UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2022.~~March 31, 2023.

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________.

Commission File Number 001-37468

AppFolio, Inc.

(Exact name of registrant as specified in its charter)

Delaware

26-0359894

(State of incorporation or organization)

(I.R.S. Employer Identification No.)

70 Castilian Drive

93117

Santa Barbara,

California

(Address of principal executive offices)

(Zip Code)

(805) 364-6093

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Class A common stock, $0.0001 par value	APPF	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of ~~October~~April 20, ~~2022,~~2023, the number of shares of the registrant’s Class A common stock outstanding was ~~20,414,695~~20,766,610 and the number of shares of the registrant’s Class B common stock outstanding was ~~14,746,432.~~14,719,225.

Table of Contents

TABLE OF CONTENTS


						Page No.
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, 2022~~March 31, 2023 and December 31, ~~2021~~2022						3
Condensed Consolidated Statements of Operations for the Three ~~and~~ ~~Nine~~Months Ended ~~September~~ ~~30,~~March 31, 2023 and 2022 ~~and 2021~~						4
Condensed Consolidated Statements of Comprehensive ~~(Loss) Income~~Loss for the Three ~~and~~ ~~Nine~~Months Ended ~~September~~ ~~30,~~March 31, 2023 and 2022 ~~and 2021~~						5
Condensed Consolidated Statements of Stockholders' Equity for the Three ~~and~~ ~~Nine~~Months Ended ~~September~~ ~~30,~~March 31, 2023 and 2022 ~~and 2021~~						6
Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September~~ ~~30,~~March 31, 2023 and 2022 ~~and 2021~~						87
Notes to Condensed Consolidated Unaudited Financial Statements						108
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						2017
Item 3. Qualitative and Quantitative Disclosure about Market Risk						2623
Item 4. Controls and Procedures						2624
Part II. Other Information						2825
Item 1. Legal Proceedings						2825
Item 1A. Risk Factors						28
~~Item 5. Other Information~~						2825
Item 6. Exhibits						2925
Signatures

Table of Contents

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended ~~September 30, 2022~~March 31, 2023 (this "Quarterly Report"), contains forward-looking statements within the meaning of federal securities laws, which statements involve substantial risks and uncertainties. The forward-looking statements made in this Quarterly Report are based primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects and relate only to events as of the date on which the statements are made. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “might,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report and "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021~~2022 (our "Annual Report"), as well as in the other reports we file with the Securities and Exchange Commission (the "SEC"). You should read this Quarterly Report, and the other documents we file with the SEC, with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. As such, you should not rely upon forward-looking statements as predictions of future events. Examples of forward-looking statements include, among others, statements made regarding changes in the competitive environment, responding to customer needs, research and product development plans, future products and services, growth in the size of our business and number of customers, strategic plans and objectives, business forecasts and plans, our future or assumed financial condition, results of operations and liquidity, trends affecting our business and industry, capital needs and financing plans, capital resource allocation plans, share repurchase plans, and commitments and contingencies, including with respect to the outcome of legal proceedings or regulatory matters. Any forward-looking statement made by us in this Quarterly Report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law.

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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APPFOLIO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in ~~thousands, except par values)~~thousands)


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Assets	Assets					Assets
Current assets	Current assets					Current assets
Cash and cash equivalents	Cash and cash equivalents	$	67,232	$	57,847	Cash and cash equivalents	$	103,925	$	70,769
Investment securities—current	Investment securities—current	72,018		64,600		Investment securities—current	65,022		89,297
Accounts receivable, net	Accounts receivable, net	14,884		12,595		Accounts receivable, net	17,416		16,503
Prepaid expenses and other current assets	Prepaid expenses and other current assets	22,660		23,553		Prepaid expenses and other current assets	25,515		24,899
Total current assets	Total current assets	176,794		158,595		Total current assets	211,878		201,468
Investment securities—noncurrent	Investment securities—noncurrent	45,200		61,076		Investment securities—noncurrent	12,723		25,161
Property and equipment, net	Property and equipment, net	27,633		30,479		Property and equipment, net	25,789		26,110
Operating lease right-of-use assets	Operating lease right-of-use assets	28,539		41,710		Operating lease right-of-use assets	20,849		23,485
Capitalized software development costs, net	Capitalized software development costs, net	36,002		41,212		Capitalized software development costs, net	30,467		35,315
Goodwill	Goodwill	56,060		56,147		Goodwill	56,060		56,060
Intangible assets, net	Intangible assets, net	5,810		11,711		Intangible assets, net	4,214		4,833

Other long-term assets	Other long-term assets	8,844		7,087		Other long-term assets	8,720		8,785
Total assets	Total assets	$	384,882	$	408,017	Total assets	$	370,700	$	381,217
Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Current liabilities	Current liabilities					Current liabilities
Accounts payable	Accounts payable	$	1,508	$	1,704	Accounts payable	$	740	$	2,473
Accrued employee expenses—current		29,496		30,065
Accrued employee expenses						Accrued employee expenses	47,087		34,376
Accrued expenses	Accrued expenses	16,161		13,284		Accrued expenses	18,029		15,601

Other current liabilities	Other current liabilities	10,600		7,589		Other current liabilities	13,971		8,893

Total current liabilities	Total current liabilities	57,765		52,642		Total current liabilities	79,827		61,343

Operating lease liabilities	Operating lease liabilities	53,256		55,733		Operating lease liabilities	45,257		50,237

Other liabilities	Other liabilities	1,989		2,261		Other liabilities	5,047		4,091
Total liabilities	Total liabilities	113,010		110,636		Total liabilities	130,131		115,671
Commitments and contingencies (Note 8)	Commitments and contingencies (Note 8)					Commitments and contingencies (Note 8)
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:

Class A common stock	Class A common stock	2		2		Class A common stock	2		2
Class B common stock	Class B common stock	2		2		Class B common stock	2		2
Additional paid-in capital	Additional paid-in capital	197,199		171,930		Additional paid-in capital	219,074		209,704
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(2,553)		(194)		Accumulated other comprehensive loss	(921)		(1,684)
Treasury stock	Treasury stock	(25,756)		(25,756)		Treasury stock	(25,756)		(25,756)
Retained earnings	Retained earnings	102,978		151,397		Retained earnings	48,168		83,278
Total stockholders’ equity	Total stockholders’ equity	271,872		297,381		Total stockholders’ equity	240,569		265,546
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	384,882	$	408,017	Total liabilities and stockholders’ equity	$	370,700	$	381,217

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

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APPFOLIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Revenue	Revenue	$	125,079	$	95,809	$	347,825	$	263,770	Revenue	$	136,100	$	105,296
Costs and operating expenses:	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)	50,707		38,730		141,484		104,847		Cost of revenue (exclusive of depreciation and amortization)(1)	56,208		43,347
Sales and marketing(1)	Sales and marketing(1)	25,644		19,362		77,558		53,255		Sales and marketing(1)	29,398		24,919
Research and product development(1)	Research and product development(1)	28,959		16,500		79,966		46,389		Research and product development(1)	37,662		24,320
General and administrative(1)	General and administrative(1)	19,347		13,404		76,258		40,971		General and administrative(1)	31,691		18,964
Depreciation and amortization	Depreciation and amortization	8,241		7,826		24,977		22,844		Depreciation and amortization	7,671		8,415
Total costs and operating expenses	Total costs and operating expenses	132,898		95,822		400,243		268,306		Total costs and operating expenses	162,630		119,965
Loss from operations	Loss from operations	(7,819)		(13)		(52,418)		(4,536)		Loss from operations	(26,530)		(14,669)
Other income (loss), net	Other income (loss), net	4,221		(353)		4,256		705		Other income (loss), net	20		(10)
Interest income		374		65		632		173
Loss before provision for (benefit from) income taxes		(3,224)		(301)		(47,530)		(3,658)
Interest income, net										Interest income, net	1,361		107
Loss before provision for income taxes										Loss before provision for income taxes	(25,149)		(14,572)
Provision for (benefit from) income taxes	Provision for (benefit from) income taxes	938		(160)		889		(6,017)		Provision for (benefit from) income taxes	9,961		(285)
Net (loss) income		$	(4,162)	$	(141)	$	(48,419)	$	2,359
Net loss										Net loss	$	(35,110)	$	(14,287)

Net (loss) income per common share:
Basic		$	(0.12)	$	—	$	(1.39)	$	0.07
Diluted		$	(0.12)	$	—	$	(1.39)	$	0.07
Weighted average common shares outstanding:
Basic		35,043		34,614		34,936		34,525
Diluted		35,043		34,614		34,936		35,695

Net loss per common share, basic and diluted										Net loss per common share, basic and diluted	$	(0.99)	$	(0.41)

Weighted average common shares outstanding, basic and diluted										Weighted average common shares outstanding, basic and diluted	35,443		34,836

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Stock-based compensation expense included in costs and operating expenses:	Stock-based compensation expense included in costs and operating expenses:									Stock-based compensation expense included in costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)	Cost of revenue (exclusive of depreciation and amortization)	$	789	$	575	$	1,873	$	1,509	Cost of revenue (exclusive of depreciation and amortization)	$	768	$	358
Sales and marketing	Sales and marketing	2,023		738		5,496		1,587		Sales and marketing	2,417		1,460
Research and product development	Research and product development	4,330		1,451		11,160		3,522		Research and product development	5,439		2,806
General and administrative	General and administrative	3,688		1,299		9,680		3,435		General and administrative	5,279		2,794
Total stock-based compensation expense	Total stock-based compensation expense	$	10,830	$	4,063	$	28,209	$	10,053	Total stock-based compensation expense	$	13,903	$	7,418

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

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APPFOLIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~(LOSS) INCOME~~LOSS

(UNAUDITED)

(in thousands)

Three Months Ended
September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
Net (loss) income $ (4,162) $ (141) $ (48,419) $ 2,359
Other comprehensive loss:
Changes in unrealized losses on investment securities (614) (7) (2,359) (73)
Comprehensive (loss) income $ (4,776) $ (148) $ (50,778) $ 2,286


	Three Months Ended March 31,
	2023		2022
Net loss	$	(35,110)	$	(14,287)
Other comprehensive income (loss):
Changes in unrealized gains (losses) on investment securities	763		(1,345)
Comprehensive loss	$	(34,347)	$	(15,632)

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

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APPFOLIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)

(in thousands)


										Accumulated																									Accumulated
								Additional		Other																						Additional			Other
		Common Stock			Common Stock			Paid-in		Comprehensive		Treasury		Retained							Common Stock					Common Stock						Paid-in			Comprehensive			Treasury			Retained
		Class A			Class B			Capital		Loss		Stock		Earnings		Total					Class A					Class B						Capital			Loss			Stock			Earnings			Total
		Shares	Amount		Shares	Amount															Shares			Amount		Shares			Amount
Balance at December 31, 2021		19,417	$	2	15,408	$	2	$	171,930	$	(194)	$	(25,756)	$	151,397	$	297,381
Balance December 31, 2022																		Balance December 31, 2022	20,569			$	2		14,746		$	2		$	209,704		$	(1,684)		$	(25,756)		$	83,278		$	265,546
Exercise of stock options	Exercise of stock options	17	—		—	—		100		—		—		—		100				Exercise of stock options	64			—		—			—			834			—			—			—			834
Stock-based compensation		—	—		—	—		7,967		—		—		—		7,967
Vesting of restricted stock units, net of shares withheld for taxes		17	—		—	—		(1,073)		—		—		—		(1,073)
Conversion of Class B common stock to Class A common stock		572	—		(572)	—		—		—		—		—		—
Other comprehensive loss		—	—		—	—		—		(1,345)		—		—		(1,345)
Net loss		—	—		—	—		—		—		—		(14,287)		(14,287)
Balance at March 31, 2022		20,023	$	2	14,836	$	2	$	178,924	$	(1,539)	$	(25,756)	$	137,110	$	288,743
Exercise of stock options		41	—		27	—		503		—		—		—		503
Stock-based compensation		—	—		—	—		10,639		—		—		—		10,639
Stock based compensation																		Stock based compensation	—			—			—		—			14,075			—			—			—			14,075
Vesting of restricted stock units, net of shares withheld for taxes	Vesting of restricted stock units, net of shares withheld for taxes	66	—		—	—		(4,524)		—		—		—		(4,524)				Vesting of restricted stock units, net of shares withheld for taxes	79			—		—			—			(5,539)			—			—			—			(5,539)
Conversion of Class B common stock to Class A common stock	Conversion of Class B common stock to Class A common stock	37	—		(37)	—		—		—		—		—		—				Conversion of Class B common stock to Class A common stock	27			—		(27)			—			—			—			—			—			—
Issuance of restricted stock awards	Issuance of restricted stock awards	6	—		—	—		—		—		—		—		—				Issuance of restricted stock awards	2			—		—			—			—			—			—			—			—
Other comprehensive loss		—	—		—	—		—		(400)		—		—		(400)
Other comprehensive income																		Other comprehensive income	—			—			—		—			—			763			—			—			763

Net loss	Net loss	—	—		—	—		—		—		—		(29,970)		(29,970)				Net loss	—			—		—			—			—			—			—			(35,110)			(35,110)
Balance June 30, 2022		20,173	$	2	14,826	$	2	$	185,542	$	(1,939)	$	(25,756)	$	107,140	$	264,991
Exercise of stock options		102	—		—	—		1,976		—		—		—		1,976
Stock-based compensation		—	—		—	—		11,665		—		—		—		11,665
Vesting of restricted stock units, net of shares withheld for taxes		32	—		—	—		(1,984)		—		—		—		(1,984)
Conversion of Class B common stock to Class A common stock		80	—		(80)	—		—		—		—		—		—
Balance March 31, 2023																		Balance March 31, 2023	20,741			$	2		14,719		$	2		$	219,074		$	(921)		$	(25,756)		$	48,168		$	240,569

Other comprehensive loss		—	—		—	—		—		(614)		—		—		(614)

Net loss		—	—		—	—		—		—		—		(4,162)		(4,162)
Balance September 30, 2022		20,387	$	2	14,746	$	2	$	197,199	$	(2,553)	$	(25,756)	$	102,978	$	271,872

~~Table of Contents~~


										Accumulated																									Accumulated
								Additional		Other																						Additional			Other
		Common Stock			Common Stock			Paid-in		Comprehensive		Treasury		Retained							Common Stock					Common Stock						Paid-in			Comprehensive			Treasury			Retained
		Class A			Class B			Capital		Income (Loss)		Stock		Earnings		Total					Class A					Class B						Capital			Loss			Stock			Earnings			Total
		Shares	Amount		Shares	Amount															Shares			Amount		Shares			Amount
Balance at December 31, 2020		18,729	$	2	15,659	$	2	$	161,247	$	56	$	(25,756)	$	150,369	$	285,920
Exercise of stock options		23	—		—	—		100		—		—		—		100
Stock-based compensation		—	—		—	—		3,295		—		—		—		3,295
Vesting of restricted stock units, net of shares withheld for taxes		42	—		—	—		(3,992)		—		—		—		(3,992)
Conversion of Class B common stock to Class A common stock		108	—		(108)	—		—		—		—		—		—

Other comprehensive loss		—	—		—	—		—		(18)		—		—		(18)
Net income		—	—		—	—		—		—		—		479		479
Balance at March 31, 2021		18,902	$	2	15,551	$	2	$	160,650	$	38	$	(25,756)	$	150,848	$	285,784
Exercise of stock options		13	—		84	—		545		—		—		—		545
Stock-based compensation		—	—		—	—		3,873		—		—		—		3,873
Vesting of restricted stock units, net of shares withheld for taxes		56	—		—	—		(4,908)		—		—		—		(4,908)
Conversion of Class B common stock to Class A common stock		14	—		(14)	—		—		—		—		—		—
Issuance of restricted stock awards		4	—		—	—		—		—		—		—		—
Other comprehensive loss		—	—		—	—		—		(48)		—		—		(48)
Net income		—	—		—	—		—		—		—		2,021		2,021
Balance at June 30, 2021		18,989	$	2	15,621	$	2	$	160,160	$	(10)	$	(25,756)	$	152,869	$	287,267
Balance at December 31, 2021																		Balance at December 31, 2021	19,417			$	2		15,408		$	2		$	171,930		$	(194)		$	(25,756)		$	151,397		$	297,381
Exercise of stock options	Exercise of stock options	29	—		—	—		146		—		—		—		146				Exercise of stock options	17			—		—			—			100			—			—			—			100
Stock-based compensation	Stock-based compensation	—	—		—	—		4,837		—		—		—		4,837				Stock-based compensation	—			—		—			—			7,967			—			—			—			7,967
Vesting of restricted stock units, net of shares withheld for taxes	Vesting of restricted stock units, net of shares withheld for taxes	5	—		—	—		(403)		—		—		—		(403)				Vesting of restricted stock units, net of shares withheld for taxes	17			—		—			—			(1,073)			—			—			—			(1,073)
Conversion of Class B common stock to Class A common stock	Conversion of Class B common stock to Class A common stock	168	—		(168)	—		—		—		—		—		—				Conversion of Class B common stock to Class A common stock	572			—		(572)			—			—			—			—			—			—

Other comprehensive loss	Other comprehensive loss	—	—		—	—		—		(7)		—		—		(7)				Other comprehensive loss	—			—		—			—			—			(1,345)			—			—			(1,345)
Net loss	Net loss	—	—		—	—		—		—		—		(141)		(141)				Net loss	—			—		—			—			—			—			—			(14,287)			(14,287)
Balance at September 30, 2021		19,191	$	2	15,453	$	2	$	164,740	$	(17)	$	(25,756)	$	152,728	$	291,699
Balance at March 31, 2022																		Balance at March 31, 2022	20,023			$	2		14,836		$	2		$	178,924		$	(1,539)		$	(25,756)		$	137,110		$	288,743

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

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APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Nine Months Ended
September 30,
2022 2021
Cash from operating activities
Net (loss) income $ (48,419) $ 2,359
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization 23,295 21,545
Amortization of operating lease right-of-use assets 2,498 2,312
Impairment 19,792 —
Deferred income taxes (1,392) (6,394)
Stock-based compensation, including as amortized 29,891 11,352
Gain on sale of business (4,156) (380)
Other (86) 89
Changes in operating assets and liabilities:
Accounts receivable (2,579) (1,350)
Prepaid expenses and other current assets (3,159) (3,558)
Other assets (1,629) (1,181)
Accounts payable 231 1,384
Accrued employee expenses—current (822) 6,335
Accrued expenses 3,991 (1,426)
Operating lease liabilities (1,748) 1,995
Other liabilities 3,576 (6,623)
Net cash provided by operating activities 19,284 26,459
Cash from investing activities
Purchases of available-for-sale investments (70,394) (167,041)
Proceeds from sales of available-for-sale investments — 43,198
Proceeds from maturities of available-for-sale investments 76,598 73,754
Purchases of property and equipment (5,943) (5,166)
Capitalization of software development costs (10,468) (18,511)
Proceeds from sale of business, net of cash divested 5,124 —
Net cash used in investing activities (5,083) (73,766)
Cash from financing activities
Proceeds from stock option exercises 2,579 791
Tax withholding for net share settlement (7,581) (9,303)
Net cash used in financing activities (5,002) (8,512)
Net increase (decrease) in cash, cash equivalents and restricted cash 9,199 (55,819)
Cash, cash equivalents and restricted cash
Beginning of period 58,283 140,699
End of period $ 67,482 $ 84,880
Noncash investing and financing activities
Purchases of property and equipment included in accounts payable and accrued expenses $ 219 $ 886
Capitalization of software development costs included in accrued expenses and accrued employee expenses 549 945
Stock-based compensation capitalized for software development 2,062 1,952

~~Table of Contents~~


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

	Three Months Ended March 31,
	2023		2022
Cash from operating activities
Net loss	$	(35,110)	$	(14,287)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	6,937		7,878
Amortization of operating lease right-of-use assets	568		887

Gain on lease modification	(2,366)		—
Deferred income taxes	4		(342)
Stock-based compensation, including as amortized	14,637		7,955

Other	(159)		427

Changes in operating assets and liabilities:
Accounts receivable	(914)		(3,431)
Prepaid expenses and other current assets	(2,465)		(1,942)
Other assets	66		(573)
Accounts payable	(1,777)		2,987
Accrued employee expenses	13,041		(5,016)
Accrued expenses	2,407		1,722




Operating lease liabilities	(771)		(631)
Other liabilities	7,475		2,122
Net cash provided by (used in) operating activities	1,573		(2,244)
Cash from investing activities
Purchases of available-for-sale investments	(1,285)		(23,309)
Proceeds from sales of available-for-sale investments	1,013		—
Proceeds from maturities of available-for-sale investments	37,890		23,343
Purchases of property and equipment	(794)		(1,830)
Capitalization of software development costs	(1,165)		(3,484)
Proceeds from sale of equity-method investment	629		—



Net cash provided by (used in) investing activities	36,288		(5,280)
Cash from financing activities
Proceeds from stock option exercises	834		100


Tax withholding for net share settlement	(5,539)		(1,073)






Net cash used in financing activities	(4,705)		(973)
Net increase (decrease) in cash, cash equivalents and restricted cash	33,156		(8,497)
Cash, cash equivalents and restricted cash
Beginning of period	71,019		58,283
End of period	$	104,175	$	49,786

The following table presents a reconciliation of cash, cash equivalents and restricted cash reported within our Condensed Consolidated Balance Sheets to the total of the same such amounts shown above (in thousands):


		September 30,					March 31,
		2022		2021			2023		2022
Cash and cash equivalents	Cash and cash equivalents	$	67,232	$	84,444	Cash and cash equivalents	$	103,925	$	49,536
Restricted cash included in other assets	Restricted cash included in other assets	250		436		Restricted cash included in other assets	250		250
Total cash, cash equivalents and restricted cash	Total cash, cash equivalents and restricted cash	$	67,482	$	84,880	Total cash, cash equivalents and restricted cash	$	104,175	$	49,786

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

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APPFOLIO, INC.

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

1. Nature of Business

AppFolio, Inc. ("we," "us" or "our") is a leading provider of cloud business management solutions for the real estate industry. Our solutions are designed to enable our customers to digitally transform their businesses, ~~automate and streamline~~address critical business operations and deliver a better customer experience. ~~We were founded in 2006 with the vision of revolutionizing vertical industry businesses by providing great software and services. Our mission is even more relevant today, when digital~~Digital transformation is effectively a requirement for business success in the modern world, and the way we work and live requires powerful software ~~solutions to enable a more seamless experience.~~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 (“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 ~~28, 2022.~~9, 2023. The year-end condensed balance sheet was derived from our audited consolidated financial statements. Our unaudited interim Condensed Consolidated Financial Statements include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of our Condensed Consolidated Financial Statements. The operating results for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 are not necessarily indicative of the results expected for the full year ending December 31, ~~2022.~~2023.

Reclassification

We reclassified certain amounts in our ~~Condensed Consolidated Balance Sheets and~~ Condensed Consolidated Statements of Cash Flows within the cash flows from operating activities section in the prior year to conform to the current year's presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue, expenses, other income, and provision for income taxes during the reporting period. Assets and liabilities which are subject to judgment and use of estimates include the fair value of 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 from those estimates and any such differences may have a material impact on our Condensed Consolidated Financial Statements.

~~Table of Contents~~

Net ~~(Loss) Income~~Loss per Common Share

Net ~~(loss) income~~loss per common share was the same for shares of our Class A and Class B common stock because they are entitled to the same liquidation and dividend rights and are therefore combined in the table below. The following table presents a reconciliation of the weighted average number of shares of our Class A and Class B common stock used to compute net ~~(loss) income~~loss per common share (in thousands):

Three Months Ended
September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
Weighted average common shares outstanding 35,049 34,620 34,941 34,530
Less: Weighted average unvested restricted shares subject to repurchase 6 6 5 5
Weighted average common shares outstanding; basic 35,043 34,614 34,936 34,525
Plus: Weighted average options, restricted stock units and restricted shares used to compute diluted net income per common share — — — 1,170
Weighted average common shares outstanding; diluted 35,043 34,614 34,936 35,695


	Three Months Ended March 31,
	2023	2022
Weighted average common shares outstanding	35,451	34,840
Less: Weighted average unvested restricted shares subject to repurchase	8	4
Weighted average common shares outstanding; basic and diluted	35,443	34,836

For the three and nine months ended September 30, 2022 and 2021, an aggregate of 212,000 and 127,000 shares, respectively, underlying performance-based restricted stock units ("PSUs") were not included in the computations of diluted and anti-dilutive shares as they are considered contingently issuable upon satisfaction of pre-defined performance measures and their respective performance measures have not been met. Restricted stock units ("RSUs") with an anti-dilutive effect were excluded from the calculation of weighted average number of shares used to compute diluted net income per common share and they were not material for the nine months ended September 30, 2021. Because we reported a net loss for ~~the three and nine months ended September 30, 2022, and the three months ended September 30, 2021,~~all periods presented, all potentially dilutive common shares are anti-dilutive for these periods and have been excluded from the calculation of net loss per share.

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Recent Accounting Pronouncements Not Yet Adopted

In October 2021, the ~~FASB~~Financial Accounting Standards Board ("FASB") issued ~~ASU~~Accounting Standards Update ("ASU") 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers," as if the acquirer had originated the contracts. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We ~~expect to adopt~~adopted ASU 2021-08 on January 1, 2023.

Adoption did not have an impact on our condensed consolidated financial statements.

3. ~~Sale of Subsidiary Business~~

~~Sale of WegoWise~~

In August 2022, we completed the sale of AppFolio Utility Management, Inc., dba WegoWise ("WegoWise"), a former wholly owned subsidiary of the Company that provided cloud-based utility analytics reporting software solutions to our customers. We sold WegoWise for $5.2 million (the “WegoWise Transaction”) and recognized a pre-tax gain on the sale of $4.2 million. Net assets divested are primarily comprised of intangible assets of $2.5 million and deferred revenue of $1.7 million. The gain on the sale is included within ~~Other income (loss), net~~ ~~in our Condensed Consolidated Statements of Operations.~~

~~Table of Contents~~

4. Investment Securities and Fair Value Measurements

Investment Securities

Investment securities classified as available-for-sale consisted of the following as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 (in thousands):


		September 30, 2022									March 31, 2023
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Corporate bonds	Corporate bonds	$	17,483	$	—	$	(163)	$	17,320	Corporate bonds	$	9,631	$	—	$	(52)	$	9,579
Agency securities	Agency securities	17,504		—		(596)		16,908		Agency securities	11,259		—		(317)		10,942

Treasury securities	Treasury securities	84,855		1		(1,866)		82,990		Treasury securities	58,249		—		(1,025)		57,224
Total available-for-sale investment securities	Total available-for-sale investment securities	$	119,842	$	1	$	(2,625)	$	117,218	Total available-for-sale investment securities	$	79,139	$	—	$	(1,394)	$	77,745


		December 31, 2021									December 31, 2022
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Corporate bonds	Corporate bonds	$	29,080	$	—	$	(11)	$	29,069	Corporate bonds	$	17,497	$	2	$	(112)	$	17,387
Agency securities	Agency securities	19,753		—		(27)		19,726		Agency securities	17,507		—		(484)		17,023

Treasury securities	Treasury securities	77,108		2		(229)		76,881		Treasury securities	81,605		—		(1,557)		80,048
Total available-for-sale investment securities	Total available-for-sale investment securities	$	125,941	$	2	$	(267)	$	125,676	Total available-for-sale investment securities	$	116,609	$	2	$	(2,153)	$	114,458

As of ~~September 30, 2022,~~March 31, 2023, the 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 until maturity or recovery of the cost basis. No allowance for credit losses for available-for-sale investment securities was recorded as of ~~September 30, 2022~~March 31, 2023 or December 31, ~~2021.~~2022.

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


		September 30, 2022				December 31, 2021					March 31, 2023				December 31, 2022
		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value			Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	Due in one year or less	$	72,816	$	72,018	$	64,627	$	64,600	Due in one year or less	$	66,348	$	65,022	$	90,822	$	89,297
Due after one year through three years	Due after one year through three years	47,026		45,200		61,314		61,076		Due after one year through three years	12,791		12,723		25,787		25,161
Total available-for-sale investment securities	Total available-for-sale investment securities	$	119,842	$	117,218	$	125,941	$	125,676	Total available-for-sale investment securities	$	79,139	$	77,745	$	116,609	$	114,458

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ we had sales and maturities ~~(which include calls)~~ of investment securities, as follows (in thousands):

Table of Contents


	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
Agency securities	—		—		—		6,250

Treasury securities	—		—		—		24,780
Total	$	3	$	—	$	1,013	$	37,890

~~Nine~~Three Months Ended ~~September 30,~~March 31, 2022

Gross Realized Gains

Gross Realized Losses

Gross Proceeds from Sales

Gross Proceeds from Maturities

Corporate bonds

—

~~28,998~~12,343

~~Agency securities~~

—

~~2,250~~

Treasury securities

—

~~45,350~~11,000

Total

—

~~76,598~~23,343

~~Table of Contents~~

Nine Months Ended September 30, 2021
Gross Realized Gains Gross Realized Losses Gross Proceeds from Sales Gross Proceeds from Maturities
Corporate bonds $ — $ — $ — $ 2,800
Agency securities — — — 9,250
Treasury securities 6 — 43,198 61,704
Total $ 6 $ — $ 43,198 $ 73,754

Fair Value Measurements

Recurring Fair Value Measurements

The following tables present our financial assets and liabilities measured at fair value on a recurring basis as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 by level within the fair value hierarchy (in thousands):


		September 30, 2022				March 31, 2023
		Level 1		Level 2			Total Fair Value			Level 1		Level 2		Total Fair Value
Cash equivalents:	Cash equivalents:								Cash equivalents:
Money market funds	Money market funds	$	5,570	$	—		$	5,570	Money market funds	$	24,442	$	—	$	24,442
Treasury securities	Treasury securities	7,030		—			7,030		Treasury securities	56,173		—		56,173

Available-for-sale investment securities:	Available-for-sale investment securities:								Available-for-sale investment securities:
Corporate bonds	Corporate bonds	—		17,320			17,320		Corporate bonds	—		9,579		9,579
Agency securities	Agency securities	—		16,908			16,908		Agency securities	—		10,942		10,942

Treasury securities	Treasury securities	82,990		—			82,990		Treasury securities	57,224		—		57,224
Total	Total	$	95,590	$	34,228		$	129,818	Total	$	137,839	$	20,521	$	158,360


		December 31, 2021				December 31, 2022
		Level 1		Level 2			Total Fair Value			Level 1		Level 2		Total Fair Value
Cash equivalents:	Cash equivalents:								Cash equivalents:
Money market funds	Money market funds	$	6,105	$	—		$	6,105	Money market funds	$	41,973	$	—	$	41,973

Treasury securities									Treasury securities	1,287		—		1,287
Available-for-sale investment securities:	Available-for-sale investment securities:								Available-for-sale investment securities:
Corporate bonds	Corporate bonds	—		29,069			29,069		Corporate bonds	—		17,387		17,387
Agency securities	Agency securities	—		19,726			19,726		Agency securities	—		17,023		17,023

Treasury securities	Treasury securities	76,881		—			76,881		Treasury securities	80,048		—		80,048
Total	Total	$	82,986	$	48,795		$	131,781	Total	$	123,308	$	34,410	$	157,718

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.

Fair value for our 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.

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5.4. Capitalized Software Development Costs, net

Capitalized software development costs were as follows (in thousands):


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Capitalized software development costs, gross	Capitalized software development costs, gross	$	125,686	$	115,377	Capitalized software development costs, gross	$	128,120	$	129,749
Less: Accumulated amortization	Less: Accumulated amortization	(89,684)		(74,165)		Less: Accumulated amortization	(97,653)		(94,434)
Capitalized software development costs, net	Capitalized software development costs, net	$	36,002	$	41,212	Capitalized software development costs, net	$	30,467	$	35,315

Capitalized software development costs were ~~$4.5~~ $1.0 million and ~~$7.0~~$4.1 million for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $12.8 million and $21.0 million for the nine months ended September 30, 2022 and 2021,~~ respectively. Amortization expense with respect to capitalized software development costs totaled ~~$5.9~~$5.9 million and ~~$5.5~~$6.1 million for the three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021, respectively, and $18.0 million and $15.8 million for the nine months ended September 30, 2022 and 2021, respectively.~~2022. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, we disposed of ~~$0.7~~$2.2 million and ~~$2.5~~$0.8 million, respectively, of fully amortized capitalized software development costs.

Future amortization expense with respect to capitalized software development costs is estimated as follows (in thousands):


Years Ending December 31,	Years Ending December 31,			Years Ending December 31,
2022		$	5,590
2023	2023	17,691		2023	$	13,707
2024	2024	9,761		2024	11,598
2025	2025	2,766		2025	4,567
2026	2026	194		2026	595
Total amortization expense	Total amortization expense	$	36,002	Total amortization expense	$	30,467

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6.5. Intangible Assets, net ~~and Goodwill~~

Intangible assets consisted of the following (in thousands, except years):


		September 30, 2022								March 31, 2023
		Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted Average Useful Life in Years		Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted Average Useful Life in Years
Customer relationships	Customer relationships	$	1,670	$	(1,393)	$	277	5.0	Customer relationships	$	1,670	$	(1,503)	$	167	5.0
Database	Database	4,710		(1,766)		2,944		10.0	Database	4,710		(2,002)		2,708		10.0
Technology	Technology	6,539		(6,182)		357		4.0	Technology	6,539		(6,539)		—		4.0
Trademarks and trade names	Trademarks and trade names	1,520		(1,133)		387		5.0	Trademarks and trade names	1,520		(1,288)		232		5.0
Partner relationships	Partner relationships	680		(680)		—		3.0	Partner relationships	680		(680)		—		3.0
Non-compete agreements	Non-compete agreements	7,340		(5,505)		1,835		5.0	Non-compete agreements	7,340		(6,239)		1,101		5.0
Domain names	Domain names	90		(80)		10		5.0	Domain names	90		(84)		6		5.0
Patents	Patents	252		(252)		—		5.0	Patents	252		(252)		—		5.0

Total intangible assets, net	Total intangible assets, net	$	22,801	$	(16,991)	$	5,810	4.7	Total intangible assets, net	$	22,801	$	(18,587)	$	4,214	5.8


		December 31, 2021								December 31, 2022
		Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted Average Useful Life in Years		Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted Average Useful Life in Years
Customer relationships	Customer relationships	$	2,840	$	(2,006)	$	834	5.0	Customer relationships	$	1,670	$	(1,448)	$	222	5.0
Database	Database	8,330		(2,620)		5,710		10.0	Database	4,710		(1,884)		2,826		10.0
Technology	Technology	6,539		(5,107)		1,432		4.0	Technology	6,539		(6,539)		—		4.0
Trademarks and trade names	Trademarks and trade names	1,890		(1,128)		762		5.0	Trademarks and trade names	1,520		(1,211)		309		5.0
Partner relationships	Partner relationships	680		(680)		—		3.0	Partner relationships	680		(680)		—		3.0
Non-compete agreements	Non-compete agreements	7,400		(4,444)		2,956		5.0	Non-compete agreements	7,340		(5,872)		1,468		5.0
Domain names	Domain names	90		(75)		15		5.0	Domain names	90		(82)		8		5.0
Patents	Patents	252		(250)		2		5.0	Patents	252		(252)		—		5.0

Total intangible assets, net	Total intangible assets, net	$	28,021	$	(16,310)	$	11,711	6.3	Total intangible assets, net	$	22,801	$	(17,968)	$	4,833	4.7

Amortization expense with respect to intangible assets totaled ~~$1.1~~$0.6 million and $1.2 million for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $3.4 million and $3.5 million for the nine months ended September 30, 2022 and 2021,~~ respectively. Future amortization expense with respect to intangible assets is estimated as follows (in thousands):


Years Ending December 31,	Years Ending December 31,			Years Ending December 31,
2022		$	977
2023	2023	2,476		2023	$	1,857
2024	2024	473		2024	473
2025	2025	471		2025	471
2026	2026	471		2026	471
2027				2027	471
Thereafter	Thereafter	942		Thereafter	471
Total amortization expense	Total amortization expense	$	5,810	Total amortization expense	$	4,214

~~Our goodwill balance is solely attributed to acquisitions. The change in the carrying amount of goodwill during the nine months ended September 30, 2022 is as follows (in thousands):~~


~~Goodwill at December 31, 2021~~	$	~~56,147~~
~~Goodwill attributed to WegoWise Transaction~~	~~(87)~~
~~Goodwill at September 30, 2022~~	$	~~56,060~~

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6. Accrued Employee Expenses

Accrued employee expenses consisted of the following (in thousands):


	March 31, 2023		December 31, 2022
Accrued vacation	$	13,263	$	12,067
Accrued bonuses	5,525		13,806
Accrued severance	16,693		496
Accrued payroll and other	11,606		8,007


Total accrued employee expenses	$	47,087	$	34,376

Accrued severance as of March 31, 2023 is primarily related to $14.9 million of separation costs associated with our former Chief Executive Officer's Transition and Separation Agreement, dated March 1, 2023 ("Separation Agreement"), which will be paid out in the second quarter of 2023.

7. Leases

Operating leases for our corporate offices have remaining lease terms ranging from one to ten 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 Condensed Consolidated Statements of Operations were as follows (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Operating lease cost	Operating lease cost	$	1,254	$	1,459	$	4,169	$	3,756	Operating lease cost	$	1,145	$	1,447
Variable lease cost	Variable lease cost	308		388		683		1,088		Variable lease cost	573		123
Total lease cost	Total lease cost	$	1,562	$	1,847	$	4,852	$	4,844	Total lease cost	$	1,718	$	1,570

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


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Assets	Assets					Assets
Prepaid expenses and other current assets		$	—	$	4,854

Operating lease right-of-use assets	Operating lease right-of-use assets	28,539		41,710		Operating lease right-of-use assets	$	20,849	$	23,485

Liabilities	Liabilities					Liabilities
Other current liabilities	Other current liabilities	$	3,802	$	1,874	Other current liabilities	$	3,132	$	3,357
Operating lease liabilities	Operating lease liabilities	53,256		55,733		Operating lease liabilities	45,257		50,237
Total lease liabilities	Total lease liabilities	$	57,058	$	57,607	Total lease liabilities	$	48,389	$	53,594

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.

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Future minimum lease payments under non-cancellable leases as of ~~September 30, 2022~~March 31, 2023 were as follows (in thousands):

Years ending December 31,
2022 $ 1,321
2023 5,427
2024 6,351
2025 6,837
2026 7,035
Thereafter 42,281
Total future minimum lease payments 69,252
Less: imputed interest (12,194)
Total $ 57,058

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During the second quarter of 2022, we decided to exit and make available for sublease certain leased office spaces. As a result, we reassessed our asset groupings and evaluated the recoverability of our right-of-use and other lease related assets, and determined that the carrying value of the respective asset groups of $23.3 million was not fully recoverable. As a result, we utilized discounted cash flow models to estimate the fair value of the asset groups taking into consideration the time period it will take to obtain a sublessee, the applicable discount rate and the anticipated sublease income and calculated the corresponding impairment loss. We used prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets, as well as our historical experience in real estate transactions. When available, we use valuation inputs from independent valuation experts, such as real estate appraisers and brokers, to corroborate our estimates of fair value. We recorded an impairment of $19.4 million consisting of $15.7 million related to right-of-use ("ROU") assets and $3.7 million related to property and equipment associated with our leased office spaces. These charges were recorded within ~~General and administrative expenses~~ ~~in our Condensed Consolidated Statements of Operations.~~


Years ending December 31,
2023	$	1,077
2024	5,607
2025	6,837
2026	7,035
2027	7,239
Thereafter	35,043
Total future minimum lease payments	62,838
Less: imputed interest	(14,449)
Total	$	48,389

8. Commitments and Contingencies

Legal Liability to Landlord Insurance

We have a wholly owned subsidiary, Terra Mar Insurance Company, Inc., which was established in connection with reinsuring liability to landlord insurance policies offered to our customers by our third-party service provider. Each policy has a limit of $100 thousand per incident. We assume a 100% quota share of the liability to landlord insurance policies placed with our customers by our third-party service provider. We accrue for reported claims, and include an estimate of losses incurred but not reported by our property manager customers, in cost of revenue because we bear the risk related to all such claims. Our ~~estimated~~estimated liability for reported claims and incurred but not reported claims as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 was ~~$2.9~~$3.4 million ~~and $1.7~~and $2.7 million, respectively, and is included in Other current liabilities on our Condensed Consolidated Balance Sheets.

Included in Prepaid expenses and other current assets as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021 are $2.7~~2022 are $2.8 million and ~~$3.0~~$4.5 million, respectively, of deposits held with a third party related to requirements to maintain collateral for this insurance service.

Legal Proceedings

From time to time we may become involved in various legal proceedings, investigative inquiries, and other disputes arising from or related to matters incident to the ordinary course of our business activities. We are not currently a party to any ~~legal proceedings,~~matters, nor are we aware of any pending or threatened ~~legal proceedings,~~matters, that we believe would have a material adverse effect on our business, operating results, cash flows or financial condition should such proceedings be resolved unfavorably.

Indemnification

In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, business partners, investors, directors, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of any applicable agreements, intellectual property infringement claims made by third 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 and is indeterminable. We have not incurred any costs as a result of such indemnification obligations and have not recorded any liabilities related to such obligations in the Condensed Consolidated Financial Statements.

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9. Stock-Based Compensation

Stock Options

A summary of activity in connection with our stock options for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, 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, 2021 846 $ 13.15 3.0
Options granted —
Options exercised (187) 13.76
Options cancelled/forfeited —
Options outstanding as of September 30, 2022 659 $ 12.98 2.4


	Number of Shares	Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life in Years
Options outstanding as of December 31, 2022	516	$	12.90	2.7
Options granted	120	129.74
Options exercised	(64)	13.05

Options outstanding as of March 31, 2023	572	$	37.38	3.3

During the three months ended March 31, 2023, we granted our Chief Executive Officer 120,000 stock options of our Class A common stock. These stock options vest based on service conditions with one-third vesting at the end of each of the years ending December 31, 2025, 2026 and 2027. No stock options were granted during the three months ended March 31, 2022.

Our stock-based compensation expense for stock options was not material for the periods presented.

NoThe fair value of stock options ~~were~~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 nine~~three months ended ~~September 30, 2022 or 2021.~~March 31, 2023:




Weighted average grant-date fair value per share	$	67.23
Weighted average Black-Scholes model assumptions:
Risk-free interest rate	4.06		%
Expected term (in years)	6.92
Expected volatility	44		%
Expected dividend yield	—

As of March 31, 2023, the total estimated remaining stock-based compensation expense for the aforementioned stock options was $7.9 million, which is expected to be recognized over a weighted average period of 4.8 years.

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Restricted Stock Units

A summary of activity in connection with our RSUs for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, is as follows (number of shares in thousands):


		Number of Shares	Weighted Average Grant Date Fair Value per Share			Number of Shares	Weighted Average Grant Date Fair Value per Share
Unvested as of December 31, 2021		837	$	118.27
Unvested as of December 31, 2022					Unvested as of December 31, 2022	1,162	$	116.88
Granted	Granted	667	110.95		Granted	610	122.08
Vested	Vested	(187)	108.20		Vested	(124)	116.45
Forfeited	Forfeited	(130)	102.56		Forfeited	(28)	112.95
Unvested as of September 30, 2022		1,187	$	117.46
Unvested as of March 31, 2023					Unvested as of March 31, 2023	1,620	$	118.94

Unvested RSUs as of ~~September 30, 2022~~March 31, 2023 were composed of ~~1.0~~1.4 million RSUs with only service conditions and 0.2 million PSUs with both service conditions and performance conditions. RSUs granted with only service conditions generally vest over a four-year period. The number of PSUs granted, as included in the above table, assumes achievement of the performance metric at 100% of the performance target. Of the unvested PSUs as of ~~September 30, 2022,~~March 31, 2023, 0.1 million are subject to vesting based on the achievement of pre-established performance metrics for the year ending December 31, ~~2022~~2023 and will vest over a three year period, assuming continued employment ~~throughout the performance period.~~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%~~142% of the target number of shares depending on achievement relative to the performance metric over the applicable period. The remaining 0.1 million PSUs unvested as of ~~September 30, 2022~~March 31, 2023 are subject to vesting based on the achievement of pre-established performance metrics for three year measurement periods ending December 31, ~~2022 and~~ 2023, assuming continued employment throughout the performance period. The actual number of shares to be issued at the end of the performance period will range from 0% to 100% of the initial target awards. Achievement of the performance metric between 100% and 150% of the performance target will result in a performance-based cash bonus payment between 0% and 65% of the initial target awards.

We recognized stock-based compensation expense for the RSUs and PSUs of ~~$11.5~~$13.8 million and ~~$4.6~~$7.8 million for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $29.8 million and $11.4 million for the nine months ended September 30, 2022 and 2021,~~ respectively. Excluded from stock-based compensation expense is capitalized software development costs of ~~$0.8~~$0.2 million and $0.5 million for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, and $2.1 million and $2.0 million for the nine months ended September 30, 2022 and 2021,~~ respectively. As of ~~September 30, 2022,~~March 31, 2023, the total estimated remaining stock-based compensation expense for the aforementioned RSUs and PSUs was ~~$107.4~~$152.7 million, which is expected to be recognized over a weighted average period of ~~2.8~~2.9 years.

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Restricted Stock Awards

A summary of activity in connection with our restricted stock awards ("RSAs") for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 is as follows (number of shares in thousands):

Number of
Shares Weighted Average
Grant Date
Fair Value per Share
Unvested as of December 31, 2021 4 $ 144.33
Granted 6 96.33
Vested (4) 144.33
Forfeited — —
Unvested as of September 30, 2022 6 $ 96.33


	Number of Shares	Weighted Average Grant Date Fair Value per Share
Unvested as of December 31, 2022	6	$	96.33
Granted	2	126.44


Unvested as of March 31, 2023	8	$	103.59

We have the right to repurchase any unvested RSAs subject to certain conditions. RSAs vest over a one-year period. Our stock-based compensation expense for RSAs was not material for the periods presented.

As of ~~September 30, 2022,~~March 31, 2023, the total estimated remaining stock-based compensation expense for unvested RSAs with a repurchase right was $0.4 million, which is expected to be recognized over a weighted average period of 0.7 years.

10. Income Taxes

We calculate our provision for (benefit from) income taxes on a quarterly basis by applying an estimated annual effective tax rate to income/loss from operations and by calculating the tax effect of discrete items recognized during the quarter.

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For the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, we recorded income tax expense of ~~$0.9 million and $0.9 million, respectively.~~$10.0 million. The effective tax rate as compared to the U.S. federal statutory rate of 21% differs primarily due to the ~~significance of the~~change in valuation allowance against deferred tax assets, non-deductible officers' compensation and state income taxes, partially offset by tax benefits ~~associated with stock-based compensation expense,~~from research and development tax ~~credits, offset by the change in the valuation allowance against deferred taxes.~~credits.

There were no material changes to our unrecognized tax benefits during the ~~nine~~three months ended ~~September 30, 2022 and we do not expect to have any significant changes to unrecognized tax benefits through the remainder of the fiscal year.~~

In August 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA contains several revisions to the Internal Revenue Code, including a 15% corporate minimum income tax on adjusted financial statement income for companies with profits greater than $1.0 billion and a 1% excise tax on corporate stock repurchases in tax years beginning after DecemberMarch 31, 2022. While these tax law changes have no immediate effect and are not expected to have a material adverse effect on our results of operations going forward, we will continue to evaluate its impact as further information becomes available.2023.

11. Revenue and Other Information

The following table presents our revenue categories for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Core solutions	Core solutions	$	33,940	$	26,920	$	97,163	$	76,457	Core solutions	$	37,169	$	30,809
Value Added Services	Value Added Services	88,399		65,578		241,349		177,535		Value Added Services	96,835		71,500
Other	Other	2,740		3,311		9,313		9,778		Other	2,096		2,987
Total revenue	Total revenue	$	125,079	$	95,809	$	347,825	$	263,770	Total revenue	$	136,100	$	105,296

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

Deferred Revenue

Deferred revenue as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021 was $1.1~~2022 was $1.0 million and $0.9 million, respectively, and ~~$2.5 million, respectively.~~is included in Other current liabilities on our Condensed Consolidated Balance Sheets. During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ we recognized ~~$2.3~~ $0.6 million ~~and $2.1~~and $1.3 million of revenue, respectively, which were included in the deferred revenue balances as of December 31, 2022 and 2021, respectively.

Remaining Performance Obligations

As of March 31, 2023, the total non-cancelable remaining performance obligations ("RPO") under our contracts with customers was $20 million, and ~~2020, respectively.~~

we expect to recognize revenue on approximately 49% of these RPO over the following 12 months, with the balance to be recognized thereafter.

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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 our Annual Report, as well as our other public filings with the SEC. Please also refer to the section of this Quarterly Report entitled "Forward-Looking Statements" for additional information.

Overview

We are a leading provider of cloud business management solutions for the real estate industry. Our solutions are designed to enable our property manager customers to digitally transform their businesses, ~~automate and streamline~~address critical business operations and deliver a better customer experience. Our products assist our customers with an interconnected and growing ~~ecosystem~~network of ~~users,~~stakeholders in their business ecosystems, including ~~property managers,~~ property owners, real estate investment managers, rental prospects, residents, and service providers, ~~with~~and provide key functionality related to critical transactions across the real estate lifecycle, including screening potential tenants, sending and receiving payments and ~~providing insurance-related~~ risk mitigation services. AppFolio’s intuitive interface, coupled with streamlined and automated workflows, make it easier for our customers to eliminate redundant and manual processes so they can deliver a great experience for their ~~users~~network of stakeholders while improving financial and operational performance.

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We rely heavily on our talented team of employees to execute our growth plans and achieve our long-term strategic objectives. We believe our people are at the heart of our success and our customers' success, and we have worked hard not only to 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 navigate the challenges of increased competition for talent, we ~~have evolved~~continue to evolve our compensation and employee reward ~~practices, which has had, and we expect will continue to have, a material impact on our results.~~practices.

Property management units under management. We believe that our ability to increase our number of property management units under management is an indicator of our market penetration, growth, and potential future business opportunities. We define property management units under management as active or committed units under management at the ~~number of active units in our core solutions.~~period end date. We had ~~7.08~~7.5 million and ~~6.04~~6.6 million property management units under management as of ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively.

Key Components of Results of Operations

Revenue

Our core solutions and certain of our Value Added Services are offered on a subscription basis. Our core solutions subscription fees vary by property type and are designed to scale with the size of our customers’ businesses. We recognize revenue for subscription-based services on a straight-line basis over the contract term beginning on the date that our service is made available. We generally invoice monthly or, to a lesser extent, annually in advance of the subscription period.

We also offer certain Value Added Services, which are not covered by our subscription fees, on a per-use basis. Usage-based fees are charged either as a percentage of the transaction amount (e.g., for certain of our ~~electronic~~ payment services) or on a flat fee per transaction basis with no minimum usage 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 ~~electronic~~ payments services fees are recorded gross of the interchange and payment processing related fees. We generally invoice our usage-based services on a monthly basis or collect the fee at the time of service. A significant majority of our Value Added Services revenue comes ~~directly and indirectly~~ from the use of our ~~electronic~~ payment services, tenant screening services, and risk mitigation services. ~~Usage-based fees are paid either by customers or by users.~~

We charge our customers for assistance onboarding ~~assistance to~~onto our core solutions and for certain other non-recurring services. We generally invoice for these other services in advance of the services being completed and recognize revenue ~~upon completion of~~in the ~~related service.~~period the service is rendered. We generate revenue from the legacy customers of previously acquired businesses by providing services outside of our property management core solution platform. Revenue derived from these services is recorded in Other revenue. As of ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ we had ~~18,109~~18,834 and ~~16,844~~17,550 property management customers, respectively.

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Costs and Operating Expenses

Cost of ~~Revenue.~~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 ~~electronic~~ 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 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), and allocated shared and other costs. Cost of revenue excludes depreciation of property and equipment, amortization of capitalized software development costs and amortization of intangible assets.

Sales and Marketing. Sales and marketing expense consists of personnel-related costs 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 Added Services by our new and existing customers are deferred and then amortized on a straight-line basis over a period of benefit, which we have determined to be three years. We focus our sales and marketing efforts on generating awareness of our software solutions, creating sales leads, establishing and promoting our brands, and cultivating an educated community of successful and vocal customers.

Research and Product Development. Research and product development expense consists of personnel-related costs 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 of our existing software solutions by adding new core functionality, Value Added Services and other improvements, as well as developing new products and ~~services for existing and adjacent markets.~~services. We capitalize our software development costs that meet the criteria for capitalization. Amortization of capitalized software development costs is included in depreciation and amortization expense.

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General and Administrative. General and administrative expense consists of personnel-related costs for employees in our executive, finance, information technology, human resources, legal, compliance, corporate development and administrative organizations (including salaries, performance-based cash compensation, benefits, and stock-based compensation). In addition, general and administrative expense includes fees for third-party professional services (including audit, legal, compliance, ~~tax,~~ and ~~consulting~~tax services), transaction costs related to ~~business combinations and~~ sales of subsidiary businesses, regulatory fees, other corporate expenses, impairment of long-lived assets, gains on lease modifications, and allocated shared and 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.

Other Income (Loss), Net. Other income (loss), net includes gains and losses associated with the sale of businesses and property and ~~equipment, and income from certain post-closing transition services provided by us to MyCase, Inc. during fiscal year 2021.~~equipment.

Interest ~~Income.~~Income, 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 cash deposited in our bank accounts.

Provision for (Benefit from) Income Taxes. Provision for ~~(benefit from)~~ income taxes consists of federal and state income taxes in the United States.

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Results of Operations

Revenue


		Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change					Three Months Ended March 31,				Change
		2022		2021		Amount		%		2022		2021		Amount		%			2023		2022		Amount		%
		(dollars in thousands)																	(dollars in thousands)
Core solutions	Core solutions	$	33,940	$	26,920	$	7,020	26	%	$	97,163	$	76,457	$	20,706	27	%	Core solutions	$	37,169	$	30,809	$	6,360	21	%
Value Added Services	Value Added Services	88,399		65,578		22,821		35	%	241,349		177,535		63,814		36	%	Value Added Services	96,835		71,500		25,335		35	%
Other	Other	2,740		3,311		(571)		(17)	%	9,313		9,778		(465)		(5)	%	Other	2,096		2,987		(891)		(30)	%
Total revenue	Total revenue	$	125,079	$	95,809	$	29,270	31	%	$	347,825	$	263,770	$	84,055	32	%	Total revenue	$	136,100	$	105,296	$	30,804	29	%

The increase in revenue for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared to the same ~~periods~~period in the prior year, was primarily attributable to growth in our base of property management customers driving an increase in the number of property management units under management, and growth in users of our subscription and usage-based services. During the three ~~and nine~~ month period ended ~~September 30, 2022,~~March 31, 2023, we experienced growth of ~~17%~~14% in the number of property management units under management, ~~resulting from 8% growth in the number of property management customers,~~ compared to the same ~~periods~~period in the prior year. Our payment services, tenant screening and risk mitigation services usage also increased during the comparative periods in line with the increase in units under management.

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Cost of Revenue (Exclusive of Depreciation and Amortization)


		Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change					Three Months Ended March 31,						Change
		2022			2021			Amount		%		2022			2021			Amount		%			2023			2022			Amount		%
		(dollars in thousands)																					(dollars in thousands)
Cost of revenue (exclusive of depreciation and amortization)	Cost of revenue (exclusive of depreciation and amortization)	$	50,707		$	38,730		$	11,977	31	%	$	141,484		$	104,847		$	36,637	35	%	Cost of revenue (exclusive of depreciation and amortization)	$	56,208		$	43,347		$	12,861	30	%
Percentage of revenue	Percentage of revenue	40.5		%	40.4		%					40.7		%	39.7		%					Percentage of revenue	41.3		%	41.2		%
Stock-based compensation, included above	Stock-based compensation, included above	$	789		$	575		$	214	37	%	$	1,873		$	1,509		$	364	24	%	Stock-based compensation, included above	$	768		$	358		$	410	115	%
Percentage of revenue	Percentage of revenue	0.6		%	0.6		%					0.5		%	0.6		%					Percentage of revenue	0.6		%	0.3		%

For the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, expenditures to third-party service providers related to the delivery of our Value Added Services increased ~~$8.5~~$8.2 million, ~~and $27.2 million, respectively,~~ compared to the same ~~periods~~period in the prior year. ~~These increases were~~This increase was directly associated with the increased adoption and utilization of our Value Added Services. Personnel-related costs, including performance-based compensation, necessary to support growth and key investments, increased ~~$3.5 million and $9.2~~$3.7 million for the three ~~and nine~~ months ended ~~September 30, 2022, respectively,~~March 31, 2023, compared to the same ~~periods~~period in the prior year. ~~Additionally, offsetting cost of revenue (exclusive of depreciation~~Allocated shared and ~~amortization) during~~other costs increased by $1.0 million for the three ~~and nine~~ months ended ~~September 30, 2022 was $0.4 million and during~~March 31, 2023, compared to the ~~nine months ended September 30, 2021 was $2.0 million of incentives earned from third-party service providers~~same period in the prior year, primarily related to ~~programs intended to increase adoption~~platform infrastructure, software and ~~utilization~~other costs incurred in support of ~~online payments.~~our overall growth.

As a percentage of revenue, cost of revenue (exclusive of depreciation and amortization) fluctuates primarily based on the mix of Value Added Services revenue in the period, given the varying percentage of revenue we pay to third-party service providers. We expect cost of revenue (exclusive of depreciation and amortization) for the year ending December 31, ~~2022,~~2023, to ~~increase~~decrease as a percentage of revenue compared to the year ended December 31, ~~2021,~~2022, as we expect to leverage headcount efficiencies to offset an increase in expenditures to third-party service providers related to the delivery of our Value Added ~~Services to increase at a faster rate than total revenue as a result of a higher growth rate related to our Value Added Services revenue.~~

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Services.

Sales and Marketing


		Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change					Three Months Ended March 31,						Change
		2022			2021			Amount		%		2022			2021			Amount		%			2023			2022			Amount		%
		(dollars in thousands)																					(dollars in thousands)
Sales and marketing	Sales and marketing	$	25,644		$	19,362		$	6,282	32	%	$	77,558		$	53,255		$	24,303	46	%	Sales and marketing	$	29,398		$	24,919		$	4,479	18	%
Percentage of revenue	Percentage of revenue	20.5		%	20.2		%					22.3		%	20.2		%					Percentage of revenue	21.6		%	23.7		%
Stock-based compensation, included above	Stock-based compensation, included above	$	2,023		$	738		$	1,285	174	%	$	5,496		$	1,587		$	3,909	246	%	Stock-based compensation, included above	$	2,417		$	1,460		$	957	66	%
Percentage of revenue	Percentage of revenue	1.6		%	0.8		%					1.6		%	0.6		%					Percentage of revenue	1.8		%	1.4		%

Sales and marketing expense for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 increased primarily due to increases in personnel-related costs, including performance-based compensation, necessary to support growth in the business of ~~$5.0~~$3.3 million, ~~and $17.2 million, respectively,~~ compared to the same ~~periods~~period in the prior year. Advertising costs increased by $0.8 million for the three months ended March 31, 2023, compared to the same period in the prior year, due to increased promotional activities. Allocated shared and other costs increased by ~~$1.9 million and $6.6~~$0.4 million for the three ~~and nine~~ months ended ~~September 30, 2022, respectively,~~March 31, 2023, compared to the same ~~periods~~period in the prior year, with such increase being primarily related to software and other costs incurred in support of our overall growth.

We expect sales and marketing expense for the year ending December 31, ~~2022~~2023 to ~~increase~~decrease as a percentage of revenue compared to the year ended December 31, ~~2021,~~2022, as we continue to ~~invest in~~leverage headcount ~~to support our growth and increase our advertising, promotion and other marketing activities.~~efficiencies.

Research and Product Development


		Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change					Three Months Ended March 31,						Change
		2022			2021			Amount		%		2022			2021			Amount		%			2023			2022			Amount		%
		(dollars in thousands)																					(dollars in thousands)
Research and product development	Research and product development	$	28,959		$	16,500		$	12,459	76	%	$	79,966		$	46,389		$	33,577	72	%	Research and product development	$	37,662		$	24,320		$	13,342	55	%
Percentage of revenue	Percentage of revenue	23.2		%	17.2		%					23.0		%	17.6		%					Percentage of revenue	27.7		%	23.1		%
Stock-based compensation, included above	Stock-based compensation, included above	$	4,330		$	1,451		$	2,879	198	%	$	11,160		$	3,522		$	7,638	217	%	Stock-based compensation, included above	$	5,439		$	2,806		$	2,633	94	%
Percentage of revenue	Percentage of revenue	3.5		%	1.5		%					3.2		%	1.3		%					Percentage of revenue	4.0		%	2.7		%

Table of Contents

Research and product development expense for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 increased primarily due to an increase in personnel-related costs including performance-based compensation, net of capitalized software development costs, of ~~$11.6~~$12.8 million, ~~and $31.5 million, respectively,~~ compared to the same ~~periods~~period in the prior year. The increase in personnel-related costs was primarily due to headcount growth within our research and product development organization. Allocated shared and other costs also increased by $0.5 million driven by expenses supporting our growth.

We expect research and product development expenses for the year ending December 31, ~~2022~~2023 to increase as a percentage of revenue compared to the year ended December 31, ~~2021,~~2022, as we continue to invest in our research and product development organization to support our strategy to expand the use cases of our product capabilities to the larger customer ~~segment and to continue to strengthen the security of our product.~~segment.

General and Administrative
Three Months Ended
September 30, Change Nine Months Ended
September 30, Change
2022 2021 Amount % 2022 2021 Amount %
(dollars in thousands)
General and administrative $ 19,347 $ 13,404 $ 5,943 44 % $ 76,258 $ 40,971 $ 35,287 86 %
Percentage of revenue 15.5 % 14.0 % 21.9 % 15.5 %
Stock-based compensation, included above $ 3,688 $ 1,299 $ 2,389 184 % $ 9,680 $ 3,435 $ 6,245 182 %
Percentage of revenue 2.9 % 1.4 % 2.8 % 1.3 %

~~Table of Contents~~


	Three Months Ended March 31,						Change
	2023			2022			Amount		%
	(dollars in thousands)
General and administrative	$	31,691		$	18,964		$	12,727	67	%
Percentage of revenue	23.3		%	18.0		%
Stock-based compensation, included above	$	5,279		$	2,794		$	2,485	89	%
Percentage of revenue	3.9		%	2.7		%

General and administrative expense for the three months ended ~~September 30, 2022~~March 31, 2023 increased primarily due to an increase in personnel-related costs, including performance-based compensation, of ~~$3.1~~$15.6 million, compared to the same period in the prior year. The increase in personnel-related costs was driven primarily by the separation costs associated with our former Chief Executive Officer's Separation Agreement. For further information see Note 6, Accrued Employee Expenses, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report. Allocated shared and other costs ~~increased $0.9~~decreased $2.9 million for the three months ended ~~September 30, 2022,~~March 31, 2023, compared to the same period in the prior year, for professional fees, education and training, insurance, software and other costs to support our growth. Additionally, offsetting general and administrative expense for the three months ended September 30, 2021 was a $1.9 million insurance recovery related to our previously disclosed settlement with the Federal Trade Commission (the "FTC").

~~General and administrative expense for the nine months ended September 30, 2022 increased~~ primarily due to a ~~lease-related asset impairment charge~~gain on lease modification of ~~$19.8~~$2.4 million. Personnel-related costs, including performance-based compensation, increased $10.1 million for the nine months ended September 30, 2022, compared to the same period in the prior year. Allocated shared and other costs increased $3.5 million for the nine months ended September 30, 2022, compared to the same period in the prior year, for professional fees, education and training, insurance, software and other costs to support our growth. Additionally, offsetting general and administrative expense for the nine months ended September 30, 2021 was a $1.9 million insurance recovery related to our previously disclosed settlement with the Federal Trade Commission (the "FTC").

~~Excluding the impairment charge, we~~We expect general and administrative expenses for the year ending December 31, ~~2022~~2023 to ~~increase~~decrease as a percentage of revenue compared to the year ended December 31, ~~2021,~~2022, as we continue to ~~invest in headcount. Further, we expect to incur additional personnel-related costs in future periods related to certain incentive-based compensation programs.~~leverage headcount efficiencies.

Depreciation and Amortization


		Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change					Three Months Ended March 31,						Change
		2022			2021			Amount		%		2022			2021			Amount		%			2023			2022			Amount		%
		(dollars in thousands)																					(dollars in thousands)
Depreciation and amortization	Depreciation and amortization	$	8,241		$	7,826		$	415	5	%	$	24,977		$	22,844		$	2,133	9	%	Depreciation and amortization	$	7,671		$	8,415		$	(744)	(9)	%
Percentage of revenue	Percentage of revenue	6.6		%	8.2		%					7.2		%	8.7		%					Percentage of revenue	5.6		%	8.0		%

Depreciation and amortization expense for the three ~~and nine~~ months ended ~~September 30, 2022 increased,~~March 31, 2023 decreased, compared to the same ~~periods~~period in the prior year, primarily due to ~~increased~~decreased amortization expense associated with capitalized software development and intangible balances.

We expect depreciation and amortization expenses for the year ending December 31, 2023 to decrease as a percentage of revenue compared to the year ended December 31, 2022 due to a decrease in amortization of accumulated capitalized software development balances.

~~Other~~Interest Income, ~~(Loss),~~ Net


		Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change					Three Months Ended March 31,						Change
		2022			2021			Amount		%		2022			2021			Amount		%			2023			2022			Amount		%
		(dollars in thousands)																					(dollars in thousands)
Other income (loss), net		$	4,221		$	(353)		$	4,574	(1,296)	%	$	4,256		$	705		$	3,551	504	%
Interest income, net																						Interest income, net	$	1,361		$	107		$	1,254	1,172	%
Percentage of revenue	Percentage of revenue	3.4		%	(0.4)		%					1.2		%	0.3		%					Percentage of revenue	1		%	—		%

~~Other~~

Interest income ~~(loss), net~~ for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 increased, compared to the same ~~periods~~period in the prior year, primarily due to ~~the gain~~higher interest rates.

Table of ~~$4.2 million associated with the WegoWise Transaction.~~Contents

Provision for (Benefit from) Income Taxes


		Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change				Three Months Ended March 31,						Change
		2022			2021			Amount		%	2022			2021			Amount		%		2023			2022			Amount		%
		(dollars in thousands)																			(dollars in thousands)
Provision for (benefit from) income taxes	Provision for (benefit from) income taxes	$	938		$	(160)		$	1,098	*	$	889		$	(6,017)		$	6,906	*	Provision for (benefit from) income taxes	$	9,961		$	(285)		$	10,246	*
Percentage of revenue	Percentage of revenue	0.7		%	(0.2)		%				0.3		%	(2.3)		%				Percentage of revenue	7.3		%	(0.3)		%

*Percentage not meaningful

Our effective tax rate as compared to the U.S. federal statutory rate of 21% differs primarily due to ~~the significance of the benefits associated with stock-based~~change in valuation allowance against deferred tax assets, non-deductible officers' compensation ~~expense,~~ and ~~research and development~~state income taxes, partially offset by tax ~~credits.~~benefit.

~~Table of Contents~~

Liquidity and Capital Resources

Our principal sources of liquidity continue to be cash, cash equivalents, and investment securities totaling $181.7 million, as well as cash flows generated from our operations. We have financed our operations primarily through cash generated from operations. We believe that our existing cash and cash equivalents, investment securities, and cash generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

Capital Requirements

Our future capital requirements will depend on many factors, including continued market acceptance of our software solutions, changes in the number of our customers, adoption and utilization of our Value Added Services by new and existing customers, the timing and extent of the introduction of new core functionality, products and Value Added Services, ~~the timing and extent of our expansion into new or adjacent markets,~~ and the timing and extent of our investments across our organization. In addition, we have in the past entered into, and may in the future enter into, arrangements to acquire or invest in new technologies or markets adjacent to those we serve today. Furthermore, our Board of Directors has authorized the repurchase of up to $100.0 million of shares of our Class A common stock from time to time. To date, we have repurchased $4.2 million of our Class A common stock under the share repurchase program.

Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):


		Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021			2023		2022
Net cash provided by operating activities		$	19,284	$	26,459
Net cash used in investing activities		(5,083)		(73,766)
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	$	1,573	$	(2,244)
Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	36,288		(5,280)
Net cash used in financing activities	Net cash used in financing activities	(5,002)		(8,512)		Net cash used in financing activities	(4,705)		(973)
Net increase (decrease) in cash, cash equivalents and restricted cash	Net increase (decrease) in cash, cash equivalents and restricted cash	$	9,199	$	(55,819)	Net increase (decrease) in cash, cash equivalents and restricted cash	$	33,156	$	(8,497)

Operating Activities

Our primary source of operating cash inflows is cash collected from our customers in connection with their use of our core solutions and Value Added Services. Our primary uses of cash from operating activities are for personnel-related expenditures and third-party costs incurred to support the delivery of our software solutions.

~~Net~~The net increase in cash provided by operating activities ~~was $19.3 million~~ for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023, compared to ~~net cash provided by operating activities of $26.5 million for~~ the ~~nine months ended September 30, 2021. The net decrease~~same period in ~~cash provided by operating activities~~the prior year, was primarily due to an increase in ~~employee related costs and the settlement of accounts payable offset by an increase in~~ cash collections from customers ~~due to higher revenue growth~~offset by changes in working capital levels and ~~a decrease in income taxes paid~~timing of payments related to ~~the sale~~employee-related costs.

Table of ~~MyCase, Inc. during the nine months ended September 30, 2021.~~Contents

Investing Activities

Cash used in investing activities is generally composed of purchases of investment securities, maturities and sales of investment securities, purchases of property and equipment, and additions to capitalized software development.

~~Net~~The net increase in cash ~~used in~~provided by investing activities for the ~~nine~~three months ended ~~September 30, 2022 was $5.1 million~~March 31, 2023, compared to ~~$73.8 million for~~ the ~~nine months ended September 30, 2021. The net decrease~~same period in ~~cash used in investing activities~~the prior year, was primarily due to ~~decreases in purchases of available-for-sale investment securities and capitalization of software development costs, offset by a decrease in~~higher proceeds from maturities and sales of available-for-sale investment ~~securities and net proceeds from the WegoWise Transaction.~~securities.

Financing Activities

Cash used in financing activities is generally composed of net share settlements for employee tax withholdings associated with the vesting of equity awards offset by proceeds from the exercise of stock options.

~~Net cash used in financing activities for the nine months ended September 30, 2022 was $5.0 million compared to $8.5 million for the nine months ended September 30, 2021.~~ The ~~decrease~~net increase in cash used in financing activities in the three months ended March 31, 2023, compared to the same period in the prior year, was primarily due to ~~a decrease~~an increase in ~~taxes paid related to~~ net share ~~settlement~~settlements for employee tax withholdings associated with the vesting of equity awards.

Critical Accounting Policies and Estimates

~~Impairment of long-lived assets~~

~~Table of Contents~~

InOur Condensed Consolidated Financial Statements and the related notes are prepared in accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), we evaluate our long-lived assets, such as property and equipment and right-of-use assets, for impairment whenever events and circumstances indicate thataccounting principles generally accepted in the assets might be impaired due to the carrying amount of an asset group not being recoverable. When the projected undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts, the assets are adjusted to their estimated fair value and an impairment loss is recorded as a component of operating expenses.

During the second quarter of 2022, we decided to exit and make available for sublease certain other leased office spaces. As a result, we reassessed our asset groupings and evaluated the recoverabilityUnited States. The preparation of our ~~right-of-use~~Condensed Consolidated Financial Statements requires management to make estimates and ~~other lease related~~assumptions that affect the reported amounts of assets and ~~determined that~~liabilities, the ~~carrying value~~disclosure of contingent assets and liabilities at the dates of the respective asset groups was not fully recoverable. As a result, we utilized discounted cash flow models to estimate the fair value of the asset groups and calculated the corresponding impairment loss. We recorded an impairment of $19.4 million consisting of $15.7 million related to ROU assets and $3.7 million related to property and equipment associated with our leased office spaces as described further in Note 7, ~~Leases.~~ ~~We used the following significant assumptions to determine the impairment charge: time period it will take to obtain a sublessee, the applicable discount rate~~financial statements, and the ~~anticipated sublease income.~~reported amounts of revenues and expenses during the reporting period.

There have been no changes to our critical accounting policies and estimates described in our Annual Report that have had a material impact on our Condensed Consolidated Financial Statements and related notes.

Item 3. Qualitative and Quantitative Disclosure about Market Risk

Interest Rate Risk

Investment Securities

As of ~~September 30, 2022,~~March 31, 2023, we had ~~$117.2~~ $77.7 million ofof investment securities consisting of United States government agency securities, corporate bonds, and treasury securities. The primary objective of investing in securities is to support our liquidity and capital needs. We did not purchase these investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.

Our investment securities are exposed to market risk due to interest rate fluctuations. While fluctuations in interest rates do not impact our interest income from our investment securities as all of these securities have fixed interest rates, changes in interest rates may impact the fair value of the investment securities. Since our investment securities are held as available for sale, all changes in fair value impact our other comprehensive (loss) income unless an investment security is considered impaired in which case changes in fair value are reported in other expense. As of ~~September 30, 2022,~~March 31, 2023, a hypothetical 100 basis point decrease in interest rates would have resulted in an increase in the fair value of our investment securities of approximately ~~$0.9~~$0.5 million and a hypothetical 100 basis point increase in interest rates would have resulted in a decrease in the fair value of our investment securities of approximately ~~$0.9~~$0.5 million. This estimate is based on a sensitivity model which measures an instant change in interest rates by 100 basis points at ~~September 30, 2022.~~March 31, 2023.

Table of Contents

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the supervision and participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and other procedures designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Based on our management's evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

~~Table of Contents~~

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in various investigative inquiries, legal proceedings and other disputes arising from or related to matters incident to the ordinary course of our business activities, including actions with respect to intellectual property, employment, labor, regulatory and contractual matters. Although the results of such investigative inquiries, legal proceedings and other disputes cannot be predicted with certainty, we believe that we are not currently a party to any matters which, if determined adversely to us, would, individually or taken together, have a material adverse effect on our business, operating results, financial condition or cash flows. However, regardless of the merit of any matters raised or the ultimate outcome, investigative inquiries, legal proceedings and other disputes may generally have an adverse impact on us as a result of defense and settlement costs, diversion of management resources, and other factors.

Item 1A. Risk Factors

An investment in our Class A common stock involves risks. Before making an investment decision, you should carefully consider all of the information in this Quarterly Report, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Condensed Consolidated Financial Statements and related notes. In addition, you should carefully consider the risks and uncertainties described in the section entitled “Risk Factors” in our Annual Report, which was filed with the SEC on February ~~28, 2022,~~9, 2023, as well as in our other public filings with the SEC. If any of the identified risks are realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that case, the trading price of our Class A common stock may decline, and you could lose all or part of your investment. In addition, other risks of which we are currently unaware, or which we do not currently view as material, could have a material adverse effect on our business, financial condition, operating results and prospects. As of the date of this report, there have been no material changes to the risk factors previously disclosed in the Annual Report. We may, however, disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

~~Item 5. Other Information~~

On October 25, 2022, Jon Walker, our Founder and Chief Technology Officer, announced his intention to step down from his position as Chief Technology Officer, effective December 31, 2022. Mr. Walker will continue to serve at AppFolio as Founder, focusing primarily on growing the business, and will work to transition the responsibilities of the Chief Technology Officer among others within the organization over the coming months. We do not intend to appoint a new Chief Technology Officer at this time.

~~Table of Contents~~

Item 6. Exhibits


			Exhibit Number						Description of Document
			10.1						Transition and Separation Agreement, dated March 1, 2023, by and between Jason Randall and the Company
			10.2						Employment agreement , dated March 1, 2023, between the Company and William Shane Trigg
			31.1						Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
			31.2						Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
			32.1*						Certifications of Chief Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
			101.INS						Inline XBRL Instance Document.
			101.SCH						Inline XBRL Taxonomy Extension Schema Document.
			101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document.
			101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document.
			101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document.
			101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document.
			104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

			*						The certifications attached as Exhibit 32.1 accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the registrant for purposes of Section 18 of the Exchange Act, and are not to be incorporated by reference into any of the registrant’s filings under the Securities Act or the Exchange Act, whether made before or after the date of this Quarterly Report, irrespective of any general incorporation language contained in any such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AppFolio, Inc.

Date:

~~October~~April 27, ~~2022~~2023

By:

/s/ ~~Jason Randall~~Shane Trigg

~~Jason Randall~~Shane Trigg

Chief Executive Officer

(Principal Executive Officer)

Date:

~~October~~April 27, ~~2022~~2023

By:

/s/ Fay Sien Goon

Fay Sien Goon

Chief Financial Officer

(Principal Financial and Accounting Officer)


	Nine Months Ended September 30, 2021
	Gross Realized Gains		Gross Realized Losses		Gross Proceeds from Sales		Gross Proceeds from Maturities
Corporate bonds	$	—	$	—	$	—	$	2,800
Agency securities	—		—		—		9,250

Treasury securities	6		—		43,198		61,704
Total	$	6	$	—	$	43,198	$	73,754


Years ending December 31,
2022	$	1,321
2023	5,427
2024	6,351
2025	6,837
2026	7,035
Thereafter	42,281
Total future minimum lease payments	69,252
Less: imputed interest	(12,194)
Total	$	57,058