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Table of Contents

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.

Commission File Number 001-37468
AppFolio, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
26-0359894
(State of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
50 Castilian Drive
 
93117
   Santa Barbara,
California
 
 
(Address of principal executive offices)
 
(Zip Code)
 (805) 364-6093
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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



Table of Contents

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A Common Stock, $0.0001 par value
APPF
NASDAQ Global Market

As of July 22, 2019, the number of shares of the registrant’s Class A common stock outstanding was 16,356,547 and the number of shares of the registrant’s Class B common stock outstanding was 17,686,957.


Table of Contents

TABLE OF CONTENTS
 
Section
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2019 (this "Quarterly Report"), includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which statements are subject to considerable risks and uncertainties. Forward-looking statements include all statements that are not statements of historical facts contained in this Quarterly Report and can be identified by words such as “anticipates,” “believes,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts, “projects,” “should,” “could,” “will,” “would” or similar expressions and the negatives of those expressions. Forward-looking statements also include the assumptions underlying or relating to such statements. In particular, forward-looking statements contained in this Quarterly Report relate to, among other things, our future or assumed financial condition, results of operations and liquidity, business forecasts and plans, certain trends affecting our business and industry, capital needs and financing plans, capital resource allocation plans, potential repurchase of our shares, research and product development plans, future products and Value+ services, growth in the size of our business and number of customers, strategic plans and objectives, the impact of acquisitions and investments, changes in the competitive environment, the outcome of legal proceedings or regulatory matters, and the application of accounting guidance. We caution you that the foregoing list may not include all of the forward-looking statements made in this Quarterly Report.

Our forward-looking statements are based on our management’s current beliefs, assumptions and expectations about future events and trends, which affect or may affect our business, strategy, operations 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 in these forward-looking statements as a result of various factors, including those discussed in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report and in the section entitled "Risk Factors" of this Quarterly Report and in our Annual Report on form 10-K for the fiscal year ended December 31, 2018 (our "Annual Report"), as well as in the other reports we file with the Securities and Exchange Commission (the "SEC"). You should read this Quarterly Report, and the other documents that we have filed with the SEC, with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements.

Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time to time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual future results to be materially different from those expressed or implied by any forward-looking statements.

Forward-looking statements speak only as of the date they were made, and, except to the extent required by law or the rules of the NASDAQ Global Market, we undertake no obligation to update or review any forward-looking statement because of new information, future events or other factors.

We qualify all of our forward-looking statements by these cautionary statements.


1

Table of Contents

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

APPFOLIO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except par values)
 
 
 
June 30,
2019
 
December 31,
2018
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
19,514

 
$
74,076

Investment securities—current
 
19,425

 
16,631

Accounts receivable, net
 
8,180

 
5,516

Prepaid expenses and other current assets
 
16,945

 
11,775

Total current assets
 
64,064

 
107,998

Investment securities—noncurrent
 
3,586

 
11,256

Property and equipment, net
 
7,930

 
6,871

Operating lease right-of-use assets
 
15,440

 

Capitalized software, net
 
24,658

 
20,485

Goodwill
 
58,518

 
15,548

Intangible assets, net
 
24,003

 
5,895

Deferred taxes
 
21,704

 

Other long-term assets
 
6,191

 
7,688

Total assets
 
$
226,094

 
$
175,741

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
1,579

 
$
1,481

Accrued employee expenses
 
13,626

 
12,377

Accrued expenses
 
9,407

 
8,281

Deferred revenue
 
3,929

 
3,414

Other current liabilities
 
12,067

 
1,447

Long-term debt, net—current portion
 
1,208

 
1,213

Total current liabilities
 
41,816

 
28,213

Operating lease liabilities
 
18,071

 

Long-term debt, net
 
47,979

 
48,602

Other long-term liabilities
 
13

 
7,080

Total liabilities
 
107,879

 
83,895

Commitments and contingencies (Note 9)
 

 

Stockholders’ equity:
 
 
 
 
Preferred stock, $0.0001 par value, 25,000 authorized and no shares issued and outstanding at June 30, 2019 and December 31, 2018
 

 

Class A common stock, $0.0001 par value, 250,000 shares authorized at June 30, 2019 and December 31, 2018; issued - 16,456 and 16,159, shares at June 30, 2019 and December 31, 2018; outstanding - 16,086 and 15,789 shares at June 30, 2019 and December 31, 2018, respectively;
 
2

 
2

Class B common stock, $0.0001 par value, 50,000 shares authorized at June 30, 2019 and December 31, 2018; 17,952 and 18,109 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively;
 
2

 
2

Additional paid-in capital
 
157,195

 
157,898

Accumulated other comprehensive loss
 
18

 
(178
)
Treasury stock, at cost, 370 Class A shares at June 30, 2019 and December 31, 2018
 
(21,562
)
 
(21,562
)
Accumulated deficit
 
(17,440
)
 
(44,316
)
Total stockholders’ equity
 
118,215

 
91,846

Total liabilities and stockholders’ equity
 
$
226,094

 
$
175,741

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

2

Table of Contents

APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
63,624

 
$
47,240

 
$
120,715

 
$
89,580

Costs and operating expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization)
25,128

 
17,729

 
49,309

 
34,342

Sales and marketing
13,232

 
7,625

 
24,451

 
15,030

Research and product development
9,339

 
5,750

 
17,820

 
11,083

General and administrative
8,214

 
5,248

 
16,406

 
10,564

Depreciation and amortization
5,415

 
3,579

 
10,491

 
7,079

Total costs and operating expenses
61,328

 
39,931

 
118,477

 
78,098

Income from operations
2,296

 
7,309

 
2,238

 
11,482

Other expense, net
(56
)
 
(18
)
 
(57
)
 
(21
)
Interest income (expense), net
(427
)
 
226

 
(924
)
 
402

Income before provision for (benefit from) income taxes
1,813

 
7,517

 
1,257

 
11,863

Provision for (benefit from) income taxes
(21,338
)
 
43

 
(25,619
)
 
69

Net income
$
23,151

 
$
7,474

 
$
26,876

 
$
11,794

 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.68

 
$
0.22

 
$
0.79

 
$
0.35

Diluted
$
0.65

 
$
0.21

 
$
0.76

 
$
0.33

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
34,010

 
34,173

 
33,962

 
34,122

Diluted
35,412

 
35,408

 
35,385

 
35,361

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


3

Table of Contents


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


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
23,151

 
$
7,474

 
$
26,876

 
$
11,794

Other comprehensive income (loss):
 
 
 
 
 
 
 
    Changes in unrealized gains (losses) on investment securities
67

 
68

 
196

 
(80
)
Comprehensive income
$
23,218

 
$
7,542

 
$
27,072

 
$
11,714

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


4

Table of Contents


APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)

 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
Other
 
 
 
 
 
 
 
Common Stock
 
Common Stock
 
Paid-in
 
Comprehensive
 
Treasury
 
Accumulated
 
 
 
Class A
 
Class B
 
Capital
 
Loss
 
Stock
 
Deficit
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
15,789

 
$
2

 
18,109

 
$
2

 
$
157,898

 
$
(178
)
 
$
(21,562
)
 
$
(44,316
)
 
$
91,846

Exercise of stock options
14

 

 

 

 
90

 

 

 

 
90

Stock-based compensation

 

 

 

 
1,831

 

 

 

 
1,831

Vesting of restricted stock units, net of shares withheld for taxes
58

 

 

 

 
(2,572
)
 

 

 

 
(2,572
)
Vesting of early exercised shares

 

 

 

 
6

 

 

 

 
6

Conversion of Class B stock to Class A stock
38

 

 
(38
)
 

 

 

 

 

 

Issuance of restricted stock awards

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 
129

 

 

 
129

Net income

 

 

 

 

 

 

 
3,725

 
3,725

Balance at March 31, 2019
15,899

 
$
2

 
18,071

 
$
2

 
$
157,253

 
$
(49
)
 
$
(21,562
)
 
$
(40,591
)
 
$
95,055

Exercise of stock options
23

 

 

 

 
109

 

 

 

 
109

Stock-based compensation

 

 

 

 
2,080

 

 

 

 
2,080

Vesting of restricted stock units, net of shares withheld for taxes
42

 

 

 

 
(2,247
)
 

 

 

 
(2,247
)
Conversion of Class B stock to Class A stock
119

 

 
(119
)
 

 

 

 

 

 

Issuance of restricted stock awards
3

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 
67

 

 

 
67

Net income

 

 

 

 

 

 

 
23,151

 
23,151

Balance at June 30, 2019
16,086

 
$
2

 
17,952

 
$
2

 
$
157,195

 
$
18

 
$
(21,562
)
 
$
(17,440
)
 
$
118,215


5

Table of Contents


APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)

 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
Other
 
 
 
 
 
Common Stock
 
Common Stock
 
Paid-in
 
Comprehensive
 
Accumulated
 
 
 
Class A
 
Class B
 
Capital
 
Loss
 
Deficit
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
Balance at December 31, 2017
14,879

 
$
1

 
19,102

 
$
3

 
$
152,531

 
$
(209
)
 
$
(67,247
)
 
$
85,079

Exercise of stock options
98

 

 

 

 
470

 

 

 
470

Stock-based compensation

 

 

 

 
1,495

 

 

 
1,495

Vesting of restricted stock units, net of shares withheld for taxes
68

 

 

 

 
(1,650
)
 

 

 
(1,650
)
Vesting of early exercised shares

 

 

 

 
9

 

 

 
9

Conversion of Class B stock to Class A stock
47

 

 
(47
)
 

 

 

 

 

Issuance of restricted stock awards

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 
(148
)
 

 
(148
)
Cumulative-effect adjustment resulting from adoption of ASU 2014-09

 

 

 

 

 

 
2,964

 
2,964

Net income

 

 

 

 

 

 
4,320

 
4,320

Balance at March 31, 2018
15,092

 
$
1

 
19,055

 
$
3

 
$
152,855

 
$
(357
)
 
$
(59,963
)
 
$
92,539

Exercise of stock options
35

 

 

 

 
188

 

 

 
188

Stock-based compensation

 

 

 

 
1,544

 

 

 
1,544

Vesting of restricted stock units, net of shares withheld for taxes
28

 

 

 

 
(844
)
 

 

 
(844
)
Vesting of early exercised shares

 

 

 

 
9

 

 

 
9

Conversion of Class B stock to Class A stock
478

 
1

 
(478
)
 
(1
)
 

 

 

 

Issuance of restricted stock awards
5

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 
68

 

 
68

Net income

 

 

 

 

 

 
7,474

 
7,474

Balance at June 30, 2018
15,638

 
$
2

 
18,577

 
$
2

 
$
153,752

 
$
(289
)
 
$
(52,489
)
 
$
100,978

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


6

Table of Contents

APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
 
 
Six Months Ended
June 30,
 
2019
 
2018
Cash from operating activities
 
 
 
Net income
$
26,876

 
$
11,794

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
10,491

 
7,079

Amortization of operating lease right-of-use assets
1,928

 

Stock-based compensation
3,239

 
2,655

Deferred income taxes
(25,643
)
 

Other
108

 
146

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(2,695
)
 
(2,168
)
Prepaid expenses and other current assets
(5,199
)
 
(559
)
Other long-term assets
1,254

 
(1,062
)
Accounts payable
188

 
839

Accrued employee expenses
680

 
(2,040
)
Accrued expenses
1,384

 
1,433

Deferred revenue
581

 
(3,289
)
Operating lease liabilities
(1,759
)
 

Other long-term liabilities
380

 
226

Net cash provided by operating activities
11,813

 
15,054

Cash from investing activities
 
 
 
Purchases of property and equipment
(2,395
)
 
(580
)
Additions to capitalized software
(9,420
)
 
(5,505
)
Purchases of investment securities
(678
)
 
(20,832
)
Sales of investment securities
1,750

 
5

Maturities of investment securities
4,000

 
15,595

Acquisition, net of cash acquired
(54,004
)
 

Purchases of intangible assets
(30
)
 

Net cash used in investing activities
(60,777
)
 
(11,317
)
Cash from financing activities
 
 
 
Proceeds from stock option exercises
199

 
658

Tax withholding for net share settlement
(4,751
)
 
(2,494
)
Proceeds from issuance of debt
1,169

 
63

Principal payments on debt
(1,794
)
 
(63
)
Payment of debt issuance costs
(420
)
 

Net cash used in financing activities
(5,597
)
 
(1,836
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(54,561
)
 
1,901

Cash, cash equivalents and restricted cash
 
 
 
Beginning of period
74,506

 
16,537

End of period
$
19,945

 
$
18,438

 
 
 
 

7

Table of Contents

APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
 
 
Six Months Ended
June 30,
 
2019
 
2018
Noncash investing and financing activities
 
 
 
Purchases of property and equipment included in accounts payable and accrued expenses
$
580

 
$
462

Additions of capitalized software included in accrued and accrued employee expenses
865

 
476

Stock-based compensation capitalized for software development
789

 
502

Tax withholding for net share settlement included in accrued employee expenses
68

 

Purchase consideration for acquisitions included in other current liabilities
6,000

 


The following table presents a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the total of the same such amounts shown above (in thousands):
 
June 30,
 
2019
 
2018
Cash and cash equivalents
$
19,514

 
$
18,010

Restricted cash included in other assets
431

 
428

Total cash, cash equivalents and restricted cash
$
19,945

 
$
18,438


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

8

Table of Contents

APPFOLIO, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Nature of Business
AppFolio, Inc. (“we,” "us" or "our") provides industry-specific, cloud-based business software solutions, services and data analytics to the real estate market, which comprises a significant majority of our revenue, and, to a lesser extent, to the legal market. Our mission is to revolutionize vertical industry businesses by providing great software and services. We believe we accomplish this mission by providing 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, 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. Customers in our real estate market directly and indirectly account for more than 90% of our annual revenue. Real estate customers include third-party property managers, owner-operators and real estate investment managers who manage and/or invest in single- and multi-family residences, commercial properties, community associations, student housing, as well as mixed real estate portfolios. Our legal customers are typically small law firms that directly and indirectly account for less than 10% of our annual revenue.

Recent Developments

Acquisition of Dynasty Marketplace, Inc.

On January 7, 2019, we completed the acquisition of Dynasty Marketplace, Inc. ("Dynasty"),  a provider of advanced artificial intelligence ("AI") solutions for the real estate market. Dynasty offers advanced conversational AI solutions that automate leasing communications, replace manual tasks and help customers grow their portfolios. Dynasty’s technology is designed to enable operational efficiency in the leasing process including consistent prospect experience, lead conversion, and improved market insights. For additional information regarding this acquisition, refer to Note 3, Business Combinations.
2. Summary of Significant Accounting Policies
Basis of Presentation and Significant Accounting Policies
The accompanying unaudited Condensed Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these Condensed Consolidated Financial Statements should be read in conjunction with our audited consolidated financial statements and the related notes included in our Annual Report filed with the Securities and Exchange Commission ("SEC") on February 28, 2019. The year-end condensed balance sheet was derived from our audited consolidated financial statements. Our unaudited interim Condensed Consolidated Financial Statements include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of the Condensed Consolidated Financial Statements. The operating results for the six months ended June 30, 2019 are not necessarily indicative of the results expected for the full year ending December 31, 2019.
Changes in Accounting Policies
On January 1, 2019, we adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-02, Leases (as amended, "ASU 2016-02" or the "new lease standard"), and have revised certain related accounting policies as follows:
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities on our Condensed 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 and excludes lease incentives 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.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have lease arrangements with lease and non-lease components, which are generally accounted for as a single lease component. Leases with

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an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. On an ongoing basis, management evaluates its estimates based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Net Income per Common Share
The net income per common share was the same for shares of our Class A and Class B common stock because they are entitled to the same liquidation and dividend rights and are therefore combined in the table below. The following table presents a reconciliation of our weighted average number of shares of our Class A and Class B common stock used to compute net income per common share (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Weighted average common shares outstanding
 
34,015

 
34,186

 
33,967

 
34,136

Less: Weighted average unvested restricted shares subject to repurchase
 
5

 
13

 
5

 
14

Weighted average common shares outstanding; basic
 
34,010

 
34,173

 
33,962

 
34,122

Plus: Weighted average options, restricted stock units and restricted shares used to compute diluted net income per common share
 
1,402

 
1,235

 
1,423

 
1,239

Weighted average common shares outstanding; diluted
 
35,412

 
35,408

 
35,385

 
35,361

For the six months ended June 30, 2019 and 2018, an aggregate of approximately 363,000 and 601,000 shares, respectively, underlying performance based options ("PSOs") and performance based restricted stock units ("PSUs"), are not included in the computations of diluted and anti-dilutive shares as they are considered contingently issuable upon the satisfaction of pre-defined performance measures and their respective performance measures have not been met.
The following table presents the number of anti-dilutive common shares excluded from the calculation of weighted average number of shares used to compute diluted net income per common share for the three and six months ended June 30, 2019 and 2018 (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Unvested restricted stock units
 
5

 
1

 
5

 

Contingent restricted stock units(1)
 

 
4

 

 
4

Total shares excluded from diluted net income per common share
 
5

 
5

 
5

 
4

(1) The reported shares are based on fixed price restricted stock unit (“RSU”) commitments for which the number of shares was not determined at the grant date. For the purposes of this table, the number of shares has been determined by dividing the fixed price commitment to issue shares in the future by the closing price of our common stock as of the applicable reporting period date.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, which requires an entity to recognize ROU assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements ("ASU 2018-11"). Among other things, ASU 2018-11 provides administrative relief by allowing entities to implement the lease standard on a modified retrospective basis (the "Optional Transition Method"). Effectively, the Optional

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Transition Method permits us to adopt the lease standard through a cumulative effect adjustment to our opening balance sheet as of January 1, 2019, and report under the new lease standard on a post-adoption basis.

We adopted ASU 2016-02 effective January 1, 2019 using the Optional Transition Method. We elected the package of practical expedients permitted under the transition guidance, which allows us to carry forward our historical lease classification, our assessment of whether a contract is or contains a lease, and our initial direct costs for any leases that existed prior to adoption of the new lease standard. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We updated our accounting policies, processes, internal controls and information systems that were required to meet the new lease standard's reporting and disclosure requirements.

The adoption of ASU 2016-02 had a material impact on our Condensed Consolidated Balance Sheets, but did not have an impact on our Condensed Consolidated Statements of Operations or our Condensed Consolidated Statements of Cash Flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. We also reclassified prepaid and deferred rent to the ROU asset balance as of January 1, 2019.

The cumulative effect of the changes made to our Condensed Consolidated Balance Sheet at January 1, 2019 for the adoption of the new lease standard was as follows (in thousands):
 
Balance at
December 31, 2018
 
Adjustments
 
Balance at
January 1, 2019
Assets
 
 
 
 
 
Prepaid expenses and other current assets
$
11,775

 
$
(317
)
 
$
11,458

Operating lease right-of-use assets

 
16,945

 
16,945

 
 
 
 
 


Liabilities and Stockholders’ Equity
 
 
 
 
 
Other current liabilities
$
1,447

 
$
3,493

 
$
4,940

Operating lease liabilities

 
20,056

 
20,056

Other long-term liabilities
7,080

 
(6,921
)
 
159



In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, ASU 2017-08 requires the premium to be amortized to the earliest call date. ASU 2017-08 does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment made directly to retained earnings at the beginning of the period of adoption. The adoption of this guidance did not have a material impact on our financial condition, results of operations, cash flows or disclosures. 
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"). This amendment expands the scope of Topic 718, Compensation—Stock Compensation (which only included share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The adoption of this guidance did not have a material impact on our financial condition, results of operations, cash flows or disclosures.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which amends the current accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions and reasonable and supportable forecasts. This guidance amends the accounting for credit losses for available-for-sale investment securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period after December 15, 2018. We are currently evaluating the effect of the adoption of ASU 2016-13 on our Consolidated Financial Statements. The effect will largely depend on the composition and credit quality of our investment portfolio and the economic conditions at the time of adoption.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

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("ASU 2018-15"), a series of amendments which align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. For public business entities, the amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. We will adopt ASU 2018-15 on January 1, 2020, on a prospective basis for all implementation costs incurred after the date of adoption. We do not expect the adoption of this guidance will have a material impact on our financial condition, results of operations, cash flows or disclosures.
3. Business Combinations
Acquisition of Dynasty

On January 7, 2019, we acquired 100% of the voting equity interest of Dynasty, a provider of advanced artificial intelligence ("AI") solutions for the real estate market. Dynasty offers advanced conversational AI solutions that automate leasing communications, replace manual tasks and help customers grow their portfolios. Dynasty’s technology is designed to enable operational efficiency in the leasing process including consistent prospect experience, lead conversion, and improved market insights.

The total purchase consideration was $60.2 million, subject to certain adjustments, of which $6.0 million (the "Holdback Amount") was retained by the Company to satisfy any such adjustments, including without limitation certain indemnification claims. The balance of the Holdback Amount, less any amount retained (the “Retained Amount”) with respect to any unresolved indemnification claims (each, an “Unresolved Claim”), will be released to the stockholders of Dynasty, within three business days after the one-year anniversary of the Closing Date (the “Holdback Release Date”). If an Unresolved Claim is finally resolved after the Holdback Release Date, then, within three business days after the final resolution of such Unresolved Claim, the balance of the Retained Amount after satisfying such Unresolved Claim, less any amounts associated with all remaining Unresolved Claims, will be released to the stockholders of Dynasty. The Holdback Amount is recorded in other current liabilities on the Condensed Consolidated Balance Sheet as of June 30, 2019.

The transaction was accounted for using the acquisition method, and as a result, assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. We are in the process of finalizing the valuation of the assets. Based on additional information obtained during the quarter ended June 30, 2019, the initial fair value of backlog increased by $0.4 million and technology decreased by $1.7 million with a corresponding increase to goodwill. These changes did not have a material impact on amortization expense. The following table summarizes the preliminary purchase price allocation (in thousands) as well as the estimated useful lives of the acquired intangible assets over which they are amortized on a straight-line basis, as this approximates the pattern in which economic benefits are consumed:


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Amount
(in thousands)
 
Estimated Useful Life (in years)
Total current assets
 
$
305

 
 
Identified intangible assets:
 
 
 
 
Technology
 
5,730

 
4.0
Database
 
4,710

 
10.0
Customer relationships
 
1,110

 
5.0
Backlog
 
470

 
1.0
Trademark & trade name
 
1,390

 
10.0
Non-compete agreement
 
7,340

 
5.0
Total intangible assets subject to amortization
 
20,750

 
6.0
Goodwill
 
42,970

 
Indefinite
Other noncurrent assets
 
35

 
 
Total assets acquired
 
64,060

 
 
 
 
 
 
 
Accrued and other liabilities
 
48

 
 
Deferred tax liability, net
 
3,781

 
 
Total liabilities assumed
 
3,829

 
 
Purchase consideration
 
$
60,231

 
 

Goodwill is mainly attributable to synergies expected from the acquisition and assembled workforce and is non-deductible for U.S. federal income tax purposes.

We incurred a total of $291,000 in transaction costs related to the acquisition and expensed all transaction costs incurred during the period in which such service was received. The results of operations of Dynasty since the acquisition are included in our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019. Revenue and net loss attributable to Dynasty for the three months ended June 30, 2019 was $0.7 million and $2.2 million, respectively, and in the period from the acquisition date of January 7, 2019 through June 30, 2019, was $1.2 million and $4.1 million, respectively.
Acquisition of WegoWise

On August 31, 2018, we completed the acquisition of substantially all of the assets of WegoWise, Inc. ("WegoWise"), a provider of cloud-based utility analytics software solutions serving the real estate market. The WegoWise platform empowers building owners and third-party property managers to better manage operating and capital expenditures relating to utilities, and we expect that the acquisition will provide enhanced functionality to our real estate customers over time, such as a future utility analytics and management Value+ services.

The consideration paid in cash for the assets was $14.4 million, of which $2.0 million will be held in escrow for 12 months to satisfy WegoWise’s indemnity obligations.

The transaction was accounted for using the acquisition method, and as a result, assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The following table summarizes the final purchase price allocation (in thousands) as well as the estimated useful lives of the acquired intangible assets over which they are amortized on a straight-line basis, as this approximates the pattern in which economic benefits are consumed:


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Amount
(in thousands)
 
Estimated Useful Life (in years)
Net tangible assets
$
270

 
 
Identified intangible assets:
 
 
 
Customer relationships
1,170

 
5.0
Database
3,620

 
10.0
Trademark and trade name
370

 
10.0
Non-compete agreement
60

 
5.0
Backlog
140

 
1.0
Total intangible assets subject to amortization
5,360

 
8.6
Goodwill
8,811

 
Indefinite
Purchase consideration, paid in cash
$
14,441

 
 


Goodwill is mainly attributable to synergies expected from the acquisition and assembled workforce and is deductible for U.S. federal income tax purposes.

We incurred a total of $240,000 in transaction costs related to the acquisition and expensed all transaction costs incurred during the period in which such service was received.
Pro Forma Results of Acquisitions

The following unaudited pro forma information has been prepared for illustrative purposes only, and assumes that the aforementioned Dynasty and WegoWise acquisitions occurred on January 1, 2018 and January 1, 2017, respectively, and includes pro forma adjustments related to the amortization of acquired intangible assets, elimination of historical interest and amortization expense, income taxes, compensation arrangements, and the transaction costs incurred. The unaudited pro forma results have been prepared based on estimates and assumptions, which we believe are reasonable; however, they are not necessarily indicative of the consolidated results of operations had the acquisitions occurred at the beginning of the periods presented, or of future results of operations. The unaudited pro forma results are as follows (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenue
 
$
63,624

 
$
48,550

 
$
120,750

 
$
91,608

Net income
 
$
23,479

 
$
3,971

 
$
22,933

 
$
8,769

 
 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.69

 
$
0.12

 
$
0.68