Table of Contents
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 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)
Delaware26-0359894
(State of incorporation or organization)(I.R.S. Employer Identification No.)
70 Castilian Drive93117
   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 classTrading SymbolName of each exchange on which registered
Class A common stock, $0.0001 par valueAPPFNASDAQ 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 filerAccelerated 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 OctoberApril 20, 2022,2023, the number of shares of the registrant’s Class A common stock outstanding was 20,414,69520,766,610 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.
 



Table of Contents
FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2022March 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, 20212022 (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.


1

Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
2

Table of Contents
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
AssetsAssetsAssets
Current assetsCurrent assetsCurrent assets
Cash and cash equivalentsCash and cash equivalents$67,232 $57,847 Cash and cash equivalents$103,925 $70,769 
Investment securities—currentInvestment securities—current72,018 64,600 Investment securities—current65,022 89,297 
Accounts receivable, netAccounts receivable, net14,884 12,595 Accounts receivable, net17,416 16,503 
Prepaid expenses and other current assetsPrepaid expenses and other current assets22,660 23,553 Prepaid expenses and other current assets25,515 24,899 
Total current assetsTotal current assets176,794 158,595 Total current assets211,878 201,468 
Investment securities—noncurrentInvestment securities—noncurrent45,200 61,076 Investment securities—noncurrent12,723 25,161 
Property and equipment, netProperty and equipment, net27,633 30,479 Property and equipment, net25,789 26,110 
Operating lease right-of-use assetsOperating lease right-of-use assets28,539 41,710 Operating lease right-of-use assets20,849 23,485 
Capitalized software development costs, netCapitalized software development costs, net36,002 41,212 Capitalized software development costs, net30,467 35,315 
GoodwillGoodwill56,060 56,147 Goodwill56,060 56,060 
Intangible assets, netIntangible assets, net5,810 11,711 Intangible assets, net4,214 4,833 
Other long-term assetsOther long-term assets8,844 7,087 Other long-term assets8,720 8,785 
Total assetsTotal assets$384,882 $408,017 Total assets$370,700 $381,217 
Liabilities and Stockholders’ EquityLiabilities and Stockholders’ EquityLiabilities and Stockholders’ Equity
Current liabilitiesCurrent liabilitiesCurrent liabilities
Accounts payableAccounts payable$1,508 $1,704 Accounts payable$740 $2,473 
Accrued employee expenses—current29,496 30,065 
Accrued employee expensesAccrued employee expenses47,087 34,376 
Accrued expensesAccrued expenses16,161 13,284 Accrued expenses18,029 15,601 
Other current liabilitiesOther current liabilities10,600 7,589 Other current liabilities13,971 8,893 
Total current liabilitiesTotal current liabilities57,765 52,642 Total current liabilities79,827 61,343 
Operating lease liabilitiesOperating lease liabilities53,256 55,733 Operating lease liabilities45,257 50,237 
Other liabilitiesOther liabilities1,989 2,261 Other liabilities5,047 4,091 
Total liabilitiesTotal liabilities113,010 110,636 Total liabilities130,131 115,671 
Commitments and contingencies (Note 8)Commitments and contingencies (Note 8)Commitments and contingencies (Note 8)
Stockholders’ equity:Stockholders’ equity:Stockholders’ equity:
Class A common stockClass A common stockClass A common stock
Class B common stockClass B common stockClass B common stock
Additional paid-in capitalAdditional paid-in capital197,199 171,930 Additional paid-in capital219,074 209,704 
Accumulated other comprehensive lossAccumulated other comprehensive loss(2,553)(194)Accumulated other comprehensive loss(921)(1,684)
Treasury stockTreasury stock(25,756)(25,756)Treasury stock(25,756)(25,756)
Retained earningsRetained earnings102,978 151,397 Retained earnings48,168 83,278 
Total stockholders’ equityTotal stockholders’ equity271,872 297,381 Total stockholders’ equity240,569 265,546 
Total liabilities and stockholders’ equityTotal 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.
3

Table of Contents
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,
2022202120222021 20232022
RevenueRevenue$125,079 $95,809 $347,825 $263,770 Revenue$136,100 $105,296 
Costs and operating expenses:Costs and operating expenses:Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)(1)
Cost of revenue (exclusive of depreciation and amortization)(1)
50,707 38,730 141,484 104,847 
Cost of revenue (exclusive of depreciation and amortization)(1)
56,208 43,347 
Sales and marketing(1)
Sales and marketing(1)
25,644 19,362 77,558 53,255 
Sales and marketing(1)
29,398 24,919 
Research and product development(1)
Research and product development(1)
28,959 16,500 79,966 46,389 
Research and product development(1)
37,662 24,320 
General and administrative(1)
General and administrative(1)
19,347 13,404 76,258 40,971 
General and administrative(1)
31,691 18,964 
Depreciation and amortizationDepreciation and amortization8,241 7,826 24,977 22,844 Depreciation and amortization7,671 8,415 
Total costs and operating expensesTotal costs and operating expenses132,898 95,822 400,243 268,306 Total costs and operating expenses162,630 119,965 
Loss from operationsLoss from operations(7,819)(13)(52,418)(4,536)Loss from operations(26,530)(14,669)
Other income (loss), netOther income (loss), net4,221 (353)4,256 705 Other income (loss), net20 (10)
Interest income374 65 632 173 
Loss before provision for (benefit from) income taxes(3,224)(301)(47,530)(3,658)
Interest income, netInterest income, net1,361 107 
Loss before provision for income taxesLoss before provision for income taxes(25,149)(14,572)
Provision for (benefit from) income taxesProvision for (benefit from) income taxes938 (160)889 (6,017)Provision for (benefit from) income taxes9,961 (285)
Net (loss) income$(4,162)$(141)$(48,419)$2,359 
Net lossNet loss$(35,110)$(14,287)
Net (loss) income per common share:
Basic$(0.12)$— $(1.39)$0.07 
Diluted$(0.12)$— $(1.39)$0.07 
Weighted average common shares outstanding:
Basic35,043 34,614 34,936 34,525 
Diluted35,043 34,614 34,936 35,695 
Net loss per common share, basic and dilutedNet loss per common share, basic and diluted$(0.99)$(0.41)
Weighted average common shares outstanding, basic and dilutedWeighted average common shares outstanding, basic and diluted35,443 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,
202220212022202120232022
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 marketingSales and marketing2,023 738 5,496 1,587 Sales and marketing2,417 1,460 
Research and product developmentResearch and product development4,330 1,451 11,160 3,522 Research and product development5,439 2,806 
General and administrativeGeneral and administrative3,688 1,299 9,680 3,435 General and administrative5,279 2,794 
Total stock-based compensation expenseTotal 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.

4

Table of Contents

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

 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2022202120222021
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)$2,286 
 Three Months Ended
March 31,
 20232022
Net loss$(35,110)$(14,287)
Other comprehensive income (loss):
    Changes in unrealized gains (losses) on investment securities763 (1,345)
Comprehensive loss$(34,347)$(15,632)
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

5

Table of Contents

APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
AccumulatedAccumulated
AdditionalOtherAdditionalOther
Common StockCommon StockPaid-inComprehensiveTreasuryRetainedCommon StockCommon StockPaid-inComprehensiveTreasuryRetained
Class AClass BCapitalLossStockEarningsTotalClass AClass BCapitalLossStockEarningsTotal
SharesAmountSharesAmountSharesAmountSharesAmount
Balance at December 31, 202119,417 $15,408 $$171,930 $(194)$(25,756)$151,397 $297,381 
Balance December 31, 2022Balance December 31, 202220,569 $14,746 $$209,704 $(1,684)$(25,756)$83,278 $265,546 
Exercise of stock optionsExercise of stock options17 — — — 100 — — — 100 Exercise of stock options64 — — — 834 — — — 834 
Stock-based compensation— — — — 7,967 — — — 7,967 
Vesting of restricted stock units, net of shares withheld for taxes17 — — — (1,073)— — — (1,073)
Conversion of Class B common stock to Class A common stock572 — (572)— — — — — — 
Other comprehensive loss— — — — — (1,345)— — (1,345)
Net loss— — — — — — — (14,287)(14,287)
Balance at March 31, 202220,023 $14,836 $$178,924 $(1,539)$(25,756)$137,110 $288,743 
Exercise of stock options41 — 27 — 503 — — — 503 
Stock-based compensation— — — — 10,639 — — — 10,639 
Stock based compensationStock based compensation— — — — 14,075 — — — 14,075 
Vesting of restricted stock units, net of shares withheld for taxesVesting of restricted stock units, net of shares withheld for taxes66 — — — (4,524)— — — (4,524)Vesting of restricted stock units, net of shares withheld for taxes79 — — — (5,539)— — — (5,539)
Conversion of Class B common stock to Class A common stockConversion of Class B common stock to Class A common stock37 — (37)— — — — — — Conversion of Class B common stock to Class A common stock27 — (27)— — — — — — 
Issuance of restricted stock awardsIssuance of restricted stock awards— — — — — — — — Issuance of restricted stock awards— — — — — — — — 
Other comprehensive loss— — — — — (400)— — (400)
Other comprehensive incomeOther comprehensive income— — — — — 763 — — 763 
Net lossNet loss— — — — — — — (29,970)(29,970)Net loss— — — — — — — (35,110)(35,110)
Balance June 30, 202220,173 $14,826 $$185,542 $(1,939)$(25,756)$107,140 $264,991 
Exercise of stock options102 — — — 1,976 — — — 1,976 
Stock-based compensation— — — — 11,665 — — — 11,665 
Vesting of restricted stock units, net of shares withheld for taxes32 — — — (1,984)— — — (1,984)
Conversion of Class B common stock to Class A common stock80 — (80)— — — — — — 
Balance March 31, 2023Balance March 31, 202320,741 $14,719 $$219,074 $(921)$(25,756)$48,168 $240,569 
Other comprehensive loss— — — — — (614)— — (614)
Net loss— — — — — — — (4,162)(4,162)
Balance September 30, 202220,387 $14,746 $$197,199 $(2,553)$(25,756)$102,978 $271,872 



6

Table of Contents
AccumulatedAccumulated
AdditionalOtherAdditionalOther
Common StockCommon StockPaid-inComprehensiveTreasuryRetainedCommon StockCommon StockPaid-inComprehensiveTreasuryRetained
Class AClass BCapitalIncome (Loss)StockEarningsTotalClass AClass BCapitalLossStockEarningsTotal
SharesAmountSharesAmountSharesAmountSharesAmount
Balance at December 31, 202018,729 $15,659 $$161,247 $56 $(25,756)$150,369 $285,920 
Exercise of stock options23 — — — 100 — — — 100 
Stock-based compensation— — — — 3,295 — — — 3,295 
Vesting of restricted stock units, net of shares withheld for taxes42 — — — (3,992)— — — (3,992)
Conversion of Class B common stock to Class A common stock108 — (108)— — — — — — 
Other comprehensive loss— — — — — (18)— — (18)
Net income— — — — — — — 479 479 
Balance at March 31, 202118,902 $15,551 $$160,650 $38 $(25,756)$150,848 $285,784 
Exercise of stock options13 — 84 — 545 — — — 545 
Stock-based compensation— — — — 3,873 — — — 3,873 
Vesting of restricted stock units, net of shares withheld for taxes56 — — — (4,908)— — — (4,908)
Conversion of Class B common stock to Class A common stock14 — (14)— — — — — — 
Issuance of restricted stock awards— — — — — — — — 
Other comprehensive loss— — — — — (48)— — (48)
Net income— — — — — — — 2,021 2,021 
Balance at June 30, 202118,989 $15,621 $$160,160 $(10)$(25,756)$152,869 $287,267 
Balance at December 31, 2021Balance at December 31, 202119,417 $15,408 $$171,930 $(194)$(25,756)$151,397 $297,381 
Exercise of stock optionsExercise of stock options29 — — — 146 — — — 146 Exercise of stock options17 — — — 100 — — — 100 
Stock-based compensationStock-based compensation— — — — 4,837 — — — 4,837 Stock-based compensation— — — — 7,967 — — — 7,967 
Vesting of restricted stock units, net of shares withheld for taxesVesting of restricted stock units, net of shares withheld for taxes— — — (403)— — — (403)Vesting of restricted stock units, net of shares withheld for taxes17 — — — (1,073)— — — (1,073)
Conversion of Class B common stock to Class A common stockConversion of Class B common stock to Class A common stock168 — (168)— — — — — — Conversion of Class B common stock to Class A common stock572 — (572)— — — — — — 
Other comprehensive lossOther comprehensive loss— — — — — (7)— — (7)Other comprehensive loss— — — — — (1,345)— — (1,345)
Net lossNet loss— — — — — — — (141)(141)Net loss— — — — — — — (14,287)(14,287)
Balance at September 30, 202119,191 $15,453 $$164,740 $(17)$(25,756)$152,728 $291,699 
Balance at March 31, 2022Balance at March 31, 202220,023 $14,836 $$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.

76

Table of Contents
APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Nine Months Ended
September 30,
 20222021
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 amortization23,295 21,545 
Amortization of operating lease right-of-use assets2,498 2,312 
Impairment19,792 — 
Deferred income taxes(1,392)(6,394)
Stock-based compensation, including as amortized29,891 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 payable231 1,384 
Accrued employee expenses—current(822)6,335 
Accrued expenses3,991 (1,426)
Operating lease liabilities(1,748)1,995 
Other liabilities3,576 (6,623)
Net cash provided by operating activities19,284 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 investments76,598 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 divested5,124 — 
Net cash used in investing activities(5,083)(73,766)
Cash from financing activities
Proceeds from stock option exercises2,579 791 
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 cash9,199 (55,819)
Cash, cash equivalents and restricted cash
Beginning of period58,283 140,699 
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 expenses549 945 
Stock-based compensation capitalized for software development2,062 1,952 
8

Table of Contents
APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three Months Ended
March 31,
 20232022
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 amortization6,937 7,878 
Amortization of operating lease right-of-use assets568 887 
Gain on lease modification(2,366)— 
Deferred income taxes(342)
Stock-based compensation, including as amortized14,637 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 assets66 (573)
Accounts payable(1,777)2,987 
Accrued employee expenses13,041 (5,016)
Accrued expenses2,407 1,722 
Operating lease liabilities(771)(631)
Other liabilities7,475 2,122 
Net cash provided by (used in) operating activities1,573 (2,244)
Cash from investing activities
Purchases of available-for-sale investments(1,285)(23,309)
Proceeds from sales of available-for-sale investments1,013 — 
Proceeds from maturities of available-for-sale investments37,890 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 investment629 — 
Net cash provided by (used in) investing activities36,288 (5,280)
Cash from financing activities
Proceeds from stock option exercises834 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 cash33,156 (8,497)
Cash, cash equivalents and restricted cash
Beginning of period71,019 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,
2022202120232022
Cash and cash equivalentsCash and cash equivalents$67,232 $84,444 Cash and cash equivalents$103,925 $49,536 
Restricted cash included in other assetsRestricted cash included in other assets250 436 Restricted cash included in other assets250 250 
Total cash, cash equivalents and restricted cashTotal 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.
97

Table of Contents
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 streamlineaddress 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 digitalDigital 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 ninethree months ended September 30, 2022March 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.
10

Table of Contents
Net (Loss) IncomeLoss per Common Share
Net (loss) incomeloss 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) incomeloss per common share (in thousands):
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2022202120222021
Weighted average common shares outstanding35,049 34,620 34,941 34,530 
Less: Weighted average unvested restricted shares subject to repurchase
Weighted average common shares outstanding; basic35,043 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; diluted35,043 34,614 34,936 35,695 
 Three Months Ended
March 31,
 20232022
Weighted average common shares outstanding35,451 34,840 
Less: Weighted average unvested restricted shares subject to repurchase
Weighted average common shares outstanding; basic and diluted35,443 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.
8

Table of Contents
Recent Accounting Pronouncements Not Yet Adopted
In October 2021, the FASBFinancial Accounting Standards Board ("FASB") issued ASUAccounting 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 adoptadopted 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.
11

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, 2022March 31, 2023 and December 31, 20212022 (in thousands):
September 30, 2022March 31, 2023
Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair ValueAmortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Corporate bondsCorporate bonds$17,483 $— $(163)$17,320 Corporate bonds$9,631 $— $(52)$9,579 
Agency securitiesAgency securities17,504 — (596)16,908 Agency securities11,259 — (317)10,942 
Treasury securitiesTreasury securities84,855 (1,866)82,990 Treasury securities58,249 — (1,025)57,224 
Total available-for-sale investment securitiesTotal available-for-sale investment securities$119,842 $$(2,625)$117,218 Total available-for-sale investment securities$79,139 $— $(1,394)$77,745 
December 31, 2021December 31, 2022
Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair ValueAmortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Corporate bondsCorporate bonds$29,080 $— $(11)$29,069 Corporate bonds$17,497 $$(112)$17,387 
Agency securitiesAgency securities19,753 — (27)19,726 Agency securities17,507 — (484)17,023 
Treasury securitiesTreasury securities77,108 (229)76,881 Treasury securities81,605 — (1,557)80,048 
Total available-for-sale investment securitiesTotal available-for-sale investment securities$125,941 $$(267)$125,676 Total available-for-sale investment securities$116,609 $$(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, 2022March 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, 2022December 31, 2021March 31, 2023December 31, 2022
Amortized CostEstimated Fair ValueAmortized CostEstimated Fair ValueAmortized CostEstimated Fair ValueAmortized CostEstimated Fair Value
Due in one year or lessDue 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 yearsDue after one year through three years47,026 45,200 61,314 61,076 Due after one year through three years12,791 12,723 25,787 25,161 
Total available-for-sale investment securitiesTotal 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 ninethree 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):
9

Table of Contents
Three Months Ended March 31, 2023
Gross Realized GainsGross Realized LossesGross Proceeds from SalesGross Proceeds from Maturities
Corporate bonds$$— $1,013 $6,860 
Agency securities— — — 6,250 
Treasury securities— — — 24,780 
Total$$— $1,013 $37,890 
NineThree Months Ended September 30,March 31, 2022
Gross Realized GainsGross Realized LossesGross Proceeds from SalesGross Proceeds from Maturities
Corporate bonds$— $— $— $28,99812,343 
Agency securities— — — 2,250 
Treasury securities— — — 45,35011,000 
Total$— $— $— $76,59823,343 
12

Table of Contents
Nine Months Ended September 30, 2021
Gross Realized GainsGross Realized LossesGross Proceeds from SalesGross Proceeds from Maturities
Corporate bonds$— $— $— $2,800 
Agency securities— — — 9,250 
Treasury securities— 43,198 61,704 
Total$$— $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, 2022March 31, 2023 and December 31, 20212022 by level within the fair value hierarchy (in thousands):
September 30, 2022March 31, 2023
Level 1Level 2Total Fair
Value
Level 1Level 2Total Fair
Value
Cash equivalents:Cash equivalents:Cash equivalents:
Money market fundsMoney market funds$5,570 $— $5,570 Money market funds$24,442 $— $24,442 
Treasury securitiesTreasury securities7,030 — 7,030 Treasury securities56,173 — 56,173 
Available-for-sale investment securities:Available-for-sale investment securities:Available-for-sale investment securities:
Corporate bondsCorporate bonds— 17,320 17,320 Corporate bonds— 9,579 9,579 
Agency securitiesAgency securities— 16,908 16,908 Agency securities— 10,942 10,942 
Treasury securities Treasury securities82,990 — 82,990  Treasury securities57,224 — 57,224 
TotalTotal$95,590 $34,228 $129,818 Total$137,839 $20,521 $158,360 
December 31, 2021December 31, 2022
Level 1Level 2Total Fair
Value
Level 1Level 2Total Fair
Value
Cash equivalents:Cash equivalents:Cash equivalents:
Money market fundsMoney market funds$6,105 $— $6,105 Money market funds$41,973 $— $41,973 
Treasury securitiesTreasury securities1,287 — 1,287 
Available-for-sale investment securities:Available-for-sale investment securities:Available-for-sale investment securities:
Corporate bondsCorporate bonds— 29,069 29,069 Corporate bonds— 17,387 17,387 
Agency securitiesAgency securities— 19,726 19,726 Agency securities— 17,023 17,023 
Treasury securitiesTreasury securities76,881 — 76,881 Treasury securities80,048 — 80,048 
TotalTotal$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.
1310

Table of Contents
 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, grossCapitalized software development costs, gross$125,686 $115,377 Capitalized software development costs, gross$128,120 $129,749 
Less: Accumulated amortizationLess: Accumulated amortization(89,684)(74,165)Less: Accumulated amortization(97,653)(94,434)
Capitalized software development costs, netCapitalized 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, 2022March 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 
2023202317,691 2023$13,707 
202420249,761 202411,598 
202520252,766 20254,567 
20262026194 2026595 
Total amortization expense Total amortization expense$36,002  Total amortization expense$30,467 
1411

Table of Contents
 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 YearsGross Carrying
Value
Accumulated
Amortization
Net Carrying
Value
Weighted Average Useful Life in Years
Customer relationshipsCustomer relationships$1,670 $(1,393)$277 5.0Customer relationships$1,670 $(1,503)$167 5.0
DatabaseDatabase4,710 (1,766)2,944 10.0Database4,710 (2,002)2,708 10.0
TechnologyTechnology6,539 (6,182)357 4.0Technology6,539 (6,539)— 4.0
Trademarks and trade namesTrademarks and trade names1,520 (1,133)387 5.0Trademarks and trade names1,520 (1,288)232 5.0
Partner relationshipsPartner relationships680 (680)— 3.0Partner relationships680 (680)— 3.0
Non-compete agreementsNon-compete agreements7,340 (5,505)1,835 5.0Non-compete agreements7,340 (6,239)1,101 5.0
Domain namesDomain names90 (80)10 5.0Domain names90 (84)5.0
PatentsPatents252 (252)— 5.0Patents252 (252)— 5.0
Total intangible assets, netTotal intangible assets, net$22,801 $(16,991)$5,810 4.7Total 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 relationshipsCustomer relationships$2,840 $(2,006)$834 5.0Customer relationships$1,670 $(1,448)$222 5.0
DatabaseDatabase8,330 (2,620)5,710 10.0Database4,710 (1,884)2,826 10.0
TechnologyTechnology6,539 (5,107)1,432 4.0Technology6,539 (6,539)— 4.0
Trademarks and trade namesTrademarks and trade names1,890 (1,128)762 5.0Trademarks and trade names1,520 (1,211)309 5.0
Partner relationshipsPartner relationships680 (680)— 3.0Partner relationships680 (680)— 3.0
Non-compete agreementsNon-compete agreements7,400 (4,444)2,956 5.0Non-compete agreements7,340 (5,872)1,468 5.0
Domain namesDomain names90 (75)15 5.0Domain names90 (82)5.0
PatentsPatents252 (250)5.0Patents252 (252)— 5.0
Total intangible assets, netTotal intangible assets, net$28,021 $(16,310)$11,711 6.3Total 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 
202320232,476 2023$1,857 
20242024473 2024473 
20252025471 2025471 
20262026471 2026471 
20272027471 
ThereafterThereafter942 Thereafter471 
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 
1512

Table of Contents
 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 bonuses5,525 13,806 
Accrued severance16,693 496 
Accrued payroll and other11,606 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,
202220212022202120232022
Operating lease costOperating lease cost$1,254 $1,459 $4,169 $3,756 Operating lease cost$1,145 $1,447 
Variable lease costVariable lease cost308 388 683 1,088 Variable lease cost573 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
AssetsAssetsAssets
Prepaid expenses and other current assets$— $4,854 
Operating lease right-of-use assetsOperating lease right-of-use assets28,539 41,710 Operating lease right-of-use assets$20,849 $23,485 
LiabilitiesLiabilitiesLiabilities
Other current liabilitiesOther current liabilities$3,802 $1,874 Other current liabilities$3,132 $3,357 
Operating lease liabilitiesOperating lease liabilities53,256 55,733 Operating lease liabilities45,257 50,237 
Total lease liabilitiesTotal 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.
13

Table of Contents

Future minimum lease payments under non-cancellable leases as of September 30, 2022March 31, 2023 were as follows (in thousands):
Years ending December 31,
2022$1,321 
20235,427 
20246,351 
20256,837 
20267,035 
Thereafter42,281 
Total future minimum lease payments69,252 
Less: imputed interest(12,194)
Total$57,058 
16

Table of Contents
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 
20245,607 
20256,837 
20267,035 
20277,239 
Thereafter35,043 
Total future minimum lease payments62,838 
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 estimatedestimated liability for reported claims and incurred but not reported claims as of September 30, 2022March 31, 2023 and December 31, 20212022 was $2.9$3.4 million and $1.7and $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, 2022March 31, 2023 and December 31, 2021 are $2.72022 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.
1714

Table of Contents
 9. Stock-Based Compensation
Stock Options
A summary of activity in connection with our stock options for the ninethree 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, 2021846 $13.15 3.0
Options granted— 
Options exercised(187)13.76 
Options cancelled/forfeited— 
Options outstanding as of September 30, 2022659 $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, 2022516 $12.90 2.7
Options granted120 129.74 
Options exercised(64)13.05 
Options outstanding as of March 31, 2023572 $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 weregranted 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 ninethree 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 rate4.06 %
Expected term (in years)6.92
Expected volatility44 %
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.
15

Table of Contents
Restricted Stock Units
A summary of activity in connection with our RSUs for the ninethree months ended September 30, 2022,March 31, 2023, is as follows (number of shares in thousands):
Number of SharesWeighted Average Grant Date Fair Value per ShareNumber of SharesWeighted Average Grant Date Fair Value per Share
Unvested as of December 31, 2021837 $118.27 
Unvested as of December 31, 2022Unvested as of December 31, 20221,162 $116.88 
GrantedGranted667 110.95 Granted610 122.08 
VestedVested(187)108.20 Vested(124)116.45 
ForfeitedForfeited(130)102.56 Forfeited(28)112.95 
Unvested as of September 30, 20221,187 $117.46 
Unvested as of March 31, 2023Unvested as of March 31, 20231,620 $118.94 
Unvested RSUs as of September 30, 2022March 31, 2023 were composed of 1.01.4 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, 20222023 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, 2022March 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 2.82.9 years.
18

Table of Contents
Restricted Stock Awards
A summary of activity in connection with our restricted stock awards ("RSAs") for the ninethree months ended September 30, 2022March 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$144.33 
Granted96.33 
Vested(4)144.33 
Forfeited— — 
Unvested as of September 30, 2022$96.33 
Number of
Shares
Weighted Average
Grant Date
Fair Value per Share
Unvested as of December 31, 2022$96.33 
Granted126.44 
Unvested as of March 31, 2023$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.
16

Table of Contents
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 thechange 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 ninethree 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,
2022202120222021 20232022
Core solutionsCore solutions$33,940 $26,920 $97,163 $76,457 Core solutions$37,169 $30,809 
Value Added ServicesValue Added Services88,399 65,578 241,349 177,535 Value Added Services96,835 71,500 
OtherOther2,740 3,311 9,313 9,778 Other2,096 2,987 
Total revenueTotal 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, 2022March 31, 2023 and December 31, 2021 was $1.12022 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 ninethree months ended September 30,March 31, 2023 and 2022, and 2021, we recognized $2.3 $0.6 million and $2.1and $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.
19
we expect to recognize revenue on approximately 49% of these RPO over the following 12 months, with the balance to be recognized thereafter.

Table of Contents
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 streamlineaddress critical business operations and deliver a better customer experience. Our products assist our customers with an interconnected and growing ecosystemnetwork of users,stakeholders in their business ecosystems, including property managers, property owners, real estate investment managers, rental prospects, residents, and service providers, withand 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 usersnetwork of stakeholders while improving financial and operational performance.
17

Table of Contents
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 evolvedcontinue 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 7.087.5 million and 6.046.6 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 toonto 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 ofin 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 18,10918,834 and 16,84417,550 property management customers, respectively.
20

Table of Contents
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 enhancingexpanding 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.
18

Table of Contents
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 consultingtax 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.
21

Table of Contents
Results of Operations

Revenue
Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change Three Months Ended
March 31,
Change
20222021Amount%20222021Amount% 20232022Amount%
(dollars in thousands) (dollars in thousands)
Core solutionsCore 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 ServicesValue Added Services88,399 65,578 22,821 35 %241,349 177,535 63,814 36 %Value Added Services96,835 71,500 25,335 35 %
OtherOther2,740 3,311 (571)(17)%9,313 9,778 (465)(5)%Other2,096 2,987 (891)(30)%
Total revenueTotal 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 periodsperiod 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 periodsperiod 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.

19

Table of Contents
Cost of Revenue (Exclusive of Depreciation and Amortization)
Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change Three Months Ended
March 31,
Change
20222021Amount%20222021Amount% 20232022Amount%
(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 revenuePercentage of revenue40.5 %40.4 %40.7 %39.7 %Percentage of revenue41.3 %41.2 %
Stock-based compensation, included aboveStock-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 revenuePercentage of revenue0.6 %0.6 %0.5 %0.6 %Percentage of revenue0.6 %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 periodsperiod in the prior year. These increases wereThis 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 periodsperiod in the prior year. Additionally, offsetting cost of revenue (exclusive of depreciationAllocated shared and amortization) duringother costs increased by $1.0 million for the three and nine months ended September 30, 2022 was $0.4 million and duringMarch 31, 2023, compared to the nine months ended September 30, 2021 was $2.0 million of incentives earned from third-party service providerssame period in the prior year, primarily related to programs intended to increase adoptionplatform infrastructure, software and utilizationother 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 increasedecrease 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.
22

Table of Contents
Services.
Sales and Marketing
Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change Three Months Ended
March 31,
Change
20222021Amount%20222021Amount% 20232022Amount%
(dollars in thousands) (dollars in thousands)
Sales and marketingSales 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 revenuePercentage of revenue20.5 %20.2 %22.3 %20.2 %Percentage of revenue21.6 %23.7 %
Stock-based compensation, included aboveStock-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 revenuePercentage of revenue1.6 %0.8 %1.6 %0.6 %Percentage of revenue1.8 %1.4 %
Sales and marketing expense for the three and nine months ended September 30, 2022March 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 periodsperiod 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 periodsperiod 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, 20222023 to increasedecrease as a percentage of revenue compared to the year ended December 31, 2021,2022, as we continue to invest inleverage headcount to support our growth and increase our advertising, promotion and other marketing activities.efficiencies.
Research and Product Development
Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change Three Months Ended
March 31,
Change
20222021Amount%20222021Amount% 20232022Amount%
(dollars in thousands) (dollars in thousands)
Research and product developmentResearch 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 revenuePercentage of revenue23.2 %17.2 %23.0 %17.6 %Percentage of revenue27.7 %23.1 %
Stock-based compensation, included aboveStock-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 revenuePercentage of revenue3.5 %1.5 %3.2 %1.3 %Percentage of revenue4.0 %2.7 %
20

Table of Contents
Research and product development expense for the three and nine months ended September 30, 2022March 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 periodsperiod 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, 20222023 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,
ChangeNine Months Ended
September 30,
Change
 20222021Amount%20222021Amount%
 (dollars in thousands)
General and administrative$19,347 $13,404 $5,943 44 %$76,258 $40,971 $35,287 86 %
Percentage of revenue15.5 %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 revenue2.9 %1.4 %2.8 %1.3 %
23

Table of Contents
 Three Months Ended
March 31,
Change
 20232022Amount%
 (dollars in thousands)
General and administrative$31,691 $18,964 $12,727 67 %
Percentage of revenue23.3 %18.0 %
Stock-based compensation, included above$5,279 $2,794 $2,485 89 %
Percentage of revenue3.9 %2.7 %
General and administrative expense for the three months ended September 30, 2022March 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 $0.9decreased $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 chargegain 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, weWe expect general and administrative expenses for the year ending December 31, 20222023 to increasedecrease 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,
ChangeNine Months Ended
September 30,
Change Three Months Ended
March 31,
Change
20222021Amount%20222021Amount% 20232022Amount%
(dollars in thousands) (dollars in thousands)
Depreciation and amortizationDepreciation and amortization$8,241 $7,826 $415 %$24,977 $22,844 $2,133 %Depreciation and amortization$7,671 $8,415 $(744)(9)%
Percentage of revenuePercentage of revenue6.6 %8.2 %7.2 %8.7 %Percentage of revenue5.6 %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 periodsperiod in the prior year, primarily due to increaseddecreased 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.
OtherInterest Income, (Loss), Net
Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
ChangeThree Months Ended
March 31,
Change
20222021Amount%20222021Amount%20232022Amount%
(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, netInterest income, net$1,361 $107 $1,254 1,172 %
Percentage of revenuePercentage of revenue3.4 %(0.4)%1.2 %0.3 %Percentage of revenue%— %
Other
Interest income (loss), net for the three and nine months ended September 30, 2022March 31, 2023 increased, compared to the same periodsperiod in the prior year, primarily due to the gainhigher interest rates.
21

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

Provision for (Benefit from) Income Taxes
Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change Three Months Ended
March 31,
Change
20222021Amount%20222021Amount% 20232022Amount%
(dollars in thousands) (dollars in thousands)
Provision for (benefit from) income taxesProvision 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 revenuePercentage of revenue0.7 %(0.2)%0.3 %(2.3)%Percentage of revenue7.3 %(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-basedchange in valuation allowance against deferred tax assets, non-deductible officers' compensation expense, and research and developmentstate income taxes, partially offset by tax credits.benefit.
24

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,
20222021 20232022
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 activitiesNet cash provided by (used in) operating activities$1,573 $(2,244)
Net cash provided by (used in) investing activitiesNet cash provided by (used in) investing activities36,288 (5,280)
Net cash used in financing activitiesNet 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 cashNet 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.
NetThe net increase in cash provided by operating activities was $19.3 million for the ninethree months ended September 30, 2022March 31, 2023, compared to net cash provided by operating activities of $26.5 million for the nine months ended September 30, 2021. The net decreasesame period in cash provided by operating activitiesthe 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 growthoffset by changes in working capital levels and a decrease in income taxes paidtiming of payments related to the saleemployee-related costs.
22

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.
NetThe net increase in cash used inprovided by investing activities for the ninethree months ended September 30, 2022 was $5.1 millionMarch 31, 2023, compared to $73.8 million for the nine months ended September 30, 2021. The net decreasesame period in cash used in investing activitiesthe 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 inhigher 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 decreasenet 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 decreasean increase in taxes paid related to net share settlementsettlements for employee tax withholdings associated with the vesting of equity awards.
Critical Accounting Policies and Estimates
Impairment of long-lived assets
25

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-useCondensed Consolidated Financial Statements requires management to make estimates and other lease relatedassumptions that affect the reported amounts of assets and determined thatliabilities, the carrying valuedisclosure 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 ratefinancial 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.
23

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.
26

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.
2724

Table of Contents
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.
28

Table of Contents
Item 6. Exhibits
  Exhibit
Number
  Description of Document
10.1
10.2
  31.1  
  31.2  
  32.1*  
  101.INSInline XBRL Instance Document.
  101.SCHInline XBRL Taxonomy Extension Schema Document.
  101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.
  101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.
  101.LABInline XBRL Taxonomy Extension Label Linkbase Document.
  101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document.
104Cover 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.

2925

Table of Contents
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:OctoberApril 27, 20222023By:/s/ Jason RandallShane Trigg
Jason RandallShane Trigg
Chief Executive Officer
(Principal Executive Officer)
Date:OctoberApril 27, 20222023By:/s/ Fay Sien Goon
Fay Sien Goon
Chief Financial Officer
(Principal Financial and Accounting Officer)