have even greater difficulty hiring and retaining skilled personnel than our competitors. If we hire employees from other companies, their former employers may attempt to assert that we or these employees have breached their legal obligations, resulting in a diversion of our time and resources.
In addition, prospective and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity awards declines, or if the price of our Class A common stock experiences significant volatility, this may adversely affect our ability to recruit and retain highly skilled employees. If we are unable to attract and retain the personnel necessary to execute our growth plan, we may be unable to achieve our strategic objectives and our operating results may suffer.
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The marketsvertical market in which we participate areis intensely competitive and our business could be harmed if we do not compete effectively, our business could be harmed.
The overall market for cloud-based business management software is global, highly competitive and continually evolving in response to a number of factors, including changes in technology, operational requirements, and laws and regulations. The market for cloud-based business management software is also highly competitive and subject to similar market factors.
While we focus on providing industry-specific, cloud-based business management software solutions in our targeted verticals,to the real estate vertical, we compete with other vertical cloud-based solution providers, as well as with horizontal cloud-based solution providers that provide broad cloud-based solutions across multiple verticals. Our competitors include established vertical software vendors, as well as newer entrants in the market. We also face competition from numerous cloud-based solution providers that focus almost exclusively on one or more point solutions. Continued consolidation among cloud-based providers could lead to significantly increased competition.
competitors are larger and have greater name recognition, longer operating histories, and significantly greater resources than we do.resources. As a result, our competitors may be able to respond more quickly and effectively to new or changing opportunities, technologies, operational requirements and industry standards. Some of these competitors may have more established customer relationships or strategic partnerships with third parties that enhance their products and services. Other competitors may offer products or services that address one or a number of business functions on a standalone basis at lower prices or bundledstandards, as part of a broader product sale, or with greater depth than our software solutions.well as to new challenges such as those resulting from the COVID-19 pandemic. In addition, our current and potential competitors may develop, market and sell new technologies with comparable functionality to our software solutions, which could cause us to lose customers, slow the rate of growth of new customers andand/or cause us to decrease our prices in order to remain competitive. For all of these reasons, we may not be able to compete effectively against our current and future competitors, which could harm our business.
As the markets for our existing software solutions mature, or as current and future competitors introduce new products or services that compete with ours, we may experience pricing pressure and be unable to renew our subscription agreements with existing customers or increase adoption and usage of our Value+ services, or attract new customers at prices that are consistent with our current pricing model and operating budget. If this were to occur, it is possible that we wouldWe may ultimately have to change our pricing model or offer pricing incentives or generally reduce our prices, which may adversely affect our revenue even if adoption and utilization remain constant. In addition, many of our customers are smaller companies or firms, which are typically more cost sensitive than larger enterprises. Changes to our pricing model could harm our customer retention rates and our ability to attract new customers, whether in connection with our core solutions or our Value+ services, which could adversely affect our operating results.
We expectprovide cloud-based business management software for SMBs in the real estate vertical and will assess entry into new or adjacent markets consistent with our strategic plan. Our success will depend, in part, on the continued widespread adoption by SMBs of cloud-based business management software. The market for industry-specific, cloud-based business management software for SMBs, both generally, and specifically within the real estate market, is evolving and is relatively small. The continued expansion of this market depends on numerous factors, including the cost and perceived value associated with cloud-based business management software relative to continuedisparate point solutions, the willingness of SMBs to derive a significant portiontransition from their existing software systems or otherwise alter their existing businesses practices, and the ability of cloud-based solution providers to address security, privacy, availability and other concerns. If the widespread adoption of cloud-based business management software by SMBs does not continue, our revenue from our real estate customers, and factors resulting in a loss of these customers could adversely affect our operating results.
If we are unable to increase sales of our software solutions to larger customers while mitigating the risks associated with serving such customers, our business and operating results may suffer.
While we plan to continue to market and sell our software solutions to smaller companies or firms, our growth strategy is dependent, in part, upon increasing sales of our software solutions to larger customers within the real estate and legal markets.vertical. Sales to larger customers may involve risks that are not present, or are present to a lesser extent, in sales to smaller businesses. As we seek to increase our sales to larger customers, we may invest considerably greater amounts of time and financial resources in our sales and marketing efforts. In addition, we may face longer sales cycles and experience less predictability and greater competition in completing some of our sales than we have in selling our software solutions to smaller businesses. Although we generally have not configured our software solutions or negotiated our pricing for specific customers, which has historically resulted in reduced upfront selling costs, oursales. Our ability to successfully sell our software solutions to larger customers may be dependent, in part, on our ability to develop functionality, or to implement pricing policies, that are unique to particular customers or are necessary for success in a market segment dominated by larger customers. It may also be dependent on our ability to attract and retain sales personnel with experience selling to larger organizations. Also, because security breaches or other performance problems with respect to larger customers may result in greater economic harm to these customers and more adverse publicity, there is increased financial and reputational risk associated with serving such customers. Further, our ability to sell our software solutions to larger customers may depend largely upon our successful acquisition and integration of synergistic businesses, and, if we are unable to acquire and integrate such businesses successfully, then our business and operating results may be negatively impacted. If we are unable to increase sales of our software solutions to larger customers, while mitigating the risks associated with serving such customers, our business and operating results may suffer.
If we are unable to introduce successful enhancements, including new and innovative core functionality and/or Value+ services, or new products for adjacent markets or additional verticals, our operating results could be adversely affected.
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The software industry is characterized by rapid technological advances, changing industry standards, evolving customer requirements and intense competition. Our ability to attract new customers, increase revenue from our existing customers, and expand into adjacent markets or, potentially, new verticals depends, in part, on our ability to enhance the functionality of our existing software solutions by introducing new and innovative core functionality and/or Value+ services that keep pace with technological developments and address the evolving business needs of our customers. In addition, our growth over the long-term depends, in part, on our ability to introduce new products for adjacent markets and, potentially, additional verticals that we identify through our market validation process consistent with our strategic plan. Market acceptance of our current and future software solutions will depend on numerous factors, including the pricing of our software solutions relative to competitive products, perceptions about the security, privacy and availability of our software solutions relative to competitive products, and the time-to-market of our updates and enhancements to our core functionality, Value+ services and products. If we are unable to successfully enhance the functionality of our existing software solutions and timely develop or acquire new products that gain market acceptance in adjacent markets and additional verticals consistent with our strategic plan, our revenue may increase at a slower rate than we expect and may even decline, which could adversely affect our operating results.
Our business depends substantially on existing customers renewing their subscriptions with us and expanding their use of our Value+ services, and a decline in either could adversely impact our operating results.
In order for us to maintain or increase our revenue and improve our operating results, it is important that our existing customers continue to pay subscription fees for the use of our core solutions, which tend to incrementally rise over time, as well as increase their adoption and utilization of our Value+ services. We cannot assure you that our customers will renew their subscriptions with us, that our existing customers will continue to broaden their adoption and utilization of our Value+ services, or that they will use our Value+ services at all. If our existing customers do not renew their subscriptions and increase their adoption and utilization of our existing or newly developed Value+ services, our revenue may increase at a slower rate than we expect and may even decline, which could adversely impact our financial condition and operating results. The loss of our existing customers could have a significant impact on our reputation and our ability to acquire new customers cost-effectively via word-of-mouth. A reduction in the number of our existing customers, even if offset by an increase in new customers, could reduce our revenue and operating margins. We may need to employ increasingly costly sales and marketing efforts and make significant investments in research and product development to introduce Value+ services that ultimately are not broadly adopted by our customers. In either of those cases, we could incur significantly increased costs without a corresponding increase in revenue. Furthermore, we may fail to identify Value+ services that our customers need for their businesses, in which case we could miss opportunities to increase our revenue. We may experience lower rates of subscription renewals, as well as lower rates of adoption and utilization of Value+ services, as a result of the COVID-19 pandemic as customers may seek to reduce or delay spending within their businesses.
All of our revenues are presently generated by sales to customers and users in the real estate vertical, and factors that adversely affect that vertical, or our customers or users within it, could also adversely affect us.
We expect that our real estate customers and users will continue to account for a significant portion or all of our revenue for the foreseeable future. Demand for our software solutions and services could be affected by factors that are unique to and adversely affect the real estate vertical and our customers and users within it. If the vertical itself declines, our customers may decide not to renew their subscriptions or they may cease using our Value+ services in order to reduce costs to remain competitive. Further, we could lose real estate customers as a result of acquisitions or consolidations within the real estate vertical, bankruptcies or other financial difficulties facing our real estate customers, new or enhanced legal or regulatory regimes that negatively impact the real estate vertical, and conditions or trends specific to the real estate vertical such as the economic factors that impact the rental market. It is possible that the significant increase in unemployment rates, regulation and financial uncertainty caused by the COVID-19 pandemic could have a disproportionate impact on businesses within the real estate vertical, which may, in turn, disproportionately affect our customers and users and, therefore, our business, financial condition and operating results. In addition to the foregoing risks, there is an overarching risk stemming from potential widespread adoption of quickly evolving financial or other disruptive technology products that could significantly impact the real estate vertical, even if the disruptive technology is not specifically designed to apply directly to it. The adoption of these new technologies could significantly reduce the volume or demand of our customers and users, thereby reducing our revenue, which could materially impact our business, financial condition and operating results.
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Our growth depends in part on the success of our strategic relationships with third parties and, if we are unsuccessful in establishing or maintaining these relationships, our ability to compete in our targeted markets or grow our revenue could be impaired.
In order to grow our business, we anticipate that we will continue to depend on our relationships with third parties, including our data center operators, cloud computing service providers, electronic payment, tenant screening and insurance services providers, and other third parties that support delivery of our software solutions. Identifying partners, negotiating agreements and maintaining relationships requires significant time and resources. Our competitors may be more effective than us in cost-effectively building relationships with third parties that enhance their products and services, allow them to provide more competitive pricing, or offer other benefits to their customers. In addition, acquisitions of our partners by our competitors or others could result in a decrease in the number of current and potential strategic partners willing to establish or maintain relationships with us, and could increase the price at which products or services are available to us. If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace or to grow our revenue could be impaired, which could
negatively impact our operating results. Even if we are successful, we cannot assure you that these relationships will result in increased customer adoption and usage of our software solutions or improved operating results. Furthermore, if our partners fail to perform as expected, we may be subjected to litigation, our reputation may be harmed, and our business and operating results could be adversely affected.
We depend on data centerscloud computing platforms and computing infrastructure operated by third parties and any disruption in these operations could adversely affect our operating results.
We currently serve our customers through a combination of our own servers located in third party data center facilities, andrely on cloud computing resources operated by Amazon Web Services and other third party cloud computing service providers. Whileproviders to power the products and services that we control and have accessprovide to our own servers and the other components of our networkcustomers. These cloud computing service providers may experience service interruptions that are located in our third party data centers, we do not control the operation of any of these third party data center facilities. The owners of our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our third party data center operators is acquired, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur significant costs and possible service interruptions in connection with doing so. Further, our third party data center providers could experience significant outages outside of our control, that could adversely affect our business.
Our platform must integrate with a variety of devices, operating systems and browsers that are developed by others, and if we are unable to ensure that our software solutions interoperate with such devices, operating systems and browsers, our software solutions may become less competitive and our operating results may be harmed.
We offer our software solutions across a variety of operating systems and through the Internet. We are dependentdepend on the interoperability of our platform with third party devices, desktop and mobile operating systems, as well as web browsers that we do not control. Any changes in such devices, systems or web browsers that degrade the functionality of our software solutions or give preferential treatment to competitive services could adversely affect the adoption and usage of our software solutions. In addition, in order to deliver high quality software solutions, we will need to continuously enhance and modify our functionality to keep pace with changes in Internet-related hardware, mobile operating systems such as iOS and Android, browsers and other software, communication, network and database technologies. We may not be successful in developing enhancements and modifications that operate effectively with these devices, operating systems, web browsers and other technologies or in bringing them to market in a timely manner. Furthermore, uncertainties regarding the timing or nature of new network platforms or technologies, and modifications to existing platforms or technologies, could increase our research and product development expenses. In the event that it is difficult for our customers to access and use our software solutions, our software solutions may become less competitive, and our operating results could be adversely affected.
If our property management customers stop requiring residents to provide proof of legal liability to landlord insurance, if insurance premiums decline or if insureds experience greater than expected losses, our operating results could be harmed.
We generate revenue by offering legal liability to landlord insurance through a wholly owned subsidiary. Some of our property management customers require residents to provide proof of legal liability to landlord insurance and offer to enroll residents in their legal liability to landlord insurance policy. If demand for rental housing declines, or if our property management customers believe that it may decline, these customers may reduce their rental rates and stop requiring residents to provide proof of legal liability to landlord insurance in order to reduce the overall cost of renting and make their rental offerings more competitive. If our property management customers stop requiring residents to provide proof of legal liability to landlord insurance or elect to enroll residents in insurance programs offered by competing providers, or if insurance premiums otherwise decline, our revenues from insurance services could be adversely affected.
Additionally, we underwrite our legal liability to landlord insurance policies, are underwritten by us, and we are required by our insurance partner to maintain a reserve to cover potential claims under the policies. While our policies have a limit of $100,000 per occurrence,per-occurrence limits, there is no limit on the dollar amount of claims that could be made against us in any particular period or in the aggregate. In the event that claims by the insureds increase unexpectedly, our reserve may not be sufficient to cover our resulting liability under the policies. To the extentIf we are required to pay out significantly higher amounts to insureds that are significantly higher than our current reserves, this could have a material adverse effectimpact on our operating results.
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Our insurance business is subject to state governmental regulation, which could limit the growth of our insurance business and impose additional costs on us.
Our insurance-related wholly owned subsidiaries and third-party service providers maintain licenses with a number of individual state departments of insurance. Collectively, we are subject to state governmental regulation and supervision in connection with the operation of our insurance business, which includes both our legal liability to landlord insurance and renters insurance businesses. This state governmentalSuch supervision could limit the growth of our insurance business by increasing the costs of regulatory compliance, limiting or restricting the products or services we provide or the methods by which we provide them, and subjecting us to the possibility of regulatory actions or proceedings. Our continued ability to maintain these insurance licenses in the jurisdictions in which we are licensed depends on our compliance with the rules and regulations promulgated from time to time by the regulatory authorities in each of these jurisdictions. Furthermore, we are routinely subject to periodic state insurance departments conduct periodic examinations, audits and investigations of the affairs of insurance companies and agencies, any of which could result in the expenditure of significant management time or financial resources.
If we are unable to deliver effective customer service and/or effectively maintain and promote our brands, it could harm our relationships with our existing customers and adversely affect our ability to attract new customers.
Our business depends, in part, on our ability to satisfy our customers, both by providing software solutions that address their business needs, and by providing onboarding services and ongoing customer service, which contributes to retaining customers and increasing adoption and utilization of our Value+ services by our existing customers.service. Once our software solutions are deployed, our customers depend on our customer service organization to resolve technical issues relating to their use of our solutions. We may be unable to respond quickly to accommodate short-term increases in customer demand for support services or may otherwise encounter a customer issue that is difficult to resolve. If a customer is not satisfied with the quality or responsiveness of our customer service, we could incur additional costs to address the situation. As we do not separately charge our customers for support services, increased demand for our support services would increase costs without corresponding revenue, which could adversely affect our operating results. In addition, regardless of the quality or responsiveness ofFurther, our customer service efforts, a customer that is not satisfied with an outcome may choose to terminate, or not to renew, their relationship with us.
We believe that maintaining and promoting our brands is critical to achieving widespread awareness and acceptance of our software solutions, and maintaining and expanding our customer base. We also believe that the importance of brand recognition will increase as competition in our targeted verticalsthe real estate vertical increases. If we do not continue to build awareness of our brands, we could be placed at a competitive disadvantage as compared to companies whose brands are, or become, more recognizable than ours. Maintaining and promoting our brands will depend, in part, on our ability to continue to provide new and innovative core functionality and Value+ services and best-in-class customer service, as well as the effectiveness of our sales and marketing efforts. If we fail to deliver products and functionality that address our customers’ business needs, or if we fail to meet our customers’ expectations for customer service, it could weaken our brands and harm our reputation. Additionally, the actions of third parties which are out of our control may affect our brands and reputation if customers do not have a positive experience using the services of our third party partners that support our software solutions. Maintaining and enhancing our brands may require us to make substantial investments, and these investments may not result in commensurate increases in our revenue. If we fail to successfully maintain and promote our brands, or if we make investments that are not offset by increased revenue, our operating results could be adversely affected.
Failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brands, which could harm our business.
We currently rely on patent, trademark, copyright and trade secret laws, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our intellectual property rights. Our success and ability to compete depend, in part, on our ability to continue to protect our intellectual property, including our proprietary technology and our brands. If we are unable to protect our proprietary rights adequately, our competitors could use the intellectual property we have developed to enhance their own products and services, which could harm our business.
In order to monitor and protect our intellectual property rights, we may be required to expend significant resources. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management, and could result in the impairment or loss of portions of our intellectual property or require us to pay costly royalties. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Accordingly, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. Our failure to secure, protect and enforce our intellectual property rights could adversely affect our business and operating results.
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We may be sued by third parties for alleged infringement of their proprietary rights, which could cause us to incur significant expenses and require us to pay substantial damages.
Our software solutions contain both third-party and open source software, which may pose risks to our proprietary source code and/or introduce security vulnerabilities, and could have a negative impact on our business and operating results.
We use open source software in our software solutions and expect to continue to do so in the future. The terms of many open source licenses to which we are subject have not been interpreted by United States or foreign courts, and there is a risk that open source licenses could be construed in a manner that imposes unanticipated conditions, restrictions or costs on our ability to provide or distribute our software solutions. Additionally, we may from time to time face claims from third parties alleging
ownership of, or demanding release of, the open source software or of derivative works that we developed using such software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation, which could be costly for us to defend, and could require us to make our source code freely available, purchase a costly license or cease offering the implicated functionality unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and product development resources, and we may not be able to complete it successfully or in a timely manner. In addition to risks related to license requirements, usage of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. These risks could be difficult to eliminate or manage, and could have a negative impact on our business and operating results.
We also use third-party commercial software in our software solutions and expect to continue to do so in the future. Third-party commercial software is developed outside of our direct control and may introduce security vulnerabilities that may be difficult to anticipate or mitigate. Further, there is no guarantee that third-party software developers or open source software providers will continue active work on the third-party software that we use. Should development of in-use third-party software cease, significant engineering effort may be required to create an in-house solution. These risks could also be difficult to eliminate or manage, and could have a negative impact on our business and operating results.
There are risks associated with our outstanding andpotential future indebtedness that couldmay adversely affect our financial condition.condition and future financing agreements may contain restrictive operating and financial covenants.
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Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
Our business financial condition and operating results.
Risks Related to Our Class A Common Stock
The market price of our Class A common stock may be volatile or may decline regardless of our operating performance, which could result in substantial losses for our stockholders.
The market price of our Class A common stock has been, and is likely to continue to be, highly volatile, and fluctuations in the price of our Class A common stock could cause you to lose all or part of your investment. For example, during 2019, the share price of our Class A common stock on the NASDAQ Global Market fluctuated between $55.00 and $116.98.
There are numerousa wide variety of factors, many of which are outside our control, that could cause fluctuations in the market price of our Class A common stock including:
The dual class structure of our common stock has the effect of concentratingconcentrates voting control with a limited number of stockholders, including our executive officers, directors and principal stockholders, which will limiteffectively limiting your ability to influence corporate matters.
Our Class B common stock has 10 votes per share, and our Class A common stock has one vote per share. AtAs of December 31, 2019,2020, the holders of the outstanding shares of our Class B common stock, including our executive officers, directors, and principal stockholders, collectively holdheld approximately 91%90% of the combined voting power of our outstanding capital stock. Because of the 10-to-1 voting ratio between our Class B common stock and Class A common stock, the holders of our Class B common stock collectively control a majority of the combined voting power of our outstanding capital stock and therefore are able to exercise significant influence and control over the establishment and implementationelection of a majority of our future business plansdirectors and thereby have the power to control our affairs and policies, including the appointment of management and strategic objectives,decisions, as well as to control all matters that are submitted to a vote by our stockholders for approval. These persons may manageholders of our business in ways with which you disagree and whichcommon stock.The interests of our principal stockholders may be inconsistent with or adverse to your interests.those of holders our Class A common stock. This concentrated control may also have the effect of delaying, deterring or preventing a change-in-control transaction, depriving our stockholders of an opportunity to receive a premium for their capital stock or negatively affecting the market price of our Class A common stock.
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We cannot predict the impact that our capital structure may have on our stock price.
S&P Dow Jones, a provider of widely followed stock indices, has announced that companies with multiple classes of stock will not be eligible for inclusion in certain of their indices. As a result, our Class A common stock will not be eligible for those stock indices. Additionally, FTSE Russell, another provider of widely followed stock indices, requires new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders. At December 31, 2019, the holders of the outstanding shares of our Class B common stock, including our executive officers, directors, and principal stockholders, collectively hold approximately 91% of the combined voting power of our outstanding capital stock. Many investment funds are precluded from investing in companies that are not included in such indices, and these funds would be unable to purchase our Class A common stock. We cannot assure you that other stock indices will not take a similar approach in the future. Exclusion from these and other indices could make our Class A common stock less attractive to investors and, as a result, the market price of our Class A common stock could be adversely affected.
In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our common stock may cause shareholder advisory firms tomay publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A common stock.
Future sales of shares of our Class A common stock, or the perception that these sales could occur, could depress the market price of our Class A common stock.
Sales of a substantial number of shares of our Class A common stock in the public market, or the perception that these sales might occur, could cause the market price of our Class A common stock to decline or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate, and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales, or the perception that our shares may be available for sale, will have on the prevailing market price of our Class A common stock.
We do not expect to declare any dividends in the foreseeable future.
We have never declared, or paid any cash dividends on our existing common stock. Weand we do not anticipate declaring or paying, any cash dividends to holders of our Class A common stock in the foreseeable future and intend to retain all future earnings for use in the growth of our business.future. In addition, the terms of our Credit Agreementfuture borrowing arrangements we may enter into from time to time may restrict our ability to pay dividends. Consequently, investors may need to rely on sales of our Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors should
Price appreciation, which may never occur, may be further impacted by repurchases of our shares in accordance with our Share Repurchase Program. Repurchases of our shares could increase the volatility of the trading price of our shares, which could have a negative impact on the trading price of our shares. Similarly, the future announcement of the termination or suspension of the Share Repurchase Program, or our decision not purchaseto utilize the full authorized repurchase amount under the Share Repurchase Program, could result in a decrease in the trading price of our shares. In addition, the Share Repurchase Program could have the impact of diminishing our cash reserves, which may impact our ability to finance our growth, complete acquisitions and execute our strategic plan. For additional information regarding our Share Repurchase Program, refer to Note 12, Stockholders' Equity, of our Consolidated Financial Statements.
General Risk Factors
Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could have the effect of rendering more difficult hostile takeovers, change-in-control transactions or changes in our Board of Directors or management. Among other things, these provisions authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock, provide for the adoption of a staggered three-class Board of Directors, prohibit our stockholders from filling vacancies on our Board of Directors or calling special stockholder meetings, require the vote of at least two-thirds of the combined voting power of our outstanding capital stock to approve amendments to our certificate of incorporation or bylaws, and require the approval of the holders of at least a majority of the outstanding shares of our Class B common stock voting as a separate class prior to consummating a change-in-control transaction. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation
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Law, which may delay, deter or prevent a change-in-control transaction. Section 203 imposes certain restrictions on mergers, business combinations and other transactions between us and holders of 15% or more of our common stock. Any provision of Delaware law, our amended and restated certificate of incorporation, or our amended and restated bylaws that has the effect of rendering more difficult, delaying, deterring or preventing a change-in-control transaction could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock and could also affect the price that some investors are willing to pay for our Class A common stockstock.
Government regulations and laws are continuously evolving and unfavorable changes could adversely affect our operating results, subject us to litigation or governmental investigation, or otherwise harm our business.
We are subject to general business regulations and laws, as well as regulations and laws specifically governing the highly regulated real estate market, electronic payment, background screening and insurance services markets, the Internet itself, the use of mobile devices to conduct business and communicate, and many other products and services we provide. It is not clear how existing laws governing issues such as property ownership, management, rental and investment, data protection, and personal privacy apply to the Internet, digital content, communication services, web services, and artificial intelligence technologies and services. Unfavorable regulations, laws, and administrative or judicial decisions interpreting or applying those laws and regulations could diminish the demand for, or availability of, our products and services, subject us to litigation or governmental investigation and increase our cost of doing business, any of which may adversely affect our operating results. In addition, the application of federal, state, local and foreign tax laws to services provided electronically is continuously evolving. New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted or amended at any time, possibly with retroactive effect, and could be applied solely or disproportionately to services provided over the expectation of receiving cash dividends.Internet. These enactments or amendments could adversely affect our sales activity due to the inherent cost increase such taxes would represent and could ultimately result in a negative impact on our operating results. In addition, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, modified or applied adversely to us, possibly with retroactive effect, which could require us or our customers to pay additional tax amounts, as well as require us or our customers to pay fines or penalties, as well as interest on past amounts. If we are unsuccessful in collecting such taxes due from our customers, we could be held liable for such costs, thereby adversely impacting our operating results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters is located in three adjacent office buildings in Santa Barbara, California. The lease on the first building covers approximately 43,700 square feet, the lease on the second building covers approximately 86,000 square feet, and the lease on the third building covers approximately 35,900 square feet.feet, respectively, in the three buildings. These leases expire in February 2032 and may be extended for two additional five-year terms at our election.
We also lease office space in San Diego, California; Venice, California; Plano, Texas;a variety of other U.S. cities, most notably Richardson, Texas; and Boston, Massachusetts under leases that expire at various times between 2020 and 2024 with various term extensions available.
We intend to procure additional space as we add employees and expand our operations geographically. We believe our current facilities are adequate for our current needs and that, should it be needed, suitable additional or alternative space will be available to us to accommodate any such expansion of our operations.
We lease all of our facilities and do not own any real property.
ITEM 3.LEGAL PROCEEDINGS
From time to time, we are involved in various investigatoryinvestigative inquiries, or legal proceedings and other disputes arising from or related to matters incident to the ordinary course of our business activities, including without limitation actions involvingwith respect to intellectual property, employment, regulatory and contractual issues.matters. Although the results of such investigatoryinvestigative inquiries, or legal proceedings and other disputes cannot be predicted with certainty, we believe that we are not currently a party to any investigatory inquiries or legal proceeding(s)matters which, if determined adversely to us, would, individually or taken together, have a material adverse effect on our business, operating results, financial condition or cash flows. However, regardless of the merit of any claimsmatters raised or the ultimate outcome, investigatoryinvestigative inquiries, or legal proceedings and other disputes may generally have an adverse impact on us as a result of compliance or defense and settlement costs, diversion of management resources, and other factors.
For additional information regarding legal proceedings, refer to Note 10,11, Commitments and Contingencies of our Consolidated Financial Statements.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market for our Common Stock
Our Class A common stock began trading publicly on the NASDAQ Global Market under the symbol "APPF" on June 26, 2015. Prior to that date, there was no public trading market for our Class A common stock.
Our Class B common stock is not listed or traded on any stock exchange.
Holders of Record
At February 14, 2020,15, 2021, there were 2723 holders of record of our Class A common stock and 8078 holders of record of our Class B common stock. Because many of our shares of Class A common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We do not anticipate declaring or paying any cash dividends to holders of our capital stock in the foreseeable future and intend to retain all future earnings for use in the growth of our business. In addition, the terms of our Credit Agreement restrict our ability to pay dividends. Consequently, investors may need to rely on sales of our Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors should not purchase our Class A common stock with the expectation of receiving cash dividends.
Stock Performance Graph
The following performance graph compares the cumulative total return on our Class A common stock with that of the S&P 500 Index and the NASDAQ Computer Index. This chart assumes $100 was invested in our Class A common stock at the close of market on June 26,December 31, 2015, which was our initial trading day, and in the S&P 500 Index and the NASDAQ Computer Index, and assumes the reinvestment of any dividends.
The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
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This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any of our other filings under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
Unregistered Sales of Equity Securities and Purchases of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
The following tables present our historical selected consolidated financial data for the periods indicated. We have derived the selected Consolidated Statements of Operations data for the fiscal years ended December 31, 2020, 2019 2018 and 20172018 and the selected Consolidated Balance Sheet data at December 31, 20192020 and 20182019 from our audited Consolidated Financial Statements included elsewhere in this Annual Report. We have derived the selected Consolidated Statements of Operations data for the fiscal years ended December 31, 20162017 and 20152016 and the selected Consolidated Balance Sheet data at December 31, 2018, 2017 2016 and 20152016 from our audited Consolidated Financial Statements, which are not included in this Annual Report. Our historical results are not necessarily indicative of the results we expect in the future.
The following historical selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, the section of this Annual Report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report.
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| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2019 (1) | 2018 (2) | 2017 | 2016 | 2015 | 2020 (1) | 2019 (2) | 2018 (3) | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Statements of Operations Data: | Consolidated Statements of Operations Data: | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 256,012 | $ | 190,071 | $ | 143,803 | $ | 105,586 | $ | 74,977 | Revenue | $ | 310,056 | $ | 256,012 | $ | 190,071 | $ | 143,803 | $ | 105,586 | |||||||||||||||||||||||||||
| Costs and operating expenses: | Costs and operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
Cost of revenue (exclusive of depreciation and amortization)(3) | 101,642 | 73,549 | 55,283 | 44,630 | 33,903 | |||||||||||||||||||||||||||||||||||||||||||
Sales and marketing(3) | 51,528 | 33,288 | 28,709 | 28,827 | 26,076 | |||||||||||||||||||||||||||||||||||||||||||
Research and product development(3) | 39,508 | 24,111 | 16,578 | 12,638 | 9,554 | |||||||||||||||||||||||||||||||||||||||||||
General and administrative(3) | 34,478 | 24,891 | 21,199 | 17,979 | 14,343 | |||||||||||||||||||||||||||||||||||||||||||
Cost of revenue (exclusive of depreciation and amortization)(4) | Cost of revenue (exclusive of depreciation and amortization)(4) | 119,029 | 101,642 | 73,549 | 55,283 | 44,630 | ||||||||||||||||||||||||||||||||||||||||||
Sales and marketing(4) | Sales and marketing(4) | 58,445 | 51,528 | 33,288 | 28,709 | 28,827 | ||||||||||||||||||||||||||||||||||||||||||
Research and product development(4) | Research and product development(4) | 48,529 | 39,508 | 24,111 | 16,578 | 12,638 | ||||||||||||||||||||||||||||||||||||||||||
General and administrative(4) | General and administrative(4) | 47,480 | 34,478 | 24,891 | 21,199 | 17,979 | ||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 22,395 | 14,576 | 12,699 | 9,935 | 6,104 | Depreciation and amortization | 26,790 | 22,395 | 14,576 | 12,699 | 9,935 | |||||||||||||||||||||||||||||||||||||
| Total costs and operating expenses | 249,551 | 170,415 | 134,468 | 114,009 | 89,980 | Total costs and operating expenses | 300,273 | 249,551 | 170,415 | 134,468 | 114,009 | |||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | 6,461 | 19,656 | 9,335 | (8,423 | ) | (15,003 | ) | Income (loss) from operations | 9,783 | 6,461 | 19,656 | 9,335 | (8,423) | |||||||||||||||||||||||||||||||||||
| Other income (expense), net | 16 | (56 | ) | (96 | ) | (37 | ) | 5 | Other income (expense), net | 188,897 | 16 | (56) | (96) | (37) | ||||||||||||||||||||||||||||||||||
| Interest (expense) income, net | (1,654 | ) | 787 | 535 | 246 | (595 | ) | Interest (expense) income, net | (1,849) | (1,654) | 787 | 535 | 246 | |||||||||||||||||||||||||||||||||||
| Income (loss) before provision for income taxes | 4,823 | 20,387 | 9,774 | (8,214 | ) | (15,593 | ) | Income (loss) before provision for income taxes | 196,831 | 4,823 | 20,387 | 9,774 | (8,214) | |||||||||||||||||||||||||||||||||||
| Provision for (benefit from) income taxes | (31,459 | ) | 420 | 58 | 67 | 75 | Provision for (benefit from) income taxes | 38,428 | (31,459) | 420 | 58 | 67 | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 36,282 | $ | 19,967 | $ | 9,716 | $ | (8,281 | ) | $ | (15,668 | ) | Net income (loss) | $ | 158,403 | $ | 36,282 | $ | 19,967 | $ | 9,716 | $ | (8,281) | |||||||||||||||||||||||||
| Net income (loss) per common share: | Net income (loss) per common share: | |||||||||||||||||||||||||||||||||||||||||||||||
| Basic | 1.07 | 0.59 | 0.29 | (0.25 | ) | (0.73 | ) | Basic | $ | 4.62 | $ | 1.07 | $ | 0.59 | $ | 0.29 | $ | (0.25) | ||||||||||||||||||||||||||||||
| Diluted | 1.02 | 0.56 | 0.28 | (0.25 | ) | (0.73 | ) | Diluted | $ | 4.44 | $ | 1.02 | $ | 0.56 | $ | 0.28 | $ | (0.25) | ||||||||||||||||||||||||||||||
| Weighted average common shares outstanding: | Weighted average common shares outstanding: | |||||||||||||||||||||||||||||||||||||||||||||||
| Basic | 34,016 | 34,128 | 33,849 | 33,561 | 21,336 | Basic | 34,264 | 34,016 | 34,128 | 33,849 | 33,561 | |||||||||||||||||||||||||||||||||||||
| Diluted | 35,567 | 35,562 | 35,151 | 33,561 | 21,336 | Diluted | 35,713 | 35,567 | 35,562 | 35,151 | 33,561 | |||||||||||||||||||||||||||||||||||||
(1) We acquired Dynasty on January 7, 2019. The results of Dynasty have been included in our results of operations from the date of acquisition. Refer to Note 3, Business Combinations of our Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding this transaction. | ||||||||||||||||||||||||||||||||||||||||||||||||
(2) We acquired WegoWise on August 31, 2018. The results of WegoWise have been included in our results of operations from the date of acquisition. Refer to Note 3, Business Combinations of our Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding this transaction. | ||||||||||||||||||||||||||||||||||||||||||||||||
(3) The following table presents stock-based compensation expense included in each respective expense category: | ||||||||||||||||||||||||||||||||||||||||||||||||
(1) MyCase was divested on September 30, 2020. The results of MyCase have been included in our results of operations through the date of divestiture. Refer to Note 3, Divestitures and Business Combinations of our Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding this transaction. | (1) MyCase was divested on September 30, 2020. The results of MyCase have been included in our results of operations through the date of divestiture. Refer to Note 3, Divestitures and Business Combinations of our Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding this transaction. | |||||||||||||||||||||||||||||||||||||||||||||||
(2) We acquired Dynasty on January 7, 2019. The results of Dynasty have been included in our results of operations from the date of acquisition. Refer to Note 3, Divestitures and Business Combinations of our Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding this transaction. | (2) We acquired Dynasty on January 7, 2019. The results of Dynasty have been included in our results of operations from the date of acquisition. Refer to Note 3, Divestitures and Business Combinations of our Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding this transaction. | |||||||||||||||||||||||||||||||||||||||||||||||
(3) We acquired WegoWise on August 31, 2018. The results of WegoWise have been included in our results of operations from the date of acquisition. | (3) We acquired WegoWise on August 31, 2018. The results of WegoWise have been included in our results of operations from the date of acquisition. | |||||||||||||||||||||||||||||||||||||||||||||||
(4) The following table presents stock-based compensation expense included in each respective expense category: | (4) The following table presents stock-based compensation expense included in each respective expense category: | |||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Stock-based compensation expense included in costs and operating expenses: | |||||||||||||||||||||||||||||
| Cost of revenue (exclusive of depreciation and amortization) | $ | 1,506 | $ | 1,466 | $ | 1,103 | $ | 725 | $ | 471 | |||||||||||||||||||
| Sales and marketing | 1,415 | 1,271 | 1,034 | 723 | 442 | ||||||||||||||||||||||||
| Research and product development | 1,818 | 1,411 | 1,079 | 657 | 382 | ||||||||||||||||||||||||
| General and administrative | 4,286 | 3,161 | 3,121 | 3,991 | 3,006 | ||||||||||||||||||||||||
| Total stock-based compensation expense | $ | 9,025 | $ | 7,309 | $ | 6,337 | $ | 6,096 | $ | 4,301 | |||||||||||||||||||
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| Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Stock-based compensation expense included in costs and operating expenses: | |||||||||||||||||||
| Cost of revenue (exclusive of depreciation and amortization) | $ | 1,466 | $ | 1,103 | $ | 725 | $ | 471 | $ | 124 | |||||||||
| Sales and marketing | 1,271 | 1,034 | 723 | 442 | 115 | ||||||||||||||
| Research and product development | 1,411 | 1,079 | 657 | 382 | 41 | ||||||||||||||
| General and administrative | 3,161 | 3,121 | 3,991 | 3,006 | 727 | ||||||||||||||
| Total stock-based compensation expense | $ | 7,309 | $ | 6,337 | $ | 6,096 | $ | 4,301 | $ | 1,007 | |||||||||
| At December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||||||||||||||
| Cash and cash equivalents and investment securities | $ | 175,289 | $ | 50,778 | $ | 101,963 | $ | 68,310 | $ | 52,860 | |||||||||||||||||||
| Capitalized software development costs, net | 35,459 | 30,023 | 20,485 | 17,609 | 15,539 | ||||||||||||||||||||||||
| Total assets | 389,480 | 260,102 | 175,741 | 110,248 | 92,583 | ||||||||||||||||||||||||
| Deferred revenue | 2,262 | 4,586 | 3,414 | 7,080 | 7,638 | ||||||||||||||||||||||||
| Operating lease liabilities | 41,991 | 36,138 | — | — | — | ||||||||||||||||||||||||
| Current and long-term debt, net | — | 48,583 | 49,815 | — | — | ||||||||||||||||||||||||
| Total stockholders’ equity | 285,920 | 131,950 | 91,846 | 85,079 | 69,682 | ||||||||||||||||||||||||
| At December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||||
| Cash and cash equivalents and investment securities | $ | 50,778 | $ | 101,963 | $ | 68,310 | $ | 52,860 | $ | 56,715 | |||||||||
| Capitalized software, net | 30,023 | 20,485 | 17,609 | 15,539 | 10,021 | ||||||||||||||
| Total assets | 260,102 | 175,741 | 110,248 | 92,583 | 90,481 | ||||||||||||||
| Deferred revenue | 4,586 | 3,414 | 7,080 | 7,638 | 4,953 | ||||||||||||||
| Current and long-term debt, net | 48,583 | 49,815 | — | — | — | ||||||||||||||
| Total stockholders’ equity | 131,950 | 91,846 | 85,079 | 69,682 | 72,697 | ||||||||||||||
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that are based on our current expectations and reflect our plans, estimates and anticipated future financial performance. See the section of this Annual Report entitled “Cautionary Note Regarding Forward-Looking Statements” for additional information. These statements involve numerous risks and uncertainties.uncertainties, including those related to the anticipated impact on our business from, and our response to, the COVID-19 pandemic. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the section of this Annual Report entitled "Risk Factors". See the section of this Annual Report entitled “Cautionary Note Regarding Forward-Looking Statements” for additional information.
The following discussion and analysis of our financial condition and results of operations discusses 2020 and 2019 items and year-over-year comparisons between 2020 and 2019. For discussion of 2018 items and year-over-year comparisons between 2019 and 2018. For discussion of 2017 items and year-over-year comparisons between 2018, and 2017, refer to Part II. Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Overview
Our real estate software solutions provide our property management customers (including third-party property managerssolutions and owner-operators who manage single- and mutli- family residences, community associations, commercial properties, and student housing, as well as mixed real estate portfolios)services provides our customers with a system of record to automate essential business processes, a system of engagement to enhance business interactions between our customers and their clients and other stakeholders,a variety of users and a system of intelligence designed to leverage data to predict and optimize business workflows in order to enable superior customer experiences and increase efficiency across our customers' businesses. Our mobile-optimized software solutions are designed for use across multiple devices and operating systems. Our software solutions are all offered as a service, for our customers andare hosted using a
modern cloud-based architecture.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. We also provide software solutionscustomers and users.
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In 2008, we introduced APM, a property management solution designed to address the unique operational and business requirements of property management companies and their business ecosystems. Recognizing that our customers and their business ecosystems would benefit from additional business critical services, we launched a series of Value+ services beginning in 2009. Our Value+ services are tailored to the legal market thatspecific workflows of property management businesses and generally fall into the categories of marketing and leasing, electronic payment services, business optimization and risk mitigation. In 2018, we introduced APM PLUS, a tier of APM designed for larger businesses with more complex needs. APM PLUS builds upon the functionality of APM and additionally offers data analytics, configurable workflows, and revenue management and optimization functionality for our customers. In April 2019, we launched AppFolio Investment Management, which is designed to enable law firmsreal estate investment managers to administer their practice andbetter manage their caseloads more efficiently by centralizing case details in a single system of record and system of engagement.
APM and APM PLUS serve our customer baseproperty management customers, including third-party property managers and owner operators, who typically manage single- and multi-family residential, and others who manage community association, and commercial properties. Our solutions and services also serve other constituencies in the markets we serve, increasingproperty management market, including property owners, rental prospects, tenants and service providers. Revenue generated from each customer varies based on the type of property, the number of units under management, introducing new or expandedand the level of adoption and utilization of Value+ services retaining customers,by the customer and increasingusers. Revenue per unit generated from each customer typically varies based on the type of property and the level of adoption and utilization of Value+ services by the customer and users. For example, revenue generated per community association unit, which represent a growing percentage of our overall units, is lower than revenue generated per residential unit given the unique and complex needs of the residential rental lifecycle and resulting impact on the adoption and utilization of V+ services.
Property management customer count and property management units under management are presented in the table below. We define property management customers as those paying for a subscription to our Value+ services by new and existing customers. We evaluate the success of our business during the periods presented based on factors such as the development and launch of new and innovative core functionality and Value+ services, enhancements to user experience, customer satisfaction, growth in our revenue and customer base, fluctuations in costs and operating expenses as a percentage of revenue, operating loss or income and cash flows from operating activities.solutions.
| Quarter Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Property management customers | 15,724 | 15,352 | 15,011 | 14,729 | 14,385 | 14,034 | 13,737 | 13,409 | |||||||||||||||||||||||||||||||||||||||
| Property management units under management (in millions) | 5.36 | 5.12 | 4.94 | 4.8 | 4.64 | 4.41 | 4.23 | 4.08 | |||||||||||||||||||||||||||||||||||||||
To date, we have experienced rapid revenue growth due to strong relationships with our customers, our investments in research and product development, sales and marketing, customer service and support, and infrastructure. We have invested, and intend to continue to invest, in growth across our organization as we expand in our current and adjacent markets and into new verticals. These investments to grow our business willto capitalize on our market opportunity by working closely with our customers, prospects, partners and other industry participants to inform our product strategy. Over the long-term, these investments are expected to continue to increase our costs and operating expenses on an absolute basis. Many of these investments will occur in advance of our realization of revenue or any other benefit, which will make it difficult to determine if we are allocating our resources effectively and efficiently. We expect our operating margins will improve over the long term,long-term, but this trend may be interrupted from time to time as a result of accelerated investment opportunities occurring in advance of realization of revenue.
We rely heavily on our talented team of employees to execute our growth plans and achieve our long-term strategic objectives. We believe our people are at the heart of our success and our customers' success, and we have managed,worked hard not only to attract and planretain talented individuals, but also to provide a challenging and rewarding environment to motivate and develop our valuable human capital. Beginning in March 2020, in an effort to protect our employees and comply with applicable government orders, we transitioned our employees to a remote work environment and restricted non-essential employee travel. We currently expect the majority of our employees will continue working remotely at least through the second quarter of 2021. Our workforce has continued to effectively develop and support our software and services offerings notwithstanding the current environment. We take the health and welfare of our people very seriously, and have encouraged safe practices designed to stem the infection and spread of COVID-19 within our workforce and beyond and to maintain the mental health and well-being of our employees. However, if the COVID-19 pandemic requires remote working conditions for a prolonged period of time, it could have an adverse impact on the productivity of our employees, which would harm our business and impede our ability to achieve our strategic objectives. For example, certain employees with younger children have been required to respond to ongoing school closures and adapt to a distance learning environment, and may be required to continue to manage,do so for the foreseeable future. Furthermore, we have a limited history of remote work and the long-term impact on, and the resulting types of continuing investments necessary for, our business towardsemployee base is uncertain.
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Moreover, the achievementCOVID-19 pandemic may have long-term effects on the nature of long-term growththe office environment and remote working. This may present operational and workplace culture challenges that may adversely affect our business. However, we believe will positively impact long-term stockholder value, and not towardsare committed to our employees returning to the realization of short-term financial or business metrics, or short-term stockholder value. We have invested, and intend to continue to invest, in our business to capitalize on our market opportunity. Accordingly, if opportunities arise that might cause us to sacrifice our performance with respect to short-term financial or business metrics, but that we believe areworkplace in the best interests oflong-term, and have recently constructed a new office space in Santa Barbara, California, extended the lease for our stockholdersoffice in Richardson, Texas and are seeking new office space to lease in San Diego, California to accommodate our employees' return to the workplace in the long term, we will take those opportunities. future.
| Quarter Ended | |||||||||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||
| Property management customers | 14,385 | 14,034 | 13,737 | 13,409 | 13,046 | 12,641 | 12,317 | 12,030 | |||||||||||||||
| Property management units under management (in millions) | 4.64 | 4.41 | 4.23 | 4.08 | 3.91 | 3.7 | 3.55 | 3.4 | |||||||||||||||
During certain periods covered by this Annual Report, we also provided software solutions and services to the legal market are subjectvertical. As previously disclosed, we completed our divestiture of MyCase, Inc. on September 30, 2020. In connection with the MyCase Transaction, our Credit Agreement was terminated and all obligations outstanding under the Term Loan and Revolving Facility, including all guarantees and security interests granted with respect to strict legal, regulatorysuch obligations, were satisfied in full with proceeds from the sale and other requirements. Please refer to Item 1A., "Risk Factors", for a more complete discussionextinguished. For additional details, see Note 1, Nature of theseBusiness and other risk-related issues.
| Quarter Ended | |||||||||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||
| Law firm customers | 10,971 | 10,781 | 10,631 | 10,485 | 10,279 | 10,173 | 10,001 | 9,706 | |||||||||||||||
Key Components of Results of Operations
Revenue
We also charge our customers usage-basedoffer Value+ services that are not covered by subscription fees for using certain Value+ services. Certain of the usage-based fees are paid by either our customers or clients of our customers.on per use basis. Usage-based fees are charged on a flat fee per transaction basis with no minimum usage commitments. We recognize revenue for usage-based services in the period the service is rendered. We generally invoice our customers for usage-based services on a monthly basis for services rendered inor collect the preceding month. Revenue from usage-based services is impacted by a numberfee at the time of factors, including the numberservice. A significant majority of new and existing customers that adopt and utilize our Value+ services, the size and needs of our customers, and our customer renewal rates.
We offer assistance tocharge our customers withfor on-boarding assistance to our core solutions as well as website designand certain other non-reoccurring services. We generally invoice our customers for these other services in advance of the services being completed. Wecompleted and recognize revenue for these other services upon completion of the related service. We generate revenue from RentLinx, WegoWise, and Dynasty stand-alonestandalone customers by providing services outside of our property management core solution platform. Revenue derived from customers using these services is recorded in Other revenue.
Costs and Operating Expenses
Cost of Revenue. Cost of revenue consists of fees paid to third-party service providers associated with delivering certainMany of our Value+ services are facilitated by third-party service providers. Cost of revenue includes the fees paid to these third-party service providers (including legal fees and costs associated with the delivery and provision of those services, as well as loss reserves and other costs associated with our legal liability to landlord insurance services), which vary both in cost and as a percent of revenue for each Value+ service offering, personnel-related costs (including salaries, incentive-basedperformance-based compensation, benefits, and stock-based compensation) for our employees focused on customer service and the support of our operations, platform infrastructure costs (such as data center operations and hosting-related costs), payment processing fees and allocated shared and other costs. Cost of revenue excludes depreciation of property and equipment, and amortization of capitalized software development costs and intangible assets. We intend to continue to invest in customer service and support, and the expansion of our technology infrastructure as we grow the number of our customers, enter new markets, and offer additional Value+ services. These investments could impact cost of revenue both in absolute dollars and as an overall percentage of revenue.
Sales and Marketing. Sales and marketing expense consists of personnel-related costs (including salaries, sales commissions, incentive-basedperformance-based compensation, benefits, and stock-based compensation) for our employees focused on sales and marketing, costs associated with sales and marketing activities, and allocated shared and other costs. Marketing activities include advertising, online lead generation, lead nurturing, customer and industry events, and the creation of industry-related content and collateral. Sales commissions and other incremental costs to acquire customers and grow adoption and utilization of our Value+ services by our new and existing customers are deferred and then amortized on a straight-line basis over a period of benefit, thatwhich we have determined to be three years. We focus our sales and marketing efforts on generating awareness of our software solutions, creating sales leads, establishing and promoting our brands, and cultivating an educated community of successful and vocal customers. We intend to continue to invest in sales and marketing to increase our customer base in new and existing markets, and increase the adoption and utilization of Value+ services by our new and existing customers.
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Research and Product Development. Research and product development expense consists of personnel-related costs (including salaries, incentive-basedperformance-based compensation, benefits, and stock-based compensation) for our employees focused on research and product development, fees for third-party development resources, and allocated shared and other costs. Our research and product development efforts are focused on enhancing functionality and the ease of use of our existing software solutions by adding new core functionality, Value+ services and other improvements, as well as developing new products and services for new and existing markets. We capitalize our software development costs which meet the criteria for capitalization. Amortization of capitalized software development costs is included in depreciation and amortization expense. We intend to continue to invest in research and product development as we continue to introduce new core functionality, roll out new Value+ services, develop new products and services, and expand into adjacent markets, and new verticals.
General and Administrative. General and administrative expense consists of personnel-related costs (including salaries, a majority of total incentive-basedperformance-based compensation, benefits, and stock-based compensation) for employees in our executive, finance, information technology, human resources, legal, compliance, corporate development legal, and administrative organizations. In addition, general and administrative expense includes fees for third-party professional services (including audit, legal, compliance, tax, and consulting services), transaction costs related to business combinations and divestitures, regulatory fines and penalties, other corporate expenses, and allocated shared costs. We intend to continue to incur incremental general and administrative costs associated with supporting the growth of our business.
Depreciation and Amortization. Depreciation and amortization expense includes depreciation of property and equipment, amortization of capitalized software development costs, and amortization of intangible assets. We depreciate or amortize property and equipment, software development costs, and intangible assets over their expected useful lives on a straight-line basis, which approximates the pattern in which the economic benefits of the assets are consumed. As we continue to invest in our research
Other Income (Expense), Net. Other income (expense), net includes gains and product development organization andlosses associated with the development or acquisitionsale of new technology, we expect to have increased capitalized software development costs and incremental amortization. Further, we may incur additional amortization expense to the extent we enter into additional arrangements to acquire or invest in new technologies or markets adjacent to those we serve today or entirely new verticals. Finally, as we expand our facilities footprint and increase our base of employees, we expect to have increasedbusinesses, property and equipment expenditures and incremental depreciation expense.investment securities and income from certain post-closing transition services to be provided by us to MyCase in connection with the MyCase Transaction.
Interest Income (Expense),Expense, Net. Interest expense includes interest paid on any outstanding borrowings. Interest income includes interest earned on investment securities, amortization and accretion of the premium and discounts paid from the purchase of investment securities, and interest earned on notes receivable and on cash deposited in our bank accounts. Interest expense includes interest paid on outstanding borrowings under the credit agreement with Wells Fargo, as administrative agent, and the lenders that are parties thereto, ("the Credit Agreement").
Provision for (Benefit from) Income Taxes. Provision for (benefit from) income taxes consists of federal and state income taxes in the United States and a non-cash benefit related to the release of the valuation allowance for our deferred tax assets.States.
Results of Operations for the Years Ended December 31, 20192020 and 20182019
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, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||||||||||||
| Consolidated Statements of Operations Data: | Consolidated Statements of Operations Data: | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 256,012 | 100.0 | % | $ | 190,071 | 100.0 | % | Revenue | $ | 310,056 | 100.0 | % | $ | 256,012 | 100.0 | % | |||||||||||||||||||||||||||||||
| Costs and operating expenses: | Costs and operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
Cost of revenue (exclusive of depreciation and amortization)(1) | 101,642 | 39.7 | 73,549 | 38.7 | Cost of revenue (exclusive of depreciation and amortization)(1) | 119,029 | 38.4 | 101,642 | 39.7 | |||||||||||||||||||||||||||||||||||||||
Sales and marketing(1) | 51,528 | 20.1 | 33,288 | 17.5 | Sales and marketing(1) | 58,445 | 18.8 | 51,528 | 20.1 | |||||||||||||||||||||||||||||||||||||||
Research and product development(1) | 39,508 | 15.4 | 24,111 | 12.7 | Research and product development(1) | 48,529 | 15.7 | 39,508 | 15.4 | |||||||||||||||||||||||||||||||||||||||
General and administrative(1) | 34,478 | 13.5 | 24,891 | 13.1 | General and administrative(1) | 47,480 | 15.3 | 34,478 | 13.5 | |||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 22,395 | 8.7 | 14,576 | 7.7 | Depreciation and amortization | 26,790 | 8.6 | 22,395 | 8.7 | |||||||||||||||||||||||||||||||||||||||
| Total costs and operating expenses | 249,551 | 97.5 | 170,415 | 89.7 | Total costs and operating expenses | 300,273 | 96.8 | 249,551 | 97.5 | |||||||||||||||||||||||||||||||||||||||
| Income from operations | 6,461 | 2.5 | 19,656 | 10.3 | Income from operations | 9,783 | 3.2 | 6,461 | 2.5 | |||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | 16 | — | (56 | ) | — | |||||||||||||||||||||||||||||||||||||||||||
| Interest income (expense), net | (1,654 | ) | (0.6 | ) | 787 | 0.4 | ||||||||||||||||||||||||||||||||||||||||||
| Other income, net | Other income, net | 188,897 | 60.9 | 16 | — | |||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | Interest expense, net | (1,849) | (0.6) | (1,654) | (0.6) | |||||||||||||||||||||||||||||||||||||||||||
| Income before provision for (benefit from) income taxes | 4,823 | 1.9 | 20,387 | 10.7 | Income before provision for (benefit from) income taxes | 196,831 | 63.5 | 4,823 | 1.9 | |||||||||||||||||||||||||||||||||||||||
| Provision for (benefit from) income taxes | (31,459 | ) | (12.3 | ) | 420 | 0.2 | Provision for (benefit from) income taxes | 38,428 | 12.4 | (31,459) | (12.3) | |||||||||||||||||||||||||||||||||||||
| Net income | $ | 36,282 | 14.2 | % | $ | 19,967 | 10.5 | % | Net income | $ | 158,403 | 51.1 | % | $ | 36,282 | 14.2 | % | |||||||||||||||||||||||||||||||
(1) The following table presents stock-based compensation expense included in each respective expense category:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Stock-based compensation expense included in costs and operating expenses: | |||||||||||||||||
| Cost of revenue (exclusive of depreciation and amortization) | $ | 1,506 | $ | 1,466 | |||||||||||||
| Sales and marketing | 1,415 | 1,271 | |||||||||||||||
| Research and product development | 1,818 | 1,411 | |||||||||||||||
| General and administrative | 4,286 | 3,161 | |||||||||||||||
| Total stock-based compensation expense | $ | 9,025 | $ | 7,309 | |||||||||||||
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| Year Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| Stock-based compensation expense included in costs and operating expenses: | |||||||
| Cost of revenue (exclusive of depreciation and amortization) | $ | 1,466 | $ | 1,103 | |||
| Sales and marketing | 1,271 | 1,034 | |||||
| Research and product development | 1,411 | 1,079 | |||||
| General and administrative | 3,161 | 3,121 | |||||
| Total stock-based compensation expense | $ | 7,309 | $ | 6,337 | |||
Revenue
| Year Ended December 31, | Change | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Amount | % | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Core solutions | $ | 100,938 | $ | 88,581 | $ | 12,357 | 14 | % | |||||||||||||||||||||||||||
| Value+ services | 195,146 | 153,994 | 41,152 | 27 | % | ||||||||||||||||||||||||||||||
| Other | 13,972 | 13,437 | 535 | 4 | % | ||||||||||||||||||||||||||||||
| Total revenue | $ | 310,056 | $ | 256,012 | $ | 54,044 | 21 | % | |||||||||||||||||||||||||||
| Year Ended December 31, | 2019 to 2018 % Change | |||||||||
| 2019 | 2018 | |||||||||
| (dollars in thousands) | ||||||||||
| Core solutions | $ | 88,581 | $ | 70,549 | 26 | % | ||||
| Value+ services | 153,994 | 113,072 | 36 | % | ||||||
| Other | 13,437 | 6,450 | 108 | % | ||||||
| Total revenue | $ | 256,012 | $ | 190,071 | 35 | % | ||||
Our electronic payment services experienced increased demand during the current year as residents, property managers, residents, applicantsowners and owners increased their usage of our Value+ services. A significant majority of our Value+ services revenue comes directly and indirectly from our customers' use of our Electronic Payment Services, Tenant Screening Services, and Insurance Services.customers transacted more business online, which we attribute in part to the response to the COVID-19 pandemic. It is unclear whether the trend will continue over the long-term. During the comparative period, we also introduced new Value+ services and expanded the functionality of others, which enables newresulted in incremental revenue. A significant majority of our Value+ services revenue streams. The increase in Other revenue was primarily attributedcomes directly and indirectly from the use of our electronic payment services, tenant screening services, and the insurance services we make available to revenue generated from our real estate-related acquisitions and from an increase in fees associated with our property management customers upgrading to a new website hosting platform. customers.
Cost of Revenue (Exclusive of Depreciation and Amortization)
| Year Ended December 31, | 2019 to 2018 % Change | Year Ended December 31, | Change | ||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2020 | 2019 | Amount | % | ||||||||||||||||||||||||||||||||||
| (dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
| Cost of revenue (exclusive of depreciation and amortization) | $ | 101,642 | $ | 73,549 | 38 | % | Cost of revenue (exclusive of depreciation and amortization) | $ | 119,029 | $ | 101,642 | $ | 17,387 | 17 | % | ||||||||||||||||||||||||
| Percentage of revenue | 39.7 | % | 38.7 | % | Percentage of revenue | 38.4 | % | 39.7 | % | ||||||||||||||||||||||||||||||
| Stock-based compensation, included above | $ | 1,466 | $ | 1,103 | 33 | % | Stock-based compensation, included above | $ | 1,506 | $ | 1,466 | $ | 40 | 3 | % | ||||||||||||||||||||||||
Cost of revenue (exclusive of depreciationrelated to our software and amortization)solutions offered to the real estate vertical for the years ended December 31, 2020 and 2019 was $101.6$109.7 million for fiscal 2019, compared to $73.5and $93.0 million, for fiscal 2018,respectively, an increase of $28.1$16.7 million, or 38%18%. This increase in cost of revenue (exclusive of depreciation and amortization) was primarily attributedattributable to increased costs associated with servicing the 35% increaseincremental $53.6 million in revenue over the same period.period, partially offset by third-party service provider incentives earned of $2.0 million. The remaining cost of revenue was attributed to our legacy legal vertical.
Expenditures to third-party service providers related to the delivery of our Value+ services to the real estate vertical increased $13.1$6.9 million, which was directly associated with the increased adoption and utilization of our Value+ services, as evidenced by the 36%$39.1 million increase in Value+ services revenue. Ourrevenue to the real estate vertical. Partially offsetting this increase was $2.0 million of annual maximum incentives earned during the period from third-party service provider expenses include costs associated with the delivery and provision of Value+ services, as well as loss reserves, legal fees and other costs associated with our insurance services. There was also an increase in personnel-related costs of $11.5 million,providers related to increased headcountprograms intended to increase adoption and utilization of online payments. Personnel-related costs, including performance-based compensation, necessary to support thegrowth and key investments, increased number of customers, including those acquired in our recent acquisitions and investments made for the future growth of our business.$7.8 million. Allocated and othershared costs increased by $3.5$2.1 million primarily driven by an increase in facilities, platform infrastructure payment processing related to customer receivables and other costs, incurred in support of our overall growth, as well as costs associated with the delivery and provision of our Value+ services. This increase in allocated and other costs was partially offset by a reduction of allocated expenses attributed to a decrease in legal feesworkplace-related and costs associated with settling a litigation matter, netother expenditures in response to the impact of expected insurance proceeds of $1.1 million which was included in cost of revenue (exclusive of depreciation and amortization) in fiscal 2018.the COVID-19 pandemic.
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As a percentage of revenue, cost of revenue (exclusive of depreciation and amortization) fluctuates primarily based on the mix and prices of Value+ services revenue in the period, given the varying percentage of revenue we pay to third-party service providers, and investments made in advance of expected revenue generation. For fiscal 2019 compared to fiscal 2018,Excluding the third-party service provider incentives earned during the period, cost of revenue (exclusive of depreciation and amortization), as a percentage of revenue increaseddecreased to 39.7%39.2% from 38.7%40.2%. This increasedecrease in cost as a percentage of revenue was primarily due to increased personnel-related investments made in advancedriven by the mix of expectedValue+ services revenue generation associated with growth initiatives.varying underlying costs.
Sales and Marketing
| Year Ended December 31, | 2019 to 2018 % Change | Year Ended December 31, | Change | ||||||||||||||||||||||||||||||
| 2019 | 2018 | 2020 | 2019 | Amount | % | ||||||||||||||||||||||||||||
| (dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 51,528 | $ | 33,288 | 55 | % | Sales and marketing | $ | 58,445 | $ | 51,528 | $ | 6,917 | 13 | % | ||||||||||||||||||
| Percentage of revenue | 20.1 | % | 17.5 | % | Percentage of revenue | 18.8 | % | 20.1 | % | ||||||||||||||||||||||||
| Stock-based compensation, included above | 1,271 | 1,034 | 23 | % | Stock-based compensation, included above | $ | 1,415 | $ | 1,271 | $ | 144 | 11 | % | ||||||||||||||||||||
Sales and marketing expense related to our software and solutions offered to the real estate vertical for the years ended December 31, 2020 and 2019 was $51.5$52.5 million for fiscal 2019, compared to $33.3and $44.5 million, for fiscal 2018,respectively, an increase of $18.2$8.0 million, or 55%18%. This increase was primarily due to ana $6.7 million increase in personnel-related costs, of $13.0 million driven by an increaseincluding performance-based compensation, necessary to support growth and key investments in the average headcount to support our growth, the impact of adoption of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), and an increase in investments made in advance of expected revenue generation. Under ASU 2014-09, sales commissions and other incremental costs to acquire customers are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be three years. Given we are in the second year of adoption, we have higher expense associated with sales commissions when compared to the prior period. There was also an increase in advertisingbusiness. Advertising and promotion costs ofincreased by $2.4 million relateddue to our newincreased online advertising and expanding service offerings.virtual marketing events aimed at increasing revenue and supporting growth in the business. In addition, there was an increasea decrease in allocated and other costs of $2.8$1.1 million driven by an increase in consulting services, ITrelated to the elimination of event-related travel from cancelled or postponed events and the reduction of workplace-related and other costs incurrednon-essential expenditures in supportresponse to the impact of our overall growth in personnel.the COVID-19 pandemic.
As a percentage of revenue, sales and marketing expense increaseddecreased to 20.1%18.4% from 17.5%19.2% for fiscal 20192020 compared to fiscal 2018.2019. This increaseleverage in cost as a percentage of revenue was primarily driven by personnel-related investments, the expense impactreduction of event related travel and other non-essential expenditures as a result of the COVID-19 pandemic. Notwithstanding the leverage in cost as a percentage of revenue, we intend to beingcontinue to invest in sales and marketing to increase our second yearcustomer base and increase the adoption and utilization of adoption of ASU 2014-09, and investments made in advance of expected revenue generation from growth initiatives in the business.
Research and Product Development
| Year Ended December 31, | Change | ||||||||||||||||||||||
| 2020 | 2019 | Amount | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Research and product development | $ | 48,529 | $ | 39,508 | $ | 9,021 | 23 | % | |||||||||||||||
| Percentage of revenue | 15.7 | % | 15.4 | % | |||||||||||||||||||
| Stock-based compensation, included above | $ | 1,818 | $ | 1,411 | $ | 407 | 29 | % | |||||||||||||||
| Year Ended December 31, | 2019 to 2018 % Change | |||||||||
| 2019 | 2018 | |||||||||
| (dollars in thousands) | ||||||||||
| Research and product development | $ | 39,508 | $ | 24,111 | 64 | % | ||||
| Percentage of revenue | 15.4 | % | 12.7 | % | ||||||
| Stock-based compensation, included above | 1,411 | 1,079 | 31 | % | ||||||
Research and product development expense related to our software and solutions offered to the real estate vertical for the years ended December 31, 2020 and 2019 was $39.5$43.8 million for fiscal 2019, compared to $24.1and $34.0 million, for fiscal 2018,respectively, an increase of $15.4$9.8 million, or 64%29%. This increase was the result of an increase in personnel-related costs, net of capitalized software development costs, of $10.5$11.3 million due to investments in headcount growth within our research and product development organization, and anorganization. This increase was partially offset by a decrease in allocated and other costs of $4.9$1.4 million driven by an increase in facilities, ITprimarily related to the reduction of workplace-related and other costs incurrednon-essential expenditures in supportresponse to the impact of our overall growth in personnel. the COVID-19 pandemic.
General and Administrative
| Year Ended December 31, | Change | ||||||||||||||||||||||
| 2020 | 2019 | Amount | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| General and administrative | $ | 47,480 | $ | 34,478 | $ | 13,002 | 38 | % | |||||||||||||||
| Percentage of revenue | 15.3 | % | 13.5 | % | |||||||||||||||||||
| Stock-based compensation, included above | $ | 4,286 | $ | 3,161 | $ | 1,125 | 36 | % | |||||||||||||||
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| Year Ended December 31, | 2019 to 2018 % Change | |||||||||
| 2019 | 2018 | |||||||||
| (dollars in thousands) | ||||||||||
| General and administrative | $ | 34,478 | $ | 24,891 | 39 | % | ||||
| Percentage of revenue | 13.5 | % | 13.1 | % | ||||||
| Stock-based compensation, included above | 3,161 | 3,121 | 1 | % | ||||||
General and administrative expense related to our software and solutions offered to the real estate vertical and general corporate overhead expenses for the years ended December 31, 2020 and 2019 was $34.5$46.1 million for fiscal 2019, compared to $24.9and $33.4 million, for fiscal 2018,respectively, an increase of $9.6$12.7 million, or 39%38%. ThisThe increase in general and administrative expense was primarily due to ana $7.4 million increase in personnel-related costs, including performance-based compensation, due to investments in headcount growth within our general and administrative organizations. In addition, there was a $4.3 million legal settlement expense recorded during the current period related to our compliance with certain regulations in our tenant screening business. For additional information regarding this legal settlement, refer to Note 11, Commitments and Contingencies, of $6.9 million, andour Consolidated Financial Statements. There was also an increase in professional services fees and allocatedother costs of $2.3 million related to the MyCase Transaction. Allocated and other costs of $2.6decreased $1.4 million related to expanded audit services, legal and other services fees associated with compliance with Section 404(b) of SOX, increased leasing activities, due diligence and acquisition related activities, as well as other costs incurred to support our growth. The increase in personnel-related costs was primarily due to headcount growth.the reduction of workplace-related and other non-essential expenditures in response to the impact of the COVID-19 pandemic.
We expect equity denominated performance-basedstock-based compensation expense will continue to decrease for certain executives within light of our adoption of the introduction of a Long-Term Cash Bonus Plan adopted in fiscal 2018. No accrual has yet been made under this plan as a result of the high leveldegree of uncertainty regarding potential future payments under the plan.
Depreciation and Amortization
| Year Ended December 31, | 2019 to 2018 % Change | Year Ended December 31, | Change | ||||||||||||||||||||||||||||||
| 2019 | 2018 | 2020 | 2019 | Amount | % | ||||||||||||||||||||||||||||
| (dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||||||
| Depreciation and amortization | $ | 22,395 | $ | 14,576 | 54 | % | Depreciation and amortization | $ | 26,790 | $ | 22,395 | $ | 4,395 | 20 | % | ||||||||||||||||||
| Percentage of revenue | 8.7 | % | 7.7 | % | Percentage of revenue | 8.6 | % | 8.7 | % | ||||||||||||||||||||||||
Depreciation and amortization expense related to our software and solutions offered to the real estate vertical for the years ended December 31, 2020 and 2019 was $22.4$25.0 million for fiscal 2019, compared to $14.6and $20.0 million, for fiscal 2018,respectively, an increase of $7.8$5.0 million, or 54%25%. This increase in depreciation and amortization expense was primarily due to increased amortization expense associated with intangible assets acquired from WegoWise and Dynasty, and increased amortization expense associated with higher accumulated capitalized software development balances.
| Year Ended December 31, | Change | ||||||||||||||||||||||
| 2020 | 2019 | Amount | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Other income, net | $ | 188,897 | $ | 16 | $ | 188,881 | * | ||||||||||||||||
| Percentage of revenue | 60.9 | % | — | % | |||||||||||||||||||
| Year Ended December 31, | 2019 to 2018 % Change | |||||||||
| 2019 | 2018 | |||||||||
| (dollars in thousands) | ||||||||||
| Interest income (expense), net | $ | (1,654 | ) | $ | 787 | (311 | )% | |||
| Percentage of revenue | (0.6 | )% | 0.4 | % | ||||||
Provision for (Benefit from) Income Taxes
| Year Ended December 31, | Change | ||||||||||||||||||||||
| 2020 | 2019 | Amount | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Provision for (benefit from) income taxes | $ | 38,428 | $ | (31,459) | $ | 69,887 | * | ||||||||||||||||
| Percentage of revenue | 12.4 | % | (12.3) | % | |||||||||||||||||||
*Percentage not meaningful
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| Year Ended December 31, | 2019 to 2018 % Change | ||||||||
| 2019 | 2018 | ||||||||
| (dollars in thousands) | |||||||||
| Provision for (benefit from) income taxes | $ | (31,459 | ) | $ | 420 | * | |||
| Percentage of revenue | (12.3 | )% | 0.2 | % | |||||
For the year ended December 31, 2020, we recorded income tax expense of $38.4 million. The tax provision for the year ended December 31, 2020 includes tax expense of $51.3 million relating to the MyCase Transaction which includes $52.3 million of current tax expense on the gain on the sale of MyCase, less a $1.0 million benefit from income taxes was $31.5 million for fiscal 2019,on the reversal of deferred tax liabilities relating to MyCase. For tax purposes, we plan to file an election to treat the transaction as a sale of assets. As such, the tax impact takes into consideration the tax basis of the assets on the date of sale and the availability of net operating losses and research and development tax credits. The effective tax rate as compared to a provision for income taxesthe U.S. federal statutory rate of $0.4 million for fiscal 2018. The change in the provision for income taxes was21% differs primarily due to state income taxes and the releasebenefits associated with stock-based compensation expense and research and development tax credits.
For the year ended December 31, 2019, we recorded an income tax benefit of the valuation allowance during$31.5 million. During the second quarter of 2019, as further describedwe evaluated all available positive and negative evidence, including our sustained profitability in Note 13, Income Taxes2018 and 2019, and the impact of recent acquisitions and future projections of profitability. As a result, we determined that all of our Consolidated Financial Statements.deferred tax assets were more likely than not to be realized and reversed the valuation allowance against those deferred tax assets accordingly.
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Quarterly Results of Operations
The following table presents selected unaudited quarterly consolidated statements of operations data for each of the eight quarters during the years ended December 31, 20192020 and December 31, 2018.2019. We have prepared the unaudited quarterly consolidated statements of operations data on a basis consistent with the audited annual Consolidated Financial Statements included elsewhere in this Annual Report. In management's opinion, the financial information in this table reflects all normal and recurring adjustments necessary for the fair statement of this data. This information should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this Annual Report. The results of historical periods are not necessarily indicative of the results for any future periods.
| Quarter Ended | Quarter Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | December 31, | September 30, | June 30, | March 31, | December 31, | September 30, | June 30, | March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Statements of Operations Data: | Consolidated Statements of Operations Data: | Consolidated Statements of Operations Data: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 67,362 | $ | 67,935 | $ | 63,624 | $ | 57,091 | $ | 50,365 | $ | 50,126 | $ | 47,240 | $ | 42,340 | Revenue | $ | 72,432 | $ | 84,086 | $ | 81,043 | $ | 72,495 | $ | 67,362 | $ | 67,935 | $ | 63,624 | $ | 57,091 | |||||||||||||||||||||||||||||||||||||||||||||
| Costs and operating expenses: | Costs and operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of revenue (exclusive of depreciation and amortization) (1) | 26,403 | 25,930 | 25,128 | 24,181 | 19,925 | 19,282 | 17,729 | 16,613 | Cost of revenue (exclusive of depreciation and amortization) (1) | 29,905 | 32,752 | 27,411 | 28,961 | 26,403 | 25,930 | 25,128 | 24,181 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales and marketing (1) | 14,441 | 12,636 | 13,232 | 11,219 | 9,577 | 8,681 | 7,625 | 7,405 | Sales and marketing (1) | 15,328 | 14,894 | 13,717 | 14,506 | 14,441 | 12,636 | 13,232 | 11,219 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Research and product development (1) | 11,086 | 10,602 | 9,339 | 8,481 | 6,588 | 6,440 | 5,750 | 5,333 | Research and product development (1) | 11,735 | 13,454 | 12,128 | 11,212 | 11,086 | 10,602 | 9,339 | 8,481 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative (1) | 9,117 | 8,955 | 8,214 | 8,192 | 7,786 | 6,541 | 5,248 | 5,316 | General and administrative (1) | 11,177 | 12,946 | 14,785 | 8,572 | 9,117 | 8,955 | 8,214 | 8,192 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 6,226 | 5,678 | 5,415 | 5,076 | 3,792 | 3,705 | 3,579 | 3,500 | Depreciation and amortization | 7,039 | 6,680 | 6,657 | 6,414 | 6,226 | 5,678 | 5,415 | 5,076 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total costs and operating expenses | 67,273 | 63,801 | 61,328 | 57,149 | 47,668 | 44,649 | 39,931 | 38,167 | Total costs and operating expenses | 75,184 | 80,726 | 74,698 | 69,665 | 67,273 | 63,801 | 61,328 | 57,149 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | 89 | 4,134 | 2,296 | (58 | ) | 2,697 | 5,477 | 7,309 | 4,173 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Loss) income from operations | (Loss) income from operations | (2,752) | 3,360 | 6,345 | 2,830 | 89 | 4,134 | 2,296 | (58) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | 84 | (11 | ) | (56 | ) | (1 | ) | (36 | ) | 1 | (18 | ) | (3 | ) | Other income (expense), net | 1,138 | 187,747 | (10) | 22 | 84 | (11) | (56) | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income (expense), net | (330 | ) | (400 | ) | (427 | ) | (497 | ) | 156 | 229 | 226 | 176 | Interest income (expense), net | 60 | (853) | (562) | (494) | (330) | (400) | (427) | (497) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) before provision for (benefit from) income taxes | (157 | ) | 3,723 | 1,813 | (556 | ) | 2,817 | 5,707 | 7,517 | 4,346 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for (benefit from) income taxes | (4,585 | ) | (1,255 | ) | (21,338 | ) | (4,281 | ) | 168 | 183 | 43 | 26 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 4,428 | $ | 4,978 | $ | 23,151 | $ | 3,725 | $ | 2,649 | $ | 5,524 | $ | 7,474 | $ | 4,320 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income per common share: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Loss) income before (benefit from) provision for income taxes | (Loss) income before (benefit from) provision for income taxes | (1,554) | 190,254 | 5,773 | 2,358 | (157) | 3,723 | 1,813 | (556) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Benefit from) provision for income taxes | (Benefit from) provision for income taxes | (1,041) | 52,578 | (13,484) | 375 | (4,585) | (1,255) | (21,338) | (4,281) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | Net (loss) income | $ | (513) | $ | 137,676 | $ | 19,257 | $ | 1,983 | $ | 4,428 | $ | 4,978 | $ | 23,151 | $ | 3,725 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income per common share: | Net (loss) income per common share: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic | $ | 0.13 | $ | 0.15 | $ | 0.68 | $ | 0.11 | $ | 0.08 | $ | 0.16 | $ | 0.22 | $ | 0.13 | Basic | $ | (0.01) | $ | 4.01 | $ | 0.56 | $ | 0.06 | $ | 0.13 | $ | 0.15 | $ | 0.68 | $ | 0.11 | |||||||||||||||||||||||||||||||||||||||||||||
| Diluted | $ | 0.12 | $ | 0.14 | $ | 0.65 | $ | 0.11 | $ | 0.07 | $ | 0.16 | $ | 0.21 | $ | 0.12 | Diluted | $ | (0.01) | $ | 3.86 | $ | 0.54 | $ | 0.06 | $ | 0.12 | $ | 0.14 | $ | 0.65 | $ | 0.11 | |||||||||||||||||||||||||||||||||||||||||||||
(1) The following table presents stock-based compensation expense included in each respective expense category:
| Quarter Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense included in costs and operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of revenue (exclusive of depreciation and amortization) | $ | 408 | $ | 452 | $ | 520 | $ | 126 | $ | 393 | $ | 334 | $ | 415 | $ | 324 | |||||||||||||||||||||||||||||||
| Sales and marketing | 346 | 367 | 477 | 225 | 367 | 354 | 302 | 248 | |||||||||||||||||||||||||||||||||||||||
| Research and product development | 470 | 474 | 580 | 294 | 387 | 353 | 363 | 308 | |||||||||||||||||||||||||||||||||||||||
| General and administrative | 993 | 1,803 | 1,176 | 314 | 731 | 1,151 | 607 | 672 | |||||||||||||||||||||||||||||||||||||||
| Total stock-based compensation expense | $ | 2,217 | $ | 3,096 | $ | 2,753 | $ | 959 | $ | 1,878 | $ | 2,192 | $ | 1,687 | $ | 1,552 | |||||||||||||||||||||||||||||||
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| Quarter Ended | |||||||||||||||||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||
| Stock-based compensation expense included in costs and operating expenses: | |||||||||||||||||||||||||||||||
| Cost of revenue (exclusive of depreciation and amortization) | $ | 393 | $ | 334 | $ | 415 | $ | 324 | $ | 351 | $ | 282 | $ | 250 | $ | 220 | |||||||||||||||
| Sales and marketing | 367 | 354 | 302 | 248 | 326 | 270 | 228 | 210 | |||||||||||||||||||||||
| Research and product development | 387 | 353 | 363 | 308 | 349 | 218 | 287 | 225 | |||||||||||||||||||||||
| General and administrative | 731 | 1,151 | 607 | 672 | 892 | 994 | 572 | 663 | |||||||||||||||||||||||
| Total stock-based compensation expense | $ | 1,878 | $ | 2,192 | $ | 1,687 | $ | 1,552 | $ | 1,918 | $ | 1,764 | $ | 1,337 | $ | 1,318 | |||||||||||||||
The following table presents selected consolidated statements of operations data for the specified periods as a percentage of our revenue for those periods:
| Quarter Ended | Quarter Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | December 31, | September 30, | June 30, | March 31, | December 31, | September 30, | June 30, | March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Statements of Operations Data: | Consolidated Statements of Operations Data: | Consolidated Statements of Operations Data: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||||||||||||||||||||
| Costs and operating expenses: | Costs and operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of revenue (exclusive of depreciation and amortization) | 39.2 | 38.2 | 39.5 | 42.4 | 39.6 | 38.5 | 37.5 | 39.2 | Cost of revenue (exclusive of depreciation and amortization) | 41.3 | 39.0 | 33.8 | 39.9 | 39.2 | 38.2 | 39.5 | 42.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 21.4 | 18.6 | 20.8 | 19.7 | 19.0 | 17.3 | 16.1 | 17.5 | Sales and marketing | 21.2 | 17.7 | 16.9 | 20.0 | 21.4 | 18.6 | 20.8 | 19.7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Research and product development | 16.5 | 15.6 | 14.7 | 14.9 | 13.1 | 12.8 | 12.2 | 12.6 | Research and product development | 16.2 | 16.0 | 15.0 | 15.5 | 16.5 | 15.6 | 14.7 | 14.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative | 13.5 | 13.2 | 12.9 | 14.3 | 15.5 | 13.0 | 11.1 | 12.6 | General and administrative | 15.4 | 15.4 | 18.2 | 11.8 | 13.5 | 13.2 | 12.9 | 14.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 9.2 | 8.4 | 8.5 | 8.9 | 7.5 | 7.4 | 7.6 | 8.3 | Depreciation and amortization | 9.7 | 7.9 | 8.2 | 8.8 | 9.2 | 8.4 | 8.5 | 8.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total costs and operating expenses | 99.9 | 93.9 | 96.4 | 100.1 | 94.6 | 89.0 | 84.5 | 90.1 | Total costs and operating expenses | 103.8 | 96.0 | 92.2 | 96.1 | 99.9 | 93.9 | 96.4 | 100.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | 0.1 | 6.1 | 3.6 | (0.1 | ) | 5.4 | 10.9 | 15.5 | 9.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Loss) income from operations | (Loss) income from operations | (3.8) | 4.0 | 7.8 | 3.9 | 0.1 | 6.1 | 3.6 | (0.1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | 0.1 | — | (0.1 | ) | — | (0.1 | ) | — | — | — | Other income (expense), net | 1.6 | 223.3 | — | — | 0.1 | — | (0.1) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income (expense), net | (0.5 | ) | (0.6 | ) | (0.7 | ) | (0.9 | ) | 0.3 | 0.5 | 0.5 | 0.4 | Interest income (expense), net | 0.1 | (1.0) | (0.7) | (0.7) | (0.5) | (0.6) | (0.7) | (0.9) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) before provision for (benefit from) income taxes | (0.2 | ) | 5.5 | 2.8 | (1.0 | ) | 5.6 | 11.4 | 15.9 | 10.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for (benefit from) income taxes | (6.8 | ) | (1.8 | ) | (33.5 | ) | (7.5 | ) | 0.3 | 0.4 | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 6.6 | % | 7.3 | % | 36.3 | % | 6.5 | % | 5.3 | % | 11.0 | % | 15.8 | % | 10.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Loss) income before (benefit from) provision for income taxes | (Loss) income before (benefit from) provision for income taxes | (2.1) | 226.3 | 7.1 | 3.3 | (0.2) | 5.5 | 2.8 | (1.0) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Benefit from) provision for income taxes | (Benefit from) provision for income taxes | (1.4) | 62.5 | (16.6) | 0.5 | (6.8) | (1.8) | (33.5) | (7.5) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | Net (loss) income | (0.7) | % | 163.7 | % | 23.8 | % | 2.7 | % | 6.6 | % | 7.3 | % | 36.3 | % | 6.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Seasonality
We experience limited seasonality in our Value+ services revenue, primarily with respect to certain leasing-related services we provide to our property management customers, including our tenant screening services and new tenant applicationsfor rental prospects which also impact electronic payment services revenue. Our property management customers historically have processed fewer applications for new tenantsrental prospects during the fourth quarter. As a result of this seasonal decline in activity, we have typically experienced overall slower sequential revenue growth or a sequential decline in revenue in the fourth quarter of each of our most recent fiscal years. We expect this seasonality to continue in the foreseeable future.
Liquidity and Capital Resources
Cash and Cash Equivalents
Working Capital
At December 31, 2019,2020, we had working capital of $14.3$149.5 million, compared to working capital of $79.8$14.3 million at December 31, 2018.2019. The decreaseincrease in our working capital was primarily due to a decreasean increase in cash and cash equivalents related toas a result of the acquisition of Dynasty, an increasenet proceeds from the MyCase Transaction, a decrease in other current liabilities due to the $6.0 million we retained to satisfy any adjustments including without limitation certain indemnification claimspayment of contingent consideration related to the total purchase consideration for Dynasty the recordingacquisition, an increase in investment securities-current, an increase in accounts receivable primarily driven by increased usage of lease liabilities associated with the adoption of ASU No. 2016-02, Leases ("ASU 2016-02"),our Value+ services, and increasesa decrease in accrued employee expenses and accrued expenses.deferred revenue. The decreaseincrease in our working capital was partially offset by increases in investment securities-current and accounts receivable due to an increase in revenue from Value+ services.
Liquidity Requirements
We have financed our operations primarily through cash generated from operations. We believe that our existing cash and cash equivalents, investment securities, available borrowing capacity of $50.0 million under our Revolving Facility, and cash generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve12 months.
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Capital Requirements
Our future capital requirements will depend on many factors, including continued market acceptance of our software solutions, changechanges in the number of our customers, adoption and utilization of our Value+ services by new and existing customers, the timing and extent of the introduction of new core functionality, products and Value+ services, the timing and extent of our expansion into adjacent or new markets, andthe timing and extent of our investments across our organization.organization, and the impact of the COVID-19 pandemic on the customers we serve and on our business. In addition, we have in the past entered into, and may in the future enter into, arrangements to acquire or invest in new technologies or markets adjacent to those we serve today or entirely new verticals. Furthermore, our Board of Directors has authorized our management tothe repurchase of up to $100.0 million of shares of our Class A common stock in open market transactions, privately negotiated transactions or otherwise.from time to time, as directed by a committee consisting of three directors. To date, we have repurchased $4.2 million of our Class A common stock under the Share Repurchase Program. For additional information regarding our share repurchase program, refer to Note 11,12, Stockholders' Equityof our Consolidated Financial Statements included elsewhere in this Annual Report..
Cash Flows
The following table presents our cash flows for the periods indicated (in thousands):
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net cash provided by operating activities | $ | 38,887 | $ | 36,268 | ||||
| Net cash used in investing activities | (89,874 | ) | (4,644 | ) | ||||
| Net cash (used in) provided by financing activities | (7,272 | ) | 26,346 | |||||
| Net (decrease) increase in cash and cash equivalents | $ | (58,259 | ) | $ | 57,970 | |||
| Year Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||
| Net cash provided by operating activities | $ | 48,299 | $ | 38,887 | ||||||||||||||||
| Net cash provided by (used in) investing activities | 146,511 | (89,874) | ||||||||||||||||||
| Net cash used in financing activities | (70,358) | (7,272) | ||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 124,452 | $ | (58,259) | ||||||||||||||||
Cash Provided by Operating Activities
Our primary source of operating cash inflows is cash collected from our customers in connection with their use of our core solutions and Value+ services. Our primary uses of cash from operating activities are for personnel-related expenditures and third-party costs incurred to support the delivery of our software solutions.
For the year ended December 31, 2020, cash provided by operating activities was $48.3 million resulting from our net income of $158.4 million, adjusted by the gain related to the MyCase Transaction of $187.7 million, non-cash charges of $68.6 million and a net increase in our operating assets and liabilities of $8.9 million. The non-cash charges primarily consist of a decrease in deferred taxes of $29.0 million, depreciation and amortization costs of $26.8 million, stock-based compensation expense of $9.0 million, and amortization of operating lease right-of-use assets of $3.7 million. The net increase in our operating assets and liabilities was mostly attributable to a $9.4 million increase in other liabilities primarily driven by income taxes payable due to the MyCase Transaction, a $6.9 million increase in accrued expenses which includes a $4.3 million accrual related to legal loss reserves, a $2.8 million increase in accrued employee expenses related to an overall increase in personnel-related costs, and a $0.5 million increase in deferred revenue. These increases were partially offset by a $2.8 million increase in accounts receivable primarily driven by growth of our Value+ services, an increase in prepaid expenses and other current assets of $5.9 million primarily driven by an increase in prepaid expenses to support the growth in our business, an increase in deposits held with a third party related to requirements to maintain collateral for our insurance services, and an increase in deferred costs, and a $0.9 million decrease in accounts payable due to timing of payments.
For the year ended December 31, 2019, cash provided by operating activities was $38.9 million resulting from our net income of $36.3 million, adjusted by non-cash charges of $2.4 million and a net increase in our operating assets and liabilities of $0.2 million. The non-cash charges primarily consist of a one-time benefit of $31.5 million related to the release of the valuation allowance for our deferred tax assets, offset by $22.4 million of depreciation and amortization of our property and equipment, intangible assets, and capitalized software development costs, $7.3 million of stock-based compensation and $4.1 million of amortization of operating lease right-of-use ("ROU") assets in accordance with ASU 2016-02.assets. The net increase in our operating assets and liabilities was primarily attributable to an increase of $4.5 million in accrued employee expenses related to an overall increase in personnel-related costs, a $1.4 million decrease in other assets, a $1.2 million increase in other liabilities and a $1.2 million increase in deferred revenue. The increase in our operating assets and liabilities was partially offset by a $4.0 million increase in prepaid expenses and other current assets, a $2.7 million decrease in operating lease liabilities, and a $2.0 million increase in accounts receivable primarily driven by the growth in sales of our Value+ services.
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Cash Used inProvided by (Used in) Investing Activities
Cash used inprovided by (used in) investing activities is generally comprised of proceeds from divestitures, purchases, maturities and sales of investment securities, purchases of property and equipment, additions to capitalized software development, and cash paid for business acquisitionsacquisitions.
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.expenditures of $19.0 million to purchase property and equipment primarily related to the growth and expansion of our headquarters in Santa Barbara, CA, a portion of which was reimbursed through tenant improvement allowances.
For the year ended December 31, 2019, investing activities used $89.9 million in cash primarily due to $54.0 million used to acquire Dynasty, as well as purchases of investment securities of $25.2 million, capitalized software development costs of $21.0 million for the continued investment in our software development, and capital expenditures of $8.1 million to purchase property, equipment and intangible assets for the continued growth and expansion of our business. These uses were partially offset by sales and maturities of investment securities of $2.8 million and $15.7 million, respectively.
Cash (used in) provided byused in financing activities is generally comprised of proceeds from the exercise of stock options, net share settlements for employee tax withholdings associated with the vesting of RSUs, andthe payment of contingent consideration under acquisition arrangements, activities associated with our former Credit Facility, and activities related to the repurchase of our Class A common stock.
For the year ended December 31, 2020, financing activities used $70.4 million in cash primarily as a result of the payment of all outstanding amounts due under the Credit Facility.Facility of $99.6 million, net share settlements for employee tax withholdings associated with the vesting of RSUs of $12.2 million, payment of contingent consideration related to the Dynasty acquisition of $6.0 million, and the repurchase of outstanding shares of Class A common stock in the amount of $4.2 million. These uses of cash were partially offset by net proceeds from the Revolving Facility of $50.8 million.
For the year ended December 31, 2019, financing activities used $7.3 million in cash primarily as a result of net share settlements for employee tax withholdings associated with the vesting of RSUs of $6.2 million, as well as principal payments on debt of $3.4 million, and payments of debt issuance costs of $0.4 million, partially offset by proceeds from issuance of debt of $2.2 million and proceeds from stock option exercises of $0.6 million.
At December 31, 2018, financing activities provided $26.3 million in cash primarily as a result of $50.0 million of proceeds from the issuance of the Term Loan, partially offset by $21.6 million used to repurchase our common stock and $3.1 million as a result of tax withholdings from RSU net settlements offset by proceeds from stock option exercises.2020, we did not have any off-balance sheet arrangements.
Contractual Obligations and Other Commitments
The following table presents our contractual obligations and other commitments at December 31, 2019:2020:
| Payments Due by Period | |||||||||||||||||||
| Total | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | |||||||||||||||
| (in thousands) | |||||||||||||||||||
Debt principal and interest(1) | $ | 54,663 | $ | 2,836 | $ | 7,977 | $ | 43,850 | $ | — | |||||||||
| Operating lease obligations | 44,415 | 472 | 6,468 | 7,885 | 29,590 | ||||||||||||||
| $ | 99,078 | $ | 3,308 | $ | 14,445 | $ | 51,735 | $ | 29,590 | ||||||||||
| Payments Due by Period | |||||||||||||||||||||||||||||
| Total | Less than 1 year(1) | 1 to 3 years | 3 to 5 years | More than 5 years | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Operating lease obligations | 52,692 | (1,275) | 9,327 | 10,172 | 34,468 | ||||||||||||||||||||||||
(1) Interest payments were calculated usingOperating lease obligations for the applicable interest rate atyear ending December 31, 2019.2021 are presented net of tenant improvement allowances of $5.2 million.
At December 31, 2019,2020, liabilities for unrecognized tax benefits of $4.4$6.1 million were not included in our contractual obligations in the table above because, due to their nature, there is a high degree of uncertainty regarding the timing of future cash outflows and other events that would extinguish these liabilities.
For additional information regarding our contractual obligations, commitments and indemnification arrangements, refer to Note 9, Long-term DebtLeases and Note 10,11, Commitments and Contingencies of our Consolidated Financial Statements included elsewhere in this Annual Report.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our Consolidated Financial Statements 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 and expenses during the reporting period. Actual results could differ materially from those estimates.
We believe that the following critical accounting policies involve a greater degree of judgment or complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to a full understanding and evaluation of our Consolidated Financial Statements. For additional information, refer to Note 2, Summary of Significant Accounting Policies of our Consolidated Financial Statements included elsewhere in this Annual Report.
Revenue Recognition
We generate revenue from our customers primarily forthrough subscriptions to access our core solutions and Value+ services for our cloud-based software solutions. Revenue is recognized upon transfer of control of promised services in an amount that reflects the consideration we expect to receive in exchange for those services. We enter into contracts that can include various combinations of services, which are generally capable of being distinct, distinct within the context of the contract, and accounted for as separate performance obligations. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.
Contracts with Multiple Performance Obligations
Many of our contracts with customers contain multiple performance obligations. For these contracts, the performance obligations include access to and use of our core solutions, implementation services, and customer support. We account for individual performance obligations separately if they are distinct. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require judgment. We account for individual performance obligations separately if they are distinct. The performance obligations for these contracts include access and use of our core solutions, implementation services, and customer support. Access and use of our core solutions and implementation services are considered distinct.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. Judgment is required to determine the standalone selling price for each distinct performance obligation. We typically have more than one
standalone selling price for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we determine the standalone selling price based on our overall pricing objectives, taking into consideration customer demographics and other factors. Fees are fixed based on rates specified in the subscription agreements, which do not provide for any refunds or adjustments.
Capitalized Software Development Costs
Software development costscost consist of certain payroll and stock compensation costs incurred to develop functionality of our internal-use software solutions. We capitalize certain software development costs for new offerings as well as significant upgrades and enhancements to our existing software solutions. Capitalized software development costs are amortized using the straight-line method over an estimated useful life of three years. We do not transfer ownership of our software, or lease our software, to third parties. We believe there are two key estimates within the capitalized software balance, which are the determination of the useful life of the software and the determination of the amounts to be capitalized.
We determined that a three year life is appropriate for our internal-use software based on our best estimate of the useful life of the internally developed software after considering factors such as continuous developments in the technology, obsolescence and anticipated life of the service offering before significant upgrades. Based on our prior experience, internally generated software will generally remain in use for a minimum of three years before being significantly replaced or modified to keep up with evolving customer and company needs. While we do not anticipate any significant changes to this three year estimate, a change in this estimate could produce a material impact on our financial statements.
We determine the amount of internal software costs to be capitalized based on the amount of time spent by our software engineers on projects. Costs associated with building or significantly enhancing our software solutions and new internally built software solutions are capitalized, while costs associated with planning new developments and maintaining our software solutions are expensed as incurred. There is judgment involved in estimating the stage of development as well as estimating time allocated to a particular project. 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.
42
Business Combinations
The results of a business acquired in a business combination are included in our Consolidated Financial Statements from the date of acquisition. We allocate the purchase price, including the fair value of contingent consideration, to the identifiable assets and liabilities of the acquired business at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill.
Determining the fair value of assets acquired and liabilities assumed requires management to make significant judgments and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. The Company engagesWe engage the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination.
Acquisition-related transaction costs are not included as a component of consideration transferred, but are accounted for as an operating expense in the period in which the costs are incurred.
Income Taxes
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. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the Consolidated Statements of Operations in the period that includes the enactment date. 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.
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.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in prepaid expenses and other current assets, operating lease ROUright of use ("ROU") assets, other current liabilities, and operating lease liabilities on our Consolidated Balance Sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As none of our leases provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU assets also include any lease payments made to the lessor before or at the lease commencement date and excludeexcludes lease incentives received and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2, Summary of Significant Accounting Policies of our Consolidated Financial Statements included elsewhere in this Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
At December 31, 2019,2020, we had cash and cash equivalents of $15.8$140.3 million consisting of bank deposits, and money market funds, and treasury securities, and $35.0 million of investment securities consisting of corporate bonds, United States government agency securities and treasury securities. The primary objective of investing in securities is to support our liquidity and capital needs. We did not purchase these investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.
Our investment securities are exposed to market risk due to interest rate fluctuations. While fluctuations in interest rates do not impact our interest income from our investment securities as all of these securities have fixed interest rates, changes in interest rates may impact the fair value of the investment securities. Since our investment securities are held as available for sale, all changes in fair value impact our other comprehensive income unless an investment security is considered impaired in which case changes in fair value are reported in other expense. At December 31, 2019,2020, a hypothetical 100 basis point decreasechange in interest rates would not have resulted in an approximate increasea material change in the fair value of our investment securities of $0.3 million and a hypothetical 100 basis point increase in interest rates would have resulted in an approximate decrease in fair value of our investment securities of $0.3 million.securities. This estimate is based on a sensitivity model which measured an instant change in interest rates by 1% or 100 basis points at December 31, 2019.2020.
Credit Facility
Inflation Risk
We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in inflation rates.
We have not been exposed to, nor do we anticipate being exposed to, material risks relating to foreign currency exchange rate fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |||||
| The supplementary financial information required by this Item 8 is included in Item 7 of this Annual Report in the section entitled "Quarterly Results of Operations." | |||||
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Tothe Board of Directors and Stockholders of AppFolio, Inc.
We have audited the accompanying consolidated balance sheets of AppFolio, Inc. and its subsidiaries (the "Company"“Company”) as of December 31, 20192020 and 2018,2019, and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019,2020, including the related notes (collectively referred to as the "consolidated“consolidated financial statements"statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenue from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’sManagement's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
45
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that (i) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Uncertain Tax Positions
As described in Notes 2 and 314 to the consolidated financial statements, in 2019 the Company completedhas recorded reserves for unrecognized tax benefits from uncertain tax positions of $6.1 million as of December 31, 2020.Judgment is required to measure the acquisitionamount of Dynasty for total purchase consideration of $60.2 million, which resulted in $20.8 million of intangible assets, including technology of $5.7 million and database of $4.7 million, being recorded. tax benefits that can be recognized associated with uncertain tax positions.Management applied significant judgment in estimatingrecognizes the fair valuetax 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 technology and database intangible assets acquired, which involvedposition. The tax benefits recognized from such positions are then measured based on the uselargest benefit that has a greater than 50% likelihood of significant estimates and assumptions, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates, the software decay rate and database ramp up rate.being realized.
The principal considerations for our determination that performing procedures relating to the valuation of the technology and database intangible assets from the acquisition of Dynastyuncertain tax positions is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of the technology and database intangible assets acquired due to the significant amount of judgment by management when developingdetermining uncertain tax positions and measuring the estimate,amount of reserve required to be recognized, (ii) significant audit effort was required in evaluating the significant assumptions, includingauditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s identification of uncertain tax positions and measurement of the software decay rate and the database ramp up rate, amount of tax benefits recognized associated with uncertain tax positions, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuationidentification and recognition of the technology and database intangible assets and controls over the development of the assumptions related to the valuation of intangible assets, including the software decay rate and database ramp up rate.reserves for uncertain tax positions. These procedures also included, among others (i) reading the purchase agreement, (ii) testingevaluating management’s process for estimatingidentifying uncertain tax positions and measuring the fair valueamount of the technologyreserve required, (ii) testing the completeness of management’s assessment of the identification of uncertain tax positions, and database intangible assets, and (iii) evaluatingtesting the reasonableness of the significant assumptions utilized by management, including the software decay rate and database ramp up rate, using professionals with specialized skill and knowledge to assist in doing so. Testing management’s process included evaluating the appropriatenessassessment of the valuation methodologies and the reasonableness of significant assumptions, including the software decay rate and the database ramp up rate. Evaluating the reasonablenesstechnical merits of the software decay rate assumption involved considering historical time to develop the software, future expected use of software acquired including planned enhancements, consistency with external markettax positions and industry data, and whether the assumption was consistent with evidence obtained in other areas of the audit. Evaluating the reasonableness of the database ramp up rate assumption involved considering historical time to acquire data, future expected data collection from sales, consistency with competitor and industry data, and whether the assumption was consistent with evidence obtained in other areas of the audit.
relevant tax laws.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 2, 20201, 2021
We have served as the Company’s auditor since 2012.
APPFOLIO, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
| December 31, | December 31, | |||||||||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
| Assets | Assets | |||||||||||||||||||||
| Current assets | Current assets | |||||||||||||||||||||
| Cash and cash equivalents | $ | 15,813 | $ | 74,076 | Cash and cash equivalents | $ | 140,263 | $ | 15,813 | |||||||||||||
| Investment securities—current | 22,876 | 16,631 | Investment securities—current | 28,256 | 22,876 | |||||||||||||||||
| Accounts receivable, net | 7,562 | 5,516 | Accounts receivable, net | 10,057 | 7,562 | |||||||||||||||||
| Prepaid expenses and other current assets | 15,540 | 11,775 | Prepaid expenses and other current assets | 20,777 | 15,540 | |||||||||||||||||
| Total current assets | 61,791 | 107,998 | Total current assets | 199,353 | 61,791 | |||||||||||||||||
| Investment securities—noncurrent | 12,089 | 11,256 | Investment securities—noncurrent | 6,770 | 12,089 | |||||||||||||||||
| Property and equipment, net | 14,744 | 6,871 | Property and equipment, net | 26,439 | 14,744 | |||||||||||||||||
| Operating lease right-of-use assets | 27,803 | — | Operating lease right-of-use assets | 30,561 | 27,803 | |||||||||||||||||
| Capitalized software, net | 30,023 | 20,485 | ||||||||||||||||||||
| Capitalized software development costs, net | Capitalized software development costs, net | 35,459 | 30,023 | |||||||||||||||||||
| Goodwill | 58,425 | 15,548 | Goodwill | 56,147 | 58,425 | |||||||||||||||||
| Intangible assets, net | 21,377 | 5,895 | Intangible assets, net | 16,357 | 21,377 | |||||||||||||||||
| Deferred taxes | 27,574 | — | Deferred taxes | 12,181 | 27,574 | |||||||||||||||||
| Other long-term assets | 6,276 | 7,688 | Other long-term assets | 6,213 | 6,276 | |||||||||||||||||
| Total assets | $ | 260,102 | $ | 175,741 | Total assets | $ | 389,480 | $ | 260,102 | |||||||||||||
| Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | |||||||||||||||||||||
| Current liabilities | Current liabilities | |||||||||||||||||||||
| Accounts payable | $ | 1,927 | $ | 1,481 | Accounts payable | $ | 1,040 | $ | 1,927 | |||||||||||||
| Accrued employee expenses | 17,758 | 12,377 | Accrued employee expenses | 18,888 | 17,758 | |||||||||||||||||
| Accrued expenses | 10,833 | 8,281 | Accrued expenses | 14,069 | 10,833 | |||||||||||||||||
| Deferred revenue | 4,586 | 3,414 | Deferred revenue | 2,262 | 4,600 | |||||||||||||||||
| Income tax payable | Income tax payable | 9,095 | 0 | |||||||||||||||||||
| Other current liabilities | 11,139 | 1,447 | Other current liabilities | 4,451 | 11,139 | |||||||||||||||||
| Long-term debt, net—current portion | 1,208 | 1,213 | ||||||||||||||||||||
| Term loan, net—current portion | Term loan, net—current portion | 0 | 1,208 | |||||||||||||||||||
| Total current liabilities | 47,451 | 28,213 | Total current liabilities | 49,805 | 47,465 | |||||||||||||||||
| Operating lease liabilities | 33,312 | — | Operating lease liabilities | 40,146 | 33,312 | |||||||||||||||||
| Long-term debt, net | 47,375 | 48,602 | ||||||||||||||||||||
| Other long-term liabilities | 14 | 7,080 | ||||||||||||||||||||
| Term loan, net | Term loan, net | 0 | 47,375 | |||||||||||||||||||
| Deferred taxes | Deferred taxes | 13,609 | 0 | |||||||||||||||||||
| Total liabilities | 128,152 | 83,895 | Total liabilities | 103,560 | 128,152 | |||||||||||||||||
| Commitments and contingencies (Note 10) | ||||||||||||||||||||||
| Commitments and contingencies (Note 11) | Commitments and contingencies (Note 11) | 0 | 0 | |||||||||||||||||||
| Stockholders’ equity: | Stockholders’ equity: | |||||||||||||||||||||
| Preferred stock, $0.0001 par value, 25,000 authorized and no shares issued and outstanding at December 31, 2019 and December 31, 2018 | — | — | ||||||||||||||||||||
| Class A common stock, $0.0001 par value, 250,000 shares authorized at December 31, 2019 and December 31, 2018; issued - 16,923 and 16,160, shares at December 31, 2019 and December 31, 2018, respectively; outstanding - 16,552 and 15,789 shares at December 31, 2019 and December 31, 2018, respectively; | 2 | 2 | ||||||||||||||||||||
| Class B common stock, $0.0001 par value, 50,000 shares authorized at December 31, 2019 and December 31, 2018; 17,594 and 18,109 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively; | 2 | 2 | ||||||||||||||||||||
| Preferred stock, $0.0001 par value, 25,000 shares authorized and 0 shares issued and outstanding as of December 31, 2020 and December 31, 2019 | Preferred stock, $0.0001 par value, 25,000 shares authorized and 0 shares issued and outstanding as of December 31, 2020 and December 31, 2019 | 0 | 0 | |||||||||||||||||||
| Class A common stock, $0.0001 par value, 250,000 shares authorized as of December 31, 2020 and December 31, 2019; 19,148 and 16,923 shares issued as of December 31, 2020 and December 31, 2019, respectively; 18,729 and 16,552 shares outstanding as of December 31, 2020 and December 31, 2019, respectively | Class A common stock, $0.0001 par value, 250,000 shares authorized as of December 31, 2020 and December 31, 2019; 19,148 and 16,923 shares issued as of December 31, 2020 and December 31, 2019, respectively; 18,729 and 16,552 shares outstanding as of December 31, 2020 and December 31, 2019, respectively | 2 | 2 | |||||||||||||||||||
| Class B common stock, $0.0001 par value, 50,000 shares authorized as of December 31, 2020 and December 31, 2019; 15,659 and 17,594 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively | Class B common stock, $0.0001 par value, 50,000 shares authorized as of December 31, 2020 and December 31, 2019; 15,659 and 17,594 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively | 2 | 2 | |||||||||||||||||||
| Additional paid-in capital | 161,509 | 157,898 | Additional paid-in capital | 161,247 | 161,509 | |||||||||||||||||
| Accumulated other comprehensive income (loss) | 33 | (178 | ) | |||||||||||||||||||
| Treasury stock, at cost, 371 Class A shares at December 31, 2019 and December 31, 2018 | (21,562 | ) | (21,562 | ) | ||||||||||||||||||
| Accumulated deficit | (8,034 | ) | (44,316 | ) | ||||||||||||||||||
| Accumulated other comprehensive income | Accumulated other comprehensive income | 56 | 33 | |||||||||||||||||||
| Treasury stock, at cost, 419 and 371 shares of Class A common stock as of December 31, 2020 and December 31, 2019, respectively | Treasury stock, at cost, 419 and 371 shares of Class A common stock as of December 31, 2020 and December 31, 2019, respectively | (25,756) | (21,562) | |||||||||||||||||||
| Retained earnings (accumulated deficit) | Retained earnings (accumulated deficit) | 150,369 | (8,034) | |||||||||||||||||||
| Total stockholders’ equity | 131,950 | 91,846 | Total stockholders’ equity | 285,920 | 131,950 | |||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 260,102 | $ | 175,741 | Total liabilities and stockholders’ equity | $ | 389,480 | $ | 260,102 | |||||||||||||
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
APPFOLIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2020 | 2019 | 2018 | |||||||||||||||||||||||
| Revenue | $ | 256,012 | $ | 190,071 | $ | 143,803 | Revenue | $ | 310,056 | $ | 256,012 | $ | 190,071 | |||||||||||||||
| Costs and operating expenses: | Costs and operating expenses: | |||||||||||||||||||||||||||
| Cost of revenue (exclusive of depreciation and amortization) | 101,642 | 73,549 | 55,283 | Cost of revenue (exclusive of depreciation and amortization) | 119,029 | 101,642 | 73,549 | |||||||||||||||||||||
| Sales and marketing | 51,528 | 33,288 | 28,709 | Sales and marketing | 58,445 | 51,528 | 33,288 | |||||||||||||||||||||
| Research and product development | 39,508 | 24,111 | 16,578 | Research and product development | 48,529 | 39,508 | 24,111 | |||||||||||||||||||||
| General and administrative | 34,478 | 24,891 | 21,199 | General and administrative | 47,480 | 34,478 | 24,891 | |||||||||||||||||||||
| Depreciation and amortization | 22,395 | 14,576 | 12,699 | Depreciation and amortization | 26,790 | 22,395 | 14,576 | |||||||||||||||||||||
| Total costs and operating expenses | 249,551 | 170,415 | 134,468 | Total costs and operating expenses | 300,273 | 249,551 | 170,415 | |||||||||||||||||||||
| Income from operations | 6,461 | 19,656 | 9,335 | Income from operations | 9,783 | 6,461 | 19,656 | |||||||||||||||||||||
| Other income (expense), net | 16 | (56 | ) | (96 | ) | Other income (expense), net | 188,897 | 16 | (56) | |||||||||||||||||||
| Interest income (expense), net | (1,654 | ) | 787 | 535 | ||||||||||||||||||||||||
| Interest (expense) income, net | Interest (expense) income, net | (1,849) | (1,654) | 787 | ||||||||||||||||||||||||
| Income before provision for (benefit from) income taxes | 4,823 | 20,387 | 9,774 | Income before provision for (benefit from) income taxes | 196,831 | 4,823 | 20,387 | |||||||||||||||||||||
| Provision for (benefit from) income taxes | (31,459 | ) | 420 | 58 | Provision for (benefit from) income taxes | 38,428 | (31,459) | 420 | ||||||||||||||||||||
| Net income | $ | 36,282 | $ | 19,967 | $ | 9,716 | Net income | $ | 158,403 | $ | 36,282 | $ | 19,967 | |||||||||||||||
| Net income per common share: | Net income per common share: | |||||||||||||||||||||||||||
| Basic | $ | 1.07 | $ | 0.59 | $ | 0.29 | Basic | $ | 4.62 | $ | 1.07 | $ | 0.59 | |||||||||||||||
| Diluted | $ | 1.02 | $ | 0.56 | $ | 0.28 | Diluted | $ | 4.44 | $ | 1.02 | $ | 0.56 | |||||||||||||||
| Weighted average common shares outstanding: | Weighted average common shares outstanding: | |||||||||||||||||||||||||||
| Basic | 34,016 | 34,128 | 33,849 | Basic | 34,264 | 34,016 | 34,128 | |||||||||||||||||||||
| Diluted | 35,567 | 35,562 | 35,151 | Diluted | 35,713 | 35,567 | 35,562 | |||||||||||||||||||||
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
48
APPFOLIO, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2020 | 2019 | 2018 | |||||||||||||||||||||||
| Net income | $ | 36,282 | $ | 19,967 | $ | 9,716 | Net income | $ | 158,403 | $ | 36,282 | $ | 19,967 | |||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||||
| Changes in unrealized gains (losses) on investment securities | 211 | 31 | (158 | ) | ||||||||||||||||||||||||
| Other comprehensive income: | Other comprehensive income: | |||||||||||||||||||||||||||
| Changes in unrealized gains on investment securities | Changes in unrealized gains on investment securities | 23 | 211 | 31 | ||||||||||||||||||||||||
| Comprehensive income | $ | 36,493 | $ | 19,998 | $ | 9,558 | Comprehensive income | $ | 158,426 | $ | 36,493 | $ | 19,998 | |||||||||||||||