~~The accompanying Notes to Condensed Consolidated Financial Statements are an integral part~~

Table of ~~these statements.~~Contents

APPFOLIO, INC.

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

1. Nature of Business

AppFolio, Inc. ~~(“we”~~("we," "us" or ~~“AppFolio”~~"our") ~~provides industry-specific, cloud-based software~~is a leading provider of cloud business management solutions for ~~small~~the real estate industry. Our solutions are designed to enable our property manager customers to digitally transform their businesses, address critical business operations and ~~medium-sized businesses (“SMBs”)~~deliver a better customer experience. Digital transformation is effectively a requirement for business success in the property management industry and solo practitioners and small law firms in the legal industry. We refer to solo practitioners and small law firms as SMBs in connection with our legal vertical in this Quarterly Report. Our platform is designed to be the system of record to automate essential business processesmodern world, and the ~~system of engagement to enhance business interactions between our customers~~way we work and ~~their clients and vendors. We also offer optional, but often mission-critical, Value+ services, which are seamlessly built into our core~~live requires powerful software solutions.

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 ~~of America~~ (“GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these Condensed Consolidated Financial Statements should be read in conjunction with our audited consolidated financial statements and the related notes included in our Annual Report, which was filed with the SEC on February ~~27, 2017.~~1, 2024. The year-end condensed balance sheet was derived from our audited consolidated financial statements. Our unaudited interim Condensed Consolidated Financial Statements ~~have been prepared on a basis consistent with that used to prepare our audited annual consolidated financial statements and~~ include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of ~~the~~our Condensed Consolidated Financial Statements. The operating results for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2024 are not necessarily indicative of the results expected for the full year ending December 31, ~~2017.~~2024.

~~Changes in Accounting Policies~~Reclassification

~~Except as described below under~~ ~~Recently Adopted Accounting Pronouncements, there have been no significant changes~~We reclassified certain amounts in our ~~accounting policies~~Condensed Consolidated Statements of Cash Flows within the cash flows from ~~those disclosed~~operating activities section in ~~our annual consolidated financial statements and~~ the ~~related notes included in our Annual Report.~~prior year to conform to the current year's presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires ~~management~~us 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 ~~revenues~~revenue, expenses, other income, and ~~expenses~~provision for income taxes during the reporting period. Assets and liabilities which are subject to judgment and use of estimates include the fair value of financial instruments, capitalized software development costs, period of benefit associated with deferred costs, incremental borrowing rate used to measure operating lease liabilities, the recoverability of goodwill and long-lived assets, income taxes, useful lives associated with property and equipment and intangible assets, contingencies, assumptions underlying performance-based compensation (whether cash or stock-based), and assumptions underlying stock-based compensation. Actual results could differ ~~materially~~ from those ~~estimates. On an ongoing basis, management evaluates its~~ estimates ~~based~~and any such differences may have a material impact on ~~historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances, the results~~our Condensed Consolidated Financial Statements.

Table of ~~which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.~~Contents

Net Income (Loss) per Common Share

~~The net~~Net income (loss) per common share was the same for shares of our Class A and Class B common ~~shares~~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~~sets forth the computation of ~~our weighted average number of Class A~~basic and ~~Class B common shares used to compute~~diluted net income (loss) per common share (in thousands):


	Three Months Ended March 31,
	2024		2023
Basic net income (loss) per share:
Numerator
Net income (loss)	$	38,663	$	(35,110)
Less: undistributed earnings to participating securities	5		—
Net income (loss) attributable to common stockholders	$	38,658	$	(35,110)
Denominator
Weighted average common shares outstanding	36,092		35,451
Less: Weighted average unvested restricted shares subject to repurchase	5		8
Weighted average common shares outstanding; basic	36,087		35,443
Net income (loss) per common share; basic	$	1.07	$	(0.99)
Diluted net income (loss) per share:
Numerator
Net income (loss) attributable to common stockholders	$	38,658	$	(35,110)
Denominator
Weighted average common shares outstanding; basic	36,087		35,443
Add: Weighted average dilutive options outstanding	108		—
Add: Weighted average dilutive RSUs outstanding	479		—
Weighted average common shares outstanding; diluted	36,674		35,443
Net income (loss) per common share; diluted	$	1.05	$	(0.99)

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Weighted average shares outstanding 33,923
33,668
33,848
33,617
Less: Weighted average unvested restricted shares subject to repurchase 18
68
31
88
Weighted average common shares outstanding; basic 33,905
33,600
33,817
33,529

Weighted average common shares outstanding; basic 33,905
33,600
33,817
33,529
Plus: Weighted average options, RSUs and restricted shares used to compute diluted net income per share 1,300
—
1,274
—
Weighted average common shares outstanding; diluted 35,205
33,600
35,091
33,529

~~Approximately 571,000 shares of performance based options ("PSOs") and performance based restricted stock units ("PSUs")~~Potentially dilutive securities that are not included in the computations of diluted and anti-dilutive shares for the three and nine month periods ended September 30, 2017, as they are considered contingently issuable upon the satisfaction of pre-defined performance measures and their respective performance measures have not been met.

~~For the three and nine months ended September 30, 2016, we reported a net loss and therefore all potentially dilutive common shares are anti-dilutive and have been excluded from the~~ calculation of ~~net loss per share. 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 (loss) per share ~~for the three and nine months ended September 30, 2017 and 2016~~because doing so would be antidilutive are as follows (in thousands):


	Three Months Ended March 31,
	2024	2023
Unvested Restricted Stock Awards	4	8
Options	—	572
Restricted Stock Units	170	1,620
Total potentially dilutive securities	174	2,200

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Options to purchase common stock —
1,764
—
1,764
Unvested restricted stock awards —
59
—
59
Unvested restricted stock units 13
480
13
480
Contingent restricted stock units⁽¹⁾
6
27
6
27
Total shares excluded from net income (loss) per common share 19
2,330
19
2,330

⁽¹⁾ ~~Included in the anti-dilutive shares above are fixed price restricted stock unit (“RSU”) commitments for which the number~~

Table of shares has not been determined at the grant date. The number of RSU shares with a fixed price included in the table above are 6,000 and 27,000 shares at September 30, 2017 and 2016, respectively. The number of shares have been determined by dividing the fixed price commitment to issue shares in the future by the closing price of our stock as of the applicable reporting period date.Contents

~~Recently Adopted Accounting Pronouncements~~

Under the Jumpstart our Business Startups Act (the “JOBS Act”), we meet the definition of an emerging growth company. We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

~~In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, Compensation - Stock Compensation (Topic 781),~~ ~~Improvements to Employee Share-Based Payment Accounting~~ ("ASU 2016-09"), which amends and simplifies the accounting for share-based payment awards in three areas: (1) income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. ASU 2016-19 also provides an accounting policy election to account for forfeitures as they occur. We adopted this guidance on January 1, 2017. The impact on the Company’s consolidated financial statements was not material due to the full valuation allowance on

~~our deferred tax assets. We have elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized each period.~~

~~Recent Accounting Pronouncements Not Yet Adopted~~

~~In May 2014, the FASB issued ASU No. 2014-09,~~ ~~Revenue from Contracts with Customers~~, as amended which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers ( the “new revenue standard”). The new revenue standard will be effective on January 1, 2018 and early adoption is permitted. The standard permits the use of either a full retrospective or modified retrospective transition method.

The Company will adopt the new revenue standard as of January 1, 2018, using the modified retrospective transition method and is currently evaluating the expected impact of the adoption on its consolidated financial statements and related disclosures. Under the modified retrospective transition method, we will be required to calculate and record the cumulative effect of adopting the new revenue standard as an adjustment to our opening balance of our retained earnings on January 1, 2018, within our Quarterly Report on Form 10-Q for the first quarter of 2018. Prior periods will not be retrospectively adjusted.

Based on our ongoing assessment, we do not expect there will be a material impact on our revenue upon adoption. While we are continuing to assess all potential impacts of the standard, we believe the most significant impact relates to recognizing the costs of obtaining customer contracts. Under the Company's current policy election under GAAP, sales commissions and other incremental costs to acquire contracts are expensed as incurred. Under the new revenue standard, such costs will be deferred and recognized over a period of time. The Company is in the process of implementing the necessary changes to its accounting policies, processes, internal controls and information systems that will be required to meet the new standard’s reporting and disclosure requirements.

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases(Topic 842)~~ ("ASU 2016-02"). Under ASU 2016-02, an entity will be required to recognize right-of-use 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. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We anticipate this standard will have a material impact on our consolidated financial statements. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to our accounting and reporting of our operating leases on our balance sheet.

~~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 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 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 August 2016, the FASB issued ASU No. 2016-15,~~ ~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments~~ ("ASU 2016-15"), which provides cash flow statement classification guidance for debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We have not determined the effect of this guidance on our statement of cash flows.

~~In October 2016, the FASB issued ASU No. 2016-16,~~ ~~Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory~~ ("ASU 2016-16"), which changes the timing of when certain intercompany transactions are recognized within the provision for income taxes. ASU 2016-16 is effective on January 1, 2018. Early adoption is permitted. We have not determined the effect of this guidance on our financial condition, results of operations, cash flows or disclosures.

~~In November 2016, the FASB issued ASU 2016-18,~~ ~~Statement of Cash Flows (Topic 230): Restricted Cash~~ ("ASU 2016-18"), which provides amendments to current guidance to address the classification and presentation of changes in restricted cash in the statement of cash flows. ASU 2016-18 is effective on January 1, 2018 and early adoption is permitted. We are still evaluating the effect of this guidance on our financial statements. We expect that adoption will change the current presentation of restricted cash on our statement of cash flows as well as require additional disclosures to reconcile cash and cash equivalents per the balance sheet to cash and cash equivalents on the statement of cash flows.

~~In January 2017, the FASB issued ASU No. 2017-04,~~ ~~Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment~~ ("ASU 2017-04"), which eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for public entities for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on dates after January 1, 2017. 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 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. For public companies, ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. 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 since our current accounting policy is in accordance with ASU 2017-08.

~~In May 2017, the FASB issued ASU 2017-09,~~ ~~Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting~~ ~~("ASU 2017-09")~~. ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. 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.

3. Investment Securities and Fair Value Measurements

Investment Securities

Investment securities classified as available-for-sale consisted of the following ~~at September 30, 2017~~as of March 31, 2024 and December 31, ~~2016~~2023 (in thousands):


	March 31, 2024
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value


U.S. government and agency securities	184,377		17		(96)		184,298
Total available-for-sale investment securities	$	184,377	$	17	$	(96)	$	184,298

September 30, 2017
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value
Corporate bonds $ 34,558
$ 11
$ (19 ) $ 34,550
Agency securities 11,302
—
(17 ) 11,285
Certificates of deposit 2,982
3
(1 ) 2,984
Total available-for-sale investment securities $ 48,842
$ 14
$ (37 ) $ 48,819

December 31, 2016
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value
Corporate bonds $ 30,492
$ 9
$ (56 ) $ 30,445
Agency securities 6,248
—
(20 ) 6,228
Certificates of deposit 5,472
16
—
5,488
Total available-for-sale investment securities $ 42,212
$ 25
$ (76 ) $ 42,161


	December 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value


U.S. government and agency securities	162,062		193		(59)		162,196
Total available-for-sale investment securities	$	162,062	$	193	$	(59)	$	162,196

As of ~~September 30, 2017,~~March 31, 2024, the ~~unrealized losses on investment~~decline in fair value below amortized cost basis was not considered other than temporary as it is more likely than not we will hold the securities which have been in a net loss position for 12 months or greater were not material. These unrealized losses are considered temporary and there were no impairments considered to be "other-than-temporary" based on our evaluation of available evidence, which includes our intent to hold these investments tountil maturity or a recovery of the cost basis.

~~At September 30, 2017 and~~ No allowance for credit losses for available-for-sale investment securities was recorded as of March 31, 2024 or December 31, ~~2016, the contractual maturities of our investments did not exceed 36 months.~~ 2023.

The fair values of available-for-sale ~~investments,~~investment securities, by remaining contractual maturity, are as follows (in thousands):

September 30, 2017 December 31, 2016
Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value
Due in 1 year or less $ 28,398
$ 28,396
$ 15,475
$ 15,473
Due after 1 year through 3 years 20,444
20,423
26,737
26,688
Total available-for-sale investment securities $ 48,842
$ 48,819
$ 42,212
$ 42,161


	March 31, 2024				December 31, 2023
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	184,377	$	184,298	$	162,062	$	162,196

Total available-for-sale investment securities	$	184,377	$	184,298	$	162,062	$	162,196

During the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2024 and ~~2016,~~2023, we had sales and maturities ~~(which includes calls)~~ of investment securities, as follows (in thousands):


	Three Months Ended March 31, 2024
	Gross Realized Gains		Gross Realized Losses		Gross Proceeds from Sales		Gross Proceeds from Maturities


U.S. government and agency securities	—		—		—		36,670
Total	$	—	$	—	$	—	$	36,670

Nine Months Ended September 30, 2017
Gross Realized Gains Gross Realized Losses Gross Proceeds from Sales Gross Proceeds from Maturities
Agency securities $ 1
$ —
$ 15
$ 1,044
Corporate bonds —
—
—
7,440
Certificates of deposit —
—
—
2,490
$ 1
$ —
$ 15
$ 10,974

Nine Months Ended September 30, 2016
Gross Realized Gains Gross Realized Losses Gross Proceeds from Sales Gross Proceeds from Maturities
Agency securities $ 5
$ —
$ 3,005
$ 9,557
Corporate bonds 1
—
5,011
2,480
Treasury bills —
—
2,000
3,830
Certificates of Deposit —
—
—
1,245
$ 6
$ —
$ 10,016
$ 17,112

Interest income from investment securities, net of the amortization and accretion of the premium and discount, for the three months ended September 30, 2017 and 2016, was $0.2 million and $0.1 million, respectively and $0.5 million and $0.3 million for the nine months ended September 30, 2017 and 2016, respectively.


	Three Months Ended March 31, 2023
	Gross Realized Gains		Gross Realized Losses		Gross Proceeds from Sales		Gross Proceeds from Maturities
Corporate bonds	$	3	$	—	$	1,013	$	6,860

U.S. government and agency securities	—		—		—		31,030
Total	$	3			$	1,013	$	37,890

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~~present our financial assets and liabilities measured at fair value on a recurring basis as of ~~September 30, 2017~~March 31, 2024 and December 31, ~~2016,~~2023 by level within the fair value hierarchy (in thousands):

Table of Contents


			March 31, 2024
			March 31, 2024
			March 31, 2024
	Level 1									Level 1	Level 2	Total Fair Value
Cash equivalents:
Money market funds
Money market funds
Money market funds

Available-for-sale investment securities:

Available-for-sale investment securities:

Available-for-sale investment securities:
	September 30, 2017
	Level 1			Level 2		Level 3		Total Fair Value
Cash equivalents:
Money market funds	$	3,910		$	—	$	—	$	3,910
Available-for-sale investment securities:
Corporate bonds	—			34,550		—		34,550
Agency securities	—			11,285		—		11,285
Certificates of deposit	2,984			—		—		2,984
U.S. government and agency securities

U.S. government and agency securities

U.S. government and agency securities
Total	$	6,894		$	45,835	$	—	$	52,729


			December 31, 2023
			December 31, 2023
			December 31, 2023
	Level 1									Level 1	Level 2	Total Fair Value
Cash equivalents:
Money market funds
Money market funds
Money market funds

Available-for-sale investment securities:
Available-for-sale investment securities:
Available-for-sale investment securities:

U.S. government and agency securities
	December 31, 2016
	Level 1			Level 2		Level 3		Total Fair Value
Cash equivalents:
Money market funds	$	4,849		$	—	$	—	$	4,849
Available-for-sale investment securities:
Corporate bonds	—			30,445		—		30,445
Agency securities	—			6,228		—		6,228
Certificates of deposit	5,488			—		—		5,488
U.S. government and agency securities

U.S. government and agency securities
Total	$	10,337		$	36,673	$	—	$	47,010

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

~~There were no changes to~~Fair value for our valuation techniques used to measure asset and liability fair values on a recurring basis during the nine months ended September 30, 2017. The valuation techniques for the items in the table above are as follows:

~~Cash and Cash Equivalents~~

~~As of September 30, 2017 and December 31, 2016, cash and cash equivalents include cash invested in money market funds. Fair value~~Level 1 investment securities is based on market prices for identical assets. 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.

~~Available-for-Sale Investment Securities~~

The fair value of our investment securities and certificates of deposit is based on pricing determined using inputs other than quoted prices that are observable either directly or indirectly such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.

~~Non-Recurring Fair Value Measurements~~

Certain assets, including goodwill, intangible assets and our note receivable with SecureDocs, are also subject to measurement at fair value on a non-recurring basis using Level 3 measurement when they are deemed to be impaired as a result of an impairment review. For the nine months ended September 30, 2017 and 2016, no impairments were identified on those assets required to be measured at fair value on a non-recurring basis.

4. ~~Internal-Use~~Capitalized Software Development Costs, net

~~Internal-use~~Capitalized software development costs were as follows (in thousands):

September 30,
2017 December 31,
2016
Internal use software development costs, gross $ 41,902
$ 33,545
Less: Accumulated amortization (24,582 ) (18,006 )
Internal use software development costs, net $ 17,320
$ 15,539


	March 31, 2024		December 31, 2023
Capitalized software development costs, gross	$	125,890	$	126,606
Less: Accumulated amortization	(106,916)		(105,044)
Capitalized software development costs, net	$	18,974	$	21,562

Capitalized software development costs were ~~$2.9~~$1.2 million and ~~$3.3~~$1.0 million for the three months ended ~~September 30, 2017~~March 31, 2024 and ~~2016, respectively, and were $8.4 million and $8.8 million for the nine months ended September 30, 2017 and 2016,~~2023, respectively. Amortization expense with respect to capitalized software development costs totaled ~~$2.3~~$3.7 million and ~~$1.7~~$5.9 million for the three months ended ~~September 30, 2017~~March 31, 2024 and ~~2016, respectively,~~2023, respectively. During the three months ended March 31, 2024 and ~~$6.6~~2023, we disposed of $1.9 million and ~~$4.4~~$2.2 million, ~~for the nine months ended September 30, 2017 and 2016, respectively.~~

respectively, of fully amortized capitalized software development costs.

Future amortization expense with respect to capitalized software development costs as of ~~September 30, 2017,~~March 31, 2024 is estimated as follows (in thousands):


Years Ending December 31,
2024	$	9,074
2025	6,434
2026	2,816
2027	650

Total amortization expense	$	18,974

Years Ending December 31,
2017 $ 2,409
2018 8,431
2019 5,153
2020 1,327
Total amortization expense $ 17,320

Table of Contents

5. Accrued Employee Expenses

~~5. Intangible Assets~~

~~Intangible assets~~Accrued employee expenses consisted of the following ~~as of September 30, 2017 and December 31, 2016~~ (in thousands):


	March 31, 2024		December 31, 2023
Accrued vacation	$	13,258	$	12,399
Accrued bonuses	5,694		14,795

Accrued payroll, severance and related personnel cost	10,250		8,373


Total accrued employee expenses	$	29,202	$	35,567

September 30, 2017
Gross Carrying
Value Accumulated
Amortization Net Carrying
Value
Customer relationships $ 790
$ (510 ) $ 280
Technology 4,811
(3,671 ) 1,140
Trademarks 930
(508 ) 422
Partner relationships 680
(567 ) 113
Non-compete agreements 40
(33 ) 7
Domain names 273
(273 ) —
Patents 285
(193 ) 92
$ 7,809
$ (5,755 ) $ 2,054

December 31, 2016
Gross Carrying
Value Accumulated
Amortization Net Carrying
Value
Customer relationships $ 790
$ (392 ) $ 398
Technology 4,811
(3,070 ) 1,741
Trademarks 930
(416 ) 514
Partner relationships 680
(397 ) 283
Non-compete agreements 40
(23 ) 17
Domain names 273
(241 ) 32
Patents 284
(164 ) 120
$ 7,808
$ (4,703 ) $ 3,105

~~Amortization expense for~~In the three months ended ~~September 30, 2017~~March 31, 2023, we expensed $14.9 million of severance related to separation costs associated with our former Chief Executive Officer's Transition and ~~2016 was $0.4 million~~Separation Agreement, dated March 1, 2023 ("Separation Agreement").

6. Other Current Liabilities

Other Current Liabilities consisted of the following (in thousands):


	March 31, 2024		December 31, 2023
Insurance reserves	$	3,314	$	4,174
Operating lease liabilities-current	3,796		3,626
Other	4,683		3,535
Total other current liabilities	$	11,793	$	11,335

For additional information, refer to Note 8, Commitments and Contingencies and Note 7, Leases.

7. Leases

Operating leases for ~~each period~~our corporate offices have remaining lease terms ranging from four months to nine years, some of which include options to extend the leases for up to ten 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 these options. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. Certain leases contain provisions for property-related costs that are variable in nature for which we are responsible, including common area maintenance, which are expensed as incurred.

The components of lease expense recognized in the ~~nine months ended September 30, 2017 and 2016 was $1.1 million for each period.~~

AsCondensed Consolidated Statements of ~~September 30, 2017, estimated future amortization of intangible assets was~~Operations were as follows (in thousands):


	Three Months Ended March 31,
	2024		2023
Operating lease cost	$	1,073	$	1,145
Variable lease cost	365		573
Total lease cost	$	1,438	$	1,718

Table of Contents

Years Ending December 31,
2017 $ 329
2018 929
2019 352
2020 259
2021 124
Thereafter 61
Total amortization expense $ 2,054

Lease-related assets and liabilities were as follows (in thousands):


	March 31, 2024		December 31, 2023
Assets

Operating lease right-of-use assets	$	18,762	$	19,285

Liabilities
Other current liabilities	$	3,796	$	3,626
Operating lease liabilities	40,469		41,114
Total lease liabilities	$	44,265	$	44,740

In January 2023, we entered into an amendment to the lease agreement for our San Diego facility. We remeasured the lease liability and recorded a reduction to the lease liability and right-of-use asset using the discount rate at the modification date, which resulted in a gain of $2.4 million in the Condensed Consolidated Statements of Operations.

Future minimum lease payments under non-cancellable leases as of March 31, 2024 were as follows (in thousands):


Years ending December 31,
2024	$	4,323
2025	6,168
2026	6,345
2027	6,529
2028	6,717
Thereafter	24,373
Total future minimum lease payments	54,455
Less: imputed interest	(10,190)
Total	$	44,265

8. Commitments and Contingencies

~~Lease Obligations~~

As of September 30, 2017, we had operating lease obligations of approximately $9.6 million through 2022. We recorded rent expense of $0.5 million for each three month period ended September 30, 2017 and 2016, and $1.5 million for each nine month period ended September 30, 2017 and 2016.

~~In February 2017, we signed a lease amendment relating~~Legal Liability to the property located at 50 Castilian Drive in Santa Barbara, California, our corporate headquarters. This amendment extends the term from February 2018 to December 2021. The total commitment under this lease extension is $3.1 million. All of the other terms and conditions of the lease agreement remain the same.

~~Line of Credit~~

We are party to a Credit Agreement with Wells Fargo, as administrative agent, and the lenders that are parties thereto (as amended, the “Credit Agreement”). Under the terms of the Credit Agreement, the lenders made available to us a $25.0 million revolving line of credit (the “Revolving Facility”). Borrowings under the Revolving Facility are subject to the satisfaction of customary conditions. The Revolving Facility matures on October 9, 2020; however, we can make payments on, and cancel in full, the Revolving Facility at any time without premium or penalty.

~~As of September 30, 2017 and December 31, 2016, there was no outstanding balance under the Credit Agreement and we are in compliance with the financial covenants under the Revolving Facility.~~

Landlord Insurance

We have a wholly owned subsidiary, Terra Mar Insurance Company, Inc. ~~(“Terra Mar”)~~, which was established in connection with reinsuring liability to ~~provide~~landlord insurance policies offered to our customers ~~with the option to purchase tenant liability insurance. If our customers choose to use our insurance services, they are issued an insurance policy underwritten~~ by our third-party service provider. ~~The policy has a limit of $100,000 per incident for each insured residence.~~ We ~~have entered into a reinsurance agreement with our third-party service provider and, as a result, we~~ assume a 100% quota share of the ~~tenant~~ liability to landlord insurance ~~provided to~~policies placed with our customers ~~through~~by our third-party service provider. ~~Included in cost of revenue we~~We accrue for reported claims, and include an estimate of losses incurred but not reported by our property manager customers, asin cost of revenue because we bear the risk related to all such claims. Our estimated liability for reported claims and incurred but not reported claims as of ~~September 30, 2017~~March 31, 2024 and December 31, ~~2016~~2023 was ~~$0.4~~$3.3 million and ~~$0.3~~$4.2 million, respectively, and is included in Other current liabilities on ~~the~~our Condensed Consolidated Balance Sheets.

Included in ~~Other~~Prepaid expenses and other current assets as of ~~September 30, 2017~~March 31, 2024 and December 31, ~~2016,~~2023 are ~~$1.5~~$3.0 million and ~~$1.2~~$5.1 million, respectively, of deposits held with a third party related to requirements to maintain collateral for this insurance service.

Legal Proceedings

On February 10, 2023, a lawsuit was filed in the First Judicial District Court of New Mexico, Murphy, et al. v. AppFolio, Inc., et al. (No. D-101-CV-2022-02100), naming us as a defendant and alleging certain violations of the New Mexico Unfair Practices Act and negligent misrepresentation in connection with our tenant screening service (the “Murphy Litigation”). In late November 2023, the parties agreed to settle the Murphy Litigation. We did not admit any wrongdoing in connection with the settlement of the Murphy Litigation. The settlement agreement required us to pay $7.0 million, which was covered in full under our existing insurance ~~services.~~policies. In April, 2024, the parties filed a stipulation of settlement with the court dismissing all claims against AppFolio with prejudice.

~~Litigation~~As the settlement was paid in March 2024, there is no remaining liability or receivable as of March 31, 2024.

~~From~~

Table of Contents

In addition to the foregoing, from time to time, we ~~may become subject to certain~~are involved in various other investigative inquiries, legal proceedings ~~including without limitation claims and/~~and disputes arising from or ~~litigation~~related to matters ~~arising in~~incident to the ordinary course of ~~business. We are~~our business activities, including actions with respect to intellectual property, employment, labor, regulatory and contractual matters. Although the ultimate outcome of such investigative inquiries, legal proceedings and other disputes cannot be predicted with certainty, we do not ~~currently a party to~~believe that any such pending investigative inquiries, legal proceedings ~~nor are we aware of any pending~~and other disputes, if determined adversely to us, would, individually or ~~threatened litigation, that we believe would~~taken together, have a material adverse effect on our business, operating results, ~~cash flows or~~ financial condition ~~should such proceedings be resolved unfavorably.~~or cash flows.

Indemnification

In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, business partners, investors, directors, officers, and ~~officers~~other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of any applicable agreements, ~~services to be provided by us, or~~ intellectual property infringement claims made by third ~~parties.~~parties, and other liabilities relating to or arising from our services or our acts or omissions. These indemnification provisions may survive termination of the underlying agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions may not be subject to maximum loss ~~clauses. The maximum potential amount of future payments we could be required to make under these indemnification provisions~~clauses and is indeterminable. We have ~~never paid~~not incurred any costs as a ~~material claim, nor~~result of such indemnification obligations and have not recorded any ~~legal claims been brought against us~~liabilities related to such obligations in ~~connection with these indemnification arrangements. As of September 30, 2017 and December 31, 2016, we had not accrued a liability for these indemnification arrangements because we determined that~~ the likelihood of incurring a payment obligation, if any, in connection with these indemnification arrangements is not probable or reasonably possible and the amount or range of amounts of any such liability is not reasonably estimable.Condensed Consolidated Financial Statements.

7. 9. Stock-Based Compensation

Stock Options

A summary of activity in connection with our stock ~~option activity~~options for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2024, is as follows (number of shares in thousands):


	Number of Shares	Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life in Years
Options outstanding as of December 31, 2023	381	$	51.49	3.4

Options exercised	(244)	15.86
Options cancelled/forfeited	(1)	3.28
Options outstanding as of March 31, 2024	136	$	115.58	8.0

Number of
Shares

Weighted
Average
Exercise
Price per Share

Weighted
Average
Remaining
Contractual Life
in Years
Options outstanding as of December 31, 2016 1,718
$ 8.75
8.2
Options granted 172
24.77

Options exercised (133 ) 3.83

Options cancelled/forfeited (29 ) 9.84

Options outstanding as of September 30, 2017 1,728
$ 10.70
7.9

During the nine months ended September 30, 2017, we granted PSOs to purchase up to 172,000 shares of our Class A common stock. The PSOs have a weighted average exercise price of $24.77 per share. Vesting of the PSOs is based on the achievement of pre-established performance metrics for the year ended December 31, 2019, and continued employment throughout the performance period. Of the PSOs granted during 2017, 132,000 shares would vest based upon the maximum payout of 165% when the 2019 free cash flow performance metric meets the maximum achievement of 150%. For performance at 100% of the targeted 2019 free cash flow metric, approximately 61% of the PSOs would vest. For performance at 80% of the targeted metric, approximately 48% of the PSOs would vest. For performance below 80% of the 2019 targeted metric, no PSOs would vest, all previously recognized compensation expense for the PSOs would be reversed, and no compensation expense would be recognized. The remaining 40,000 PSOs granted during 2017 have a pre-established adjusted gross margin target for 2019. PSOs tied to the gross margin performance metric have two levels of vesting, with 50% vesting based upon the achievement of 110% of the targeted amount and the remaining 50% vesting upon the achievement of 115% of the targeted amount. If the 110% performance target is not met, no shares will vest and all previously recognized expense for those PSOs would be reversed and no compensation expense would be recognized.

Included in the options outstanding as of September 30, 2017 are 500,000 PSOs granted in 2016, which vest based on the achievement of a pre-established free cash flow performance metric for the years ended December 31, 2017 and 2018. The number of PSOs granted in 2016 related to the performance metrics for the years ended December 31, 2017 and 2018, assumes achievement of the performance metric at the maximum level, which is 150% of the targeted performance metric. For performance at 100% of the targeted metric, approximately 67% of the PSOs would vest. For performance at 80% of the targeted metric, approximately 53% would vest. For performance below 50% of the 2017 targeted metric or 80% of the 2018 targeted metric, no PSOs would vest, all previously recognized compensation expense for PSOs would be reversed, and no compensation expense would be recognized.

During the nine months ended September 30, 2017, 247,000 of the PSOs vested based on the achievement of 148% of the pre-established free cash flow performance metric for the year ended December 31, 2016, and 3,000 PSOs were cancelled as a result of the PSOs being granted at 150% of the target metric. During the year ended December 31, 2016, $1.0 million of expense was recognized related to the PSOs that vested during the nine months ended September 30, 2017.

We recognize expense for the PSOs based on the grant date fair value of the PSOs that we determine are probable of vesting. Adjustments to compensation expense are made each period based on changes in our estimate of the number of PSOs that are probable of vesting. Our stock-based compensation expense for stock options ~~including the PSOs,~~were not material for the three months ended September 30, 2017 and 2016, was $0.7 million and $0.7 million, respectively, and $2.0 million and $1.6 million for the nine months ended September 30, 2017 and 2016, respectively.

The fair value of stock options granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following table summarizes information relating to our stock options granted during the three and nine months ended September 30, 2017 and 2016:

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Stock options granted (in thousands) —
—
172
750
Weighted average exercise price per share $ —
$ —
$ 24.77
$ 12.85
Weighted average grant-date fair value per share $ —
$ —
$ 9.58
$ 4.85
Weighted average Black-Scholes model assumptions:
Risk-free interest rate — % — % 2.02 % 1.45 %
Expected term (in years) —
—
6.4
5.9
Expected volatility — % — % 35 % 37 %
Expected dividend yield —
—
—
—

periods presented.

As of ~~September 30, 2017,~~March 31, 2024, the total estimated remaining stock-based compensation expense for ~~unvested~~the aforementioned stock options ~~including the PSOs,~~ was ~~$2.7~~$6.3 million, which is expected to be recognized over a weighted average period of ~~1.5~~3.8 years.

Table of Contents

Restricted Stock Units

A summary of activity in connection with our ~~RSUs~~restricted stock units ("RSUs") for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2024, is as follows (number of shares in thousands):


	Number of Shares	Weighted Average Grant Date Fair Value per Share
Unvested as of December 31, 2023	943	$	121.61
Granted	270	211.40
Vested	(105)	118.27
Forfeited	(15)	127.79
Unvested as of March 31, 2024	1,093	$	144.03

Number of Shares Weighted- Average Grant Date Fair Value per Share
Unvested as of December 31, 2016 496
$ 13.34
Granted 307
25.64
Vested (139 ) 12.81
Forfeited (46 ) 16.17
Unvested as of September 30, 2017 618
$ 19.36

~~During the nine months ended September 30, 2017, we~~Unvested RSUs as of March 31, 2024 were composed of 1.0 million RSUs with only service conditions and 0.1 million performance share units ("PSUs") with both service conditions and performance conditions. RSUs granted with only service conditions generally vest over a total of 307,000 RSUs: 194,000 RSUs vest annually over four years; 100,000 PSUs vest based upon achievement of a pre-established free cash flow performance metric for the year ended December 31, 2019, andfour-year period, assuming continued employment ~~throughout~~through the ~~performance period; and 13,000 PSUs were granted and vested as a result of the attainment of the 2016 performance metric.~~applicable vesting date. The number of PSUs granted, as included in the above table, assumes achievement of the performance metric at 100% of the ~~targeted~~ performance ~~metric.~~target. The ~~actual number~~unvested PSUs as of ~~shares~~March 31, 2024, are subject to be issued at the end of the performance period will range from 0% to 165% of the initial target awards. For performance at 150% of the targeted metric in 2019, 165% of the PSUs would vest. For performance below 80% of the targeted metric in 2019, no PSUs would vest and no compensation expense would be recognized, and all previously recognized compensation expense for PSUs would be reversed.

~~During the nine months ended September 30, 2017, 41,000 of the PSUs vested~~vesting based on the achievement of ~~148% of the~~ pre-established ~~free cash flow~~ performance ~~metric~~metrics for the year ~~ended~~ending December 31, ~~2016,~~2024 and ~~an additional 13,000 PSUs were granted and vested as~~will vest over a ~~result of the attainment of the 2016 performance metric as approved by our Board of Directors. During the~~three year ~~ended December 31, 2016, $479,000 of expense was recognized related to the PSUs vested during the nine months ended September 30, 2017.~~

Included in the unvested RSUs as of September 30, 2017 are 56,000 PSUs granted in 2016, which vest based on the achievement of a pre-established free cash flow performance metric for the years ended December 31, 2017 and 2018, andperiod, assuming continued employment ~~throughout the performance period. The number of PSUs granted in 2016 related to the performance metrics for the~~

~~years ended December 31, 2017 and 2018, and assumed achievement of the performance metric at 100% of the targeted performance metric.~~through each vesting date. The actual number of shares to be issued at the end of the performance period will range from 0% to 150% of the ~~initial~~ target ~~awards. For~~number of shares depending on achievement relative to the performance ~~at 150% of~~metric over the targeted metric, 150% of the PSUs would vest. For performance below 50% of the targeted metric for 2017 or 80% of the targeted metric for 2018, no PSUs would vest and no compensation expense would be recognized, and all previously recognized compensation expense for PSUs would be reversed.applicable period.

We recognize expense for the PSUs based on the grant date fair value of the PSUs that we determine are probable of vesting. Adjustments to compensation expense are made each period based on changes in our estimate of the number of PSUs that are probable of vesting. Ourrecognized stock-based compensation expense for the RSUs and PSUs of $13.0 million and $13.8 million for the three months ended ~~September 30, 2017~~March 31, 2024 and ~~2016, was $1.0~~2023, respectively. Excluded from stock-based compensation expense is capitalized software development costs of $0.2 million and ~~$571,000, respectively, and $2.6 million and $1.2~~$0.2 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2024 and ~~2016,~~2023, respectively.

As of ~~September 30, 2017,~~March 31, 2024, the total estimated remaining ~~estimated~~ stock-based compensation expense for the aforementioned RSUs and PSUs was ~~$9.2~~$124.8 million, which is expected to be recognized over a weighted average period of ~~2.6~~2.5 years.

~~Restricted Stock Awards~~

~~A summary of activity in connection with our restricted stock awards for the nine months ended September 30, 2017, follows (number of shares in thousands):~~

Number of
Shares Weighted-Average
Grant Date
Fair Value per Share
Unvested as of December 31, 2016 46
$ 8.55
Granted 9
33.30
Vested (38 ) 9.33
Forfeited —
—
Unvested as of September 30, 2017 17
$ 19.79
10. Income Taxes

We ~~have~~calculate our provision for income taxes on a quarterly basis by applying an estimated annual effective tax rate to income (loss) from operations and by calculating the ~~right to repurchase any unvested restricted stock awards. Restricted stock awards vest over a four-year period for employees and a one-year period for non-employee directors. We~~tax effect of discrete items recognized ~~stock-based compensation expense for restricted stock awards of $84,000 and $113,000 for~~during the quarter.

For the three months ended ~~September 30, 2017 and 2016, respectively, and $274,000 and $342,000 for the nine months ended September 30, 2017 and 2016, respectively.~~

As of September 30, 2017, the total remaining stock-based compensation expense for unvested restricted stock awards with a repurchasing right was $268,000 which is expected to be recognized over a weighted average period of 0.8 years.

~~8. Income Taxes~~

Our effective tax rate differs from the U.S. Federal statutory rate of 34% primarily because our previously reported losses have been offset by a valuation allowance due to uncertainty as to the realization of those losses.

~~For the three and nine months ended September 30, 2017,~~March 31, 2024, we recorded benefits from income ~~tax expense~~taxes of ~~$52,000 and $93,000, respectively, on pre-tax income of $3.7~~$1.6 million, ~~and $7.2 million, respectively, for~~representing an effective tax rate of ~~1.4%~~(4.3)%. The effective tax rate as compared to the U.S. federal statutory rate of 21% differs primarily due to excess tax benefits from stock-based compensation, partially offset by change in valuation allowance against deferred tax assets, state income taxes and ~~1.3%, respectively. The~~non-deductible officers' compensation.

We assess our ability to realize our deferred tax assets on a quarterly basis and we establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. We weigh all available positive and negative evidence, including our earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income and tax ~~expense~~planning strategies. Due to a history of cumulative losses, including permanent adjustments, and assessing all available positive and negative evidence, we have determined that it is more likely than not that our federal and state deferred tax assets would not be realized. Accordingly, we have been maintaining full valuation allowance against our deferred tax assets. However, based on our ~~payments~~current and projected future earnings, we believe that there is reasonable possibility that sufficient positive evidence of ~~state minimum taxes, alternative minimum tax ("AMT") (net~~sustained profitability may be achieved during the current year to reach a conclusion that part or all of ~~available AMT credit), and the amortization of tax deductible goodwill that is not an available source of income to realize the~~our deferred tax ~~asset.~~assets may become realizable, resulting in a possible release of valuation allowance. Such valuation allowance release may result in a material increase to our deferred tax assets and a corresponding decrease in income tax expense. The exact timing and amount of the valuation allowance release are subject to our projection of earnings and level of profitability that will be achieved.

~~For~~There were no material changes to our unrecognized tax benefits during the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 2024, and we ~~recorded income~~do not expect to have any significant changes to unrecognized tax ~~expense~~benefits through the remainder of ~~$11,000 and $48,000, respectively, on pre-tax losses~~the year.

Table of $1.1 million and $6.9 million, respectively for an effective tax rate of (1.0)% and (0.7)%, respectively. The income tax expense is based on our payments of state minimum taxes and the amortization of tax deductible goodwill that is not an available source of income to realize the deferred tax asset.Contents

9. 11. Revenue and Other Information

The following table presents our revenue categories for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2024 and ~~2016~~2023 (in thousands):

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Core solutions $ 14,670
$ 11,302
$ 41,682
$ 31,637
Value+ services 21,752
15,684
60,053
42,338
Other 1,481
1,176
4,171
3,601
Total revenues $ 37,903
$ 28,162
$ 105,906
$ 77,576

Core solutions revenue includes our subscription fees which are designed to scale to the size of our customers’ businesses. We recognize subscription revenue ratably over the terms of the subscription agreements, which typically range from one month to one year. Revenue from subscription services is impacted by a number of factors, including the change in the number and type of our customers, the size and needs of our customers’ businesses, and our customer renewal rates.

Value+ services revenue includes subscriptions and usage-based fees. Subscription Value+ services include website hosting services and contact center services. Usage-based Value+ services include fees for electronic payment processing, applicant screening services, our tenant liability insurance program, collections, and online vacancy advertising services. Revenue from Value+ services is impacted by a number of factors, including the number of new and existing customers that adopt and utilize our Value+ service, the size and needs of our customers and our customer renewal rates.

Other revenue includes revenue from one-time services related to on-boarding customers to our core solutions, website design services and online vacancy advertising services offered to legacy RentLinx customers.


	Three Months Ended March 31,
	2024		2023
Core solutions	$	42,920	$	37,169
Value Added Services	142,331		96,835
Other	2,179		2,096
Total revenue	$	187,430	$	136,100

Our revenue is generated primarily from ~~U.S. customers.~~customers in the United States. All of our property and equipment is located in the ~~U.S.~~United States.

Item 2. 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 Condensed Consolidated Financial Statements and the related notes included elsewhere in this Quarterly Report and in our 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. These statements involve numerous risks and uncertainties. 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 entitled “Risk Factors” in Part I, Item 1A of our Annual Report. Please also refer to the section of this Quarterly Report entitled "Cautionary Note Regarding Forward-Looking Statements" for additional information.

Overview

~~AppFolio is~~We are a ~~provider~~technology leader powering the future of ~~industry-specific, cloud-based software~~the real estate industry. Our solutions ~~for SMBs in the property management and legal industries. We were formed in 2006 with a vision to revolutionize the way that SMBs grow and compete by enabling their digital transformation.~~

~~Our platform is~~are designed to be the system of record to automate essential business processes and the system of engagement to enhance business interactions between our customers and their clients and vendors. Our property management software provides small and medium-sized property managers with an end-to-end solution to many of their business needs, enabling them to manage their portfolio of properties quickly and easily in a single, integrated environment. Our legal software provides solo practitioners and small law firms with a streamlined practice and case management solution, allowing them to manage much of their case load within a single system. We also offer optional, but often mission-critical, Value+ services, which are seamlessly built into our core solutions.

We launched our first product, APM, a property management solution, in 2008. Recognizing that our customers would benefit from additional mission-critical services that they can purchase as needed, we launched our first Value+ service in 2009 by offering website design and hosting services to our property manager customers. Our websites give our customers a professional online presence and serve as the hub for our system of engagement. In 2010, we commenced the roll out of our electronic payments platform with the introduction of ACH payment processing and, in 2011, we launched resident screening as additional Value+ services. In 2012, we introduced our tenant liability insurance program as a further Value+ service. Also in 2012, after completing our market validation process, we decided to enter the legal market. We expedited our time-to-market by acquiring MyCase, a legal practice and case management solution, and we leveraged our AppFolio Business System, including our experience gained in the property management vertical, to advance our software solution in the legal vertical. In 2013, we extended our website design and hosting services to our law firm customers and expanded our electronic payments platform for property managers by allowing residents to pay rent by electronic cash payment and credit or debit card. In 2014, we launched an additional Value+ service for our property manager customers with our contact center to resolve or route incoming maintenance requests. In 2016, we launched premium leads and debt collection services as additional Value+ services toenable our property manager customers to digitally transform their businesses, address critical business operations and deliver a better customer experience. Our products assist our customers with ~~filling vacancies~~an interconnected and ~~collecting~~growing network of stakeholders in their ~~tenants' unpaid rent. Also in 2016, we expanded~~business ecosystems, including property owners, real estate investment managers, rental prospects, residents, and service providers, and provide key functionality related to critical transactions across the real estate lifecycle, including screening potential tenants, sending and receiving payments and risk mitigation services. AppFolio’s intuitive interface, coupled with streamlined and automated workflows, make it easier for our ~~electronic payments platform in~~customers to eliminate redundant and manual processes so they can deliver a great experience for their network of stakeholders while improving financial and operational performance.

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 ~~legal vertical by allowing clients~~heart of our ~~legal customers~~success and our customers' success, and we have worked hard not only to ~~pay their legal bills by credit card, debit card, or ACH. In September 2017,~~attract and retain talented individuals, but also to provide a challenging and rewarding work environment to motivate and develop our valuable human capital. As we ~~announced~~navigate the ~~upcoming release~~challenges of ~~a new Value+ service, renters insurance, which expands on~~increased competition for talent, we continue to evolve our ~~existing tenant liability insurance program~~compensation and ~~offers additional coverage for tenant’s personal belongings.~~employee reward practices.

Property management units under management. We ~~also enhanced~~believe that our ~~electronic payments platform with the addition of same day ACH payments for owner contributions and eCheck payables. Through~~ability to increase our disciplined market validation approach and ongoing investment in product development, we continuously update our software solutions through new and innovative core functionality and Value+ services, as well as assess opportunities in adjacent markets and new verticals.

We have focused on growing our revenue by increasing the size of our customer base, retaining customers, introducing new or expanded Value+ services, increasing the adoption and utilization of our Value+ services by new and existing customers, and increasing the number of units under management. We define our customer base as the number of customers subscribing to our core solutions, exclusive of free trials. We intend to continue to invest in revenue growth opportunities over time in our current markets, adjacent markets, and new verticals.

~~Customer count and~~ property ~~manager~~management units under management ~~are summarized in the table below:~~

September 30, June 30, March 31, December 31, September 30, June 30,
2017 2016
Property manager 11,258
10,820
10,468
10,038
9,612
9,275
Property manager units under management (in millions) 3.08
2.93
2.83
2.68
2.53
2.41
Law firm 9,214
8,913
8,676
8,135
7,799
7,349

We have invested in growth in a disciplined manner across our organization, and intend to continue to do so. These investments to grow our business will continue to increase our costs and operating expenses onis an ~~absolute basis. Many of these investments will occur in advance~~indicator of our ~~realization of revenue or any other benefit~~market penetration, growth, and ~~will make it difficult to determine if we are allocating our resources efficiently.~~potential future business opportunities. We expect cost of revenue, research and product development expense, sales and marketing expense, and general and administrative expense to decrease as a percentage of revenue over the long term as revenue increases and we gain additional operating leverage in our business. As a result of this increased operating leverage, we expect our operating margins will improve over the long term.

To date, we have experienced rapid revenue growth due to our investments in research and product development, sales and marketing, customer service and support, and infrastructure. During the nine months ended September 30, 2017, we have derived more than 90% of our revenue from ourdefine property management ~~solution.~~units under management as active or committed units under management at the period end date. We had 8.3 million and 7.5 million property management units under management as of March 31, 2024 and 2023, respectively.

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 towards the realization of short-term financial or business metrics, or short-term stockholder value.

Key Components of Results of Operations

Revenue

~~We charge our customers on a subscription basis for our~~Our core solutions and certain of our ~~Value+ services.~~Value Added Services are offered on a subscription basis. Our core solutions subscription fees vary by property type and are designed to scale towith the size of our customers’ businesses. We recognize ~~subscription~~ revenue ~~ratably~~for subscription-based services on a straight-line basis over the ~~terms of~~contract term beginning on the ~~subscription agreements, which typically range from one month to one year.~~date that our service is made available. We generally invoice ~~our customers for subscription services in~~ monthly ~~quarterly~~ or, ~~annual installments, typically~~to a lesser extent, annually in advance of the subscription period. Revenue from subscription services is impacted by a number of factors, including the change in the number and type of our customers, the size and needs of our customers’ businesses, our customer renewal rates, and the level of adoption of our Value+ subscription services by new and existing customers.

We also ~~charge~~offer certain Value Added Services, which are not covered by our ~~customers usage-based~~subscription fees, ~~for using certain Value+ services, although fees for electronic payment processing are generally paid by the clients of our customers.~~on a per-use basis. Usage-based fees are charged either as a percentage of the transaction amount (e.g., for certain of our payment services) or on a flat fee per transaction basis with no minimum usage ~~commitments.~~commitments (e.g., for our tenant screening and risk mitigation services). We recognize revenue for usage-based services in the period the service is rendered. Our payments services fees are recorded gross of the interchange and payment processing related fees. We generally invoice our ~~customers for~~ usage-based services on a monthly

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basis ~~for services rendered in~~or collect the ~~preceding month. Revenue from usage-based services is impacted by a number~~fee at the time of ~~factors, including the number of new and existing customers that adopt and utilize our Value+ services, the size and needs~~service. A significant majority of our ~~customers and~~Value Added Services revenue comes from the use of our ~~customer renewal rates.~~

~~We experience some seasonality in our Value+~~payment services, revenue, primarily with respect to the screening services we provide to our property manager customers. These customers historically have processed fewer applications for new tenants during the fourth quarter holiday season; therefore, revenue associated with ourtenant screening services, and ~~new tenant applications typically declines in the fourth quarter of the year. As a result of this seasonal decline in revenue,~~risk mitigation services.

In addition, we have typically experienced 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.

~~We also offer our assistance to~~charge our customers ~~with on-boarding to~~for assistance onboarding onto our core solutions ~~as well as website design~~and for certain other non-recurring services. ~~These services are generally purchased as part of a subscription agreement, and are typically performed within the first several months of the arrangement.~~ We generally invoice ~~our customers~~ for these other services in advance of the services being ~~completed. We~~completed and recognize revenue ~~for these other services upon completion of~~in the ~~related service.~~period the service is rendered. We ~~also~~ generate revenue from the legacy ~~RentLinx~~ customers of previously acquired businesses by providing ~~services that allow these customers to advertise rental houses and apartments online. Revenue~~

~~derived from customers using the RentLinx~~ services outside of our property ~~manager~~management core solution ~~platform~~platform. Revenue derived from these services is ~~being~~ recorded ~~under~~ in Other ~~revenue~~.revenue. As of March 31, 2024 and 2023, we had 19,941 and 18,834 property management customers, respectively.

Costs and Operating Expenses

Cost of Revenue(Exclusive of Depreciation and Amortization).Many of our Value Added Services are facilitated by third-party service providers. Cost of revenue paid to these third-party service providers includes the cost of electronic interchange and payment processing-related services to support our payments services, the cost of credit reporting services for our tenant screening services, and various costs associated with our risk mitigation service providers. These third-party costs vary both in amount and as a percent of revenue for each Value Added Service offering. Cost of revenue also consists of personnel-related costs ~~(including salaries, incentive-based compensation, benefits, and stock-based compensation)~~ for our employees focused on customer service and the support of our operations (including salaries, performance-based compensation, benefits, and stock-based compensation), platform infrastructure costs (such as data center operations and hosting-related costs), ~~fees paid to third-party service providers, payment processing fees,~~ and allocated shared and other costs. ~~We typically allocate shared costs across our organization based on headcount within the applicable part of our organization.~~ Cost of revenue excludes depreciation of property and equipment, amortization of capitalized software development costs and ~~acquired technology. We intend to continue to invest in customer service and support, and the expansion~~amortization of our technology infrastructure as we grow the number of our customers and roll out additional Value+ services. We also intend to expand our Value+ offerings over time, which will impact cost of revenue both in absolute dollars and overall percentage of revenue.intangible assets.

Sales and ~~Marketing~~. Marketing. Sales and marketing expense consists of personnel-related costs ~~(including salaries, sales commissions, incentive-based compensation, benefits, and stock-based compensation)~~ for our employees focused on sales and marketing (including salaries, sales commissions, performance-based compensation, benefits, and stock-based compensation), 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 new and existing customers are expensed as incurred.~~ 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 as we grow to increase the size of our customer base and increase the adoption and utilization of Value+ services by our new and existing customers.

Research and Product Development.Research and product development expense consists of personnel-related costs ~~(including salaries, incentive-based compensation, benefits, and stock-based compensation)~~ for our employees focused on research and product development(including salaries, performance-based compensation, benefits, and stock-based compensation), fees for third-party development resources, and allocated shared and other costs. Our research and product development efforts are focused on ~~enhancing~~expanding functionality and the ease of use ~~and functionality~~ of our existing software solutions by adding new core functionality, ~~Value+ services~~Value Added Services and other improvements, as well as developing new products and services. We capitalize ~~the portion of~~ our software development costs that ~~meets~~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, incentive-based compensation, benefits, and stock-based compensation)~~ for employees in our executive, finance, information technology, ~~or IT,~~ human resources, legal, compliance, corporate development ~~legal~~ and administrative ~~organizations.~~organizations (including salaries, performance-based compensation, benefits, and stock-based compensation). In addition, general and administrative expense includes fees for third-party professional services (including ~~consulting,~~audit, legal, compliance, and ~~audit~~tax services), regulatory fees, other corporate expenses, impairment of long-lived assets, gains on lease modifications, and allocated shared ~~costs. We intend to incur incremental general~~ and ~~administrative costs associated with supporting the growth of our business.~~other costs.

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 (Loss), Net. Other income (loss), net includes gains and ~~product development organization~~losses associated with the sale of businesses and ~~the development or acquisition of new technology, we expect to have increased capitalized software development costs~~property and ~~incremental amortization.~~equipment.

Interest Income, ~~(Expense)~~. Net. Interest income, net 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 ~~within~~in our bank accounts. ~~Interest expense includes interest paid on outstanding borrowings under our Credit Agreement.~~

(Benefit from) provision for income taxes. (Benefit from) provision for income taxes consists of federal and state income taxes in the United States.

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Results of Operations

~~The following table sets forth our results of operations for the periods presented in dollars (in thousands) and as a percentage of revenue:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Amount % Amount % Amount % Amount %
Consolidated Statements of Operations Data:
Revenue $ 37,903
100.0 % $ 28,162
100.0 % $ 105,906
100.0 % $ 77,576
100.0 %
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization) ⁽¹⁾
14,053
37.1
11,645
41.4
40,747
38.5
33,387
43.0
Sales and marketing ⁽¹⁾
7,257
19.1
6,979
24.8
21,556
20.4
22,097
28.5
Research and product development ⁽¹⁾
4,367
11.5
3,464
12.3
11,998
11.3
9,531
12.3
General and administrative ⁽¹⁾
5,405
14.3
4,642
16.5
15,310
14.5
12,580
16.2
Depreciation and amortization 3,237
8.5
2,636
9.4
9,347
8.8
7,112
9.2
Total costs and operating expenses 34,319
90.5
29,366
104.3
98,958
93.4
84,707
109.2
Income (loss) from operations 3,584
9.5
(1,204 ) (4.3 ) 6,948
6.6
(7,131 ) (9.2 )
Other expense, net (5 ) —
(12 ) —
(93 ) (0.1 ) (34 ) —
Interest income, net 155
0.4
102
0.4
377
0.4
221
0.3
Income (loss) before provision for income taxes 3,734
9.9
(1,114 ) (4.0 ) 7,232
6.8
(6,944 ) (9.0 )
Provision for income taxes 52
0.1
11
—
93
0.1
48
0.1
Net income (loss) $ 3,682
9.7 % $ (1,125 ) (4.0 )% $ 7,139
6.7 % $ (6,992 ) (9.0 )%

⁽¹⁾ ~~Includes stock-based compensation expense as follows (in thousands):~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization) $ 189
$ 138
$ 527
$ 321
Sales and marketing 186
124
516
296
Research and product development 173
109
471
264
General and administrative 1,040
918
2,790
1,963
Total stock-based compensation expense $ 1,588
$ 1,289
$ 4,304
$ 2,844

~~Comparison of the Three and Nine Months Ended September 30, 2017 and 2016~~

Revenue


	Three Months Ended March 31,				Change
	2024		2023		Amount		%
	(dollars in thousands)
Core solutions	$	42,920	$	37,169	$	5,751	15	%
Value Added Services	142,331		96,835		45,496		47	%
Other	2,179		2,096		83		4	%
Total revenue	$	187,430	$	136,100	$	51,330	38	%

Three Months Ended
September 30, Change Nine Months Ended
September 30, Change
2017 2016 Amount % 2017 2016 Amount %
(dollars in thousands)
Core solutions $ 14,670
$ 11,302
$ 3,368
30 % $ 41,682
$ 31,637
$ 10,045
32 %
Value+ services 21,752
15,684
6,068
39 % 60,053
42,338
17,715
42 %
Other 1,481
1,176
305
26 % 4,171
3,601
570
16 %
Total revenues $ 37,903
$ 28,162
$ 9,741
35 % $ 105,906
$ 77,576
$ 28,330
37 %

~~Revenue increased $9.7 million, or 35%,~~The increase in revenue for the three months ended ~~September 30, 2017~~March 31, 2024, compared to the same period in the prior year, was primarily attributable to an increase in the usage of our payments, tenant screening, and risk mitigation services. During the three ~~months~~month period ended ~~September 30, 2016, mainly reflecting a 17% increase~~March 31, 2024, we also experienced growth of 11% in the number of property manager customers. The overall increase was mostly attributable to revenue from Value+ services, which increased by $6.1 million, or 39%. The increase in Value+ services was mainly driven by increased usage of our electronic payments platform and screening services by a larger property manager customer base and an increase inmanagement units under management of 22%. We also experienced growth in our other Value+ services, including tenant liability insurance, customer contact center, website hosting services and premium lead services within our Value+ services. The overall increase in revenue was also attributable to growth in revenue from our Core solutions of $3.4 million, or 30%, driven by growth in the number of our customers and units under management.

~~Revenue increased $28.3 million, or 37%, for the nine months ended September 30, 2017~~ compared to the ~~nine months ended September 30, 2016, mainly reflecting a 17% increase~~same periods in the ~~number~~prior year, which drove growth in users of ~~property manager customers. The overall increase was mostly attributable to revenue from Value+~~our subscription and usage-based services.

Our payment services ~~which increased by $17.7 million, or 42%. The increase in Value+ services was mainly driven by~~experienced increased usage during the comparative periods as residents, property managers, and owners transacted more business online.

We expect total revenue for the year ending December 31, 2024 to increase compared to the year ended December 31, 2023 as we continue to add new customers and property management units under management, along with increased adoption and utilization of our electronic payments platform and screening services by a larger property manager customer base and increase in the number of units under management. We also experienced revenue growth in our other Value+ services, including tenant liability insurance, customer contact center, website hosting services and premium lead services within our Value+ services. The overall increase in revenue was also attributable to growth in revenue from our Core solutions of $10.0 million, or 32%, driven by growth in the number of our customers and units under management.Value Added Services.

~~For the nine months ended September 30, 2017 and 2016, we derived more than 90% of our revenue from our property manager customers.~~

Cost of Revenue (Exclusive of Depreciation and Amortization)


	Three Months Ended March 31,						Change
	2024			2023			Amount		%
	(dollars in thousands)
Cost of revenue (exclusive of depreciation and amortization)	$	64,646		$	56,208		$	8,438	15	%
Percentage of revenue	34.5		%	41.3		%
Stock-based compensation, included above	$	960		$	768		$	192	25	%
Percentage of revenue	0.5		%	0.6		%

Three Months Ended September 30, Change Nine Months Ended
September 30, Change
2017 2016 Amount % 2017 2016 Amount %
(dollars in thousands)
Cost of revenue (exclusive of depreciation and amortization) $ 14,053
$ 11,645
$ 2,408
21 % $ 40,747
$ 33,387
$ 7,360
22 %
Percentage of revenue 37.1 % 41.4 % 38.5 % 43.0 %

Cost of revenue (exclusive of depreciation and amortization) ~~increased $2.4 million, or 21%,~~ for the three months ended ~~September 30, 2017~~March 31, 2024 increased primarily due to increases in expenditures to third-party service providers related to the delivery of our Value Added Services of $8.6 million compared to the ~~three months ended September 30, 2016. The~~same period in the prior year. This increase was ~~primarily due to increased expenditures to third parties of $1.6 million~~ directly associated with ~~the~~ increased adoption and utilization of our ~~Value+ services, as evidenced by~~Value Added Services during the ~~39% increase in Value+ services revenues. There was also an increase in personnel-related costs of $0.6 million to support the continued growth of our business.~~period.

~~As a percentage of revenue,~~We expect cost of revenue (exclusive of depreciation and amortization) ~~improved to 37.1% from 41.4%~~ for the ~~three months ended September 30, 2017~~year ending December 31, 2024, to decrease as a percentage of revenue compared to the ~~three months~~year ended September 30, 2016. This improvement was primarily driven by our ability to increase revenue with a more moderate increase in personnel-related costs, and a slight improvement in pricing with our third-party service providers as we continue to grow.

Cost of revenue (exclusive of depreciation and amortization) increased $7.4 million, or 22%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase wasDecember 31, 2023, primarily due to increased ~~third-~~

~~party costs of $4.9 million driven by increased Value+ services~~ revenue from eCheck fee and ~~an increase in head-count~~product mix, and ~~personnel-related costs of $1.7 million due to the continued growth of our business.~~

As a percentage of revenue, cost of revenue (exclusive of depreciation and amortization) improved to 38.5% from 43.0% for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. This improvement was primarily driven by our ability to increase revenue with a more moderate increase in personnel-related costs, and an improvement in pricing with our third-party services providers as we continue to ~~grow.~~leverage headcount efficiencies.

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Sales and Marketing

Three Months Ended September 30, Change Nine Months Ended
September 30, Change
2017 2016 Amount % 2017 2016 Amount %
(dollars in thousands)
Sales and marketing $ 7,257
$ 6,979
$ 278
4 % $ 21,556
$ 22,097
$ (541 ) (2 )%
Percentage of revenue 19.1 % 24.8 % 20.4 % 28.5 %

Sales and marketing expense increased by $0.3 million or 4% for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. This increase was the result of an increase in personnel-related costs in our sales and marketing organization to support our revenue growth.


	Three Months Ended March 31,						Change
	2024			2023			Amount		%
	(dollars in thousands)
Sales and marketing	$	24,455		$	29,398		$	(4,943)	(17)	%
Percentage of revenue	13.0		%	21.6		%
Stock-based compensation, included above	$	1,510		$	2,417		$	(907)	(38)	%
Percentage of revenue	0.8		%	1.8		%

Sales and marketing expense decreased ~~$0.5 million, or 2%,~~ for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2024 compared to the ~~nine~~same period in the prior year, primarily due to a $3.5 million decrease in personnel-related costs, including stock-based and performance-based compensation, driven by the lower headcount resulting from our improved efficiency . In addition, advertising costs decreased by $0.6 million for the three months ended ~~September 30, 2016. The~~March 31, 2024 compared to the same period in the prior year due to timing of promotional activities.

We expect sales and marketing expense for the year ending December 31, 2024 to decrease ~~was~~as a percentage of revenue compared to the ~~result of a decrease in allocated and other operating costs of $0.3 million and a decrease in personnel related costs of $0.2 million~~year ended December 31, 2023, as we ~~gain efficiencies in our expenses relative~~continue to ~~revenue growth.~~leverage headcount efficiencies.

Research and Product Development







	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
	2017			2016			Amount		%		2017			2016			Amount		%
	(dollars in thousands)																				(dollars in thousands)
Research and product development	$	4,367		$	3,464		$	903	26	%	$	11,998		$	9,531		$	2,467	26	%
Percentage of revenue	11.5		%	12.3		%					11.3		%	12.3		%
Percentage of revenue
Percentage of revenue
Stock-based compensation, included above
Stock-based compensation, included above
Stock-based compensation, included above
Percentage of revenue
Percentage of revenue
Percentage of revenue


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



~~Section~~	Page No.
~~Cautionary Note Regarding~~ Forward-Looking Statements			1
Part I. Financial Information			2
Item 1. Condensed Consolidated Financial Statements (Unaudited)			2
Condensed Consolidated Balance Sheets as of ~~September 30, 2017~~March 31 , 202 4 and December 31, ~~2016~~20 23			23
Condensed Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2024 and ~~2016~~2023			34
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2024 and ~~2016~~2023			45
Condensed Consolidated ~~Statement~~Statements of Stockholders' Equity for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2024 and 2023			56
Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2024 and ~~2016~~2023			67
Notes to Condensed Consolidated Unaudited Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2216
Item 3. Q uantitative and Qualitative ~~and Quantitative~~ Disclosure s about Market Risk			3022
Item 4. Controls and Procedures			3122
Part II. Other Information			3223
Item 1. Legal Proceedings			3223
Item 1A. Risk Factors			3223
~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~		32
~~Item 3. Defaults Upon Senior Securities~~	32
~~Item 4. Mine Safety Disclosures~~	32
Item 5. Other Information		3223
Item 6. Exhibits			3223
Signatures
~~Exhibit Index~~


	September 30, 2017			December 31, 2016				March 31, 2024	December 31, 2023
Assets
Current assets
Current assets
Current assets
Cash and cash equivalents
Cash and cash equivalents
Cash and cash equivalents	$	14,781		$	10,699
Investment securities—current	28,396			15,473
Accounts receivable, net	3,419			2,511
Prepaid expenses and other current assets	4,393			3,537
Total current assets	50,989			32,220
Investment securities—noncurrent	20,423			26,688

Property and equipment, net	7,005			7,077
Capitalized software, net	17,320			15,539
Property and equipment, net
Property and equipment, net
Operating lease right-of-use assets
Capitalized software development costs, net
Goodwill	6,737			6,737
Intangible assets, net	2,054			3,105
Other assets	1,219			1,217

Other long-term assets

Other long-term assets

Other long-term assets
Total assets	$	105,747		$	92,583
Liabilities and Stockholders’ Equity
Current liabilities
Current liabilities
Current liabilities
Accounts payable
Accounts payable
Accounts payable	$	1,164		$	937
Accrued employee expenses	8,169			7,550
Accrued expenses	5,908			4,044
Deferred revenue	7,508			7,638

Other current liabilities	1,083			1,192

Other current liabilities

Other current liabilities

Total current liabilities	23,832			21,361
Total current liabilities
Total current liabilities

Operating lease liabilities

Operating lease liabilities

Operating lease liabilities

Other liabilities

Other liabilities

Other liabilities	1,238			1,540
Total liabilities	25,070			22,901
Commitments and contingencies (Note 6)
Commitments and contingencies (Note 8)							Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.0001 par value, 25,000 authorized and no shares issued and outstanding as of September 30, 2017 and December 31, 2016	—			—
Class A common stock, $0.0001 par value, 250,000 shares authorized as of September 30, 2017 and December 31, 2016; 14,494 and 11,691 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively;	1			1
Class B common stock, $0.0001 par value, 50,000 shares authorized as of September 30, 2017 and December 31, 2016; 19,448 and 22,028 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively;	3			3

Class A common stock

Class A common stock

Class A common stock
Class B common stock
Additional paid-in capital	150,520			146,692
Accumulated other comprehensive loss	(23		)	(51		)
Accumulated deficit	(69,824		)	(76,963		)
Accumulated other comprehensive Income (loss)
Treasury stock
Retained earnings
Total stockholders’ equity	80,677			69,682
Total liabilities and stockholders’ equity	$	105,747		$	92,583



APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)

	Nine Months Ended September 30,
	2017			2016
Cash from operating activities
Net income (loss)	$	7,139		$	(6,992	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	9,347			7,112
Purchased investment premium, net of amortization	(22		)	185
Amortization of deferred financing costs	48			48
Loss on disposal of property and equipment	94			33
Stock-based compensation	4,304			2,844
Lease abandonment	—			161
Changes in operating assets and liabilities:
Accounts receivable	(908		)	(659		)
Prepaid expenses and other current assets	(856		)	(804		)
Other assets	(54		)	(163		)
Accounts payable	369			(1,109		)
Accrued employee expenses	846			(144		)
Accrued expenses	1,713			1,354
Deferred revenue	(130		)	1,674
Other liabilities	(334		)	1,183
Net cash provided by operating activities	21,556			4,723
Cash from investing activities
Purchases of property and equipment	(1,680		)	(3,560		)
Additions to capitalized software	(8,085		)	(8,554		)
Purchases of investment securities	(17,597		)	(24,334		)
Sales of investment securities	15			10,016
Maturities of investment securities	10,974			17,112
Purchases of intangible assets	(1		)	(2		)
Net cash used in investing activities	(16,374		)	(9,322		)
Cash from financing activities
Proceeds from stock option exercises	508			260
Tax withholding for net share settlement	(1,608		)	(85		)
Principal payments under capital lease obligations	—			(24		)
Proceeds from issuance of debt	88			87
Principal payments on debt	(88		)	(99		)
Net cash (used in) provided by financing activities	(1,100		)	139
Net increase (decrease) in cash and cash equivalents	4,082			(4,460		)
Cash and cash equivalents
Beginning of period	10,699			12,063
End of period	$	14,781		$	7,603


APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)

	Three Months Ended March 31,
	2024		2023
Cash from operating activities
Net Income (loss)	$	38,663	$	(35,110)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	4,693		6,937
Amortization of operating lease right-of-use assets	523		568

Gain on lease modification	—		(2,366)
Stock-based compensation, including as amortized	13,992		14,637


Other	(1,824)		(155)
Changes in operating assets and liabilities:
Accounts receivable	(5,470)		(914)
Prepaid expenses and other current assets	8,849		(2,399)
Accounts payable	733		(1,777)
Operating lease liabilities	(475)		(771)
Accrued expenses and other liabilities	(16,730)		22,923
Net cash provided by operating activities	42,954		1,573
Cash from investing activities
Purchases of available-for-sale investments	(57,162)		(1,285)
Proceeds from sales of available-for-sale investments	—		1,013
Proceeds from maturities of available-for-sale investments	36,670		37,890
Purchases of property and equipment	(1,420)		(794)
Capitalization of software development costs	(1,125)		(1,165)

Proceeds from sale of business, net of cash divested	—		629
Net cash (used in) provided by investing activities	(23,037)		36,288
Cash from financing activities
Proceeds from stock option exercises	3,874		834
Tax withholding for net share settlement	(14,086)		(5,539)
Net cash used in financing activities	(10,212)		(4,705)
Net increase in cash, cash equivalents and restricted cash	9,705		33,156
Cash, cash equivalents and restricted cash
Beginning of period	49,759		71,019
End of period	$	59,464	$	104,175
Cash, cash equivalents and restricted cash at end of period:
Cash and cash equivalents	$	59,214	$	103,925
Restricted cash included in prepaid expenses and other current assets	250		250
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows	$	59,464	$	104,175
Supplemental disclosure of cash flow information


Cash paid for amounts included in the measurement of lease liabilities included in operating cash flows	1,483		1,348





	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Revenue	$	37,903		$	28,162		$	105,906		$	77,576
Revenue
Revenue
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)	14,053			11,645			40,747			33,387
Sales and marketing	7,257			6,979			21,556			22,097
Research and product development	4,367			3,464			11,998			9,531
General and administrative	5,405			4,642			15,310			12,580
Costs and operating expenses:
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)(1)
Cost of revenue (exclusive of depreciation and amortization)(1)
Cost of revenue (exclusive of depreciation and amortization)(1)
Sales and marketing(1)
Sales and marketing(1)
Sales and marketing(1)
Research and product development(1)
Research and product development(1)
Research and product development(1)
General and administrative(1)
General and administrative(1)
General and administrative(1)
Depreciation and amortization
Depreciation and amortization
Depreciation and amortization	3,237			2,636			9,347			7,112
Total costs and operating expenses	34,319			29,366			98,958			84,707
Total costs and operating expenses
Total costs and operating expenses
Income (loss) from operations	3,584			(1,204		)	6,948			(7,131		)
Other expense, net	(5		)	(12		)	(93		)	(34		)
Income (loss) from operations
Income (loss) from operations
Other income (loss), net
Other income (loss), net
Other income (loss), net
Interest income, net
Interest income, net
Interest income, net	155			102			377			221
Income (loss) before provision for income taxes	3,734			(1,114		)	7,232			(6,944		)
Provision for income taxes	52			11			93			48
Income (loss) before provision for income taxes
Income (loss) before provision for income taxes
(Benefit from) provision for income taxes
(Benefit from) provision for income taxes
(Benefit from) provision for income taxes
Net income (loss)
Net income (loss)
Net income (loss)	$	3,682		$	(1,125	)	$	7,139		$	(6,992	)

Net income (loss) per common share:

Net income (loss) per common share:

Net income (loss) per common share:
Basic
Basic
Basic	$	0.11		$	(0.03	)	$	0.21		$	(0.21	)
Diluted	$	0.10		$	(0.03	)	$	0.20		$	(0.21	)
Diluted
Diluted
Weighted average common shares outstanding:
Weighted average common shares outstanding:
Weighted average common shares outstanding:
Basic	33,905			33,600			33,817			33,529
Basic
Basic
Diluted	35,205			33,600			35,091			33,529
Diluted
Diluted


									Accumulated
							Additional		Other
	Common Stock			Common Stock			Paid-in		Comprehensive		Treasury		Retained
	Class A			Class B			Capital		Income (Loss)		Stock		Earnings		Total
	Shares	Amount		Shares	Amount
Balance at December 31, 2023	21,749	$	2	14,116	$	2	$	236,985	$	99	$	(25,756)	$	85,980	$	297,312
Exercise of stock options	244	—		—	—		3,874		—		—		—		3,874
Stock-based compensation	—	—		—	—		13,646		—		—		—		13,646
Vesting of restricted stock units, net of shares withheld for taxes	89	—		—	—		(14,086)		—		—		—		(14,086)
Conversion of Class B common stock to Class A common stock	199	—		(199)	—		—		—		—		—		—
Other comprehensive loss	—	—		—	—		—		(214)		—		—		(214)
Net Income	—	—		—	—		—		—		—		38,663		38,663
Balance at March 31, 2024	22,281	$	2	13,917	$	2	$	240,419	$	(115)	$	(25,756)	$	124,643	$	339,195



	Nine Months Ended September 30, 2017
	Gross Realized Gains		Gross Realized Losses		Gross Proceeds from Sales		Gross Proceeds from Maturities
Agency securities	$	1	$	—	$	15	$	1,044
Corporate bonds	—		—		—		7,440
Certificates of deposit	—		—		—		2,490
	$	1	$	—	$	15	$	10,974



	Nine Months Ended September 30, 2016
	Gross Realized Gains		Gross Realized Losses		Gross Proceeds from Sales		Gross Proceeds from Maturities
Agency securities	$	5	$	—	$	3,005	$	9,557
Corporate bonds	1		—		5,011		2,480
Treasury bills	—		—		2,000		3,830
Certificates of Deposit	—		—		—		1,245
	$	6	$	—	$	10,016	$	17,112



	September 30, 2017			December 31, 2016
Internal use software development costs, gross	$	41,902		$	33,545
Less: Accumulated amortization	(24,582		)	(18,006		)
Internal use software development costs, net	$	17,320		$	15,539



Years Ending December 31,
2017	$	2,409
2018	8,431
2019	5,153
2020	1,327
Total amortization expense	$	17,320



	September 30, 2017
	Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Customer relationships	$	790	$	(510	)	$	280
Technology	4,811		(3,671		)	1,140
Trademarks	930		(508		)	422
Partner relationships	680		(567		)	113
Non-compete agreements	40		(33		)	7
Domain names	273		(273		)	—
Patents	285		(193		)	92
	$	7,809	$	(5,755	)	$	2,054



	Number of Shares		Weighted- Average Grant Date Fair Value per Share
Unvested as of December 31, 2016	496		$	13.34
Granted	307		25.64
Vested	(139	)	12.81
Forfeited	(46	)	16.17
Unvested as of September 30, 2017	618		$	19.36



	Number of Shares		Weighted-Average Grant Date Fair Value per Share
Unvested as of December 31, 2016	46		$	8.55
Granted	9		33.30
Vested	(38	)	9.33
Forfeited	—		—
Unvested as of September 30, 2017	17		$	19.79



	September 30,	June 30,	March 31,	December 31,	September 30,	June 30,
	2017			2016
Property manager	11,258	10,820	10,468	10,038	9,612	9,275
Property manager units under management (in millions)	3.08	2.93	2.83	2.68	2.53	2.41
Law firm	9,214	8,913	8,676	8,135	7,799	7,349