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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 March 31, 2020.
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 April 27, 2020, the number of shares of the registrant’s Class A common stock outstanding was 16,712,280 and the number of shares of the registrant’s Class B common stock outstanding was 17,536,442.


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 March 31, 2020 (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 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;
trends affecting our business and industry, and the economy as a whole;
capital needs and financing plans;
capital resource allocation plans;
share repurchase plans;
research and product development plans;
future products and Value+ services;
growth in the size of our business and number of customers;
strategic plans and objectives;
the impact of acquisitions and investments;
changes in the competitive environment;
the outcome of legal proceedings or regulatory matters; and
the impact of, and our response to, the novel coronavirus ("COVID-19") pandemic.

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, financial performance or liquidity. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to numerous known and unknown risks and uncertainties and are made in light of information currently available to us. Our actual financial condition and results could differ materially from those 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" and "Risk Factors" in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (our "Annual Report"), as well as in the other reports we file with the Securities and Exchange Commission (the "SEC"). You should read this Quarterly Report, and the other documents we file with the SEC, with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements.

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

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

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


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)
 
 
 
March 31,
2020
 
December 31,
2019
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
56,779

 
$
15,813

Investment securities—current
 
7,952

 
22,876

Accounts receivable, net
 
9,617

 
7,562

Prepaid expenses and other current assets
 
18,362

 
15,540

Total current assets
 
92,710

 
61,791

Investment securities—noncurrent
 
6,676

 
12,089

Property and equipment, net
 
22,536

 
14,744

Operating lease right-of-use assets
 
26,750

 
27,803

Capitalized software, net
 
32,587

 
30,023

Goodwill
 
58,425

 
58,425

Intangible assets, net
 
20,121

 
21,377

Deferred taxes
 
27,212

 
27,574

Other long-term assets
 
6,410

 
6,276

Total assets
 
$
293,427

 
$
260,102

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
2,509

 
$
1,927

Accrued employee expenses
 
11,833

 
17,758

Accrued expenses
 
11,419

 
10,833

Deferred revenue
 
5,732

 
4,600

Other current liabilities
 
5,636

 
11,139

Term loan, net—current portion
 
1,520

 
1,208

Total current liabilities
 
38,649

 
47,465

Operating lease liabilities
 
34,143

 
33,312

Revolving facility
 
49,000

 

Term loan, net
 
46,760

 
47,375

Total liabilities
 
168,552

 
128,152

Commitments and contingencies (Note 9)
 

 

Stockholders’ equity:
 
 
 
 
Preferred stock, $0.0001 par value, 25,000 shares authorized and no shares issued and outstanding at March 31, 2020 and December 31, 2019
 

 

Class A common stock, $0.0001 par value, 250,000 shares authorized at March 31, 2020 and December 31, 2019; 17,089 and 16,923 shares issued at March 31, 2020 and December 31, 2019, respectively; 16,670 and 16,552 shares outstanding at March 31, 2020 and December 31, 2019, respectively
 
2

 
2

Class B common stock, $0.0001 par value, 50,000 shares authorized at March 31, 2020 and December 31, 2019; 17,536 and 17,594 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
 
2

 
2

Additional paid-in capital
 
156,513

 
161,509

Accumulated other comprehensive income
 
165

 
33

Treasury stock, at cost, 419 and 371 shares of Class A common stock at March 31, 2020 and December 31, 2019, respectively
 
(25,756
)
 
(21,562
)
Accumulated deficit
 
(6,051
)
 
(8,034
)
Total stockholders’ equity
 
124,875

 
131,950

Total liabilities and stockholders’ equity
 
$
293,427

 
$
260,102

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

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APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
 
 
Three Months Ended
March 31,
 
2020
 
2019
Revenue
$
72,495

 
$
57,091

Costs and operating expenses:
 
 
 
Cost of revenue (exclusive of depreciation and amortization)
28,961

 
24,181

Sales and marketing
14,506

 
11,219

Research and product development
11,212

 
8,481

General and administrative
8,572

 
8,192

Depreciation and amortization
6,414

 
5,076

Total costs and operating expenses
69,665

 
57,149

Income (loss) from operations
2,830

 
(58
)
Other income (expense), net
22

 
(1
)
Interest expense, net
(494
)
 
(497
)
Income (loss) before provision for (benefit from) income taxes
2,358

 
(556
)
Provision for (benefit from) income taxes
375

 
(4,281
)
Net income
$
1,983

 
$
3,725

 
 
 
 
Net income per common share:
 
 
 
Basic
$
0.06

 
$
0.11

Diluted
$
0.06

 
$
0.11

Weighted average common shares outstanding:
 
 
 
Basic
34,175

 
33,913

Diluted
35,681

 
35,342

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


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


 
Three Months Ended
March 31,
 
2020
 
2019
Net income
$
1,983

 
$
3,725

Other comprehensive income:
 
 
 
    Changes in unrealized gains on investment securities
132

 
129

Comprehensive income
$
2,115

 
$
3,854

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


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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
 
Income
 
Stock
 
Deficit
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
16,552

 
$
2

 
17,594

 
$
2

 
$
161,509

 
$
33

 
$
(21,562
)
 
$
(8,034
)
 
$
131,950

Exercise of stock options
17

 

 

 

 
97

 

 

 

 
97

Stock-based compensation

 

 

 

 
1,365

 

 

 

 
1,365

Vesting of restricted stock units, net of shares withheld for taxes
91

 

 

 

 
(6,458
)
 

 

 

 
(6,458
)
Conversion of Class B stock to Class A stock
58

 

 
(58
)
 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 
132

 

 

 
132

Repurchase of common stock
(48
)
 

 

 

 

 

 
(4,194
)
 

 
(4,194
)
Net income

 

 

 

 

 

 

 
1,983

 
1,983

Balance at March 31, 2020
16,670

 
$
2

 
17,536

 
$
2

 
$
156,513

 
$
165

 
$
(25,756
)
 
$
(6,051
)
 
$
124,875



 
 
 
 
 
 
 
 
 
 
 
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
)
 

 

 

 

 

 

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

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


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APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
 
 
Three Months Ended
March 31,
 
2020
 
2019
Cash from operating activities
 
 
 
Net income
$
1,983

 
$
3,725

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
6,414

 
5,076

Amortization of operating lease right-of-use assets
1,053

 
942

Deferred income taxes
362

 
(4,281
)
Stock-based compensation
959

 
1,552

Other
(38
)
 
27

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(1,616
)
 
(2,051
)
Prepaid expenses and other current assets
(2,822
)
 
(3,577
)
Other assets
(148
)
 
660

Accounts payable
(362
)
 
100

Accrued employee expenses
(5,427
)
 
(2,867
)
Accrued expenses
726

 
1,580

Deferred revenue
693

 
268

Operating lease liabilities
784

 
(735
)
Other liabilities
522

 
(124
)
Net cash provided by operating activities
3,083

 
295

Cash from investing activities
 
 
 
Purchases of available-for-sale investments
(649
)
 

Proceeds from sales of available-for-sale investments
13,942

 
1,750

Proceeds from maturities of available-for-sale investments
7,250

 
2,250

Purchases of property, equipment and intangible assets
(7,992
)
 
(1,030
)
Additions to capitalized software
(6,822
)
 
(4,658
)
Cash paid in business acquisition, net of cash acquired

 
(54,004
)
Net cash provided by (used in) investing activities
5,729

 
(55,692
)
Cash from financing activities
 
 
 
Proceeds from stock option exercises
97

 
90

Tax withholding for net share settlement
(6,458
)
 
(1,315
)
Payment of contingent consideration
(5,977
)
 

Proceeds from issuance of debt
49,437

 
597

Principal payments on debt
(749
)
 
(909
)
Payment of debt issuance costs

 
(360
)
Purchase of treasury stock
(4,194
)
 

Net cash provided by (used in) financing activities
32,156

 
(1,897
)
Net increase (decrease) in cash, cash equivalents and restricted cash
40,968

 
(57,294
)
Cash, cash equivalents and restricted cash
 
 
 
Beginning of period
16,247

 
74,506

End of period
$
57,215

 
$
17,212


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APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
 
 
Three Months Ended
March 31,
 
2020
 
2019
 
 
 
 
Noncash investing and financing activities
 
 
 
Purchases of property and equipment included in accounts payable and accrued expenses
$
4,251

 
$
445

Additions of capitalized software included in accrued and accrued employee expenses
687

 
391

Stock-based compensation capitalized for software development
406

 
338

Tax withholding for net share settlement included in accrued employee expenses

 
1,258

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 our Condensed Consolidated Balance Sheets to the total of the same such amounts shown above (in thousands):
 
March 31,
 
2020
 
2019
Cash and cash equivalents
$
56,779

 
$
16,783

Restricted cash included in other assets
436

 
429

Total cash, cash equivalents and restricted cash
$
57,215

 
$
17,212


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

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APPFOLIO, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Nature of Business
AppFolio, Inc.'s (the "Company,"“we,” "us" or "our") mission is to revolutionize vertical industry businesses by providing great software and services. Today we offer industry-specific, cloud-based business software solutions, services and data analytics to the real estate market, which represents over 90% of our revenue, and, to a lesser extent, to the legal market. Although specific functionality varies by product, our core solutions address common business operations and interactions of businesses in our targeted verticals. In addition to our core solutions, we offer a range of optional, but often business-critical, Value+ services. Our Value+ services are built to enhance, automate and streamline processes and support workflows essential to our customers' businesses.
Our real estate software solutions provide our property management 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 to leverage data to predict and optimize business workflows that enable superior customer experiences and increase efficiency across our customers' businesses. We also provide software solutions to the legal market that enable law firms to administer their practice and manage their caseloads more efficiently by centralizing case details in a single system of record and system of engagement.
The significant majority of our customers in the real estate market use our property management solutions. Our property management customers include third-party property managers and owner-operators who manage single- and multi-family residences, community associations, commercial properties, and 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.
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 on Form 10-K for the fiscal year ended December 31, 2019 ("Annual Report"), filed with the Securities and Exchange Commission ("SEC") on March 2, 2020. The year-end condensed balance sheet was derived from our audited consolidated financial statements. Our unaudited interim Condensed Consolidated Financial Statements include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of our Condensed Consolidated Financial Statements. The operating results for the three months ended March 31, 2020 are not necessarily indicative of the results expected for the full year ending December 31, 2020.
Reclassifications
We reclassified certain amounts in our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows within the cash from operating activities section in the prior year to conform to the current year's presentation.
Changes in Accounting Policies
Except as described below under Recently Adopted Accounting Pronouncements, there have been no significant changes in our accounting policies from those disclosed in our annual consolidated financial statements and the related notes included in our Annual Report.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Assets and liabilities which are subject to judgment and use of estimates include the fair value of assets and liabilities assumed in business combinations, fair value of financial instruments, capitalized software costs, period of benefit associated with deferred costs, incremental borrowing rate used to measure operating lease liabilities, the recoverability of goodwill and long-lived assets, income taxes, useful lives associated with property and equipment and intangible assets, contingencies, and valuation and assumptions underlying stock-based compensation and other equity instruments.


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In December 2019, a novel coronavirus disease ("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. COVID-19 has created and may continue to create significant uncertainty in global financial markets, which may reduce demand for our core solutions and/or Value+ services, impact the productivity of our workforce, reduce our access to capital, and harm our business and results of operations.
In light of the currently unknown ultimate duration and severity of COVID-19, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts COVID-19 as of March 31, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts and credit losses, the carrying value of the goodwill and other long-lived assets, incentive-based compensation and income taxes.
As of the date of our Condensed Consolidated Financial Statements, we are not aware of any specific event or circumstance that would require us to update our estimates or judgments or to revise the carrying value of our assets or liabilities. However, these estimates and judgments may change as new events occur and additional information is obtained, which may result in changes being recognized in our consolidated financial statements in future periods. While we considered the effects of COVID-19 in our estimates and assumptions, due to the current level of uncertainty over the economic and operational impacts of COVID-19 on our business, there may be other judgments and assumptions that were not currently considered. Such judgments and assumptions could result in a meaningful impact on our financial statements in future periods. Actual results could differ from those estimates and any such differences may have a material impact on our financial statements.
Net Income per Common Share
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 the 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
March 31,
 
 
2020
 
2019
Weighted average common shares outstanding
 
34,180

 
33,918

Less: Weighted average unvested restricted shares subject to repurchase
 
5

 
5

Weighted average common shares outstanding; basic
 
34,175

 
33,913

Plus: Weighted average options, restricted stock units and restricted shares used to compute diluted net income per common share
 
1,506

 
1,429

Weighted average common shares outstanding; diluted
 
35,681

 
35,342

For the three months ended March 31, 2020 and 2019, an aggregate of 135,000 and 362,000 shares, respectively, underlying performance-based stock options ("PSOs") and performance-based restricted stock units ("PSUs"), were not included in the computations of diluted and anti-dilutive shares as they are considered contingently issuable upon the satisfaction of pre-defined performance measures and their respective performance measures have not been met.
Restricted stock units ("RSUs") with anti-dilutive effect were excluded from the calculation of weighted average number of shares used to compute diluted net income per common share and they were not material for the three months ended March 31, 2020 and 2019.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, 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. The adoption of this guidance did not have a material impact on our financial condition, results of operations, cash flows or disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, a series of amendments which align the requirements for capitalizing implementation costs incurred in a hosting arrangement that

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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. 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 December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). This amendment was issued to simplify the accounting for income taxes by removing certain exceptions for recognizing deferred taxes, performing intraperiod allocation, and calculating income taxes in interim periods. Further, ASU 2019-12 adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax basis goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2020. We do not expect the adoption of this guidance to have a material impact on our financial condition, results of operations, cash flows or disclosures.

In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference rate Reform on Financial Reporting. This guidance is intended to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This guidance is effective beginning March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. We are currently evaluating the effect of the adoption of this guidance on our financial condition, results of operations, cash flows and disclosures.
3. Business Combinations
Acquisition of Dynasty

On January 7, 2019, we acquired 100% of the voting equity interest of Dynasty Marketplace, Inc. ("Dynasty") for $60.2 million. Dynasty is a provider of advanced AI solutions for the real estate market that automate leasing communications, replace manual tasks and help customers grow their portfolios.

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. Determining the fair value of assets acquired and liabilities assumed requires management to make significant judgments and estimates, including the selection of valuation methodologies and comparable companies, estimates of future revenue and cash flows, discount rates, and the software decay rate and database ramp up rate. 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 will be consumed:


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Table of Contents

 
 
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
 
42,877

 
Indefinite
Other noncurrent assets
 
35

 
 
Total assets acquired
 
63,967

 
 
 
 
 
 
 
Accrued and other liabilities
 
48

 
 
Deferred tax liability, net
 
3,711

 
 
Total liabilities assumed
 
3,759

 
 
Purchase consideration
 
$
60,208

 
 

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.
Pro Forma Results

The following unaudited pro forma information has been prepared for illustrative purposes only, and assumes that the aforementioned Dynasty acquisition occurred on January 1, 2018, 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
March 31,
 
2020
 
2019
Revenue
$
72,495

 
$
57,126

Net income (loss)
1,983

 
(546
)



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Table of Contents

4. Investment Securities and Fair Value Measurements
Investment Securities
Investment securities classified as available-for-sale consisted of the following at March 31, 2020 and December 31, 2019 (in thousands):
 
March 31, 2020
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Corporate bonds
$
1,597

 
$
2

 
$

 
$
1,599

Agency securities
2,649

 
40

 

 
2,689

Treasury securities
10,205

 
135

 

 
10,340

Total available-for-sale investment securities
$
14,451

 
$
177

 
$

 
$
14,628

 
December 31, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Corporate bonds
$
9,597

 
$
18

 
$
(1
)
 
$
9,614

Agency securities
11,101

 
17

 

 
11,118

Treasury securities
14,222

 
12

 
(1
)
 
14,233

Total available-for-sale investment securities
$
34,920

 
$
47

 
$
(2
)
 
$
34,965


For available-for-sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of these criteria is met, the security’s amortized cost basis is written down to fair value through income. For securities in an unrealized loss position that do not meet these criteria, we evaluate whether the decline in fair value has resulted from credit loss or other factors. If this assessment indicates a credit loss exists, the credit-related portion of the loss is recorded as an allowance for losses on the security. No allowance for credit losses for available-for-sale investment securities was recorded as of March 31, 2020.
At March 31, 2020 and December 31, 2019, the contractual maturities of our investments did not exceed 36 months. The fair values of available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands):
 
March 31, 2020
 
December 31, 2019
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
7,897

 
$
7,952

 
$
22,846

 
$
22,876

Due after one year through three years
6,554

 
6,676

 
12,074

 
12,089

Total available-for-sale investment securities
$
14,451

 
$
14,628

 
$
34,920

 
$
34,965


During the three months ended March 31, 2020 and 2019, we had sales and maturities (which include calls) of investment securities, as follows (in thousands):
 
Three Months Ended March 31, 2020
 
Gross Realized Gains
 
Gross Realized Losses
 
Gross Proceeds from Sales
 
Gross Proceeds from Maturities
Corporate bonds
$
5

 
$

 
$
4,006

 
$
4,000

Agency securities
24

 

 
7,878

 
1,250

Treasury securities
4

 

 
2,058

 
2,000

Total
$
33

 
$

 
$
13,942

 
$
7,250


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Table of Contents

 
Three Months Ended March 31, 2019
 
Gross Realized Gains
 
Gross Realized Losses
 
Gross Proceeds from Sales
 
Gross Proceeds from Maturities
Corporate bonds
$

 
$
(1
)
 
$
1,750

 
$
2,250


Interest income, net of the amortization and accretion of the premium and discount, was $0.1 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively.
Fair Value Measurements
Recurring Fair Value Measurements
Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following tables summarize our financial assets measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 by level within the fair value hierarchy (in thousands):
 
March 31, 2020

Level 1
 
Level 2
 
Level 3
 
Total Fair
Value
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
28,548

 
$

 
$

 
$
28,548

Available-for-sale investment securities:
 
 
 
 
 
 
 
Corporate bonds

 
1,599

 

 
1,599

Agency securities

 
2,689

 

 
2,689

  Treasury securities
10,340

 

 

 
10,340

Total
$
38,888

 
$
4,288

 
$

 
$
43,176

 
December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total Fair
Value
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
337

 
$

 
$

 
$
337

Available-for-sale investment securities:
 
 
 
 
 
 
 
Corporate bonds

 
9,614

 

 
9,614

Agency securities

 
11,118

 

 
11,118

Treasury securities
14,233

 

 

 
14,233

Total
$
14,570

 
$
20,732

 
$

 
$
35,302

The carrying amounts of cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short maturity of these items.

The estimated fair value of the $50.0 million term loan issued by Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, and the lenders that are parties thereto ("Term Loan") and the $50.0 million revolving credit facility made available to us by Wells Fargo and the lenders that are parties thereto ("Revolving Facility," and together with the Term Loan, the "Credit Facility"), approximate their carrying values due to the variable interest rates. We consider the fair value of the Term Loan and the Revolving Facility to be Level 2 measurements as these debt instruments are not actively traded. We carry the Term Loan at face value less the unamortized discount. Refer to Note 8, Long-Term Debt, of our Condensed Consolidated Financial Statements for more information about our Term Loan and Revolving Facility.
There were no changes to our valuation techniques used to measure financial asset and financial liability fair values on a recurring basis during the three months ended March 31, 2020. The valuation techniques for the financial assets in the tables above are as follows:

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Table of Contents

Cash Equivalents
As of March 31, 2020 and December 31, 2019, cash equivalents include cash invested in money market funds with a maturity of three months or less. Fair value is based on market prices for identical assets.
Available-for-Sale Investment Securities
Our Level 2 securities were priced by a pricing vendor. The pricing vendor utilizes the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, other observable inputs like market transactions involving comparable securities are used.
Non-Recurring Fair Value Measurements
Certain assets, including goodwill, intangible assets and our note receivable with SecureDocs, Inc., are also subject to measurement at fair value on a non-recurring basis using Level 3 measurement, but only when they are deemed to be impaired. For the three months ended March 31, 2020 and 2019, no impairments were identified on those assets required to be measured at fair value on a non-recurring basis.
5. Internal-Use Software Development Costs
Internal-use software development costs as of March 31, 2020 and December 31, 2019 were as follows (in thousands):
 
 
March 31,
2020
 
December 31,
2019
Internal use software development costs, gross
 
$
88,204

 
$
81,475

Less: Accumulated amortization
 
(55,617
)
 
(51,452
)
Internal use software development costs, net
 
$
32,587

 
$
30,023



Capitalized software development costs were $6.7 million and $5.0 million for the three months ended March 31, 2020 and 2019, respectively. Amortization expense with respect to software development costs totaled $4.2 million and $3.0 million for the three months ended March 31, 2020 and 2019, respectively.

Future amortization expense with respect to capitalized software development costs as of March 31, 2020 is estimated as follows (in thousands):
Years Ending December 31,
2020
 
$
12,283

2021
 
12,980

2022
 
6,935

2023
 
389

    Total amortization expense
 
$
32,587



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Table of Contents

6. Intangible Assets
Intangible assets consisted of the following as of March 31, 2020 and December 31, 2019 (in thousands, except years):
 
 
March 31, 2020
 
 
Gross Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
 
Weighted Average Useful Life in Years
Customer relationships
 
$
3,070

 
$
(1,438
)
 
$
1,632

 
5.0
Database
 
8,330

 
(1,162
)
 
7,168

 
10.0
Technology
 
10,541

 
(6,466
)
 
4,075

 
5.0
Trademarks and trade names
 
2,690

 
(1,036
)
 
1,654

 
6.0
Partner relationships
 
680

 
(680
)
 

 
3.0
Non-compete agreements
 
7,400

 
(1,854
)
 
5,546

 
5.0
Domain names
 
301

 
(277
)
 
24

 
5.0
Patents
 
252

 
(230
)
 
22

 
5.0
 
 
$
33,264

 
$
(13,143
)
 
$
20,121

 
6.6

 
 
December 31, 2019
 
 
Gross Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
 
Weighted Average Useful Life in Years
Customer relationships
 
$
3,070

 
$
(1,296
)
 
$
1,774

 
5.0
Database
 
8,330

 
(954
)
 
7,376

 
10.0
Technology
 
10,541

 
(6,074
)
 
4,467

 
5.0
Trademarks & trade names
 
2,690

 
(898
)
 
1,792

 
6.0
Partner relationships
 
680

 
(680
)
 

 
3.0
Non-compete agreements
 
7,400

 
(1,484
)
 
5,916

 
5.0
Domain names
 
301

 
(276
)
 
25

 
5.0
Patents
 
252

 
(225
)
 
27

 
5.0
Backlog
 
470

 
(470
)
 

 
1.0
 
 
$
33,734

 
$
(12,357
)
 
$
21,377

 
6.2
Amortization expense with respect to intangible assets totaled $1.3 million and $1.4 million for the three months ended March 31, 2020 and 2019, respectively. Future amortization expense with respect to intangible assets is estimated as follows (in thousands):
Years Ending December 31,
2020
 
$
3,623

2021
 
4,727

2022
 
4,665

2023
 
3,060

2024
 
1,197

Thereafter
 
2,849

    Total amortization expense
 
$
20,121


7. Leases

We have operating leases for our corporate offices and data centers. Our leases have remaining lease terms ranging from one to twelve years, some of which include options to extend the leases by up to 10 years. These options to extend have not been recognized as part of our operating lease right-of-use assets and lease liabilities as it is not reasonably certain that we will exercise

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Table of Contents

these options. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. We have lease agreements with lease and non-lease components, which we have elected to combine for all asset classes. The total lease cost associated with our operating leases for the three months ended March 31, 2020 and 2019 was $1.4 million and $1.2 million, respectively.

Lease-related assets and liabilities were as follows at March 31, 2020 and December 31, 2019 (in thousands):
 
March 31,
2020
 
December 31,
2019
Assets
 
 
 
Prepaid expenses and other current assets
$
3,118

 
$
3,908

Operating lease right-of-use assets
26,750

 
27,803

 
 
 
 
Liabilities
 
 
 
Other current liabilities
$
2,779

 
$
2,826

Operating lease liabilities
34,143

 
33,312

Total lease liabilities
$
36,922

 
$
36,138



Future minimum lease payments under non-cancellable leases as of March 31, 2020 were as follows (in thousands):
Years ending December 31,
 
2020(1)
$
1,663

2021(1)
2,383

2022
4,085

2023
3,977

2024
3,908

Thereafter