UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-K
_________________
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-37468
_________________
AppFolio, Inc.
(Exact name of registrant as specified in its charter)
_________________
Delaware
26-0359894
(State
of
incorporation
or
organization)
(I.R.S.
Employer
Identification
No.)
50 Castilian Drive
Goleta, California
(Address
of
principal
executive
offices)
93117
(Zip
Code)
(805) 364-6093
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Class A common stock, par value $0.0001 per share
Name of exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
_________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o
NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of Act. YES o
NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 x
NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). YES x
NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§ 229.405 of this chapter) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o
NO x
x
¨
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price of the registrant’s Class A common
stock on June 30, 2016 (the last business day of the registrant’s mostly recently completed second fiscal quarter), as reported on the NASDAQ Global Market on such date, was
approximately $181.8 million . Shares of the registrant’s Class A common stock and Class B common stock held by each executive officer, director and holder of 10% or more
of the registrant’s outstanding Class A common stock and Class B common stock have been excluded from this calculation as such persons may be deemed to be affiliates. This
calculation does not reflect a determination that these persons are affiliates of the registrant for any other purpose.
As of February 16, 2017 , the number of shares of the registrant’s Class A common stock outstanding was 11,720,831 and the number of shares of the registrant’s Class B
common stock outstanding was 22,015,455 .
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2017 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed with the Securities and Exchange
Commission (the “SEC”) pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K (the “Annual Report”),
are incorporated by reference in Part III, Items 10-14 of this Annual Report. Except for the portions of the Proxy Statement specifically incorporated by reference in this Annual
Report, the Proxy Statement shall not be deemed to be filed as part hereof.
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
APPFOLIO, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
Section
Page No.
Cautionary Note Regarding Forward-Looking Statements
Part I
Part II
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion Analysis of Financial Condition and Results of Operation
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part III
Part IV
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Signatures
Exhibit Index
1
2
13
33
33
33
33
34
36
38
54
55
88
88
89
90
90
90
90
90
91
92
94
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended December 31, 2016 , or Annual Report, includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or
the Exchange Act, which statements are subject to considerable risks and uncertainties. Forward-looking statements include all statements that are not statements
of historical facts contained in this Annual Report and can be identified by words such as “anticipates,” “believes,” “seeks,” “estimates,” “expects,” “intends,”
“may,” “plans,” “potential,” “predicts, “projects,” “should,” “could,” “will,” “would” or similar expressions and the negatives of those expressions. In particular,
forward looking statements contained in this Annual Report relate to, among other things, our future or assumed financial condition, results of operations, business
forecasts and plans, capital needs and financing plans, research and product development plans, services provided, growth in the size of our business and number of
customers, strategic plans and objectives, acquisitions and investments, and the application of accounting guidance. We caution you that the foregoing list may not
include all of the forward-looking statements made in this Annual Report.
Forward-looking statements represent our management’s current beliefs and assumptions based on information currently available. Forward-looking
statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks and
uncertainties in greater detail in the section entitled “Risk Factors” in Part I, Item 1A of this Annual Report, as well as in our other filings with the Securities and
Exchange Commission, or SEC. You should read this Annual Report, and the other documents that we have filed with the SEC, with the understanding that our
actual future results may be materially different from the results expressed or implied by these forward-looking statements.
Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time to time and it is not possible for our management to
predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may
cause actual future results to be materially different from those expressed or implied by any forward-looking statements.
Except as required by applicable law or the rules of the NASDAQ Stock Market, we assume no obligation to update any forward-looking statements
publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information
becomes available in the future.
We qualify all of our forward-looking statements by these cautionary statements.
1
ITEM 1.
BUSINESS
PART I
Unless
otherwise
stated
in
this
Annual
Report,
references
to
"AppFolio,"
"we,"
"us,"
and
"our"
refer
to
AppFolio,
Inc.
and
its
consolidated
subsidiaries.
Overview
We were formed in 2006 with a vision to revolutionize the way that small and medium-sized businesses, or SMBs, grow and compete by enabling their
digital transformation. Today we provide industry-specific, cloud-based software solutions for SMBs, in the property management industry, and solo practitioners
and small law firms in the legal industries. We refer to solo practitioners and small law firms as SMBs for purpose of our legal vertical in this Annual Report. We
initially chose to enter the market for property management because it met our criteria for selecting industries that cloud-based solutions are ideally suited to
address, including the prevalence of unique workflows, compliance requirements and relationships among multiple industry participants. We launched our first
product, AppFolio Property Manager, or APM, a property management solution, in 2008. In 2012, after completing our market validation process, we decided to
enter the legal market. We expedited our time-to-market by acquiring MyCase, a legal practice and case management solution, and we leveraged our AppFolio
Business System, including our experience gained in the property management vertical, to advance our software solution in the legal vertical.
SMBs face a common set of issues that divert limited time and resources away from serving their clients and growing their businesses. Their day-to-day
operations are often managed through inefficient manual processes and disparate software systems. This lack of automation and integrated technology places a
significant administrative burden on these businesses, particularly in industries that involve unique workflows, relationships among multiple industry participants,
significant data inputs and management, and compliance or regulatory requirements. While larger enterprises and consumers have been experiencing a
transformational shift into the digital age, the legacy systems and manual business processes currently used by many SMBs are lagging behind in terms of
technological sophistication and ease of use. In particular, many small and medium-sized property managers are still running their businesses using spreadsheets,
older technology and a variety of point solutions that are not web-optimized. Similarly, solo practitioners and small law firms continue to be plagued by manual
processes and outdated software that divert time away from practicing law and working with clients.
Our mission is to revolutionize the way that SMBs grow and compete by enabling their digital transformation. We accomplish our mission by delivering a
software platform that is designed to be the system of record to automate essential business processes and the system of engagement to enhance business
interactions between our customers and their clients and vendors. Our mobile-optimized software solutions have a user-friendly interface designed for use across
multiple devices, enabling our customers to work at any time and from anywhere. Our property management software provides small and medium-sized property
managers with an end-to-end solution to their business needs, enabling them to manage their portfolio of properties quickly and easily in a single, unified
environment. Our legal software provides solo practitioners and small law firms with a streamlined practice and case management solution, allowing them to
manage their practices and case load within a single system. We also offer optional, but often mission-critical, Value+ services, such as our professionally designed
websites and electronic payment services, which are seamlessly built into our core solutions.
We refer to our approach to addressing similar, fundamental business needs of SMBs across our targeted verticals as our AppFolio Business System. At
the center of our AppFolio Business System is a systemized set of best practices and common technology platform that can be applied to existing and future
vertical markets. We apply a disciplined approach of using market validation to select and develop new core functionality and Value+ services for our existing
markets and to identify the most suitable adjacent markets and new verticals to pursue. We continuously expand the core functionality and add new Value+
services to our existing software solutions based on industry trends, research and feedback from our customers. We use online marketing, participation at customer
and industry events, and in-app messaging to educate new and existing customers on how our software solutions can benefit their businesses. Based on the
foundation created by our marketing activities, our sales team builds relationships with potential customers, assesses their business challenges and demonstrates the
benefits of our software solution. We then partner with our customers to navigate their digital transformation by streamlining the on-boarding process and
providing ongoing advice on best practices. Our customer-centric culture serves to deepen our relationships with our customers and helps to maximize the value of
our software solutions for their businesses.
Our core solutions address common business functions and interactions of SMBs in our targeted verticals by providing key functionality, including
accounting, document management, real-time interactive search, data analytics and communication options. We currently offer APM for property managers and
MyCase for solo practitioners and small law firms. APM is a software solution designed to address the operational requirements of small and medium-sized
property managers, including activities such as posting and tracking tenant vacancies, handling the entire leasing process electronically, administering maintenance
and repairs
2
with their vendor networks, managing accounting and reporting to property owners, and communicating with tenants and owners. MyCase is a flexible practice and
case management solution that provides time tracking, billing, calendaring, client communication, coordination with other lawyers and support staff, and legal
document management and assembly for solo practitioners and small law firms. As MyCase is in an earlier stage of development than APM, we are continuing to
expand its core functionality.
In addition to our core solutions, we offer a range of optional, but often mission-critical, Value+ services. Our Value+ services are available on an as-
needed basis and enable our customers to adapt our platform to their specific operational requirements. Today, we offer certain Value+ services to both our
property manager and law firm customers, namely, professionally designed websites and electronic payment services. In addition, we offer the following Value+
services to our property manager customers: resident screening services; tenant liability insurance; maintenance contact center services; lead generation services;
and debt collection services. Over time, we anticipate offering additional Value+ services across our targeted verticals as appropriate for each particular market.
We apply our disciplined market validation approach and customer-focused philosophy to select and develop additional Value+ services as well as new core
functionality, and to identify the most suitable adjacent markets and new verticals to target.
For the years ended December 31, 2016 , 2015 and 2014 , our revenue was $105.6 million , $75.0 million and $47.7 million , respectively, representing
year-over-year growth of 41% when comparing 2016 to 2015 , and year-over-year growth of 57% when comparing 2015 to 2014 . Our revenue has limited
seasonality as discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations within Quarterly Revenue and Cost
Trends. As a result of a substantial increase in headcount, as well as other investments to expand our research and product development, customer service, and
sales and marketing organizations, and to maintain and expand our technology infrastructure and operational support, we incurred net losses of $8.3 million , $15.7
million and $8.6 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. We have invested, and intend to continue to invest, heavily in our
business to capitalize on our market opportunity.
Our AppFolio Business System
We refer to our approach to addressing the specific needs of SMBs in each of our targeted verticals as our AppFolio Business System. Our AppFolio
Business System has been developed to find, evaluate and serve verticals in which we can deliver a transformative, easy-to-use and cost-effective software solution
that can handle the key operational requirements of SMBs. Key elements of our AppFolio Business System include:
Disciplined
Market
Validation
Process
. Since our founding, we have worked closely with our customers, partners and other industry
participants to inform our product roadmap. We have consistently applied a disciplined market validation process to select and develop new core
functionality and Value+ services, and to identify the most suitable adjacent markets and new verticals to target. This approach facilitates faster and
more focused product development, with higher confidence that our software solutions will rapidly find market acceptance within our targeted
verticals.
AppFolio
Technology
Platform
. At the center of our AppFolio Business System is our modern, cloud-based technology platform, which encompasses
a wide variety of reusable core functionality and Value+ services that can be leveraged to provide frequent updates and enhancements across our
software solutions in our targeted verticals. The functionality of our platform has been developed with a view to improving business efficiency and
productivity for SMBs.
Innovative
Marketing
Approach
. We believe a key element of our AppFolio Business System is our efficient and targeted go-to-market
strategy across our verticals. We employ sophisticated online marketing techniques, including content marketing, search engine optimization, or SEO,
and search engine marketing, or SEM, industry thought leadership and education, and participation at customer and industry events, which are used by
our sales development team to further nurture potential sales leads. Customer ‘word of mouth’ marketing, reviews and testimonials are also leveraged
throughout the marketing and sales process. We then use thoughtful in-app messaging to remind existing customers of our Value+ services at natural
points in their workflow, making it easy for our customers to become informed about and increase their adoption and usage of new Value+ services.
Efficient
Sales
Process
. Based on the foundation created by our marketing programs and sales development team, we are able to quickly
build relationships with potential customers, assess their business challenges and demonstrate the benefits of our software solutions. Following on-
boarding of our core solution, our sales team identifies specific Value+ services that enable our customers to further streamline and grow their
businesses. Our transparent pricing model is designed to simplify the sales process by pricing subscriptions in a uniform manner based on the size of
our customers’ businesses.
Customer
Service
as
a
Partnership
. Our customer service team partners with our customers to assist them with on-boarding and help ensure they are
optimally using our software solution early in their relationship with us. We believe
3
this process is critical to our customers’ success and plays an important role in customer retention. We also provide ongoing training and support, and
regularly provide advice on best practices. Our customer service is an essential component of our AppFolio Business System, serving to deepen our
relationships with our customers, maximize the value of our software solutions for their businesses, and encourage word-of-mouth referrals from
satisfied customers.
Customer
Feedback
Loop
. We are committed to listening to, understanding and anticipating our customers’ business challenges as the foundation for
our product management team to determine and set development priorities. We regularly track customer sentiment and gather feedback at key
milestones throughout the customer lifecycle. Our agile, team-based engineering approach and continual integration of customer feedback allows us to
release frequent updates to our software solutions quickly and seamlessly.
These components of our AppFolio Business System strengthen our brands and customer loyalty, often resulting in customer promotion and feedback that
we then leverage in developing, marketing and selling our software solutions across our targeted verticals.
Our Solutions
We provide SMBs with cloud-based business management software solutions that are designed and developed with our customers’ industry-specific
business needs in mind.
All-in-One
System
.
Our core solutions have been designed and developed to suit the specific workflows of SMBs in our targeted verticals. We believe
that, by focusing on specific industries, we are better able to provide our customers with broad functionality that meets their key business needs and
eliminates their need for a myriad of disparate point solutions. Our vision for each vertical software solution includes fully integrated functionality that
provides a single system of record to automate routine processes and a system of engagement to optimize business interactions among our customers
and their clients and vendors.
Essential
Value+
Services
. Our software solutions include optional, but often mission-critical, Value+ services that our customers can adopt to
enhance our core solutions. These services range from upfront professional website design to ongoing high-volume transactional services, such as
electronic payment services, in addition to industry-specific services, such as resident screening, for our property manager customers.
Modern
and
Secure
Cloud-Based
Solutions
. We have designed and developed our software solutions on a modern cloud-based platform,
allowing for rapid and cost-effective deployment of our enterprise-class software solutions and frequent updates to help ensure our software solutions
incorporate the latest technological advances and adapt to industry trends.
Built
for
Any
Device,
Anytime,
Anywhere
. We recognize that SMBs handle multiple responsibilities that require them to be available 24/7,
and they demand flexible software solutions that are compatible with the laptops, tablets and smartphones they already own to allow them to work at
any time and from anywhere. Our software solutions are designed to enable users to move seamlessly from one device to another, to run on multiple
operating systems and to launch in a variety of browsers.
User-Friendly
Interface
. We invest significant time and resources to understand and watch customers interact with our software as they
accomplish daily tasks. This allows us to design and build functionality that results in an intuitive and user-friendly customer experience. We have
found that our users are often able to benefit immediately from our software solutions with little to no training.
Ever-Evolving
Functionality
. We direct our investment in research and product development based on our market validation findings and customer
feedback loop, which inform the development of new core functionality and Value+ services that are directly relevant to our customers’ businesses and
industry trends.
Vertical
Data
Analytics
. As a vertical cloud-based solution provider, we are uniquely positioned to capture data across our customer base, forming a
new source of industry-specific business data. Our customers benefit from having access to a wide variety of customizable business performance
management reports that aggregate industry benchmarking data and provide optimization opportunities.
4
Benefits of Our Solutions
Benefits
to
Our
SMB
Customers
. Our cloud-based business management software solutions enable our customers to eliminate manual processes and
collapse a myriad of point solutions into a single system of record and system of engagement. Our software solutions facilitate the automation of
recurring transactions, enable seamless communication with multiple stakeholders and provide various reports and analytics that combine to produce
tangible time savings, reduced expenses and increased revenue for our customers.
Benefits
to
Clients
of
SMBs
. Our software solutions help ensure clients of SMBs experience high quality professional service, improved
responsiveness and easy access to useful information. Clients of SMBs are able to interact with the owners and managers of SMBs through our
intuitive, consumer-friendly interfaces and to complete a variety of tasks online.
Benefits
to
Vendors
of
SMBs
. Our software solutions enable vendors of SMBs to streamline transactions with the owners and managers of
SMBs by automating processes and facilitating communications.
Our Growth Strategy
Our growth strategy is to provide increasingly valuable cloud-based business management software solutions to SMBs within each specific vertical we
choose to target. We have managed, and plan to continue to manage, our business towards the achievement of long-term growth that we believe will positively
impact long-term stockholder value, and not towards the realization of short-term financial or business metrics, or short-term stockholder value. Key components
of growth strategy include:
Maintain
Product
and
Technology
Leadership
.
We have made, and will continue to make, significant investments in research and product
development to expand our core functionality and add new Value+ services in existing and/or new vertical markets. We intend to continue using our
disciplined market validation techniques and close relationships with our customers as a key source of feedback to inform and direct our product
roadmap. We may also choose to acquire technologies to accelerate our time-to-market for certain functionality or entry into adjacent markets or new
verticals.
Keep
Our
Existing
Customers
Happy
. Customer success is essential to our long-term success. We place significant emphasis on customer
service to differentiate our software solutions from competing products and this will continue to be a critical component of our business strategy in the
future. We do not separately charge our customers for ongoing training and support, which we believe is a key factor in retaining our existing
customers and deepening their understanding of our core functionality and Value+ services. We believe that maintaining our focus on customer
satisfaction will drive greater adoption and utilization of our software solutions over time.
Expand
Adoption
and
Use
By
Existing
Customers
. We intend to expand our core functionality and add new Value+ services to meet the
evolving needs and requirements of our customers in each vertical market in which we participate. We believe that our customers will have the
opportunity to invest newly available resources to grow their businesses as they save time and money using our software solutions. As our customers
grow, we expect they will use our technology to manage their larger businesses on our platform and increasingly adopt and use additional Value+
services.
Target
New
Customers
. We plan to grow our customer base with our sales and marketing programs, including evolving industry thought
leadership and education, and the referral power of satisfied customers promoting our software solutions within our targeted verticals. We believe that
the market for cloud-based business management software is large and generally underserved both within the industries in which we currently operate
and the broader SMB market. We believe that our prominent online presence and efficient sales and marketing infrastructure will continue to attract
new customers in our targeted verticals.
Enter
New
Adjacent
Markets
. We currently participate in a number of markets within the property management vertical and are constantly
evaluating adjacent markets in both of our current verticals based on our deliberate market validation strategy and customer feedback. We firmly
believe that, while we are continuously developing our software solution within one market, we can apply certain relevant product enhancements and
learnings from that market as we extend our platform into each successive adjacent market.
Expand
into
New
Verticals.
We consistently review potential opportunities to expand into additional vertical markets. In that regard, we
enforce a disciplined approach to growth by using market validation techniques to assess the scope and nature of business challenges in any potential
new vertical, as well as the likelihood that SMBs may purchase a cloud-based solution to solve their problems in that vertical, and their potential spend
on such solutions. Any new
5
vertical also must fit within our overall business strategy, including our management team's assessment of available alternatives, such as the number
and size of potential adjacent market opportunities, and the relative risk and return of these opportunities.
AppFolio Technology Platform
We have developed a common technology platform that enables us to create business management software solutions for SMBs within our targeted
verticals. Our suite of applications integrated within our core solution spans many of our customers’ most critical business needs by providing them with a system
of record and a system of engagement. In conjunction with our core solution, we offer a number of Value+ services, which currently consist of website services,
electronic payment services, background and credit checks, insurance services, contact center services, lead generation services and debt collection services. We
have built our platform using a modern cloud-based architecture, and our software solutions are designed to run on any device and are compatible with any
operating system. As a result, our customers' data is available at any time and from any location.
Products - AppFolio Property Manager
Core
Functionality
Our property management software solution provides small and medium-sized property managers (including both third-party managers and owner-
operators) with a multi-faceted solution for their operational requirements. We built APM from the ground up based on our analysis of the industry and input
directly from property managers. APM includes the following core functionality:
Powerful
Accounting
Software
.
APM provides integrated accounting software specifically designed for property managers, including accounts
payable, accounts receivable, trust accounting, Form 1099 creation, check printing, automatic bank reconciliation and ratio utility billing to calculate a
resident’s share of monthly utility costs based on predetermined allocations.
Data-Driven
Management
. Unlimited storage allows all data to be centralized in APM, making it available to property managers on-demand
through our dynamic search capabilities. APM also allows property managers to better understand and track their business performance through
property-level budgets and many customizable reports covering accounting details, property details, and resident and vendor information.
Effective
Online
Marketing
. Our tenant vacancy tracking software capitalizes on property data centralized in APM to streamline the listing process.
In just a few clicks, property managers can manage listings on their own websites and make automatic feeds available to a wide variety of third-party
listing sites, dramatically increasing the visibility of listings. Our core functionality also improves the quality of listings by allowing property managers
to embed YouTube videos and use our professionally formatted HTML code for listings on third-party websites. All vacancy listings and tasks are then
consolidated in real time to reflect the status of a property manager’s current vacancies, with detailed metrics showing how vacancy rates are affected
by changes in rent or marketing.
Seamless
End-to-End
Lease
Processing
. APM provides a mobile-friendly online leasing solution that allows prospective residents to complete online
rental applications from the vacancy listings and upload photographs of their drivers licenses and other important documents. If approved, the property
manager can generate a lease agreement pre-populated with the applicant’s data that can be electronically signed by the new resident in real time. Our
online lease template can be customized to create multiple lease agreements for different property types and requirements, including forms required by
applicable law. In addition, our lease renewal workflow automatically incorporates designated increases in rent into the relevant documentation.
Streamlined
Resident
Communications
. Mass emailing capability and text messaging functionality in APM streamline communications and social
interactions with residents. Our messaging center facilitates a range of communications from move-in and move-out instructions to invitations to
resident events, as well as short, time-sensitive communications, such as maintenance alerts and late rent reminders. Our messaging center allows
property managers to personalize communications and interact with property owners and vendors.
Accessible
Property
Owner
Reporting
.
APM enables property managers to post to private and secure online owner portals. These postings typically
include owner statements, completed work orders and other reports to which owners have on-demand access. Our owner statements are designed to be
easy to read and user friendly, providing a helpful overview of transactions affecting the property in the past month, and facilitating better service by
property managers to their clients.
6
Transparent
Property
Maintenance
. APM’s built-in property maintenance software facilitates electronic work orders to vendors for both
one-time and recurring tasks, which are organized in real time to provide a snapshot of all past and in-progress work orders. Residents can access
tenant portals to submit online maintenance requests, which automatically create work orders upon acceptance by the property manager. This allows
property managers to expedite response times, track and edit the status of repairs, and ensure that property issues are addressed in a timely manner.
Convenient
Payments
to
Owners
and
Vendors
. As an alternative to cash or checks, APM enables property managers to make payments to owners and
vendors faster and more securely by depositing funds directly into their bank accounts. Like our other payment solutions, this functionality is built into
APM so that payments are automatically entered into our accounting software.
Property
Inspection
on
Any
Device
. Built-in property inspection functionality allows property managers to perform and manage on-site
property inspections remotely on their preferred mobile device. Property managers can make notes directly in the application (or use their phone’s
speech-to-text functionality) and upload related photographs as they walk through the property. APM then generates an inspection report in a fraction
of the time it would take to type up handwritten notes and allows property managers to create work orders from flagged inspection items.
Optimized
Rent
Comparison
.
RentMatch, our rent comparison tool, quickly analyzes the rental price and characteristics of any appropriate
unit and uses data analytics to compare them to actual rental prices of units of similar size and bedroom count in the same geographical area,
presenting the results in a user-friendly report.
Variable
Functionality
for
Different
Property
Types
.
APM allows property managers to manage single- and multi-family residences, student
housing, commercial property, home owners' associations, or mixed real estate portfolios, as well as optional rentable items such as parking spaces or
storage. We are continually adding new core functionality, including rent-by-the-bed for student housing and the ability to allocate common area
maintenance charges.
Value+
Services
Our Value+ services enable property managers to activate certain optional, but often mission-critical, functionality that is seamlessly built into APM and
designed to improve the user experience in a number of significant ways.
Professionally
Designed
Websites
.
We collaborate with our customers to deliver and maintain websites that showcase modern and mobile-optimized
designs, with unique sites customized for individual properties, including image galleries and floor plans. Our websites are fully integrated with
APM’s functionality, including but not limited to vacancy postings, payment options, owner portals and maintenance requests. Property managers can
track and analyze site traffic and lead generation and identify prospects by evaluating the guest cards on vacancy postings that are filled in by
prospective residents.
Electronic
Payment
Services
. Our payments platform provides prospective and current residents with a number of convenient and secure payment
options. Prospective residents can pay rental application fees through our secure online rental applications. APM supports ACH payment processing
(e-Check) and credit or debit card payments of security deposits and rent through our secure online tenant portals. As an even more secure alternative
to cash and money orders, residents can make regular or last-minute Electronic Cash Payments at any 7-Eleven or ACE Cash Express location.
Instant
Background
and
Credit
Checks
. APM offers instant background screening and credit checks for use during the rental application
process. Instead of manually entering or faxing information to third-party service providers, APM allows property managers to simply press a “Screen
Now” button upon receipt of a new online rental application and receive an easy-to-read report summarizing the results of a credit check and
nationwide eviction and criminal records search. Customers also gain access to, and have the option to contribute to, Experian Rent Bureau rental
payment history data, updated every 24 hours, to identify the highest quality residents and reduce the risk of bad debts.
Reliable
Insurance
Coverage
. Property managers are increasingly requiring residents to carry tenant liability insurance to reduce the hassle
and expense associated with resident-caused damage. APM facilitates enrollment of residents in a simple, easy-to-understand tenant liability insurance
program, and allows property managers to link this service to lease signings and renewals and easily track resident compliance. Our tenant liability
insurance program seeks to provide residents with a cost-effective, integrated solution that provides property managers with a competitive advantage
when marketing their services to owners.
7
24/7
Maintenance
Contact
Center
. APM’s contact center is manned 24 hours a day, 7 days a week, by professionally trained agents. These agents can
act as an extension of the property manager’s office to resolve or route incoming maintenance requests. Our answering service is designed to work
seamlessly with APM’s property maintenance software. APM agents are equipped to enter non-emergency work orders directly into APM for the
property manager’s approval and dispatch vendors immediately in case of an emergency.
Premium
Leads
. APM customers have the option to upgrade a vacancy listing to premium status, syndicating it instantly to dozens of pay-to-
list websites, including featured placement on most sites. There is no need to maintain separate contracts or sign up for individual listing sites, and the
property manager only pays for verified leads signifying unique, real people who are interested in the subject property.
Debt
Collection
Services
. APM offers its property manager customers the ability to utilize a nationwide contingency-based debt collection
service provided by a nationally licensed third party partner. Because the relevant data is stored in APM, property managers can easily and
electronically submit past due tenant debt from their APM database directly to the collections service for processing.
Products - MyCase
Core
Functionality
Our legal software solution is designed to assist solo practitioners and small law firms with administering their practice and managing their case load. We
acquired MyCase in 2012 and are continuing to expand its functionality by leveraging our AppFolio Business System, including our experience gained in the
property management vertical, to advance our software solution in the legal vertical. MyCase includes the following core functionality:
On-the-Go
Time
Tracking
. MyCase allows attorneys to enter billable hours on their preferred mobile device, automatically linking time
entries to the appropriate case or matter. Lawyers are able to handle multiple court appearances, meetings and other interactions without having to
recreate their days after the fact. MyCase can also be used to track non-billable entries to monitor the performance and efficiency of flat-fee
arrangements and contributions to pro bono work.
Flexible
Legal
Billing
Software
. MyCase’s legal billing software can be used to generate detailed trust account balances and a wide variety of reports
to track productivity and other firm metrics. It can also quickly pull unbilled time and expenses or flat fee balances into a professionally formatted
invoice, which can be customized with the law firm’s logo. Attorneys can use our Payment Plan Generator to easily define a payment schedule for a
client with flexible due dates and balances. Our QuickBooks integration functionality provides a one-way sync of detailed accounting data into
QuickBooks, ensuring consistency across accounting software.
Secure
Client
Portals
. MyCase’s integrated client portals provide clients with on-demand access to a variety of information, including
invoices and sensitive and privileged communications, with the knowledge that such correspondence is private and secure and better protected than
messages sent over unsecure email. Our client portals have a modern interface similar to that of social networking sites, with real-time activity streams
to provide an overview of recent developments and a comment stream associated with uploaded items shared with clients, who get automatic
notifications of updates.
Automated
Organizational
Tasks
. MyCase offers broad functionality to facilitate better organization of cases and matters, including centralized
contacts, tasks, calendars and reminders accessible by the entire firm. Our workflow software allows lawyers to automate processes for routine tasks
tailored to the type of case or matter. Calendars and reminders are synchronized in real time across all devices to assist the entire team with time
management, and colleagues and clients receive notifications when calendar events are added. Practitioners can also link calendar events to the
applicable case or matter to track associated billable hours.
Robust
Document
Management
and
Collaborative
Assembly
. MyCase provides a robust legal document management system, which,
together with our unlimited storage and drag-and-drop upload tool, allows law firms to organize correspondence and other documentation in a
searchable, centralized firm library. Our cloud-based platform allows colleagues to collaborate in drafting new documents, which can be assembled
quickly and easily by capitalizing on our customizable templates.
8
Value+
Services
We currently offer two optional, but frequently essential, services to our law firm customers.
Professionally
Designed
Websites
.
Our professionally designed websites are fully integrated with MyCase so that practitioners and their
clients can easily login to the site to access case and matter information, communicate and manage bills. Our websites are geared towards improving
the effectiveness of law firm marketing and building a mobile presence. We work with our law firm customers to build their brand by tailoring website
content, providing professional images, creating a logo and purchasing their unique domain.
Electronic
Payment
Services
. MyCase enables practitioners to accept credit or debit cards online for a simple flat-rate merchant processing
fee. Clients can easily view invoices in the secure Client Portal and submit payment from any device. In addition, by linking operating and trust
accounts, practitioners can accept online payment of retainers and other amounts directly into these accounts.
Our Customers
As of December 31, 2016 , we had 10,038 property manager customers and 8,135 law firm customers. Our property manager customers include third-
party managers and owner-operators, managing single- and multi-family residences, commercial property, home owners' associations and student housing, as well
as mixed real estate portfolios. Our property manager customers typically manage portfolios ranging from 50 to 3,000 units. Our customers in the legal vertical are
generally solo practitioners and small law firms with less than 20 lawyers. No customer represented 10% or more of our total revenue, and our property manager
customers represented more than 90% of our revenue for our fiscal year ended December 31, 2016 .
Our Culture and Employees
We believe our people are at the heart of our success and our customers’ success, and have worked hard not only to attract and hire quality individuals but
also to nurture and develop our valuable human resources. We believe in the strong team we have cultivated, particularly in our deep bench of leaders who
continue to execute our strategic plans and encourage innovation across the organization. We further believe that our company culture, driven by a dedication to
the following six core values, provides us with a significant competitive advantage:
▪
▪
▪
▪
▪
▪
Simpler Is Better
Great, Innovative Products Are Key To A Great Business
Great People Make A Great Company
Listening To Customers Is In Our DNA
Small, Focused Teams Keep Us Agile
We Do The Right Thing Because It’s Good For Business
As of December 31, 2016 , we had 626 employees, and we consider our relationship with them to be good. We also hire temporary employees and
consultants, and feel similarly about our relationships with them. None of our employees is represented by a labor union or covered by a collective bargaining
agreement.
Technology and Operations
Data
Security
and
Availability
We use Ruby-on-Rails as our web application framework for both APM and MyCase. Our software solutions run on a combination of both public and
private cloud infrastructure, consisting of both our own servers and Amazon’s Elastic Compute Cloud, or EC2, platform. Our servers are located in state-of-the-art
data centers operated by third-party service providers. Physical security at these facilities includes a variety of access controls, including electronic keycards, pin
codes, biometric hand scans and mantraps, and policing by high resolution, motion sensitive video surveillance. These facilities provide redundant power and a
system of heating, ventilating and air conditioning, as well as fire-threat detection and suppression. We utilize a system of redundant routers, switches, server
clusters and back-up systems to help ensure high availability. Amazon is widely recognized for operating state-of-the-art, highly available data centers.
With respect to Internet security, sensitive data, such as passwords, Social Security and tax identification numbers, are encrypted before being written to
disk. In addition, all sensitive data is encrypted both in transit and at rest. Data is backed up
9
using Amazon’s Simple Storage Service, or S3, providing high durability, and we also perform regular backups of all customer data. We evaluate our Internet
security regularly, including through third-party penetration testing.
In addition, our software solutions allow our customers to define roles that provide different levels of access to users, allowing them to view and modify
specific items depending on their role. Supervisors can distribute work to on-site staff in a secure and controlled environment, while leadership retains visibility
across the entire system.
Research
and
Product
Development
We entrust product design, development and testing to our team of engineers, who coordinate closely with our product management team to launch new
core functionality and Value+ services. Our engineers are organized in smaller groups to foster agility and continued innovation in responding to the evolving
needs of our customers. We leverage a collaborative, team-based and test-driven approach to engineering to release new code frequently. We believe that it is
easier for our customers to adjust to these continuous updates to our software solutions, which incrementally change and improve their user experience, than it is to
adapt to infrequent, but more drastic, upgrades of legacy on-premise software.
We rely heavily on input from our customers in developing products that meet their needs and anticipate developments in their respective industries. Our
product management team leads our research and market validation efforts and provides guidance to management and our engineering team based on our collective
domain expertise and in-depth knowledge and understanding of our customers. As a result, our product management team engages regularly with customers,
partners and other industry participants, as well as our customer service and sales and marketing organizations. Our product management team manages our
development projects generally and serves to align separate functions within the company with a single strategic vision.
Our research and product development expenses were $12.6 million , $9.6 million and $6.5 million for the years ended December 31, 2016 , 2015 and
2014 , respectively.
Sales and Marketing
We leverage a modern marketing approach along with marketing automation technology to build brand recognition and our reputation as an industry
leader in our targeted verticals.
We participate in and drive industry thought leadership and education with both online and offline activities. We attend, host and present at a number of
industry events and support educational opportunities in the form of trade shows, conferences and webinars across the United States. We host informational
lunches and networking opportunities in key cities in the form of "Connects" (formerly, “Meet Ups”), which bring together existing and prospective customers.
Our online user forums facilitate discussions with other industry participants and serve as a resource for tips on using our platform and best practices. We also
make a number of valuable educational resources available for free through our industry partners and on our industry websites, such as PropertyManager.com and
our blogs.
We use a variety of in-bound marketing techniques to promote our software solutions, including content marketing, SEO, SEM, social media and
advanced digital advertising tactics. Our sales development team acts in partnership with our in-bound marketing efforts to reach potential customers, generate
additional sales opportunities and speed the time from evaluation to close. Our sales representatives then assist prospective property manager customers as they
evaluate APM, while prospective law firm customers generally sign up for a 30-day free trial on a self-service basis (with additional support from a live sales
development representative as needed).
Our sales team works closely with our marketing organization to find and acquire new customers as well as expand adoption and use by existing
customers. We have a metrics-driven sales culture with a focus on early indicators that lead to strong pipeline creation. We leverage technology and specialization
of resources along with an emphasis on continued training and development to maximize the productivity and speed the ramp time for each sales representative.
Our interactive sales methodology allows the sales team to quickly build relationships, assess the customer’s business challenges, and demonstrate the benefits of
our core functionality and Value+ services.
Throughout the customer relationship, we continue to promote adoption and usage of our Value+ services in a variety of channels, including email,
webinars, training, sales outreach and from within our software solution via in-app messaging. While APM and MyCase customers are using our core solutions, in-
app messaging puts additional Value+ services directly in their workflow. This makes it easy for customers to find out about additional Value+ services in an
unobtrusive manner and begin to adopt those services that are useful to their business. Our Value+ sales team then works in tandem with our marketing
organization to further increase adoption and usage of our Value+ services.
10
Customer Service
Our success is based on long-term customer retention, not a one-time sale, and we partner with our customers throughout the life of the customer
relationship to help them navigate their digital transformation. We design our software solutions to be simple and easy to switch to, set up, use and manage. We
offer unlimited training and support across our software solutions at no extra charge. We pride ourselves on being customer-centric and strive to educate our
customers on the additional core functionality and Value+ services they can use to improve business efficiency and productivity.
Our on-boarding team strives to ensure that customers are prepared to run their businesses on our platform and provide the best on-boarding experience in
the industry. Based on our assistance with data migration, we are able to provide valuable insights into data integrity and work diligently with our customers to
help resolve any issues in their underlying business processes. We also assist our customers with the configuration of our platform for particular property types or
cases. We provide a dedicated team throughout the on-boarding process and ongoing planning thereafter, including compliance with best practices. Our Value+
team also includes a number of employees focused on guiding our customers through the adoption of our Value+ services.
Our software solutions are designed to be intuitive; nevertheless, we provide a variety of training options to assist with implementation and adoption to help
ensure maximum value for our customers. Our instructors offer several live-streamed training courses each week, and we also make available recorded training
courses that can be accessed on demand. Our training is designed to provide product overviews for those in the process of converting to our software solutions, as
well as in-depth, step-by-step instructions and ongoing education for those seeking to leverage greater functionality.
Our cloud-based platform allows us to fix issues quickly and to continuously improve our customers’ experience through ongoing updates to our software
solutions. However, when issues and questions do arise, we strive to ensure that a real person is available to respond to a customer’s concerns quickly and
intelligently.
Throughout the customer relationship, our customer loyalty team proactively engages with our customers to facilitate our customers’ success. Similarly,
our Value+ team includes employees focused exclusively on expanding Value+ service adoption and usage by new and existing customers and providing expertise
with respect to related services.
Competition
The overall market for business management software is global, highly competitive and continually evolving in response to changes in technology,
operational requirements, laws and regulations. While we focus on providing software solutions to SMBs in each of our targeted verticals, we compete with other
vertical cloud-based solution providers that serve companies of all sizes and horizontal cloud-based solution providers that offer broad solutions across multiple
verticals.
In the property management vertical, our competitors include established vertical software vendors, such as RealPage and Yardi, and we also compete
with cloud-based solution providers whose services are geared toward individual landlords with smaller portfolios than those of our targeted customers. In the legal
vertical, our competitors include established vertical software vendors, such as Thompson-Reuters and LexisNexis, each of whom offers software solutions to solo
practitioners and small law firms, and Clio.
We also see competition from numerous cloud-based solution providers that focus almost exclusively on one or more point solutions. For example, in the
property management vertical, we compete with listing services, tenant screening applications and specialists in lease forms. In the legal vertical, we compete with
time tracking, legal billing and payment services. Continued consolidation among cloud-based solution providers could lead to significantly increased competition.
We believe the principal competitive factors in each of our vertical markets include the following:
▪
▪
▪
▪
▪
▪
▪
▪
ease of deployment and use of software solutions and applications;
total cost of ownership;
data security and availability;
breadth and depth of functionality in software solutions and applications;
nature and extent of mobile interface;
level of customer satisfaction;
size of customer base and level of user adoption and usage;
brand awareness and reputation;
11
▪
▪
▪
ability to innovate and respond to customer needs rapidly;
domain expertise with respect to our targeted verticals; and
ability to leverage a common technology platform and business strategy.
We believe that we compete favorably on the basis of these factors and that the domain expertise required for developing, marketing and selling
successful software solutions in the property management and legal verticals may hinder new entrants that are unable to invest the necessary resources to develop
and deploy software solutions with the same level of functionality as ours.
Intellectual Property
We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality procedures and contractual restrictions to establish and protect
our proprietary rights in our core solutions and Value+ services. As of January 31, 2017, we had eleven issued U.S. patents that directly relate to our technology
and expire between 2026 and 2033, and another for which we recently received a Notice of Allowance from the United States Patent and Trademark Office. We
intend to pursue additional patent protection to the extent we believe it would be beneficial and cost effective.
We registered “AppFolio,” "MyCase" and "RentLinx" and certain other marks as trademarks in the United States and several other jurisdictions. We also
filed trademark applications and renewals in the United States and certain other jurisdictions and will pursue additional trademark registrations to the extent we
believe it would be beneficial and cost effective. We are the registered holder of a variety of domestic and international domain names that include
“appfolioinc.com,” “appfolio.com,” “mycase.com,” “propertymanager.com” and similar variations. We also license software from third parties for use in our
solutions, including open source software and other software available on standard commercial terms.
We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with our employees and contractors
and confidentiality agreements with third parties. Despite our precautions, it may be possible for unauthorized third parties to copy our software solutions and use
information that we regard as proprietary to create products and services that compete with ours.
Corporate Information
We were formed in 2006 as a Delaware limited liability company and converted to a Delaware corporation in 2007. Our principal executive offices are
located at 50 Castilian Drive, Goleta, California 93117, and our telephone number is (805) 364-6093. Our corporate website is www.appfolioinc.com. The
information contained on or accessed through our website does not constitute part of, and is not incorporated by reference into this Annual Report. References to
our website address in this Annual Report are inactive textual references only.
“AppFolio,” “MyCase,” "RentLinx," the AppFolio logo, the MyCase logo, and other trademarks and trade names of AppFolio, MyCase and RentLinx
appearing in this Annual Report are our property. All other trademarks or trade names appearing in this report are the property of their respective owners. Solely
for convenience, the trademarks and trade names in this report are referred to without the ® and ™ symbols. We do not intend our use or display of the trademarks,
trade names or service marks of other parties to imply a relationship with, or endorsement or sponsorship of us by, such other parties.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, as well as amendments to those reports pursuant to
Sections 13(a) and 15(d) of the Exchange Act. We also file proxy statements and information statements pursuant to Section 14 of the Exchange Act. The public
may obtain these filings at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a website at www.sec.gov that contains the reports, proxy and information statements, and other information that we file with or furnish to the SEC
electronically. Copies of the reports, proxy statements and other information may also be obtained, free of charge, electronically through our corporate website at
www.appfolioinc.com as soon as reasonably practical after we file such material with, or furnish it to, the SEC.
12
ITEM 1A. RISK FACTORS
An investment in our Class A common stock involves risks. You should carefully consider the risks and uncertainties described below, together with all
of the other information in this Annual Report, as well as in our other public filings with the SEC, before making an investment decision. If any of the following
risks are realized, our business, financial condition, and operating results 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. Furthermore, additional risks and uncertainties of which we are currently unaware,
or which we currently consider to be immaterial, could have a material adverse effect on our business.
Please
be
advised
that
certain
of
the
risks
and
uncertainties
described
below
contain
“forward-looking
statements.”
See
the
section
of
this
Annual
Report
entitled
“Cautionary
Note
Regarding
Forward-Looking
Statements”
for
additional
information.
Risks Related to Our Business and Our Industry
If
we
are
unable
to
enter
new
verticals,
or
if
our
software
solution
for
any
new
vertical
fails
to
achieve
market
acceptance,
our
operating
results
could
be
adversely
affected
and
we
may
be
required
to
reconsider
our
growth
strategy.
Our growth strategy is dependent, in part, on leveraging our AppFolio Business System, including our common technology platform, to expand into new
verticals. However, we may be unable to identify new verticals that meet our criteria for selecting industries that cloud-based solutions are ideally suited to
address. In addition, our market validation process may not support entry into selected verticals due to our perception of the overall market opportunity or of the
willingness of market participants within those verticals to adopt our software solutions. Further, instead of pursuing new verticals, we may prefer for various
reasons to pursue alternative growth strategies, such as entry into markets that are adjacent to the markets in which we currently participate within our existing
verticals, or the development of additional products or services for our existing markets.
Even if we choose to enter new verticals, our market validation process does not guarantee our success in any particular vertical. We may be unable to
develop a software solution for a new vertical or, in the event that we enter a new vertical by way of a strategic acquisition, we may be unable to leverage the
acquired software solution in time to take advantage of the identified market opportunity, and any delay in our time-to-market could expose us to additional
competition or other factors that could impede our success. In addition, any software solution we develop or acquire for a new vertical may not provide the
functionality required by potential customers and, as a result, may not achieve widespread market acceptance within the new vertical. To the extent we choose to
enter new verticals, whether organically or via strategic acquisition, we may invest significant resources to develop and expand the functionality of our software
solutions to meet the needs of customers in those verticals, which investments will occur in advance of our realization of revenue from them. If we elect not to
enter new verticals in the future, or if we choose to enter new verticals and do so without achieving market acceptance for our software solutions, our reputation
could be harmed, our operating results could be adversely affected, and we may be required to reconsider our growth strategy.
In addition, while we expedited our entry into the legal vertical through the acquisition of MyCase in 2012, our practice and case management solution is
in an earlier stage of development than APM, our property management solution, and we are at an earlier stage in the process of expanding the core functionality
and Value+ services associated with our legal software. We face significant competition in the legal market from both vertical software vendors and cloud-based
solution providers that offer one or more point solutions. There can be no assurance that we will be able to achieve market acceptance for our legal software at or
near the levels achieved by our property management software. The success of our vertical market strategy depends, in part, on our ability to continue to
significantly increase the number of our law firm customers and the revenue derived from them, and our failure to achieve these objectives could have an adverse
impact on our operating results.
We
have
a
limited
operating
history
and
have
incurred
significant
operating
losses.
As
a
result
of
continuing
investments
across
our
organization
to
grow
our
business,
we
expect
our
financial
results
may
fluctuate
significantly
for
the
foreseeable
future.
We were formed in 2006 and launched our first product, APM, in 2008. We expedited our entry into the legal vertical through the acquisition of MyCase
in 2012. As a result, we have a limited operating history and limited experience selling our software solutions in two continually evolving vertical markets,
especially within the legal vertical. These and other factors combine to make it more difficult for us to accurately forecast our future operating results, which in
turn makes it more difficult for us to prepare accurate budgets and implement strategic plans. We expect that this uncertainty will continue to exist in our business
for the foreseeable future, and will be exacerbated to the extent we introduce new functionality, or enter adjacent markets or new verticals.
We have incurred net losses in each fiscal period since our formation. We incurred net losses of $8.3 million , $15.7 million
13
and $8.6 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. These losses reflect the substantial investments we have made across our
organization to develop our software solutions and capitalize on our market opportunity. In order to implement our business strategy, we intend to continue to
make substantial investments in, among other things:
▪
▪
▪
▪
▪
▪
▪
our research and product development organization to enhance the ease of use and functionality of our software solutions by adding new core
functionality, Value+ services and other improvements to address the evolving needs of our customers, as well as to develop new products for
adjacent markets and new verticals;
our customer service organization to deepen our relationships with our customers, assist our customers in achieving success through the use of our
software solutions, and promote customer retention;
our sales and marketing organization, including expansion of our direct sales organization and marketing programs, to increase the size of our
customer base, increase adoption and utilization of new and existing Value+ services by our new and existing customers, and enter adjacent
markets and new verticals;
maintaining and expanding our technology infrastructure and operational support, including data center operations, to promote the security and
availability of our software solutions, and support our growth;
our general and administrative functions, including hiring additional finance, IT, human resources, legal and administrative personnel, to support
our growth and assist us in achieving and maintaining compliance with public company reporting and compliance obligations;
the expansion of our existing facilities, including leasing and building out additional office space, to support our growth and strategic expansion;
and
our continued strategic efforts to identify and expand into key adjacent and new vertical markets.
As a result of our continuing investments to grow our business in these and other areas, we expect our expenses to increase significantly, and we do not
expect to be consistently profitable, if we are profitable at all, for the foreseeable future. Even if we are successful in growing our customer base and increasing
revenue from new and existing customers, we may not be able to generate additional revenue in amounts that are sufficient to cover our expenses. We may incur
significant losses in a particular period for a number of reasons, and may experience significant fluctuations in our operating results from period to period,
including as a result of the other risks and uncertainties described elsewhere in this Annual Report. We cannot assure you that we will achieve profitability in the
near term or that, if we do become profitable, we will sustain profitability over any particular period of time. Any additional operating losses will have a negative
impact on our stockholders’ equity.
We
manage
our
business
towards
the
achievement
of
long-term
growth,
which
may
not
be
consistent
with
the
short-term
expectations
of
some
investors,
and
may
cause
significant
fluctuations
in
our
quarterly
results.
We plan to continue to manage our business towards the achievement of long-term growth that we believe will positively impact long-term stockholder
value, and not towards the realization of short-term financial or business metrics, or short-term stockholder value. If opportunities arise that might cause us to
sacrifice our performance with respect to short-term financial or business metrics, but that we believe are in the best interests of our stockholders, we will take
those opportunities.
We focus on growing our customer base by launching new and innovative core functionality and Value+ services to address our customers’ evolving
business needs, developing new products for adjacent markets and additional verticals, and improving the experience of our users across our targeted verticals. We
prioritize product innovation and user experience over short-term financial or business metrics. We will make product decisions that reduce our short-term
operating results if we believe that these decisions are consistent with our strategic objective to achieve long-term growth. These decisions may not be consistent
with the short-term expectations of some investors, and may cause significant fluctuations in our operating results from period to period. In addition,
notwithstanding our intention to make strategic decisions that positively impact long-term stockholder value, the decisions we make may not produce the long-term
benefits we expect.
Our executive officers, directors and principal stockholders control a majority of the combined voting power of our outstanding capital stock. As a result,
they are able to exercise significant influence and control over the establishment and implementation of our future business plans and strategic objectives, as well
as control all matters submitted to our stockholders for approval. These persons may manage our business in ways with which you disagree and which may be
adverse to your interests.
14
Actual
or
perceived
security
vulnerabilities
in
our
software
solutions,
breaches
of
our
security
controls
or
other
unauthorized
access
to
our
customers’
data
could
result
in
liability
or
reputational
harm
to
us,
or
cause
us
to
lose
customers,
any
of
which
could
harm
our
business
and
operating
results.
In providing our software solutions, we store and transmit large amounts of our customers’ data, including sensitive and proprietary data. Our software
solutions are typically the system of record and system of engagement for all or a portion of our customers’ businesses, and the data processed through our
software solutions is critical to their businesses. Cyber-attacks and other malicious Internet-based activities continue on a regular basis, as evidenced by the recent
targeting of a number of high profile companies and organizations. As our business grows, the number of users of our software solutions, as well as the amount of
information we store, is increasing, and our brands are becoming more widely recognized. We believe these factors combine to make us an even greater target for
this type of malicious activity. Techniques used to sabotage, or to obtain unauthorized access to, systems or networks change frequently and generally are not
recognized until launched against a target. Therefore, despite our significant efforts to keep our systems and networks up to date, we may be unable to anticipate
these techniques, react in a timely manner, or implement adequate preventive measures, any of which may expose us to a risk of loss, litigation and potential
liability. In addition, some of our third-party partners also collect information from transactions with our customers, and these third parties are subject to similar
threats of cyber-attacks and other malicious Internet-based activities.
If our security measures, or the security measures of our third-party partners, are breached as a result of negligence, wrongdoing or malicious activity on
the part of our employees, our partners’ employees, our customers’ employees, or any third party, or as a result of any error, product defect or otherwise, and this
results in the disruption of the confidentiality, availability or integrity of our customers’ data, we could incur liability to our customers and to individuals or
organizations whose information was being stored by our customers, as well as fines from payment processing networks and regulatory action by governmental
bodies. If we experience a widespread security breach, we cannot be certain that our insurance coverage will be sufficient to compensate us for liabilities actually
incurred or that insurance will continue to be available to us on reasonable terms, or at all. In addition, any breaches of our security controls or other unauthorized
access to our customers’ data could result in reputational damage, adversely affect our ability to attract new customers and cause existing customers to reduce or
discontinue the use of our software solutions, any of which could harm our business and operating results. Furthermore, the perception by our current or potential
customers that our software solutions could be vulnerable to security breaches, even in the absence of a particular problem or threat, could reduce market
acceptance of our software solutions and cause us to lose customers.
Service
outages
and
other
performance
problems
associated
with
our
technology
infrastructure
could
harm
our
reputation,
adversely
affect
our
ability
to
attract
new
customers
and
cause
us
to
lose
existing
customers.
We have experienced significant growth in the number of users and the amount of data that our technology infrastructure supports, and we expect this
growth to continue. We seek to maintain sufficient excess capacity in our technology infrastructure to meet the needs of all of our customers, including to facilitate
the expansion of existing customer deployments and the provisioning of new customer deployments. In addition, we need to properly manage our technology
infrastructure in order to support version control, changes in hardware and software parameters, and the evolution of our software solutions. However, the
provision of new hosting infrastructure requires significant lead-time.
We have experienced, and may in the future experience, website disruptions, service outages and other performance problems with our technology
infrastructure. These problems may be caused by a variety of factors, including infrastructure changes, power or network outages, fire, flood or other natural
disasters affecting our data centers, human or software errors, viruses, security breaches, fraud or other malicious activity, spikes in customer usage and distributed
denial of service issues. In some instances, we may not be able to identify the cause or causes of these service outages and performance problems within an
acceptable period of time. If our technology infrastructure fails to keep pace with the increased number of users and amount of data, or if we are unable to avoid
service outages and performance problems, or to resolve them quickly, it could adversely affect our ability to attract new customers, result in the loss of existing
customers and harm our reputation, any or all of which could adversely affect our business and operating results.
Evolution
and
expansion
of
our
electronic
payment
services
may
subject
us
to
additional
risks
and
regulatory
requirements.
The evolution and expansion of our electronic payment services may subject us to additional risks and regulatory requirements, including laws and
regulations governing money transmission and anti-money laundering. These requirements vary throughout the markets in which we operate, and several
jurisdictions lack clarity in the application and interpretation of these rules. Our efforts to comply with these rules could require significant management time and
effort, as well as significant expenditures, and will not guarantee our compliance with all regulatory requirements, especially given that the applicable regulatory
frameworks are constantly changing and subject to evolving interpretation. While we maintain a compliance program focused on applicable laws and regulations
throughout our applicable industries, there is no guarantee that we will not be subject to fines, penalties or other regulatory actions in one or more jurisdictions, or
be required to adjust our business practices to accommodate
15
future regulatory requirements.
We
face
a
number
of
risks
in
our
payment
processing
business
that
could
adversely
affect
our
business
or
operating
results.
In connection with our electronic payment services, we process payments and subsequently submit these payments to our customers after varying clearing
times established by us. These payments are settled through our sponsoring clearing bank and, in the case of electronic funds transfers, or EFTs, through our
Originating Depository Financial Institutions, or ODFIs, pursuant to agreements with one or more national banking institutions that we may contract with from
time to time. Our electronic payment services subject us to a number of risks, including, but not limited to:
▪
▪
▪
▪
▪
▪
▪
liability for customer costs related to disputed or fraudulent transactions if those costs exceed the amount of the customer reserves we have during
the clearing period or after payments have been settled to our customers;
electronic processing limits on the amounts that any single ODFI, or collectively all of our ODFIs, will underwrite;
our reliance on sponsoring clearing banks, card payment processors and other electronic payment partners to process electronic transactions,
especially where those partners are highly scrutinized and regulated themselves;
failure by us, our partners or our customers to adhere to applicable laws, regulations and standards that may legally or contractually apply to the
provision of electronic payment services;
continually evolving and developing laws and regulations governing money transmission and anti-money laundering, the application or
interpretation of which is not clear in some jurisdictions;
incidences of fraud, security breaches, errors, defects, failures, vulnerabilities or bugs in our electronic payments platform, or our failure to comply
with required external audit standards; and
our inability to increase our fees at times when our electronic payment partners increase their transaction processing fees.
If any of these risks related to our electronic payment services were to materialize, our business or operating results could be negatively affected.
Although we attempt to structure and adapt our electronic payment services to comply with complex and evolving laws, regulations and standards, our
underwriting efforts do not guarantee compliance. In the event that we are found to be in violation of our legal, regulatory or contractual requirements, we may be
subject to monetary fines or penalties, cease and desist orders, mandatory product changes, or other liabilities that could have an adverse effect on our operating
results.
Additionally, with respect to the processing of EFTs, we are exposed to financial risk. EFTs between our customer and another user may be returned for
various reasons such as insufficient funds or stop payment orders. These returns are charged back to the customer by us. However, if we or our sponsoring clearing
bank is unable to collect such amounts from the customer’s account (such as if the customer is illegitimate, or if the customer refuses or is unable to reimburse us
for the amounts charged back), we bear the risk of loss for the amount of the transfer. While we have not experienced material losses resulting from amounts
charged back in the past, there can be no assurance that we will not experience these types of significant losses in the future.
In addition to the foregoing risks associated with our electronic payment services themselves, there is an overarching risk stemming from the potential
widespread adoption of quickly evolving financial technology products, including, for example, blockchain or other distributed ledger technologies, that could
materially impact the manner in which payments are processed. Such adoption of new disruptive financial technologies could significantly reduce the volume of
payments processed by us and our third party partners or change the transaction costs associated with or potential revenue derived from those payments, thereby
reducing our revenue and increasing our associated expenses, which could materially impact our business, financial condition, operating results and, ultimately, our
stock price.
Errors,
defects
or
other
disruptions
in
our
software
solutions
could
harm
our
reputation,
cause
us
to
lose
customers,
and
result
in
significant
expenditures
to
correct
the
problem.
Our customers use our software solutions to manage critical aspects of their businesses, and any errors, defects or other disruptions in the performance of
our software solutions may result in loss of or damage to our customers’ data and disruption to our customers’ businesses, which could harm our reputation. We
provide continuous updates to our software solutions and, while our software updates undergo extensive testing prior to their release, these updates may contain
undetected errors when first introduced. In the past, we have discovered errors, failures, vulnerabilities and bugs in our software updates after they have been
released, and similar problems may arise in the future. Real or perceived errors, failures, vulnerabilities or bugs in our software solutions could result in negative
publicity, reputational harm, loss of customers, delay in market acceptance of our software solutions, loss of competitive position, withholding or delay of payment
to us, claims by customers for losses sustained by them
16
and potential litigation. In any such event, we may be required to expend additional resources in order to help correct the problem or, in order to address customer
service or reputational concerns, we may choose to expend additional resources to take corrective action even where not required. The costs incurred in correcting
any material errors, defects or other disruptions could be substantial and there may not be any corresponding increase in revenue to offset these costs. In addition,
we may not carry insurance sufficient to compensate us for any losses that may result from claims arising from errors, defects or other disruptions in our software
solutions.
Our
quarterly
results
may
fluctuate
significantly
and
period-to-period
comparisons
of
our
results
may
not
be
meaningful.
Our quarterly results, including the levels of our revenue, costs, operating expenses, and operating margins, may fluctuate significantly in the future, and
period-to-period comparisons of our results may not be meaningful. Accordingly, the results of any one quarter should not be relied upon as an indication of our
future performance. In addition, our quarterly results may not fully reflect the underlying performance of our business. Factors that may cause fluctuations in our
quarterly results include, but are not limited to:
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
our ability to retain our existing customers, and to expand adoption and utilization of our core solutions and Value+ services by our existing
customers;
our ability to attract new customers, the type of customers we are able to attract, the size and needs of their businesses, and the cost of acquiring
these customers;
the mix of our core solutions and Value+ services sold during the period;
the timing and impact of security breaches, service outages or other performance problems with our technology infrastructure and software
solutions;
variations in the timing of sales of our core solutions and Value+ services as a result of trends impacting the verticals in which we sell our software
solutions;
the timing and market acceptance of new core functionality, Value+ services and other products introduced by us and our competitors;
changes in our pricing policies or those of our competitors;
the timing of our recognition of revenue;
our ability to convert customers who start their accounts on a free trial into paying subscribers;
the amount and timing of costs and operating expenses related to the maintenance and expansion of our business, infrastructure and operations;
the amount and timing of costs and operating expenses associated with assessing or entering adjacent markets or new verticals;
the amount and timing of costs and operating expenses related to the development or acquisition of businesses, services, technologies or
intellectual property rights, and potential future charges for impairment of goodwill from these acquisitions;
the timing and costs associated with legal or regulatory actions;
changes in the competitive dynamics of our industry, including consolidation among competitors, strategic partners or customers;
loss of our executive officers or other key employees;
industry conditions and trends that are specific to the verticals in which we sell or intend to sell our software solutions; and
general economic and market conditions.
Fluctuations in quarterly results may negatively impact the value of our Class A common stock, regardless of whether they impact or reflect the overall
performance of our business. If our quarterly results fall below the expectations of investors or any securities analysts who follow our stock, or below any guidance
we may provide, the price of our Class A common stock could decline substantially.
17
Business
management
software
for
SMBs
is
a
relatively
new
and
developing
market
and,
if
the
market
is
smaller
than
we
estimate
or
develops
more
slowly
than
we
expect,
our
operating
results
could
be
adversely
affected.
We currently provide cloud-based business management software for SMBs in the property management and legal industries and, as part of our business
strategy, we will assess entry into new verticals. While the overall market for cloud-based business management software is rapidly growing, it is not as mature as
the market for legacy on-premise software applications. In addition, when compared to larger enterprises, SMBs have not historically purchased enterprise resource
planning or other enterprise-wide software systems to manage their businesses due to the cost and complexity of implementing such systems, which generally did
not address their industry-specific needs. Furthermore, a number of widely adopted cloud-based solutions have not traditionally targeted SMBs. As a result, many
SMBs still run their businesses using manual processes and disparate software systems that are not web-optimized, while others may have invested substantial
resources to integrate a variety of point solutions into their organizations to address one or more specific business needs and, therefore, may be reluctant to migrate
to a vertical cloud-based solution designed to apply to their entire business. Because we derive, and expect to continue to derive, substantially all of our revenue
from sales of our cloud-based business management software to SMBs in our targeted verticals, our success will depend, to a substantial extent, on the widespread
adoption by SMBs in these verticals of cloud computing in general and of cloud-based business management software in particular.
The market for industry-specific, cloud-based business management software for SMBs, both generally, and specifically within the property management
and legal industries, is evolving and, in comparison to the overall market for cloud-based solutions, is relatively small. The continued expansion of this market
depends on numerous factors, including:
▪
▪
▪
▪
the cost and perceived value associated with cloud-based business management software relative to on-premise software applications and disparate
point solutions;
the ability of cloud-based solution providers to offer SMBs the functionality they need to operate and grow their businesses;
the willingness of SMBs to transition from their existing software systems, or otherwise alter their existing businesses practices, to migrate their
businesses to a vertical cloud-based business management software solution; and
the ability of cloud-based solution providers to address security, privacy, availability and other concerns.
If cloud-based business management software does not achieve widespread market acceptance among SMBs, our revenue may increase at a slower rate
than we expect and may even decline, which could adversely affect our operating results. In addition, it is difficult to estimate the rate at which SMBs will be
willing to transition to vertical cloud-based business management software in any particular period, which makes it difficult to estimate the overall size and growth
rate of the market for cloud-based business management software for SMBs at any given point in time or to forecast growth in our revenue or market share.
Our
estimates
of
market
opportunity
are
subject
to
significant
uncertainty
and,
even
if
the
markets
in
which
we
compete
meet
or
exceed
our
size
estimates,
we
could
fail
to
increase
our
revenue
or
market
share.
Market opportunity estimates are subject to significant uncertainty and are based on assumptions and estimates, including our internal analysis and
industry experience. Assessing the market for industry-specific, cloud-based business management software for SMBs is particularly difficult due to a number of
factors, including limited available information and rapid evolution of the market. If we had made different assumptions or estimates, our estimates of market
opportunity could be materially different.
In addition, even if the markets in which we compete meet or exceed our size estimates, our business could fail to grow in line with our forecasts, or at all,
and we could fail to increase our revenue or market share. Our growth, and our ability to serve a significant portion of our target markets, will depend on many
factors, including our success in executing our business strategy, which is subject to many risks and uncertainties, including the other risks and uncertainties
described elsewhere in this Annual Report.
18
If
we
are
unable
to
introduce
successful
enhancements,
including
new
and
innovative
core
functionality
and
Value+
services
for
our
existing
markets
and
verticals,
or
new
products
for
adjacent
markets
or
additional
verticals,
our
operating
results
could
be
adversely
affected.
The software industry in general, and our targeted verticals in particular, are characterized by rapid technological advances, changing industry standards,
evolving customer requirements and intense competition. Our ability to attract new customers, increase revenue from our existing customers, and expand into
adjacent markets or new verticals depends, in part, on our ability to enhance the functionality of our existing software solutions by introducing new and innovative
core functionality and Value+ services that keep pace with technological developments, and provide functionality that addresses the evolving business needs of our
customers. In addition, our growth over the long term depends, in part, on our ability to introduce new products for adjacent markets and additional verticals that
we identify through our market validation process. Market acceptance of our current and future software solutions will depend on numerous factors, including:
▪
▪
▪
▪
▪
▪
the unique functionality of our software solutions and the extent to which our software solutions meet the business needs of our customers;
the perceived benefits and security of our cloud-based business management software solutions relative to on-premise software applications or other
competitive products;
the pricing of our software solutions relative to competitive products;
perceptions about the security, privacy and availability of our software solutions relative to competitive products;
time-to-market of the updates and enhancements to our core functionality, Value+ services and new products; and
perceptions about the quality and responsiveness of our customer service organization.
If we are unable to successfully enhance the functionality of our existing software solutions, including our core solutions and Value+ services, and
develop new products that gain market acceptance in adjacent markets and additional verticals, our revenue may increase at a slower rate than we expect and may
even decline, which could adversely affect our operating results.
Our
business
depends
substantially
on
existing
customers
renewing
their
subscriptions
with
us
and
expanding
their
use
of
our
Value+
services,
and
a
decline
in
customer
renewal
rates,
or
failure
to
convince
existing
customers
to
adopt
and
utilize
our
Value+
services,
could
adversely
impact
our
operating
results.
In order for us to maintain or increase our revenue and improve our operating results, it is important that our existing customers continue to pay
subscription fees for the use of our core solutions, as well as increase their adoption and utilization of our Value+ services. Our customers have no obligation to
renew their subscriptions with us upon expiration of their subscription periods, which typically range from one month to one year. We cannot assure you that our
customers will renew their subscriptions with us. In addition, our customers that start their accounts using a 30-day free trial have no obligation to begin a paid
subscription. Furthermore, although a significant portion of our revenue growth has historically resulted from the adoption and utilization of our Value+ services
by our existing customers, we cannot assure you that our existing customers will continue to broaden their adoption and utilization of our Value+ services, or use
our Value+ services at all. If our existing customers do not renew their subscriptions and increase their adoption and utilization of our existing or newly developed
Value+ services, our revenue may increase at a slower rate than we expect and may even decline, which could adversely impact our operating results.
Word-of-mouth referrals represent a significant source of new customers for us and provide us with an opportunity to cost-effectively market and sell our
software solutions. The loss of our existing customers could have a significant impact on our reputation in our targeted verticals and our ability to acquire new
customers cost-effectively. A reduction in the number of our existing customers, even if offset by an increase in new customers, could have the impact of reducing
our revenue and operating margins.
In an effort to retain our customers and to expand our customers’ adoption and utilization of our Value+ services, we may choose to use increasingly costly
sales and marketing efforts. In addition, we may make significant investments in research and product development to introduce Value+ services that ultimately are
not broadly adopted by our customers. In either of those cases, we could incur significantly increased costs without a corresponding increase in revenue.
Furthermore, we may fail to identify Value+ services that our customers need for their businesses, in which case we could miss opportunities to increase our
revenue.
19
We
expect
to
continue
to
derive
a
significant
portion
of
our
revenue
from
our
property
manager
customers,
and
factors
resulting
in
a
loss
of
these
customers
could
adversely
affect
our
operating
results.
Historically, more than 90% of our revenue has been derived from APM, our property management solution, and we expect that our property manager
customers will continue to account for a significant portion of our revenue for the foreseeable future. The businesses of our property manager customers are
typically significantly larger than those of our law firm customers. In addition, our property management solution has been available for longer, is more established
within its vertical with a larger customer base, and currently offers a greater number of Value+ services. We could lose property manager customers as a result of
numerous factors, including:
▪
▪
▪
▪
▪
▪
▪
the expiration or termination of subscription agreements;
the introduction of competitive products or technologies;
a failure or inability by us to continue to provide high quality, useful products and services to our customers;
changes in pricing policies by us or our competitors;
acquisitions or consolidations within the property management industry;
bankruptcies or other financial difficulties facing our customers; and
conditions or trends that are specific to the property management industry such as the economic factors that impact the rental market.
The loss of a significant number of our property manager customers, or the loss of even a small number of our larger property manager customers, could
cause our revenue to increase at a slower rate than we expect or even decline. In addition, even if we are able to retain our property manager customers, we may be
unable to grow revenue from these property manager customers by increasing their adoption and utilization of our Value+ services. Furthermore, even if we
continue to experience significant growth in our customer base within the legal vertical, it may be insufficient to offset slower growth or a decline in the property
management business. Any of these outcomes could adversely affect our operating results.
Our
growth
depends
in
part
on
the
success
of
our
strategic
relationships
with
third
parties,
and
if
we
are
unsuccessful
in
establishing
or
maintaining
these
relationships,
our
ability
to
compete
in
the
market
place
or
grow
our
revenue
could
be
impaired.
In order to grow our business, we anticipate that we will continue to depend on our relationships with third parties, including our data center operators,
electronic payment partners and other third parties that support delivery of our software solutions. Identifying partners, negotiating agreements and maintaining
relationships requires significant time and resources. Our competitors may be more effective than us in cost-effectively building relationships with third parties that
enhance their products and services, allow them to provide more competitive pricing, or offer other benefits to their customers. In addition, acquisitions of our
partners by our competitors could result in a decrease in the number of current and potential strategic partners willing to establish or maintain relationships with us,
and could increase the price at which products or services are available to us. If we are unsuccessful in establishing or maintaining our relationships with third
parties, our ability to compete in the marketplace or to grow our revenue could be impaired, which could negatively impact our operating results. Even if we are
successful, we cannot assure you that these relationships will result in increased customer adoption and usage of our software solutions or improved operating
results. Furthermore, if our partners fail to perform as expected, we may be subjected to litigation, our reputation may be harmed, and our business and operating
results could be adversely affected.
We
depend
on
data
centers
and
computing
infrastructure
operated
by
third
parties
and
any
disruption
in
these
operations
could
adversely
affect
our
operating
results.
We currently serve our customers through a combination of our own servers located in third-party data center facilities, and servers and data centers
operated by Amazon and other third parties. While we control and have access to our own servers and the other components of our network that are located in our
third-party data centers, we do not control the operation of any of these third-party data center facilities. The owners of our data center facilities have no obligation
to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if
one of our third-party data center operators is acquired, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may
incur significant costs and possible service interruptions in connection with doing so.
Problems faced by our third-party data center operators, or with any of the service providers with whom we or they contract, could adversely affect the
experience of our customers. Our third-party data center operators could decide to close their
20
facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy, faced by our third-party data center operators, or any of the service
providers with whom we or they contract, may have negative effects on our business. Additionally, if our data centers are unable to keep up with our growing
needs for capacity or any spikes in customer demand, it could have an adverse effect on our business. Any changes in third-party service levels at our data centers
could result in loss of or damage to our customers’ stored information and service interruptions, which could hurt our reputation. These issues could also cause us
to lose customers, harm our ability to attract new customers, and subject us to potential liability, any of which could adversely affect our operating results.
Our systems are not fully redundant, and we have not yet implemented a complete disaster recovery plan or business continuity plan. Although the
redundancies we do have in place will permit us to respond, at least to some degree, to service outages, our third-party data centers are vulnerable in the event of
failure. We do not yet have adequate structure or systems in place to recover from a data center’s severe impairment or total destruction, and recovery from the
total destruction or severe impairment of any of our third-party data centers could be difficult and may not be possible at all.
We
use
third-party
service
providers
for
important
payment
processing
and
reporting
functions,
and
their
failure
to
fulfill
their
contractual
obligations
could
harm
our
reputation,
disrupt
our
business
and
adversely
affect
our
operating
results.
We use payment processing organizations and other service providers to enable us to provide electronic payment services to our customers, including
EFT, and access to various reporting tools, such as background and credit checks. As a result, we have significantly less control over these payment processing and
reporting functions than if we were to maintain and operate them ourselves. In some cases, functions necessary to our business are performed on proprietary third-
party systems and software to which we have no access. We also generally do not have long-term contracts with these organizations and service providers. In
addition, some of these organizations and service providers compete with us by directly or indirectly selling payment processing or reporting services to customers.
The failure of these organizations and service providers to renew their contracts with us or to fulfill their contractual obligations could harm our reputation, result
in significant disruptions to our business, and adversely affect our operating results.
Our
platform
must
integrate
with
a
variety
of
devices,
operating
systems
and
browsers
that
are
developed
by
others,
and
if
we
are
unable
to
ensure
that
our
software
solutions
interoperate
with
such
devices,
operating
systems
and
browsers,
our
software
solutions
may
become
less
competitive,
and
our
operating
results
may
be
harmed.
We offer our software solutions across a variety of operating systems and through the Internet. We are dependent on the interoperability of our platform
with third-party devices, desktop and mobile operating systems, as well as web browsers that we do not control. Any changes in such devices, systems or web
browsers that degrade the functionality of our software solutions or give preferential treatment to competitive services could adversely affect adoption and usage of
our software solutions. In addition, in order to deliver high quality software solutions, we will need to continuously enhance and modify our functionality to keep
pace with changes in Internet-related hardware, mobile operating systems such as iOS and Android, browsers and other software, communication, network and
database technologies. We may not be successful in developing enhancements and modifications that operate effectively with these devices, operating systems,
web browsers and other technologies or in bringing them to market in a timely manner. Furthermore, uncertainties regarding the timing or nature of new network
platforms or technologies, and modifications to existing platforms or technologies, could increase our research and product development expense. In the event that
it is difficult for our customers to access and use our software solutions, our software solutions may become less competitive, and our operating results could be
adversely affected.
The
markets
in
which
we
participate
are
intensely
competitive
and,
if
we
do
not
compete
effectively,
our
business
could
be
harmed.
The overall market for business management software is global, highly competitive and continually evolving in response to a number of factors, including
changes in technology, operational requirements, and laws and regulations. Although relatively early in its development, the market for cloud-based business
management software is also highly competitive and subject to similar market factors.
While we focus on providing industry-specific, cloud-based business management software solutions to SMBs in our targeted verticals, we compete with
other vertical cloud-based solution providers that serve companies of all sizes, as well as with horizontal cloud-based solution providers that provide broad cloud-
based solutions across multiple verticals. Our competitors include established vertical software vendors, as well as newer entrants in the market. We also face
competition from numerous cloud-based solution providers that focus almost exclusively on one or more point solutions. Continued consolidation among cloud-
based providers could lead to significantly increased competition.
Although the domain expertise required to successfully develop, market and sell cloud-based business management software solutions in the property
management and legal verticals may hinder new entrants that are unable to invest the necessary
21
resources to develop and deploy cloud-based solutions with the same level of functionality as ours, many of our competitors and potential competitors are larger
and have greater name recognition, longer operating histories, and significantly greater resources than we do. As a result, our competitors may be able to respond
more quickly and effectively to new or changing opportunities, technologies, operational requirements and industry standards. Some of these competitors may have
more established customer relationships or strategic partnerships with third parties that enhance their products and services. Other competitors may offer products
or services that address one or a number of business functions on a standalone basis at lower prices or bundled as part of a broader product sale, or with greater
depth than our software solutions. In addition, our current and potential competitors may develop, market and sell new technologies with comparable functionality
to our software solutions, which could cause us to lose customers, slow the rate of growth of new customers and cause us to decrease our prices in order to remain
competitive. For all of these reasons, we may not be able to compete effectively against our current and future competitors, which could harm our business.
Pricing
pressure
may
cause
us
to
change
our
pricing
model,
which
could
hurt
our
renewal
rates
and
our
ability
to
attract
new
customers,
as
well
as
our
ability
to
increase
adoption
and
usage
of
our
Value+
services,
which
could
adversely
affect
our
operating
results.
As the markets for our existing software solutions mature, or as current and future competitors introduce new products or services that compete with ours,
we may experience pricing pressure and be unable to renew our subscription agreements with existing customers or increase adoption and usage of our Value+
services, or attract new customers at prices that are consistent with our current pricing model and operating budget. If this were to occur, it is possible that we
would have to change our pricing model, offer pricing incentives, or generally reduce our prices. In addition, our customers are SMBs, which are typically more
price sensitive than larger enterprises. Changes to our pricing model could harm our customer retention rates and our ability to attract new customers, whether in
connection with our core solutions or our Value+ services, which could adversely affect our operating results.
If
we
lose
key
members
of
our
management
team,
our
business
may
be
harmed.
Our success and future growth depend, in part, upon the continued services of our executive officers and other key employees. From time to time, there
may be changes in our executive officers or other key employees resulting from the hiring or departure of these personnel, which may disrupt our business. Our
executive officers and other key employees are generally employed on an at-will basis, which means that these personnel could terminate their employment with us
at any time. Additionally, the equity awards held by many of our executive officers and other key employees are close to fully vested, and these employees may not
have sufficient financial incentive to stay with us. The loss of one or more of our executive officers or other key employees, or the failure by our executive team to
work effectively with our employees and lead our company, could have an adverse effect on our business.
Our
corporate
culture
has
contributed
to
our
success
and,
if
we
cannot
maintain
this
culture
as
we
grow,
we
could
lose
the
passion,
creativity,
teamwork,
focus
and
innovation
fostered
by
our
culture.
We believe that our culture has been and will continue to be a key contributor to our success. If we do not continue to develop our corporate culture or
maintain our core values as we grow and evolve, we may be unable to foster the passion, creativity, teamwork, focus and innovation we believe we need to support
our growth. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and to effectively focus on and pursue our
strategic objectives. Moreover, liquidity available to our employee security holders could lead to disparities of wealth among our employees, which could
adversely impact relations among employees and our culture in general. As we grow and mature as a public company, we may find it difficult to maintain our
corporate culture.
We
expect
to
experience
rapid
growth
and,
if
we
fail
to
manage
our
growth
effectively,
it
could
adversely
affect
our
operating
results
and
preclude
us
from
achieving
our
strategic
objectives.
We have experienced significant growth since our formation in 2006, and we anticipate that we will continue to experience growth and expansion of our
operations. For example, since our incorporation, we have significantly increased the number of employees across our organization, expanded the footprint of our
business geographically, introduced a number of new Value+ services, and entered a new vertical with the acquisition of MyCase. This growth in the size,
complexity and diversity of our business has placed, and we expect that our growth will continue to place, a significant strain on our management, administrative,
operational and financial resources, as well as our company culture. Our future success will depend, in part, on our ability to manage this growth effectively. To
manage the expected growth of our operations and personnel, we will need to continue to develop and improve our operational and financial controls and our
reporting systems and procedures, and to nurture and build on our company culture. Failure to effectively manage growth could adversely impact our business,
including by resulting in errors or delays in deploying new core functionality to our customers, delays or difficulties in introducing new Value+ services or other
22
products, declines in the quality or responsiveness of our customer service organization, increases in costs and operating expenses, and other operational
difficulties. If any of these risks actually occur, it could harm our reputation, adversely affect our operating results, and preclude us from achieving our strategic
objectives.
We
depend
on
highly
skilled
personnel
and,
if
we
are
unable
to
retain
or
hire
additional
qualified
personnel,
we
may
not
be
able
to
achieve
our
strategic
objectives.
To execute our growth plan and achieve our strategic objectives, we must continue to attract and retain highly qualified and motivated personnel across
our organization. In particular, in order to continue to enhance our software solutions, add new and innovative core functionality and Value+ services, as well as
develop new products, it will be critical for us to increase the size of our research and product development organization, including hiring highly skilled engineers
with experience in designing, developing and testing cloud-based software solutions. Competition for software engineers is intense within our industry and there
continues to be upward pressure on the compensation paid to these professionals. In addition, in order for us to achieve broader market acceptance of our software
solutions, grow our customer base, and pursue adjacent markets and new verticals, we will need to continue to significantly increase the size of our sales and
marketing organization. Identifying and recruiting qualified sales personnel and training them in the use of our platform requires significant time and expense, and
it can be particularly difficult to retain these personnel.
Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. If we hire
employees from competitors or other companies, their former employers may attempt to assert that we or these employees have breached their legal obligations,
resulting in a diversion of our time and resources. In addition, our headquarters are located in Santa Barbara, California, which is not generally recognized as a
prominent commercial center, and it is challenging to attract qualified professionals due to our geographic location. As a result, we may have difficulty hiring and
retaining suitably skilled personnel with the qualifications and motivation to expand our business. If we are unable to attract and retain the personnel necessary to
execute our growth plan, we may be unable to achieve our strategic objectives and our operating results may suffer.
In addition, prospective and existing employees often consider the value of the equity awards they receive in connection with their employment. If the
perceived value of our equity awards declines, or if the price of our Class A common stock experiences significant volatility, it may adversely affect our ability to
recruit and retain highly skilled employees. If we fail to attract new personnel or to retain and motivate our current personnel, we may not be able to achieve our
strategic objectives.
We
have
acquired,
and
may
in
the
future
acquire,
other
companies
or
technologies,
which
could
divert
our
management’s
attention,
result
in
additional
dilution
to
our
stockholders
and
otherwise
disrupt
our
operations.
We have acquired, and may in the future acquire, other companies or technologies to complement or expand our software solutions, optimize our
technical capabilities, enhance our ability to compete in our targeted verticals, provide an opportunity to expand into an adjacent market or new vertical, or
otherwise offer growth or strategic opportunities. For example, in 2012, we acquired MyCase and, in April 2015, we acquired RentLinx. The pursuit of
acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions,
whether or not they are consummated.
We have limited experience acquiring other businesses. We may not be able to integrate acquired assets, technologies, personnel and operations
successfully or achieve the anticipated synergies or other benefits from the acquired business due to a number of risks associated with acquisitions, including:
▪
▪
▪
▪
▪
▪
▪
▪
incurrence of acquisition-related costs;
difficulties integrating the assets, technologies, personnel or operations of the acquired business in a cost-effective manner, or inability to do so;
difficulties and additional expenses associated with supporting legacy products and services of the acquired business;
difficulties converting the customers of the acquired business to our software solutions and contract terms;
diversion of management’s attention from our business to address acquisition and integration challenges;
adverse effects on our existing business relationships with customers and strategic partners as a result of the acquisition;
cultural challenges associated with integrating employees from the acquired organization into our company;
the loss of key employees;
23
▪
▪
▪
use of resources that are needed in other parts of our business;
use of substantial portions of our available cash to consummate the acquisition; and
unanticipated costs or liabilities associated with the acquisition.
If an acquired business fails to meet our expectations in terms of its contribution to our overall business strategy, or if the costs of acquiring or integrating
the acquired business exceed our estimates, our business, operating results and financial condition may suffer. In addition, acquisitions could also result in dilutive
issuances of equity securities or the incurrence of debt, which could impose restrictions on our ability to operate our business and adversely affect our operating
results. Furthermore, a significant portion of the purchase price of companies we may acquire could be allocated to goodwill and other intangible assets, which
must be assessed for impairment. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based
on this impairment assessment process, which could adversely affect our operating results.
If
our
property
manager
customers
stop
requiring
residents
to
provide
proof
of
tenant
liability
insurance,
if
insurance
premiums
decline
or
if
insureds
experience
greater
than
expected
losses,
our
operating
results
could
be
harmed.
We generate revenue by offering tenant liability insurance through a wholly owned subsidiary. Some of our property manager customers require residents
to provide proof of tenant liability insurance and offer to enroll residents in their tenant liability insurance policy as additional insureds. If demand for rental
housing declines, or if our property manager customers believe that it may decline, these customers may reduce their rental rates and stop requiring residents to
provide proof of tenant liability insurance in order to reduce the overall cost of renting and make their rental offerings more competitive. If our property manager
customers stop requiring residents to provide proof of tenant liability insurance or elect to enroll residents in insurance programs offered by competing providers,
or if insurance premiums otherwise decline, our revenues from insurance services could be adversely affected.
Additionally, our tenant liability insurance policies are underwritten by us, and we are required by our insurance partner to maintain a reserve to cover
potential claims under the policies. While our policies have a limit of $100,000 per occurrence, there is no limit on the dollar amount of claims that could be made
against us in any particular period or in the aggregate. In the event that claims by the insureds increase unexpectedly, our reserve may not be sufficient to cover our
resultant liability under the policies. To the extent we are required to pay out amounts to insureds that are significantly higher than our current reserves, it could
have a material adverse effect on our operating results.
Our
tenant
liability
insurance
business
is
subject
to
state
governmental
regulation,
which
could
limit
the
growth
of
our
insurance
business
and
impose
additional
costs
on
us.
Our wholly owned subsidiary holds a license from the State of Hawaii Insurance Division of the Department of Commerce and Consumer Affairs and our
third-party service providers maintain licenses with a number of other individual state departments of insurance. Collectively, we are subject to state governmental
regulation and supervision in connection with the operation of our tenant liability insurance business. This state governmental supervision could limit the growth of
our insurance business by increasing the costs of regulatory compliance, limiting or restricting the products or services we provide or the methods by which we
provide them, and subjecting us to the possibility of regulatory actions or proceedings. Our continued ability to maintain these insurance licenses in the
jurisdictions in which we are licensed depends on our compliance with the rules and regulations promulgated from time to time by the regulatory authorities in
each of these jurisdictions. Furthermore, state insurance departments conduct periodic examinations, audits and investigations of the affairs of insurance
companies, any of which could result in the expenditure of significant management time or financial resources.
In all jurisdictions, the applicable laws and regulations are subject to amendment or interpretation by regulatory authorities. Generally, such authorities are
vested with relatively broad discretion to grant, renew and revoke licenses and approvals and to implement and interpret rules and regulations. Accordingly, we
may be precluded or temporarily suspended from carrying on some or all of the activities of our insurance business or otherwise be fined or penalized in a given
jurisdiction. No assurances can be given that our insurance business can continue to be conducted in any given jurisdiction as it has been conducted in the past or
that we will be able to expand our insurance business in the future.
24
All
of
our
revenues
are
generated
by
sales
to
customers
in
our
targeted
verticals,
and
factors
that
adversely
affect
the
applicable
industry
could
also
adversely
affect
us.
Currently, all of our sales are to customers in the property management and legal industries. Demand for our software solutions could be affected by
factors that are unique to and adversely affect our targeted verticals. In particular, the property management and legal industries are highly regulated, subject to
intense competition and impacted by changes in general economic and market conditions. For example, changes in applicable laws and regulations could
significantly impact the software functionality demanded by our customers and require us to expend significant resources to ensure our software solutions continue
to meet their evolving needs. In addition, other industry-specific factors, such as industry consolidation or the introduction of competing or disruptive technology,
could lead to a significant reduction in the number of customers that use our software solutions within a particular vertical or the Value+ services demanded by
these customers. Further, if the rental housing or legal markets decline, our customers may decide not to renew their subscriptions or they may cease using our
Value+ services in order to reduce costs to remain competitive. As a result, our ability to generate revenue from our property manager and law firm customers
could be adversely affected by specific factors that affect the property management or legal industries.
In addition to the foregoing risks associated with our targeted verticals themselves, there is an overarching risk stemming from potential widespread
adoption of quickly evolving financial or other disruptive technology products that could significantly impact our targeted verticals, even if that technology is not
specifically designed to apply directly to our targeted verticals. The adoption of these new technologies could significantly reduce the volume or demand of
customers in our targeted verticals, thereby reducing our revenue, which could materially impact our business, financial condition, operating results and,
ultimately, our stock price.
Our
software
solutions
address
functions
within
the
heavily
regulated
property
management
and
legal
industries,
and
our
customers’
failure
to
comply
with
applicable
laws
and
regulations
could
subject
us
to
litigation.
We sell our software solutions to customers within the property management and legal industries. Our customers use our software solutions for business
activities that are subject to a number of laws and regulations, including without limitation state and local real property laws and legal ethics rules. Any failure by
our customers to comply with laws and regulations applicable to their businesses could result in fines, penalties or claims for substantial damages against our
customers. To the extent our customers believe that our software solutions or our customer service organization caused or contributed to such failures, our
customers may make claims for damages against us, regardless of whether we are responsible for the failure. As a result, we may be subject to lawsuits that, even if
unsuccessful, could divert our resources and our management’s attention and adversely affect our business, and our insurance coverage may not be sufficient to
cover such claims against us.
If
we
are
unable
to
deliver
effective
customer
service,
it
could
harm
our
relationships
with
our
existing
customers
and
adversely
affect
our
ability
to
attract
new
customers.
Our business depends, in part, on our ability to satisfy our customers, both by providing software solutions that address their business needs, and by
providing on-boarding services and ongoing customer service, which contributes to retaining customers and increasing adoption and utilization of our Value+
services by our existing customers. Once our software solutions are deployed, our customers depend on our customer service organization to resolve technical
issues relating to their use of our solutions. We may be unable to respond quickly to accommodate short-term increases in customer demand for support services or
may otherwise encounter a customer issue that is difficult to resolve. If a customer is not satisfied with the quality or responsiveness of our customer service, we
could incur additional costs to address the situation. As we do not separately charge our customers for support services, increased demand for our support services
would increase costs without corresponding revenue, which could adversely affect our operating results. In addition, regardless of the quality or responsiveness of
our customer service efforts, a customer that is not satisfied with an outcome may choose to terminate, or to not renew, their relationship with us.
Our sales process is highly dependent on the ease of use of our software solutions, our reputation and positive recommendations from our existing customers.
Any failure to maintain high-quality or responsive customer service, or a market perception that we do not maintain high-quality or responsive customer service,
could harm our reputation, cause us to lose customers and adversely impact our ability to sell our software solutions to prospective customers.
If
we
are
unable
to
maintain
and
promote
our
brands,
or
to
do
so
in
a
cost-effective
manner,
our
ability
to
maintain
and
expand
our
customer
base
will
be
impaired,
and
our
operating
results
could
be
adversely
affected.
We believe that maintaining and promoting our brands is critical to achieving widespread awareness and acceptance of our software solutions, and
maintaining and expanding our customer base. We also believe that the importance of brand recognition will increase as competition in our targeted verticals
increases. If we do not continue to build awareness of our brands, we could be placed at a competitive disadvantage as compared to companies whose brands are,
or become, more recognizable than ours. Maintaining and promoting our brands will depend, in part, on our ability to continue to provide new and innovative core
25
functionality and Value+ services and best-in-class customer service, as well as the effectiveness of our sales and marketing efforts. If we fail to deliver products
and functionality that address our customers’ business needs, or if we fail to meet our customers’ expectations for customer service, it could weaken our brands and
harm our reputation. Additionally, the actions of third parties may affect our brands and reputation if customers do not have a positive experience using the
services of our third-party partners that support our software solutions. Maintaining and enhancing our brands may require us to make substantial investments, and
these investments may not result in commensurate increases in our revenue. If we fail to successfully maintain and promote our brands, or if make investments that
are not offset by increased revenue, our operating results could be adversely affected.
If
we
are
unable
to
increase
sales
of
our
software
solutions
to
larger
customers
while
mitigating
the
risks
associated
with
serving
such
customers,
our
business
and
operating
results
may
suffer.
While we plan to continue to market and sell our software solutions to SMBs, our growth strategy is dependent, in part, upon increasing sales of our
software solutions to larger customers within the SMB market. Sales to larger customers may involve risks that are not present, or are present to a lesser extent, in
sales to smaller businesses. As we seek to increase our sales to larger customers, we may invest considerably greater amounts of time and financial resources in our
sales and marketing efforts. In addition, we may face longer sales cycles and experience less predictability and greater competition in completing some of our sales
than we have in selling our software solutions to smaller businesses. Although we generally have not configured our software solutions or negotiated our pricing
for specific customers, which has historically resulted in reduced upfront selling costs, our ability to successfully sell our software solutions to larger customers
may be dependent, in part, on our ability to develop functionality, or to implement pricing policies, that are unique to particular customers. It may also be
dependent on our ability to attract and retain sales personnel with experience selling to larger organizations. Also, because security breaches or other performance
problems with respect to larger customers may result in greater economic harm to these customers and more adverse publicity, there is increased financial and
reputational risk associated with serving such customers. If we are unable to increase sales of our software solutions to larger customers, while mitigating the risks
associated with serving such customers, our business and operating results may suffer.
Because
we
recognize
revenue
from
subscriptions
for
our
software
solutions
over
the
terms
of
the
subscription
agreements,
downturns
or
upturns
in
new
business
may
not
be
immediately
reflected
in
our
operating
results.
We recognize revenue from customers ratably over the terms of their subscription agreements, which typically range from one month to one year. As a
result, some of the revenue we report in each period is derived from the recognition of deferred revenue relating to subscription agreements entered into during
previous periods. Consequently, a decline in new or renewed subscriptions in any one period may not be reflected in our revenue results for that period. However,
any such decline will negatively affect our revenue in future quarters. Our subscription model also makes it difficult for us to rapidly increase our revenue through
additional sales in any period, as revenue from new customers must be recognized over the applicable subscription period. Accordingly, the effect of downturns or
upturns in our sales and the market acceptance of our software solutions, and potential changes in our customer retention rates, may not be apparent in our
operating results until future periods.
Because
our
invoicing
is
generally
for
periods
less
than
one
year,
our
revenue
growth
is
heavily
dependent
on
new
subscription
sales,
consumption
of
our
usage-based
Value+
services
and
renewals
of
our
subscription
services
in
the
current
year.
Our growth is heavily dependent on subscription sales, adoption and consumption of our usage-based Value+ services and renewals of our subscription
services in the current year. We offer our core solutions and Value+ subscription services to customers pursuant to subscription agreements with relatively short
terms, typically ranging from one month to one year. We generally invoice our customers for subscription services in monthly, quarterly or annual installments,
typically in advance of the subscription period. We do not currently intend to extend the typical terms of our subscription agreements with any regularity, or to
invoice our customers less frequently, and we expect that we will continue to depend on current-year sales and renewals to drive our growth.
Failure
to
protect
our
intellectual
property
rights
could
impair
our
ability
to
protect
our
proprietary
technology
and
our
brands
which
could
harm
our
business.
We currently rely on patent, trademark, copyright and trade secret laws, trade secret protection and confidentiality or license agreements with our
employees, customers, partners and others to protect our intellectual property rights. Our success and ability to compete depend, in part, on our ability to protect
our intellectual property, including our proprietary technology and our brands. If we are unable to protect our proprietary rights adequately, our competitors could
use the intellectual property we have developed to enhance their own products and services, which could harm our business.
In order to monitor and protect our intellectual property rights, we may be required to spend significant resources. Litigation brought to protect and
enforce our intellectual property rights could be costly, time-consuming and distracting to management, and could result in the impairment or loss of portions of
our intellectual property or require us to pay costly royalties.
26
Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and
enforceability of our intellectual property rights. Accordingly, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual
property. Our failure to secure, protect and enforce our intellectual property rights could adversely affect our business and operating results.
We
may
be
sued
by
third
parties
for
alleged
infringement
of
their
proprietary
rights,
which
could
cause
us
to
incur
significant
expenses
and
require
us
to
pay
substantial
damages.
There is considerable patent, trademark, copyright, trade secret and other intellectual property development activity in our industry. Our success depends,
in part, on our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or
claim to own intellectual property relating to our technology or software solutions. From time to time, our competitors or other third parties may claim that we are
infringing upon their intellectual property rights. However, we may be unaware of the intellectual property rights that others may claim cover some or all of our
technology or software solutions. Any claims or litigation, regardless of merit, could cause us to incur significant expenses and, if successfully asserted against us,
could require that we pay substantial damages, settlement costs or ongoing royalty payments, require that we comply with other unfavorable license and other
terms, or prevent us from offering our software solutions in their current form. Even if the claims do not result in litigation or are resolved in our favor, these
claims, and the time and resources necessary to resolve them, could divert the attention of our management and key personnel from our business operations and
harm our operating results.
Our
software
solutions
contain
open
source
software,
which
may
pose
particular
risks
to
our
proprietary
source
code,
and
could
have
a
negative
impact
on
our
business
and
operating
results.
We use open source software in our software solutions and expect to continue to do so in the future. The terms of many open source licenses to which we
are subject have not been interpreted by U.S. or foreign courts, and there is a risk that open source licenses could be construed in a manner that imposes
unanticipated conditions, restrictions or costs on our ability to provide or distribute our software solutions. Additionally, we may from time to time face claims
from third parties alleging ownership of, or demanding release of, the open source software or derivative works that we developed using such software, which
could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation,
which could be costly for us to defend, and could require us to make our source code freely available, purchase a costly license or cease offering the implicated
core functionality and Value+ services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant
additional research and product development resources, and we may not be able to complete it successfully or in a timely manner. In addition to risks related to
license requirements, usage of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors
generally do not provide warranties or controls on the origin of software. These risks could be difficult to eliminate or manage, and could have a negative impact
on our business and operating results.
Changes
in
laws
and
regulations
related
to
the
Internet
or
changes
in
the
Internet
infrastructure
itself
may
diminish
the
demand
for
our
software
solutions,
and
could
have
a
negative
impact
on
our
business.
The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business
services. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the
Internet as a commercial medium. Changes in these laws or regulations could require us to modify our software solutions in order to comply with these changes. In
addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet, or for the commerce conducted
via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, result in reductions in the demand for
Internet-based business services such as ours, and cause us to incur significant expenses.
The use of the Internet in general could be adversely affected by delays in the development or adoption of new standards and protocols to handle
increased demands of Internet activity, accessibility, reliability, security, cost, ease of use and quality of service. In addition, the use of the Internet as a medium for
commerce, communication and business services may have been, and may continue to be, adversely affected by concerns regarding network outages, software
errors, viruses, security breaches, fraud or other malicious activity. If the use of the Internet is adversely affected by these issues, demand for our software solutions
could suffer.
Privacy
and
data
security
laws
and
regulations
could
impose
additional
costs
on
us
and
reduce
the
demand
for
our
software
solutions.
Our customers store and transmit a significant amount of personal or identifying information through our technology platform. Privacy and data security
have become significant issues in the United States and in other jurisdictions where we may offer our software solutions. The regulatory framework relating to
privacy and data security issues worldwide is rapidly evolving
27
and is likely to remain uncertain for the foreseeable future. Federal, state and foreign government bodies and agencies have in the past adopted, or may in the future
adopt, laws and regulations regarding the collection, use, processing, storage and disclosure of personal or identifying information obtained from customers and
other individuals. In addition to government regulation, privacy advocates and industry groups may propose various self-regulatory standards that may legally or
contractually apply to our business. Because the interpretation and application of many privacy and data security laws, regulations and applicable industry
standards are uncertain, it is possible that these laws, regulations and standards may be interpreted and applied in a manner inconsistent with our existing privacy
and data management practices. As we expand into new jurisdictions or verticals, we will need to understand and comply with various new requirements applicable
in those jurisdictions or verticals.
To the extent applicable to our business or the businesses of our customers, these laws, regulations and industry standards could have negative effects on
our business, including by increasing our costs and operating expenses, and delaying or impeding our deployment of new core functionality or Value+ services.
Compliance with these laws, regulations and industry standards requires significant management time and attention, and failure to comply could result in negative
publicity, subject us to fines or penalties, or result in demands that we modify or cease existing business practices. In addition, the costs of compliance with, and
other burdens imposed by, such laws, regulations and industry standards may adversely affect our customers’ ability or desire to collect, use, process and store
personal information using our software solutions, which could reduce overall demand for them. Even the perception of privacy and data security concerns,
whether or not valid, may inhibit market acceptance of our software solutions in certain verticals. Furthermore, privacy and data security concerns may cause our
customers’ clients, vendors, employees and other industry participants to resist providing the personal information necessary to allow our customers to use our
applications effectively. Any of these outcomes could adversely affect our business and operating results.
We
may
require
additional
capital
to
support
our
operations
or
the
growth
of
our
business,
and
we
cannot
be
certain
that
this
capital
will
be
available
on
favorable
terms
when
required,
or
at
all.
We may need additional capital to grow our business and meet our strategic objectives. Our ability to obtain additional capital, if and when required, will
depend on numerous factors, including investor and lender demand, our historical and forecasted financial and operating performance, our market position, and the
overall condition of the capital markets. We cannot guarantee that additional financing will be available to us on favorable terms when required, or at all. In
addition, if we raise additional funds through the issuance of equity securities, those securities may have powers, preferences or rights senior to the rights of our
Class A common stock, and our existing stockholders may experience dilution. If we raise additional funds through the issuance of debt securities, we may incur
interest expense or other costs to service the indebtedness, or we may be required to encumber certain assets, which could negatively impact our operating results.
Furthermore, if we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support the growth
of our business and the achievement of our strategic objectives could be significantly impaired and our operating results may be harmed.
Financing
agreements
we
are
party
to
or
may
become
party
to
may
contain
operating
and
financial
covenants
that
restrict
our
business
and
financing
activities.
Failure
to
comply
with
these
covenants,
or
other
restrictions,
could
result
in
default
under
these
agreements.
Our existing credit agreement, with Wells Fargo, which we refer to as the Credit Agreement, contains certain operating and financial restrictions and
covenants, including limitations on dividends, dispositions, mergers or consolidations, incurrence of indebtedness and liens, and other corporate activities. These
restrictions and covenants, as well as those contained in any future financing agreements that we may enter into, may restrict our ability to finance our operations,
and to engage in, expand or otherwise pursue our business activities and strategic objectives. Our ability to comply with these covenants may be affected by events
beyond our control, and breaches of these covenants could result in a default under our existing Credit Agreement and any future financial agreements that we may
enter into. If not waived, defaults could cause any outstanding indebtedness under the Credit Agreement and any future financing agreements that we may enter
into to become immediately due and payable.
Because
our
long-term
growth
strategy
involves
expansion
of
our
sales
to
customers
outside
the
United
States,
our
business
will
be
susceptible
to
the
risks
associated
with
international
operations.
A component of our growth strategy involves the expansion of our international operations and worldwide customer base. To date, we have realized an
immaterial amount of revenue from customers outside the United States. Operating in international markets will require significant resources and management
attention and will subject us to regulatory, economic, geographic and political risks that are different from those in the United States. Because of our limited
experience with international operations and significant differences between the United States and international markets, our international expansion efforts may
not be successful in creating demand for our software solutions outside of the United States or in effectively selling our software solutions in any international
markets we may enter. If we invest substantial time and resources to expand our international operations and are unable to do so successfully, our business and
operating results could suffer.
28
If
we
fail
to
maintain
an
effective
system
of
internal
control
over
financial
reporting,
our
ability
to
produce
timely
and
accurate
financial
statements
or
comply
with
applicable
regulations
could
be
impaired.
In connection with the audit of our consolidated financial statements for fiscal year 2014, our independent registered public accounting firm identified
material weaknesses in our internal control over financial reporting. As of December 31, 2015, we completed remediation of these material weaknesses. However,
the completion of remediation does not provide assurance that our controls will continue to operate properly or that our financial statements will not contain any
material errors. There may be future material weaknesses in our internal control over financial reporting, and as a result we may not detect financial statement
errors on a timely basis. Moreover, in the future we may engage in business transactions, such as acquisitions or reorganizations, or implement new accounting
standards, or adopt other changes to our business processes, any of which could require us to develop and implement new controls or to modify existing controls,
which could negatively affect our internal control over financial reporting and result in material weaknesses.
In the event we experience a material weakness in our internal control over financial reporting in the future, we may not detect errors on a timely basis
and our financial statements may be materially misstated. Ineffective internal control over financial reporting, failure to comply with the requirements of
Section 404 of the Sarbanes-Oxley Act in a timely manner and the inability to express an opinion as to the effectiveness of our internal control over financial
reporting could cause investors to lose confidence in our reported financial statements and other information, which could have a negative effect on the market
price of our Class A common stock. Additionally, it could lead to an investigation by the SEC, NASDAQ or other regulatory authorities, which could require the
expenditure of additional financial and management resources.
We
are
an
emerging
growth
company
and
our
decision
to
comply
with
certain
reduced
reporting
and
disclosure
requirements
could
make
our
Class
A
common
stock
less
attractive
to
investors.
We qualify as an emerging growth company under the JOBS Act. An emerging growth company may take advantage of specified reduced reporting
requirements and may be relieved of other significant requirements that are otherwise generally applicable to public companies. These provisions include:
▪
▪
▪
▪
an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting;
an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit
firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
reduced disclosure about our executive compensation arrangements; and
exemptions from the requirements to obtain a non-binding advisory vote on executive compensation or stockholder approval of any golden
parachute arrangements.
We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to
Section 107(b) of the JOBS Act. However, in this Annual Report, we are taking advantage of the other exemptions discussed above. Accordingly, the information
that we provide to our stockholders may be different from the information you receive from other public companies in which you have invested. If some investors
find our Class A common stock less attractive as a result of our reliance on these exemptions, there may be a less active trading market for our Class A common
stock, the market price of our Class A common stock may be more volatile, and the trading price of our Class A common stock may be lower than that of
comparable companies.
Our
ability
to
use
our
net
operating
loss
carryforwards
and
certain
other
tax
attributes
may
be
limited.
As of December 31, 2016 , we had U.S. federal net operating loss carryforwards of approximately $80.7 million and state net operating loss carryforwards
of approximately $50.5 million, which begin to expire in 2027 and 2017, respectively. As of December 31, 2016 we also had federal and state research and
development credit carryforwards of $3.9 million and $4.1 million , respectively. The federal credits carryforwards will begin to expire in 2027, while the state
credit carryforwards indefinitely. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership
change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset
its post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders”
that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. It is possible that our existing net operating loss
and/or credit carryforwards may be subject to limitations arising from previous ownership changes, and future issuances of our stock could cause an ownership
change.
29
Furthermore, our ability to utilize net operating loss and/or credit carryforwards of companies that we have acquired or may acquire in the future may be subject to
limitations. Any such limitations on our ability to use our net operating loss carryforwards and other tax assets could adversely impact our business, financial
condition and operating results.
Tax
laws
or
regulations
could
be
enacted
or
changed
and
existing
tax
laws
or
regulations
could
be
applied
to
us
or
to
our
customers
in
a
manner
that
could
increase
the
costs
of
our
software
solutions
and
adversely
impact
our
operating
results.
The application of federal, state, local and foreign tax laws to services provided electronically is continuously evolving. New income, sales, use or other
tax laws, statutes, rules, regulations or ordinances could be enacted or amended at any time, possibly with retroactive effect, and could be applied solely or
disproportionately to services provided over the Internet. These enactments or amendments could adversely affect our sales activity due to the inherent cost
increase the taxes would represent and ultimately result in a negative impact on our operating results.
In addition, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, modified or applied adversely to us, possibly with retroactive
effect, which could require us or our customers to pay additional tax amounts, as well as require us or our customers to pay fines or penalties, as well as interest on
past amounts. If we are unsuccessful in collecting such taxes due from our customers, we could be held liable for such costs, thereby adversely impacting our
operating results.
We
may
be
subject
to
additional
tax
liabilities.
We are subject to income, sales, use, value added and other taxes in the United States and other jurisdictions in which we conduct business, and such laws
and rates vary by jurisdiction. Certain jurisdictions in which we do not collect sales, use, value added or other taxes on our sales may assert that such taxes are
applicable, which could result in tax assessments, penalties and interest, and we may be required to pay or collect such taxes in the future. If we receive an adverse
determination as a result of an audit or related litigation, or we unilaterally determine that we have misinterpreted provisions of the tax regulations to which we are
subject, there could be a material effect on our tax provision, net income or cash flows in the period or periods for which that determination is made.
Our
reported
financial
results
may
be
adversely
affected
by
changes
in
accounting
principles
generally
accepted
in
the
United
States.
Generally accepted accounting principles in the United States, or GAAP, are subject to interpretation by the Financial Accounting Standards Board, or
FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have
a significant impact on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.
Risks Related to Our Class A Common Stock
The
market
price
of
our
Class
A
common
stock
may
be
volatile
or
may
decline
regardless
of
our
operating
performance,
which
could
result
in
substantial
losses
for
our
stockholders.
Prior to the completion of our initial public offering in June 2015, there was no public market for shares of our Class A common stock. We cannot assure
you that an active trading market for our Class A common stock will develop, or if developed, that any market will be sustained. The market price of our Class A
common stock has been, and is likely to continue to be, highly volatile, and fluctuations in the price of our Class A common stock could cause you to lose all or
part of your investment. For example, during 2016 , the share price of our Class A common stock on the NASDAQ Global Market fluctuated between $11.07 and
$24.50 .
There are numerous factors that could cause fluctuations in the market price of our Class A common stock, including:
▪
▪
▪
▪
▪
price and volume fluctuations in the overall stock market from time to time;
volatility in the market prices and trading volumes of securities issued by software companies;
changes in operating performance and stock market valuations of other software companies generally, and of companies that sell cloud-based
solutions within our targeted verticals in particular;
sales of shares of our Class A common stock by us or our stockholders, or perceptions that such sales may occur;
failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who
30
follow us, or our failure to meet these estimates or the expectations of investors;
the guidance we may provide to the public, any changes in that guidance, and our performance relative to that guidance;
announcements by us or our competitors of new products or services;
the public’s reaction to our press releases, filings with the SEC and other public announcements;
rumors and market speculation involving us or other software companies;
actual or anticipated changes in our operating results or fluctuations in our operating results;
actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;
litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;
developments or disputes concerning our intellectual property or other proprietary rights;
announced or completed acquisitions of businesses or technologies by us or our competitors;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidelines, interpretations or principles;
changes in our management; and
general economic conditions and trends, including slow or negative growth of our markets.
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class
action litigation has often been instituted against these companies. If instituted against us, any such litigation, regardless of its merit or final outcome, could result
in substantial costs and a diversion of our management’s attention, thereby adversely affecting our operating results and, potentially, the price of our Class A
common stock.
The
dual
class
structure
of
our
common
stock
has
the
effect
of
concentrating
voting
control
with
a
limited
number
of
stockholders,
including
our
executive
officers,
directors
and
principal
stockholders,
which
will
limit
your
ability
to
influence
corporate
matters.
Our Class B common stock has 10 votes per share, and our Class A common stock has one vote per share. As of December 31, 2016 , the holders of the
outstanding shares of our Class B common stock, including our executive officers, directors, and principal stockholders, collectively hold approximately 95% of
the combined voting power of our outstanding capital stock. Because of the 10-to-1 voting ratio between our Class B common stock and Class A common stock,
the holders of our Class B common stock collectively control a majority of the combined voting power of our outstanding capital stock and therefore are able to
exercise significant influence and control over the establishment and implementation of our future business plans and strategic objectives, as well as to control all
matters submitted to our stockholders for approval. These persons may manage our business in ways with which you disagree and which may be adverse to your
interests. This concentrated control may also have the effect of delaying, deterring or preventing a change-in-control transaction, depriving our stockholders of an
opportunity to receive a premium for their capital stock or negatively affecting the market price of our Class A common stock.
Transfers by holders of our Class B common stock will generally result in those shares converting to Class A common stock, subject to limited
exceptions. The conversion of our Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of the
holders of our Class B common stock who retain their shares over the long term.
31
Anti-takeover
provisions
contained
in
our
amended
and
restated
certificate
of
incorporation
and
amended
and
restated
bylaws,
as
well
as
provisions
of
Delaware
law,
could
impair
a
takeover
attempt.
Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could have the effect of rendering
more difficult hostile takeovers, change-in-control transactions or changes in our board of directors or management. Among other things, these provisions:
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock, which can be created and
issued by our board of directors without prior stockholder approval;
provide for the adoption of a staggered board of directors whereby the board is divided into three classes, each of which has a different three-year
term;
provide that the number of directors will be fixed by the board;
prohibit our stockholders from filling board vacancies;
provide for the removal of a director only for cause and then only by the affirmative vote of the holders of a majority of the combined voting power
of our outstanding capital stock;
prohibit stockholders from calling special stockholder meetings;
prohibit stockholders from acting by written consent without holding a meeting of stockholders;
require the vote of at least two-thirds of the combined voting power of our outstanding capital stock to approve amendments to our certificate of
incorporation or bylaws;
require advance written notice of stockholder proposals and director nominations;
provide for a dual-class common stock structure, as discussed above; and
require the approval of the holders of at least a majority of the outstanding shares of our Class B common stock, voting as a separate class, prior to
consummating a change-in-control transaction.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, or
DGCL, which may delay, deter or prevent a change-in-control transaction. Section 203 imposes certain restrictions on mergers, business combinations and other
transactions between us and holders of 15% or more of our common stock.
Any provision of Delaware law, our amended and restated certificate of incorporation, or our amended and restated bylaws, that has the effect of
rendering more difficult, delaying, deterring or preventing a change-in-control transaction could limit the opportunity for our stockholders to receive a premium
for their shares of our capital stock, and could also affect the price that some investors are willing to pay for our Class A common stock.
Future
sales
of
shares
of
our
Class
A
common
stock,
or
the
perception
that
these
sales
could
occur,
could
depress
the
market
price
of
our
Class
A
common
stock.
Sales of a substantial number of shares of our Class A common stock in the public market, or the perception that these sales might occur, could cause
the market price of our Class A common stock to decline or make it more difficult for you to sell your Class A common stock at a time and price that you deem
appropriate, and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales, or the
perception that our shares may be available for sale, will have on the prevailing market price of our Class A common stock.
As of December 31, 2016 , we had an aggregate of 1.7 million options outstanding that, if fully exercised, would result in the issuance of additional
shares of Class A common stock or Class B common stock, as applicable. Our Class B common stock converts into Class A common stock on a one-for-one
basis. In addition, as of December 31, 2016 , we had 0.5 million restricted stock units outstanding which, if fully vested and settled in shares, would result in the
issuance of additional shares of Class A common stock. All of the shares of Class A common stock issuable upon the exercise of options (or upon conversion of
shares of Class B common stock issued upon the exercise of options), or upon the vesting and settlement of restricted stock units, have been registered for public
resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance.
32
Certain holders of our Class A common stock and Class B common stock have rights, subject to certain conditions, to require us to file registration
statements for the public resale of such shares (in the case of Class B common stock, the Class A common stock issuable upon conversion of such shares) or to
include such shares in registration statements that we may file for us or other stockholders. Any sales of securities by these stockholders could have a material
adverse effect on the market price of our Class A common stock.
If
securities
or
industry
analysts
do
not
publish
or
cease
publishing
research
or
reports
about
us,
our
business,
our
market
or
our
competitors,
or
if
they
adversely
change
their
recommendations
regarding
our
Class
A
common
stock,
the
market
price
and
trading
volume
of
our
Class
A
common
stock
could
decline.
The trading market for our Class A common stock is influenced, to some extent, by the research and reports that securities or industry analysts publish
about us, our business, our market or our competitors. If any of the analysts who cover us adversely change their recommendations regarding our Class A
common stock or provide more favorable recommendations about our competitors, the market price of our Class A common stock may decline. If any of the
analysts who cover us were to cease coverage of us or fail to publish reports on us regularly, visibility of our company in the financial markets could decrease,
which in turn could cause the market price or trading volume of our Class A common stock to decline.
We
do
not
expect
to
declare
any
dividends
in
the
foreseeable
future.
We have never declared or paid any cash dividends on our existing common stock. We do not anticipate declaring or paying any cash dividends to
holders of our Class A common stock in the foreseeable future and intend to retain all future earnings for the growth of our business. In addition, the terms of our
Credit Agreement restrict our ability to pay dividends. Consequently, investors may need to rely on sales of our Class A common stock after price appreciation,
which may never occur, as the only way to realize any future gains on their investment. Investors should not purchase our Class A common stock with the
expectation of receiving cash dividends.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our corporate headquarters is located in two adjacent buildings in Santa Barbara, California. The lease on the first building covers approximately 43,300
square feet and expires in December 2021. The lease on the second building covers approximately 35,900 square feet and expires in November 2020.
We also lease space in San Diego, California, and Richardson, Texas under leases that expire at various times between 2021 and 2022.
We intend to procure additional space as we add employees and expand our operations geographically. We believe our current facilities are adequate for
our current needs and that, should it be needed, suitable additional or alternative space will be available to us to accommodate any such expansion of our
operations.
We lease all of our facilities and do not own any real property.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are involved in various legal proceedings arising from or related to claims incident to the normal course of our business activities.
Although the results of such legal proceedings and claims cannot be predicted with certainty, we believe we are not currently a party to any legal proceeding(s)
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 claims raised or the ultimate outcome, legal proceedings may generally have an adverse impact on us as a
result of defense and settlement costs, diversion of management resources and other factors.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
33
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
PART II
SECURITIES
Market
Information
for
our
Class
A
Common
Stock
Our Class A common stock began trading publicly on the Nasdaq Global Market under the symbol "APPF" on June 26, 2015. Prior to that date, there was
no public trading market for our Class A common stock. The following table sets forth the high and low sales price per share of our Class A common stock as
reported on the Nasdaq Global Market for the periods indicated:
Year ended December 31, 2016:
First quarter
Second quarter
Third quarter
Fourth quarter
Year ended December 31, 2015:
Second quarter (from June 26, 2015)
Third quarter
Fourth quarter
Holders
of
Record
High
Low
15.19 $
15.57 $
19.98 $
24.50 $
High
Low
14.87 $
18.48 $
19.93 $
11.07
12.07
14.12
18.27
12.11
13.50
14.51
$
$
$
$
$
$
$
As of February 1, 2017, there were 39 holders of record of our Class A common stock and 172 holders of record of our Class B common stock. Because
many of our shares of Class A common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of
stockholders represented by these record holders.
Dividend
Policy
We have never declared or paid any cash dividends on our capital stock. We have no plans to declare or pay any dividends on our capital stock in the
foreseeable future and intend to retain all future earnings, if any, generated by our operations for the growth of our business. Any future decision to declare or pay
dividends will be made by our board of directors in its sole discretion and will depend upon our financial condition, results of operations, capital requirements,
general economic conditions and other factors that our board of directors deems relevant at the time of its decision. Investors should not purchase our Class A
common stock with the expectation of receiving cash dividends. In addition, the terms of our Credit Agreement may restrict our ability to pay dividends.
34
Stock
Performance
Graph
The following performance graph compares the cumulative total return on our Class A common stock with that of the S&P 500 Index, the S&P
Information Technology Index and the NASDAQ Computer Index. This chart assumes $100 was invested at the close of market on June 26, 2015, which was our
initial trading day, in our Class A common stock, the S&P 500 Index, the S&P Information Technology Index and the NASDAQ Computer Index, and assumes the
reinvestment of any dividends. The stock price performance reflected in the performance graph is not necessarily indicative of future stock performance.
The NASDAQ Computer Index replaces the S&P Information Technology Index, which was used in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2015. We believe that the NASDAQ Computer Index, which is designed to measure the financial health of the overall computer industry,
including software and hardware companies, is a more appropriate comparative market index because it is more widely used by our publicly traded industry peers.
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any of our other
filings under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
Unregistered
Sales
of
Equity
Securities
None.
Use
of
Proceeds
None.
35
ITEM 6. SELECTED FINANCIAL DATA
The following tables provide our historical selected consolidated financial data for the periods indicated. We have derived the selected Consolidated
Statements of Operations data for the fiscal years ended December 31, 2016 , 2015 and 2014 and the selected Consolidated Balance Sheet data as of December 31,
2016 and 2015 from our audited Consolidated Financial Statements included elsewhere in this Annual Report. We have derived the selected Consolidated
Statements of Operations data for the fiscal year ended December 31, 2013 and 2012 and the selected Consolidated Balance Sheet data as of December 31, 2014,
2013 and 2012 from our audited Consolidated Financial Statements, which are not included in this Annual Report. Our historical results are not necessarily
indicative of the results we expect in the future.
The following historical selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, the
section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the
related notes included elsewhere in this Annual Report.
Consolidated Statements of Operations Data:
Revenue
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)(1)
Sales and marketing(1)
Research and product development(1)
General and administrative(1)
Depreciation and amortization
Total costs and operating expenses
Loss from operations
Other income (expense), net
Interest income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
Net loss per share, basic and diluted
Weighted average common shares outstanding, basic and diluted
(1) Includes stock-based compensation expense as follows (in thousands):
2016
2015
2014
2013
2012
Year Ended
December 31,
(in thousands, except per share data)
$
105,586 $
74,977 $
47,671 $
26,542 $
12,706
44,630
28,827
12,638
17,979
9,935
33,903
26,076
9,554
14,343
6,104
22,555
16,876
6,505
6,489
3,805
13,616
10,337
5,057
2,286
2,850
8,211
8,001
4,067
2,736
2,079
114,009
89,980
56,230
34,146
25,094
(8,423)
(15,003)
(8,559)
(7,604)
(12,388)
(37)
246
5
(595)
(121)
59
287
12
—
72
(8,214)
(15,593)
(8,621)
(7,305)
(12,316)
67
75
—
—
—
$
(8,281) $
(15,668) $
(8,621) $
(7,305) $
(12,316)
(0.25)
(0.73)
33,561
21,336
(0.98)
8,757
(0.87)
8,437
(1.52)
8,104
Year Ended
December 31,
2016
2015
2014
2013
2012
(in thousands)
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)
$
471 $
124 $
68 $
63 $
Sales and marketing
Research and product development
General and administrative
442
382
3,006
115
41
727
48
19
757
39
49
96
Total stock-based compensation expense
$
4,301 $
1,007 $
892 $
247 $
49
41
48
110
248
36
Consolidated Balance Sheet Data:
Cash and cash equivalents and investment securities (1)
Total assets
Deferred revenue
Convertible preferred stock
2016
2015
2014
2013
2012
December 31,
(in thousands)
$ 52,860 $ 56,715 $
5,412 $ 11,269 $
92,583
90,481
25,434
27,707
7,638
4,953
3,780
2,943
—
—
63,166
63,166
3,943
22,109
2,289
51,288
Total stockholders’ equity (deficit)
(1) Amounts for the years ended December 31, 2016 and 2015 include cash and cash equivalents, investment securities-current and investment securities-noncurrent. We held no
investment securities during the years ended December 31, 2014, 2013 and 2012.
(51,467)
(43,959)
69,682
72,697
(36,984)
37
ITEM 7.
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
Consolidated
Financial
Statements
and
the
related
notes
included
elsewhere
in
this
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.
See
the
section
of
this
Annual
Report
entitled
“Cautionary
Note
Regarding
Forward-Looking
Statements”
for
additional
information.
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
of
this
Annual
Report
entitled
“Risk
Factors.”
Overview
AppFolio is a provider of industry-specific, cloud-based software solutions for SMBs in the property management and legal industries. We were formed
in 2006 with a vision to revolutionize the way that small and medium-sized businesses grow and compete.
Our platform is designed to be the system of record to automate essential business processes and the system of engagement to enhance business
interactions between our customers and their clients and vendors. Our mobile-optimized software solutions have a user-friendly interface designed for use across
multiple devices, enabling our customers to work at any time and from anywhere. Our property management software provides small and medium-sized property
managers with an end-to-end solution to their business needs, enabling them to manage their portfolio of properties quickly and easily in a single, integrated
environment. Our legal software provides solo practitioners and small law firms with a streamlined practice and case management solution, allowing them to
manage their practices and case load within a single system. We also offer optional, but often mission-critical, Value+ services, such as our professionally designed
websites and electronic payment services, which are seamlessly built into our core solutions.
We launched our first product, APM, a property management solution, in 2008. Recognizing that our customers would benefit from additional mission-
critical services that they can purchase as needed, we launched our first Value+ service in 2009 by offering website design and hosting services to our property
manager customers. Our websites give our customers a professional online presence and serve as the hub for our system of engagement. In 2010, we commenced
the roll out of our electronic payments platform with the introduction of ACH payment processing and, in 2011, we launched resident screening as additional
Value+ services. In 2012, we introduced our tenant liability insurance program as a further Value+ service. Also in 2012, after completing our market validation
process, we decided to enter the legal market. We expedited our time-to-market by acquiring MyCase, a legal practice and case management solution, and we
leveraged our AppFolio Business System, including our experience gained in the property management vertical, to advance our software solution in the legal
vertical. In 2013, we extended our website design and hosting services to our law firm customers and expanded our electronic payments platform for property
managers by allowing residents to pay rent by Electronic Cash Payment and credit or debit card. In 2014, we launched an additional Value+ service for our
property manager customers with our contact center to resolve or route incoming maintenance requests. In 2016, we launched Premium Leads and Debt Collection
Services as additional Value+ services to our property manager customers to assist with filling vacancies and collecting their tenant's unpaid rent. In 2016, we also
expanded our electronic payments platform in the legal vertical by allowing clients of our legal customers to pay their legal bills by credit card, debit card, or ACH.
Through our disciplined market validation approach and ongoing investment in product development, we continuously update our software solutions through new
and innovative core functionality and Value+ services, as well as assess opportunities in adjacent markets and new verticals.
We have focused on growing our revenue by increasing the size of our customer base in the markets we serve, increasing the number of units under
management, introducing new or expanded Value+ services, retaining customers, and increasing the adoption and utilization of our Value+ services by new and
existing customers. We define our customer base as the number of customers subscribing to our core solutions, exclusive of free trials. We intend to continue to
invest in revenue growth opportunities over time in our current markets, adjacent markets, and new verticals.
38
Customer count and property manager units under management is summarized in the table below:
Property manager customers
Property manager units under management (in millions)
10,038
2.68
8,218
2.15
5,885
1.68
22%
25%
Law firm customers
8,135
6,145
3,663
32%
40%
28%
68%
As of December 31,
2015 to 2016
2014 to 2015
2016
2015
2014
% Change
% Change
We have invested in growth in a disciplined manner across our organization, and intend to continue to do so. These investments to grow our business will
continue to increase our costs and operating expenses on an absolute basis. Many of these investments will occur in advance of our realization of revenue or any
other benefit and will make it difficult to determine if we are allocating our resources efficiently. We expect cost of revenue, research and product development
expense, sales and marketing expense, and general and administrative expense to decrease as a percentage of revenue over the long term as revenue increases and
we gain additional operating leverage in our business. As a result of this increased operating leverage, we expect our operating margins will improve over the long
term.
To date, we have experienced rapid revenue growth due to our investments in research and product development, sales and marketing, customer service
and support, and infrastructure. During the fiscal year ended December 31, 2016 , we have derived more than 90% of our revenue from our property management
solution, as it has been available for a longer period of time, is more established within its vertical with a larger customer base, and currently offers a greater
number of Value+ services.
We have managed, and plan to continue to manage, our business towards the achievement of long-term growth that we believe will positively impact
long-term stockholder value, and not towards the realization of short-term financial or business metrics, or short-term stockholder value.
Key Components of Results of Operations
Revenue
We charge our customers on a subscription basis for our core solutions and many of our Value+ services. Our subscription fees are designed to scale to
the size of our customers’ businesses. We recognize subscription revenue ratably over the terms of the subscription agreements, which typically range from one
month to one year. We generally invoice our customers for subscription services in monthly, quarterly or annual installments, typically in advance of the
subscription period. Revenue from subscription services is impacted by the change in the number and type of our customers, the size and needs of our customers’
businesses, our customer renewal rates, and the level of adoption of our Value+ subscription services by new and existing customers.
We also charge our customers usage-based fees for using certain Value+ services, although fees for electronic payment processing are generally paid by
the clients of our customers. Usage-based fees are charged on a flat fee per transaction basis with no minimum usage commitments. We recognize revenue for
usage-based services in the period the service is rendered. We generally invoice our customers for usage-based services on a monthly basis for services rendered in
the preceding month. Revenue from usage-based services is impacted by the change in the number and type of our customers, the size and needs of our customers’
businesses, and the level of adoption and utilization of our Value+ usage-based services by new and existing customers and clients of our customers.
We also offer our customers assistance with on-boarding our core solutions, as well as website design services. These services are generally purchased as
part of a subscription agreement, and are typically performed within the first several months of the arrangement. We generally invoice our customers for other
services in advance of the services being completed. We recognize revenue for these other services upon completion of the related service. We also generate
revenue from legacy RentLinx customers by providing services that allow these customers to advertise rental houses and apartments online. Revenue derived from
customers using the RentLinx services outside of our property manager core solution platform is being recorded under other services.
39
Costs
and
Operating
Expenses
Cost
of
Revenue
. Cost of revenue consists of personnel-related costs (including salaries, incentive-based compensation, benefits, and stock-based
compensation) for our employees focused on customer service and the support of our operations, platform infrastructure costs (such as data center operations and
hosting-related costs), fees paid to third-party service providers, payment processing fees, and allocated shared costs. We typically allocate shared costs across our
organization based on headcount within the applicable part of our organization. Cost of revenue excludes amortization of capitalized software development costs
and acquired technology. We intend to continue to invest in customer service and support, and the expansion of our technology infrastructure as we grow the
number of our customers and roll out additional Value+ services. We also intend to expand our Value + offerings over time which will impact cost of revenue both
in absolute dollars and overall percentage of revenue.
Sales
and
Marketing
. Sales and marketing expense consists of personnel-related costs (including salaries, sales commissions, incentive-based
compensation, benefits, and stock-based compensation) for our employees focused on sales and marketing, costs associated with sales and marketing activities, and
allocated shared costs. Marketing activities include advertising, online lead generation, lead nurturing, customer and industry events, industry-related content
creation and collateral creation. Sales commissions and other incremental costs to acquire customers and grow adoption and utilization of our Value+ services by
new and existing customers are expensed as incurred. We focus our sales and marketing efforts on generating awareness of our software solutions, creating sales
leads, establishing and promoting our brands, and cultivating an educated community of successful and vocal customers. We intend to continue to invest in sales
and marketing to increase the size of our customer base and increase the adoption and utilization of Value+ services by our new and existing customers.
Research
and
Product
Development.
Research and product development expense consists of personnel-related costs (including salaries, incentive-based
compensation, benefits, and stock-based compensation) for our employees focused on research and product development, fees for third-party development
resources, and allocated shared costs. Our research and product development efforts are focused on enhancing the ease of use and functionality of our existing
software solutions by adding new core functionality, Value+ services and other improvements, as well as developing new products. We capitalize the portion of
our software development costs that meets the criteria for capitalization. Amortization of capitalized software development costs is included in depreciation and
amortization expense. We intend to continue to invest in research and product development as we continue to introduce new core functionality, roll out new
Value+ services, develop new products, and expand into adjacent markets and new verticals.
General
and
Administrative.
General and administrative expense consists of personnel-related costs (including salaries, incentive-based compensation,
benefits, and stock-based compensation) for employees in our executive, finance, information technology, or IT, human resources, corporate development, legal
and administrative organizations. In addition, general and administrative expense includes fees for third-party professional services (including consulting, legal and
audit services), other corporate expenses, and allocated shared costs. We intend to incur incremental costs associated with supporting the growth of our business,
both in terms of increased headcount and to meet the increased reporting requirements and compliance obligations associated with our operation as a public
company.
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.
Accounting guidance for internal-use software costs requires that we capitalize and then amortize qualifying internal-use software costs, rather than expense costs
as incurred, which has the impact of shifting these expenses to a future period and reducing the impact of these costs on our financial results in the current period.
As we continue to invest in our research and product development organization and the development or acquisition of new technology, we expect to have increased
capitalized software development costs and incremental amortization.
Interest
Income
(Expense)
. Interest expense includes interest paid on outstanding borrowings under our Credit Agreement. Interest income includes
interest earned on investment securities, amortization and accretion of the premium and discounts paid from the purchase of investment securities, interest earned
on notes receivable and on cash deposited within our bank accounts.
40
Results of Operations for the Years Ended December 31, 2016 , 2015 , and 2014
The following table sets forth our results of operations for the periods presented in dollars (in thousands) and as a percentage of revenue:
Consolidated Statements of Operations Data:
Revenue
Costs and operating expenses:
Year Ended December 31,
2016
2015
2014
Amount
%
Amount
%
Amount
%
$
105,586
100.0 % $
74,977
100.0 % $
47,671
100.0 %
Cost of revenue (exclusive of depreciation and amortization)
(1)
Sales and marketing (1)
Research and product development (1)
General and administrative (1)
Depreciation and amortization
Total costs and operating expenses
44,630
28,827
12,638
17,979
9,935
42.3
27.3
12.0
17.0
9.4
114,009
108.0
33,903
26,076
9,554
14,343
6,104
89,980
Loss from operations
Other income (expense), net
Interest income (expense), net
Loss before provision for income taxes
Provision for income taxes
Net loss
(8,423)
(8.0)
(15,003)
(37)
246
(8,214)
67
—
0.2
(7.8)
0.1
5
(595)
(15,593)
75
45.2
34.8
12.7
19.1
8.1
120.0
(20.0)
—
(0.8)
(20.8)
0.1
22,555
16,876
6,505
6,489
3,805
56,230
(8,559)
(121)
59
47.3
35.4
13.6
13.6
8.0
118.0
(18.0)
(0.3)
0.1
(8,621)
(18.1)
—
—
$
(8,281)
(7.8)% $
(15,668)
(20.9)% $
(8,621)
(18.1)%
(1) Includes stock-based compensation expense as follows (in thousands):
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)
Sales and marketing
Research and product development
General and administrative
Total stock-based compensation expense
41
Year Ended December 31,
2016
2015
2014
$
$
471 $
124 $
442
382
3,006
115
41
727
4,301 $
1,007 $
68
48
19
757
892
Revenue
Core solutions
Value+ services
Other
Total revenues
Year Ended December 31,
2016
2015
2014
2015 to 2016 %
Change
2014 to 2015 %
Change
$
$
43,775 $
32,119 $
56,965
4,846
37,998
4,860
105,586 $
74,977 $
(dollars in thousands)
22,406
22,525
2,740
47,671
36 %
50 %
— %
41 %
43%
69%
77%
57%
Fiscal
2016
Compared
to
Fiscal
2015
Revenue increased $30.6 million , or 41% , in 2016 compared to 2015, mainly reflecting increased revenue from a 22% year over year increase in the
number of our property manager customers. The overall increase in revenue was mostly attributable to revenue from Value+ services which increased by $19.0
million , or 50% when compared to last year. The increase in Value+ services was mainly driven by increased usage of our electronic payments platform and
screening services by a larger property manager customer base, and the increase in property manager units under management of 25% year over year. We also had
strong growth in our tenant liability insurance programs, customer contact center and website hosting services offered within our Value+ services. In addition,
during 2016 we launched Premium Leads as a Value+ services for our property manager customers. The overall increase in revenue was also the result of an
increase in revenue from our Core solutions of $11.7 million , or 36% , driven by the growth in the number of our customers, units under management, and strong
customer renewal rates.
In each of 2016 , 2015 and 2014 , we derived more than 90% of our revenue from our property manager customers.
Fiscal
2015
Compared
to
Fiscal
2014
Revenue increased $27.3 million, or 57% , in 2015 compared to 2014, mainly reflecting increased revenue from a 40% year over year increase in the
number of our property manager customers. The overall increase was mostly attributable to revenue from Value+ services which increased by $15.5 million, or
69%, when compared to last year. The increase in Value+ services revenue was mainly driven by increased usage of our electronic payments platform, screening
services and tenant liability insurance programs resulting from a larger property manager customer base and an increase in property manager units under
management of 28% year over year. The overall increase in revenue was also the result of an increase in revenue from our core solutions of $9.7 million, or 43%,
driven by growth in the number of our customers, units under management and strong customer renewal rates. The increase in other revenue of $2.1 million, or
77% was primarily the result of an increase in fees for website design fees and incremental revenue gained from the acquisition of RentLinx.
42
Cost
of
Revenue
(Exclusive
of
Depreciation
and
Amortization)
Year Ended December 31,
2016
2015
2014
2015 to 2016 %
Change
2014 to 2015 %
Change
(dollars in thousands)
Cost of revenue (exclusive of depreciation and
amortization)
$
44,630
$
33,903
$
22,555
32%
50%
Percentage of revenue
42.3%
45.2%
47.3%
Fiscal
2016
Compared
to
Fiscal
2015
Cost of revenue (exclusive of depreciation and amortization) increased $10.7 million , or 32% , in 2016 compared to 2015. The increase was primarily
due to increased third-party costs of $5.0 million driven by increased Value+ services, increased personnel-related costs of $3.9 million due to our headcount
growth, as well as increased allocated and other costs of $1.8 million driven by expanded facilities, information technology and other shared expenses supporting
our growth.
As a percentage of revenue, cost of revenue (exclusive of depreciation and amortization) improved 2.9 percentage points in 2016 compared to 2015. The
improvement was primarily driven by a decrease in personnel-related costs due to our ability to increase revenue with a more moderate increase in headcount, and
a decrease in third-party costs due to improved pricing with our third-party service providers as we continue to grow.
Fiscal
2015
Compared
to
Fiscal
2014
Cost of revenue (exclusive of depreciation and amortization) increased $11.3 million, or 50%, in 2015 compared to 2014. The increase was primarily due
to increased third-party costs of $5.4 million driven by increased Value+ services, increased personnel-related costs of $4.5 million due to our headcount growth,
as well as increased allocated and other costs of $1.4 million driven by expanded facilities, information technology and other shared expenses supporting our
growth.
As a percentage of revenue, cost of revenue (exclusive of depreciation and amortization) improved 2.1 percentage points in 2015 compared to 2014. The
improvement was primarily driven by a decrease in personnel-related costs and other costs due to our ability to increase revenue with a more moderate increase in
headcount and supporting infrastructure.
Sales
and
Marketing
Sales and marketing
Percentage of revenue
$
28,827
$
26,076
$
16,876
11%
55%
27.3%
34.8%
35.4%
Year Ended December 31,
2016
2015
2014
2015 to 2016 %
Change
2014 to 2015 %
Change
(dollars in thousands)
Fiscal
2016
Compared
to
Fiscal
2015
Sales and marketing expense increased $2.8 million , or 11% , in 2016 compared to 2015. The increase was primarily due to increased personnel-related
costs of $2.6 million due to our headcount growth and related commission based compensation, and increased allocated and other costs of $0.2 million driven by
expanded facilities, information technology and other shared expenses supporting our growth.
Fiscal
2015
Compared
to
Fiscal
2014
Sales and marketing expense increased $9.2 million, or 55%, in 2015 compared to 2014. The increase was primarily due to increased personnel-related
costs of $5.6 million due to our headcount growth and related commission based compensation, increased marketing program costs of $2.5 million incurred to
support incremental revenue growth, and increased allocated and other costs of $1.0 million driven by expanded facilities, information technology and other shared
expenses supporting our growth.
43
Research
and
Product
Development
Year Ended December 31,
2016
2015
2014
2015 to 2016 %
Change
2014 to 2015 %
Change
(dollars in thousands)
Research and product development
$12,638
$9,554
$6,505
32%
47%
Percentage of revenue
12.0%
12.7%
13.6%
Fiscal
2016
Compared
to
Fiscal
2015
Research and product development expense increased $3.1 million , or 32% , in 2016 compared to 2015. The increase was primarily due to increased
personnel-related costs, net of capitalized software development costs of $1.9 million, due to our headcount growth and rate of innovation and increased allocated
and other costs of $1.1 million driven by expanded facilities, information technology and other shared expenses supporting our growth.
Fiscal
2015
Compared
to
Fiscal
2014
Research and product development expense increased $3.0 million , or 47% , in 2015 compared to 2014. The increase was primarily due to increased
personnel-related costs, net of capitalized software development costs of $2.1 million, due to our headcount growth and rate of innovation and increased allocated
and other costs of $1.0 million driven by expanded facilities, information technology and other shared expenses supporting our growth.
General
and
Administrative
General and administrative
Percentage of revenue
Fiscal
2016
Compared
to
Fiscal
2015
Year Ended December 31,
2016
2015
2014
$17,979
$14,343
(dollars in thousands)
$6,489
17.0%
19.1%
13.6%
2015 to 2016 %
Change
2014 to 2015 %
Change
25%
121%
General and administrative expense increased $3.6 million , or 25% , in 2016 compared to 2015. The increase was primarily due to increased personnel-
related costs of $4.4 million due to headcount growth and incentive-based compensation programs partially off-set by decreased allocated and other costs of $0.7
million related to certain costs incurred in 2015 for our initial public offering, or IPO, and incremental compensation paid to certain RentLinx personnel related to
the acquisition that did not reoccur in 2016.
Fiscal
2015
Compared
to
Fiscal
2014
General and administrative expense increased $7.9 million , or 121% , in 2015 compared to 2014. The increase was primarily due to increased allocated
and other costs of $4.6 million and increased personnel-related costs of $3.2 million due to our headcount growth. The increase in allocated and other costs
included increased professional fees of $3.1 million in connection with our IPO, a $0.6 million payment to a third-party service provider to expedite our transition
to a new partner, $0.3 million of legal fees associated with the acquisition of RentLinx, and increased allocated and other costs driven by expanded facilities,
information technology and other shared expenses supporting our growth.
44
Depreciation
and
Amortization
Depreciation and amortization
Percentage of revenue
Fiscal
2016
Compared
to
Fiscal
2015
Year Ended December 31,
2016
2015
2014
2015 to 2016 %
Change
2014 to 2015 %
Change
$9,935
$6,104
(dollars in thousands)
$3,805
9.4%
8.1%
8.0%
63%
60%
Depreciation and amortization expense increased $3.8 million , or 63% , in 2016 compared to 2015. The increase was primarily due to increased
amortization expense of $2.8 million related to increased capitalized software development balances and increased depreciation expense of $0.9 million from
capital purchases and building improvements made during 2016.
Fiscal
2015
Compared
to
Fiscal
2014
Depreciation and amortization expense increased $2.3 million , or 60% , in 2015 compared to 2014. The increase was primarily due to increased
amortization expense of $1.5 million related to increased capitalized software development balances, increased depreciation expense of $0.4 million from capital
purchases made during 2015, and increased amortization of intangible assets of $0.4 million from the acquisition of RentLinx.
Interest
Income
(Expense),
net
Interest income (expense)
Percentage of revenue
Fiscal
2016
Compared
to
Fiscal
2015
Year Ended December 31,
2016
2015
2014
2015 to 2016 %
Change
2014 to 2015 %
Change
$
246
$
0.2%
(dollars in thousands)
59
$
(595)
(0.8)%
0.1%
N/A
N/A
Interest income, net increased by $0.8 million in 2016 compared to 2015. The increase is primarily due to holding investment securities for a full year in
2016 versus a few months in 2015 resulting in increased interest income of $0.2 million. In addition, interest expense decreased $0.6 million related to our term
loan repaid in 2015 and the associated write-off of deferred financing costs.
Fiscal
2015
Compared
to
Fiscal
2014
Interest expense, net increased by $0.7 million in 2015 compared to 2014. The increase is primarily due to the interest expense recognized from the write-
off of deferred financing costs associated with the repayment of our term loan in 2015 and interest expense incurred pursuant to the Original Credit Agreement of
$0.8 million. The interest expense was offset by $0.2 million of interest income from our investment securities. For additional information regarding our Original
Credit Agreement refer to Note 8, Long-term
Debt,
of our Consolidated Financial Statements.
Provision
for
Income
Taxes
Year Ended December 31,
2016
2015
2014
2015 to 2016 %
Change
2014 to 2015 %
Change
Provision for income taxes
Percentage of revenue
$
67
$
0.1%
(dollars in thousands)
—
$
75
0.1%
—%
(11)%
—%
The provision for income taxes for the years ended December 31, 2016 and 2015 , of $67,000 and $75,000 , respectively is related to minimum state taxes
and the amortization of tax deductible goodwill from the purchase of RentLinx in 2015 that is not an available source of income to realize the deferred tax asset.
45
Quarterly Results of Operations
The following table sets forth selected unaudited quarterly consolidated statements of operations data for each of the eight quarters in the period ended
December 31, 2016 . We have prepared the unaudited quarterly consolidated statements of operations data on a basis consistent with the audited annual
Consolidated Financial Statements included elsewhere in this Annual Report. In the opinion of management, the financial information in this table reflects all
adjustments, consisting of normal and recurring adjustments, necessary for the fair statement of this data. This information should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere in this Annual Report. The results of historical periods
are not necessarily indicative of the results for any future period.
2016
2015
Quarter Ended
Consolidated Statements of Operations Data:
Revenue
$
28,010 $
28,162
$
26,203
$
23,211 $
20,399 $
20,305 $
18,425 $
15,848
December 31,
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
(in thousands, except per share data)
Costs and operating expenses:
Cost of revenue (exclusive of depreciation
and amortization)(1)
Sales and marketing(1)
Research and product development(1)
General and administrative(1)
Depreciation and amortization
Total costs and operating expenses
Operating loss
Other income (expense), net
Interest income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
Net loss per share, basic and diluted
11,243
6,730
3,107
5,399
2,823
29,302
(1,292)
(3)
25
11,645
11,212
6,979
3,464
4,642
2,636
29,366
(1,204)
(12)
102
7,567
3,024
4,389
2,359
28,551
(2,348)
2
95
(1,270)
(1,114)
(2,251)
19
(1,289)
(0.04)
$
$
$
$
11
13
(1,125)
(0.03)
$
$
(2,264)
(0.07)
$
$
10,530
7,551
3,043
3,549
2,117
26,790
(3,579)
(24)
24
(3,579)
24
(3,603) $
(0.11) $
9,465
7,100
2,594
3,356
1,852
24,367
(3,968)
13
106
(3,849)
41
(3,890) $
(0.12) $
9,264
7,028
2,797
3,888
1,638
24,615
(4,310)
(1)
(426)
(4,737)
23
(4,760) $
(0.14) $
8,109
6,239
2,154
3,707
1,431
21,640
(3,215)
(5)
(243)
(3,463)
(63)
(3,400) $
(0.36) $
7,065
5,709
2,009
3,392
1,183
19,358
(3,510)
(2)
(32)
(3,544)
74
(3,618)
(0.41)
(1) Includes stock-based compensation expense as follows (in thousands):
2016
2015
Quarter Ended
December 31,
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
(in thousands)
Cost of revenue (exclusive of depreciation and
amortization)
Sales and marketing
Research and product development
General and administrative
Total stock-based compensation expense
$
$
150 $
146
118
1,043
1,457 $
138 $
124
109
918
1,289 $
138 $
130
104
720
1,092 $
45 $
42
51
325
463 $
38 $
31
19
296
384 $
35 $
33
10
200
278 $
27 $
28
7
150
212 $
24
23
5
81
133
46
The following table sets forth selected consolidated statements of operations data for the specified periods as a percentage of our revenue for those
periods.
Consolidated Statements of Operations Data:
Revenue
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
December 31,
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
2016
2015
Quarter Ended
Costs and operating expenses:
Cost of revenue (exclusive of depreciation
and amortization)
Sales and marketing
Research and product development
General and administrative
Depreciation and amortization
Total costs and operating expenses
Operating loss
Other expense, net
Interest income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
40.1 %
24.0 %
11.1 %
19.3 %
10.1 %
104.6 %
(4.6)%
— %
0.1 %
(4.5)%
0.1 %
(4.6)%
41.4 %
24.8 %
12.3 %
16.5 %
9.4 %
104.3 %
(4.3)%
— %
0.4 %
(4.0)%
— %
(4.0)%
42.8 %
28.9 %
11.5 %
16.7 %
9.0 %
109.0 %
(9.0)%
— %
0.4 %
(8.6)%
— %
(8.6)%
45.4 %
32.5 %
13.1 %
15.3 %
9.1 %
115.4 %
(15.4)%
(0.1)%
0.1 %
(15.4)%
0.1 %
(15.5)%
46.4 %
34.8 %
12.7 %
16.5 %
9.1 %
119.5 %
(19.5)%
0.1 %
0.5 %
(18.9)%
0.2 %
(19.1)%
45.6 %
34.6 %
13.8 %
19.1 %
8.1 %
121.2 %
(21.2)%
— %
(2.1)%
(23.3)%
0.1 %
(23.4)%
44.0 %
33.9 %
11.7 %
20.1 %
7.8 %
117.4 %
(17.4)%
— %
(1.3)%
(18.8)%
(0.3)%
(18.5)%
44.6 %
36.0 %
12.7 %
21.4 %
7.5 %
122.1 %
(22.1)%
— %
(0.2)%
(22.4)%
0.5 %
(22.8)%
Quarterly
Revenue
and
Cost
Trends
Our quarterly revenue trends generally reflect increased revenue from our property manager customers. The overall increase was primarily a result of a
quarter-over-quarter increase in the number of our customers, property manager units under management, as well as strong customer renewal rates, and an increase
in Value+ services revenue primarily attributable to the expansion of our electronic payments platform and screening services. We experience some seasonality in
our revenue, primarily with respect to the screening services we provide to our property manager customers. These customers historically have processed fewer
applications for new tenants during the fourth quarter holiday season; therefore, revenue associated with our screening services and new tenant applications
typically declines in the fourth quarter of the year. As a result of this seasonal decline in revenue, we have typically experienced slower revenue growth in the
fourth quarter of each year (and a slight decline in revenue in the fourth quarter of 2016) than we have experienced in other quarters.
Our quarter-over-quarter total costs and operating expenses as a percentage of revenue for each quarter during 2016 improved, with the exception of
general and administrative expenses and depreciation and amortization, as we continue to realize operating leverage. General and administrative expenses
fluctuated each quarter during 2016 primarily due to the impact of increased compensation due to an increase in headcount.
Our quarter-over-quarter total costs and operating expenses as a percentage of revenue for each quarter during 2015 remained consistent and scaled with
the growth in our business.
Liquidity and Capital Resources
Cash
and
Cash
Equivalents
As of December 31, 2016 , and 2015 , our principal sources of liquidity were cash and cash equivalents and investment securities, which had an aggregate
balance of $ 52.9 million and $56.7 million, respectively.
Working
Capital
As of December 31, 2016 , we had working capital of $10.9 million , compared to working capital of $10.6 million as of December 31, 2015 . The
increase in our working capital was primarily due to an increase in the current portion of investment securities, accounts receivable and prepaid expenses and a
decline in accounts payable, offset by increases in our accrued employee expenses, accrued expenses and deferred revenue from the continued growth of our
business and a decline in our cash and cash equivalents.
47
Revolving
Facility
As of December 31, 2016 , we had a $25.0 million revolving line of credit, which we refer to as the Revolving Facility, under the terms of the Credit
Agreement with Wells Fargo, as administrative agent, and the lenders and parties thereto. As of December 31, 2016 , we had no outstanding balance under the
Revolving Facility. As of December 31, 2015 , we had an outstanding balance of $12,000. For additional information regarding our Credit Agreement refer to Note
8, Long-term
Debt
of our Consolidated Financial Statements.
Liquidity
Requirements
We believe that our existing cash and cash equivalents, investment securities, available borrowing capacity of $25.0 million under the Revolving Facility,
and cash generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.
Capital
Requirements
Our future capital requirements will depend on many factors, including the continued market acceptance of our software solutions, the change in the
number of our customers, the adoption and utilization of our Value+ services by new and existing customers, the timing and extent of the introduction of new core
functionality and Value+ services in our existing markets and verticals, the timing and extent of our expansion into adjacent markets or new verticals and the
timing and extent of our investments across our organization. In addition, we may in the future enter into arrangements to acquire or invest in complementary
businesses, services, technologies or intellectual property rights, although we have no present plans with respect to any acquisitions or investments.
Cash
Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash
Provided
by
(Used
in)
Operating
Activities
Years Ended
December 31,
2016
2015
2014
$
11,500 $
(6,844) $
(13,065)
201
(59,367)
72,862
$
(1,364) $
6,651 $
475
(6,476)
144
(5,857)
Our primary source of operating cash inflows is cash collected from our customers in connection with their use of our core solutions and Value+ 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.
For the year ended December 31, 2016 , cash provided by operating activities was $11.5 million resulting from our net loss of $8.3 million , adjusted by
non-cash charges of $14.7 million and a net increase in our operating assets and liabilities of $5.0 million . The non-cash charges primarily consist of $9.9 million
of depreciation and amortization of our property and equipment and capitalized software and $4.3 million of stock-based compensation. The net increase in our
operating assets and liabilities was mostly attributable to an increase of $2.7 million in deferred revenue in line with our increased revenues, a $2.2 million increase
in accrued employee expenses related to an overall increase in personnel-related costs, and a $1.1 million increase in accrued expenses primarily due to payment
processing fees and fees associated with our resident screening services driven by growth in our Value+ services, and a $0.8 million increase in other liabilities.
The increase in our operating assets and liabilities was partially offset by a decrease in accounts payable of $0.9 million , an increase in accounts receivable of $0.5
million , and an increase in our prepaid expenses and current assets of $0.4 million , in conjunction with our growth and expansion during 2016.
For the year ended December 31, 2015, cash used in operating activities was $6.8 million resulting from our net loss of $15.7 million, adjusted by non-
cash charges of $6.8 million and a net increase in our operating assets and liabilities of $2.1 million. The net increase in our non-cash charges was primarily the
result of an increase of $6.1 million of depreciation and amortization of our property and equipment and capitalized software and $1.0 million of stock-based
compensation. The net increase in our operating assets and liabilities was mostly attributable to an increase of $1.9 million in accrued employee expenses related to
an overall increase in personnel-related costs, a $1.2 million increase in deferred revenue in line with our increased
48
revenues, a $1.1 million increase in accrued expenses mostly attributed to payment processing fees driven by growth in our Value+ services, and a $1.0 million
increase in other liabilities. The increase in our operating assets and liabilities was offset by an increase in our prepaid expenses and current assets of $1.9 million,
an increase in accounts receivable of $0.7 million in conjunction with our growth and expansion during 2015, and a decrease in accounts payable of $0.4 million.
For the year ended December 31, 2014, cash provided by operating activities was $0.5 million resulting from our net loss of $8.6 million, adjusted by
non-cash charges of $4.9 million and a net increase of $4.2 million in our operating assets and liabilities. The net increase in our non-cash charges was primarily
the result of an increase of $3.8 million of depreciation and amortization of our property and equipment and capitalized software, and $0.9 million of stock-based
compensation. The net increase in our operating assets and liabilities was primarily the result of a $1.8 million increase in accounts payable, a $1.1 million increase
in accrued employee expenses related to an overall increase in personnel-related costs, a $1.0 million increase in accrued expenses due to an overall increase in
expenditures associated with the growth of our business, and a $0.8 million increase in deferred revenue as a result of increased subscription sales, offset by a $0.4
million decrease in accounts receivable as a result of improved collections.
Cash
Used
in
Investing
Activities
Cash used in investing activities is generally comprised of purchases, maturities and sales of investment securities, additions to capitalized software
development, cash paid for business acquisitions and purchases and dispositions of capital expenditures.
For the year ended December 31, 2016 , investing activities used $13.1 million in cash primarily as a result of $31.6 million of investment securities
purchased offset by $21.3 million of maturities and $12.6 million of sales of investment securities. In addition, we had an increase in capitalized software
development costs of $11.2 million for the continued investment in our software development, and capital expenditures of $4.2 million to purchase property and
equipment for the continued growth and expansion of our business.
For the year ended December 31, 2015, investing activities used $59.4 million in cash primarily as a result of $74.2 million of investment securities
purchased offset by $26.1 million of maturities and $4.1 million of sales of investment securities. In addition, we had an increase in capitalized software
development costs of $7.7 million for the continued investment in our software development, an increase in capital expenditures of $3.7 million to purchase
property and equipment for the continued growth and expansion of our business. We also used $4.0 million of cash for the acquisition of RentLinx.
For the year ended December 31, 2014, investing activities used $6.5 million in cash primarily as a result of an increase in capitalized software
development costs of $4.6 million, and an increase in capital expenditures of $1.9 million to purchase property and equipment.
Cash
Provided
by
Financing
Activities
Cash provided by financing activities is generally comprised of proceeds from our IPO, proceeds from the exercise of stock options and restricted stock
awards, proceeds from the issuance of debt or draws from our revolving credit facility and principal repayments of our term loan and on our revolving credit
facility.
For the year ended December 31, 2016 , financing activities provided $0.2 million in cash primarily as a result of proceeds from stock option exercises
offset by tax withholdings from restricted stock unit, or RSU, net settlements.
For the year ended December 31, 2015, financing activities provided $72.9 million in cash primarily as a result of net proceeds from the IPO in the
amount of $75.4 million, offset by a $2.4 million earnout payment relating to our acquisition of MyCase.
For the year ended December 31, 2014, financing activities provided $0.1 million in cash primarily as a result of proceeds from the exercise of stock
options.
49
Contractual Obligations and Other Commitments
Our principal commitments consist of contractual obligations under our operating leases for office space. The following table summarizes our contractual
obligations and other commitments as of December 31, 2016 :
Total
Less than 1 year
Payments Due by Period
1 to 3 years
(in thousands)
3 to 5 years
More than 5 years
Operating lease obligations
$
8,292 $
2,375 $
3,449 $
2,288 $
180
At December 31, 2016 , liabilities for unrecognized tax benefits of $4.0 million were not included in our contractual obligations in the table above
because, due to their nature, there is a high degree of uncertainty regarding the timing of future cash outflows and other events that would extinguish these
liabilities.
In February 2017, we signed a lease amendment for 50 Castilian Drive in Santa Barbara, California, our corporate headquarters. This amendment extends
the term from February 2018 to December 2021. The total commitment under this lease extension is $3.1 million. All other terms and conditions from the original
lease and previous amendments remain the same.
For additional information regarding our contractual obligations, commitments and indemnification arrangements refer to Note 9, Commitments
and
Contingencies
of our Consolidated Financial Statements.
Off-Balance Sheet Arrangements
As of December 31, 2016 , we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our financial statements and the related notes included elsewhere in this Annual Report are prepared in accordance with GAAP. The preparation of our
financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and operating expenses,
provision for income taxes and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. However, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and
assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement
presentation, financial condition, results of operations and cash flows will be affected.
We believe that the following critical accounting policies involve a greater degree of judgment or complexity than our other accounting policies.
Accordingly, these are the policies we believe are the most critical to a full understanding and evaluation of our Consolidated Financial Statements. For additional
information, refer to Note 2, Summary
of
Significant
Accounting
Policies
of our Consolidated Financial Statements.
Revenue
Recognition
We primarily generate revenue from our customers on a subscription basis for our core solutions and Value+ services for our cloud-based property
management and legal software solutions. Subscription fees for our core solutions are charged on a per-unit per-month basis for our property management software
solution and on a per-user per-month basis for our legal software solution. We recognize subscription revenue on a straight-line basis over the terms of the
subscription agreements, which range from one month to one year. We generally invoice our customers for subscription services in monthly, quarterly or annual
installments, typically in advance of the subscription period. Any revenues which are billed in advance are recorded as deferred revenue.
We also charge our customers on a subscription basis for many of our Value+ services. Our subscription fees are designed to scale to the size of our
customers’ businesses. We charge our customers usage-based fees for using certain Value+ services, although fees for electronic payment processing are generally
paid by the clients of our customers. Usage-based fees are charged on a flat fee per transaction basis with no minimum usage commitments. We recognize revenue
for usage-based services in the period the service is rendered. We generally invoice our customers for usage-based services on a monthly basis for services
rendered in the preceding month.
50
Our legal software core solution offers our customers a free-trial period to try our software. Revenue is not recognized until the free-trial period is
complete and the customer has entered into a subscription agreement with us.
We recognize revenue when (i) there is persuasive evidence of an arrangement, (ii) our software solutions have been made available or delivered, or
services have been performed, (iii) the amount of fees is fixed or determinable, and (iv) collectability is reasonably assured. Evidence of an arrangement generally
consists of either a signed customer contract or an online click-through agreement. We consider that delivery of a solution or website has commenced once we
provide the customer with access to use the solution or website. Fees are fixed based on rates specified in the subscription agreements, which do not provide for
any refunds or adjustments. If collectability is not considered reasonably assured, revenue is deferred until the fees are collected. Some of our subscription
agreements contain minimum cancellation fees in the event that the customer cancels the subscription early.
Internal-Use
Software
We account for the costs of computer software obtained or developed for internal use in accordance with Accounting Standards Codification ("ASC") 350
,
Intangibles-Goodwill
and
Other
("ASC 350"). These include costs incurred in connection with the development of our internal-use software solutions when
(i) the preliminary project stage is completed, (ii) management has authorized further funding for the completion of the project and (iii) it is probable that the
project will be completed and perform as intended. These capitalized costs include personnel and related expenses for employees who are directly associated with
and who devote time to internal-use software projects and, when material, interest costs incurred during the development. Capitalization of these costs ceases once
the project is substantially complete and the software is ready for its intended purpose. Costs incurred for significant upgrades and enhancements to our software
solutions are also capitalized. Costs incurred for post-configuration training, maintenance and minor modifications or enhancements are expensed as incurred.
Capitalized software development costs are amortized using the straight-line method over an estimated useful life of three years. We do not transfer ownership of
our software, or lease our software, to third parties.
Business
Combinations
The results of a business acquired in a business combination are included in our consolidated financial statements from the date of acquisition. We
allocate the purchase price, including the fair value of contingent consideration, to the identifiable assets and liabilities of the acquired business at their acquisition
date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. Determining the
fair value of assets acquired and liabilities assumed requires management to make significant judgments and estimates, including the selection of valuation
methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies.
Acquisition-related transaction costs are not included as a component of consideration transferred, but are accounted for as an operating expense in the
period in which the costs are incurred.
Goodwill
and
Intangible
Assets
Goodwill and intangible assets are evaluated for impairment annually in the fourth quarter or whenever events or circumstances indicate the carrying
value of goodwill may not be recoverable or when there is a triggering event. Triggering events that may indicate impairment include, but are not limited to, a
significant adverse change in customer demand or business climate or a significant decline in expected cash flows.
When evaluating goodwill for impairment, an entity has the option to first assess qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the
totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then
additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform the first of a two-step impairment test.
The first step of the impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the
estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the reporting
unit is less than book value, then the carrying amount of the goodwill is compared with its implied fair value. The estimate of implied fair value of goodwill may
require valuations of certain internally generated and unrecognized intangible assets. If the carrying amount of goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to the excess above the estimated fair value.
At December 31, 2016 , we determined our goodwill was not impaired as the fair value of our reporting unit significantly exceeded its carrying value.
51
Stock-Based
Compensation
We account for stock-based compensation awards granted to employees and directors by recording compensation expense based on the awards’ grant-date
estimated fair value, in accordance with ASC 718, Compensation-Stock
Compensation
(“ASC 718”) over the vesting period. We estimate the fair value of
restricted stock awards ("RSA"), restricted stock units ("RSU") and performance based RSUs ("PSU") based on the fair value of our common stock on the date of
grant. We estimate the fair value of stock options and performance based stock options ("PSO") using the Black-Scholes option-pricing model. Determining the
fair value of stock options under this model requires highly subjective assumptions, including the fair value of the underlying common stock, the risk-free interest
rate, the expected term of the award, the expected volatility of the price of our common stock, and the expected dividend yield of our common stock. These
estimates involve inherent uncertainties and the application of management’s judgment. If we had made different assumptions, our stock-based compensation
expense could have been materially different.
Since our IPO in June 2015, the fair value of our common stock is based on the closing price of our common stock, as quoted on the NASDAQ Global
Market, on the date of grant.
Prior to our IPO, there was no public market for our common stock and our board of directors determined the fair value of our common stock at the time of
the grant of stock options and restricted stock awards by considering a number of objective and subjective factors, including our actual operating and financial
performance, market conditions and performance of comparable publicly traded companies, developments and milestones in our company, the likelihood of
achieving a liquidity event and transactions involving our convertible preferred stock, among other factors. The fair value of the underlying common stock was
determined by our board of directors in accordance with applicable elements of the practice aid issued by the American Institute of Certified Public Accountants
Valuation
of
Privately
Held
Company
Equity
Securities
Issued
as
Compensation
. In valuing our common stock at various dates, our board of directors determined
our equity value generally using the income approach and the market comparable approach valuation methods. Once we determined our equity value, we used an
option pricing method or the Probability Weighted Expected Return Method to allocate the equity value to preferred stock and common stock. Application of these
approaches and methods involves the use of estimates, judgments and assumptions, such as future revenue, expenses and cash flows, selections of comparable
companies, probabilities and timing of exit events, and other factors.
The Black-Scholes option-pricing model utilizes the following assumptions and estimates in the calculation of the fair value for options and PSOs:
▪
▪
▪
▪
Risk-Free
Interest
Rate
- The risk free interest rate assumption is based upon observed interest rates on United States government securities
appropriate for the expected term of the stock option.
Expected
Term
-
Given we do not have sufficient exercise history to develop reasonable expectations about future exercise patterns and post-vesting
employment termination behavior, we determine the expected term using the simplified method, which is calculated as the midpoint of the stock
option vesting term and the expiration date of the stock option.
Expected
Volatility
- We determine the expected volatility based on the historical average volatilities of publicly traded industry peers. We intend to
continue to consistently apply this methodology using the same or similar public companies until a sufficient amount of historical information
regarding the volatility of our own common stock price becomes available, unless circumstances change such that the identified companies are no
longer similar to us, in which case, more suitable companies whose stock prices are publicly available would be utilized in the calculation.
Expected
Dividend
Yield
-
We have not paid and do not anticipate paying any cash dividends in the foreseeable future and, therefore, we use an
expected dividend yield of zero .
In 2016, we began granting PSOs and PSUs. The fair value of the PSOs are estimated using the Black-Scholes option-pricing model and the PSUs fair
value is based on the fair value of our common stock on the date of grant. The vesting of the PSOs and PSUs is based on achievement of a pre-established free cash
flow performance metric and continued employment throughout the performance period. We recognize expense for the PSOs and PSUs based on the grant date fair
value and combined with the determination of the probability of the number of shares that will vest at the end of the performance period. Adjustments to
compensation expense are made each period based on changes in our estimate of the number of PSOs and PSUs that are probable of vesting.
52
In addition to the assumptions used in the Black-Scholes option-pricing model, we also estimate a forfeiture rate to calculate our stock-based
compensation expense. The forfeiture rate is based on an analysis of actual forfeitures for each type of grant made. We will continue to evaluate the
appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors. Changes in the estimated forfeiture
rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the estimated
forfeiture rate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to
our stock-based compensation expense recognized in our consolidated financial statements. If a revised forfeiture rate is lower than the previously estimated
forfeiture rate, an adjustment is made that will result in an increase to our stock-based compensation expense recognized in our consolidated financial statements.
We will continue to use judgment in evaluating the expected volatility, expected term and forfeiture rate utilized in our stock-based compensation expense
calculations on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates of expected volatility,
expected term and forfeiture rates, which could materially impact our future stock-based compensation expense.
Income
Taxes
We account for income taxes in accordance with ASC 740, Income
Taxes
, or ASC 740. ASC 740 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred
income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the consolidated statements of
operations in the period that includes the enactment date. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will
not be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in our consolidated financial statements from such positions are then
measured based on the largest benefit that has a greater than 50% likelihood of being realized. We recognize interest and penalties accrued with respect to
uncertain tax positions, if any, in our provision for income taxes in the consolidated statements of operations.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2, Summary
of
Significant
Accounting
Policies
of our Consolidated Financial
Statements.
53
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest
Rate
Risk
At December 31, 2016 , we had cash and cash equivalents of $10.7 million consisting of bank deposits and money market funds and $42.2 million of
investment securities which are comprised of fixed rate debt securities and certificates of deposit. 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.
In September 2015, we began investing in corporate debt securities, agency securities and certificate of deposits which we collectively refer to as
investment securities. The primary objective of investing in the securities is to support our liquidity and capital needs. 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 income unless an investment security is considered impaired in which case changes in
fair value are reported in other expense. As of December 31, 2016 , a hypothetical 100 basis point decrease in interest rates would have resulted in an approximate
increase in fair value or unrealized gain of $0.5 million and a hypothetical 100 basis point decrease in interest rates would have resulted in an approximate decrease
in fair value or unrealized loss of $0.5 million. This estimate is based on a sensitivity model which measures an instant change in interest rates by 1% or 100 basis
points at December 31, 2016 .
Inflation
Risk
We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in inflation rates.
54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
56
57
58
59
60
61
63
The supplementary financial information required by this Item 8 is included in Item 7 under the caption "Quarterly Results of
Operations."
55
To the Board of Directors and Stockholders of AppFolio, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive loss, and convertible preferred
stock and stockholders’ deficit present fairly, in all material respects, the financial position of AppFolio, Inc. and its subsidiaries as of December 31, 2016 and
2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting
principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 27, 2017
56
APPFOLIO, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
December 31,
2016
2015
Assets
Current assets
Cash and cash equivalents
Investment securities—current
Accounts receivable, net
Prepaid expenses and other current assets
Total current assets
Investment securities—noncurrent
Property and equipment, net
Capitalized software, net
Goodwill
Intangible assets, net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
Accrued employee expenses
Accrued expenses
Deferred revenue
Other current liabilities
Total current liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.0001 par value, 25,000 authorized and no shares issued and outstanding as of December 31,
2016 and 2015
Class A common stock, $0.0001 par value, 250,000 shares authorized as of December 31, 2016 and 2015; 11,691
and 9,005 shares issued and outstanding as of December 31, 2016 and 2015, respectively
Class B common stock, $0.0001 par value, 50,000 shares authorized as of December 31, 2016 and 2015; 22,028
and 24,541 shares issued and outstanding as of December 31, 2016 and 2015, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
10,699 $
$
$
15,473
2,511
3,537
32,220
26,688
7,077
15,539
6,737
3,105
1,217
92,583 $
937 $
7,550
4,044
7,638
1,192
21,361
1,540
22,901
—
1
3
146,692
(51)
(76,963)
69,682
$
92,583 $
12,063
10,235
2,048
3,160
27,506
34,417
6,107
10,022
6,737
4,516
1,176
90,481
2,369
5,159
3,340
4,953
1,084
16,905
879
17,784
—
1
3
141,528
(153)
(68,682)
72,697
90,481
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
57
APPFOLIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Revenue
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)
Sales and marketing
Research and product development
General and administrative
Depreciation and amortization
Total costs and operating expenses
Loss from operations
Other income (expense), net
Interest income (expense), net
Loss before provision for income taxes
Provision for income taxes
Net loss
Net loss per share, basic and diluted
Weighted average common shares outstanding, basic and diluted
Year Ended December 31,
2016
2015
2014
$
105,586 $
74,977 $
47,671
44,630
28,827
12,638
17,979
9,935
114,009
(8,423)
(37)
246
(8,214)
67
33,903
26,076
9,554
14,343
6,104
89,980
(15,003)
5
(595)
(15,593)
75
$
(8,281) $
(15,668) $
(0.25)
33,561
(0.73)
21,336
22,555
16,876
6,505
6,489
3,805
56,230
(8,559)
(121)
59
(8,621)
—
(8,621)
(0.98)
8,757
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
58
APPFOLIO, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net loss
Other comprehensive income (loss):
Changes in unrealized gains (losses) on investment securities
Comprehensive loss
Year Ended December 31,
2016
2015
2014
(8,281) $
(15,668) $
(8,621)
102
(153)
(8,179) $
(15,821) $
—
(8,621)
$
$
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
59
APPFOLIO, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
Balance December 31,
2013
Exercise of stock options
Stock-based
compensation
Net loss
Balance at December
31, 2014
Exercise of stock options
Stock-based
compensation
Conversion of
convertible preferred
stock in connection with
initial public offering
Issuance of common
stock in connection with
initial public offering,
net of offering costs
Conversion of Class B
stock to Class A stock
Issuance of restricted
stock awards
Other comprehensive
loss
Net loss
Balance at December
31, 2015
Exercise of stock options
Stock-based
compensation
Vesting of restricted
stock units, net of shares
withheld for taxes
Vesting of early
exercised shares
Conversion of Class B
stock to Class A stock
Issuance of restricted
stock awards
Other comprehensive
income
Net loss
Balance at December
31, 2016
Convertible
Common Stock
Common Stock
Preferred Stock
Class A
Class B
Shares
Amount
Shares Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Accumulated
Loss
Deficit
Total
68,027 $ 63,166
—
—
— $
—
—
—
—
—
68,027
—
63,166
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
8,871 $
171
—
—
9,042
315
—
1 $
—
—
1
—
—
433 $
168
945
—
1,546
357
1,103
— $
—
—
—
—
—
—
(44,393)
$
(43,959)
168
945
(8,621)
(8,621)
(53,014)
(51,467)
—
—
357
1,103
(68,027)
(63,166)
—
—
17,007
2
63,164
—
—
63,166
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7,130
1
—
—
1,848
—
(1,848)
—
—
—
25
—
—
—
—
9,005
140
—
—
10
—
—
—
—
—
1
—
—
—
—
25
—
—
24,541
1
—
—
—
—
2,514
—
(2,514)
—
—
—
22
—
—
—
—
—
—
—
—
—
—
—
—
—
3
75,358
—
—
—
—
141,528
352
—
4,495
—
—
—
—
—
—
127
190
—
—
—
—
—
—
—
(153)
—
—
—
—
—
75,359
—
—
(153)
(15,668)
(15,668)
(153)
(68,682)
—
—
—
—
—
—
102
—
—
—
—
—
—
—
—
(8,281)
72,697
352
4,495
127
190
—
—
102
(8,281)
— 11,691 $
1
22,028 $
3 $
146,692 $
(51)
$
(76,963)
$
69,682
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
60
APPFOLIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash from operating activities
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Year Ended December 31,
2016
2015
2014
$
(8,281) $
(15,668) $
(8,621)
Depreciation and amortization
Purchased investment premium, net of amortization
Amortization of deferred financing costs
Loss on disposal of property, equipment and intangibles
Stock-based compensation
Lease abandonment
Change in fair value of contingent consideration
Loss on equity-method investment
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued employee expenses
Accrued expenses
Deferred revenue
Other liabilities
Net cash provided by (used in) operating activities
Cash from investing activities
Purchases of property and equipment
Additions to capitalized software
Purchases of investment securities
Sales of investment securities
Maturities of investment securities
Cash paid in business acquisition, net of cash acquired
Purchases of intangible assets
Net cash used in investing activities
Cash from financing activities
Proceeds from stock option exercises
Proceeds from issuance of restricted stock
Proceeds from issuance of options
Tax withholding for net share settlement
Principal payments under capital lease obligations
Proceeds from initial public offering, net of underwriting discounts and commissions
Payments of initial public offering costs
Payment of contingent consideration
Proceeds from issuance of debt
Principal payments on debt
Payment of debt issuance costs
Net cash provided by financing activities
61
9,935
245
63
41
4,301
161
—
—
(463)
(377)
(103)
(904)
2,223
1,148
2,685
826
11,500
(4,242)
(11,166)
(31,551)
12,559
21,337
—
(2)
(13,065)
352
—
—
(111)
(29)
—
—
—
117
(128)
—
201
6,104
(865)
456
67
1,007
—
—
—
(746)
(1,893)
(56)
(439)
1,887
1,135
1,173
994
(6,844)
(3,694)
(7,677)
(74,176)
4,100
26,136
(4,039)
(17)
(59,367)
357
141
208
—
(27)
79,570
(4,213)
(2,429)
10,253
(10,241)
(757)
72,862
3,805
—
—
116
892
—
26
19
(401)
(549)
(5)
1,831
1,088
1,011
837
426
475
(1,878)
(4,567)
—
—
—
—
(31)
(6,476)
168
—
—
—
(24)
—
—
—
—
—
—
144
APPFOLIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents
Beginning of period
End of period
Supplemental disclosure of cash flow information
Cash paid for interest
Cash paid for taxes
Noncash investing and financing activities
Purchases of property and equipment included in accounts payable and accrued expenses
Additions of capitalized software included in accrued employee expenses
Stock-based compensation capitalized for software development
Conversion of convertible preferred stock into common stock in connection with initial public offering
Year Ended December 31,
2016
2015
2014
(1,364)
6,651
(5,857)
12,063
10,699 $
5,412
12,063 $
11,269
5,412
191 $
27
797 $
91
261 $
1,220 $
458
431
—
290
166
63,166
—
—
46
—
53
—
$
$
$
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
62
NOTES TO CONSOLIDATED AUDITED FINANCIAL STATEMENTS
APPFOLIO, INC.
1. Nature of Business
AppFolio, Inc. (“we” or “AppFolio”) provides industry-specific, cloud-based software solutions for small and medium-sized businesses (“SMBs”) in the
property management and legal industries. Our platform is designed to be the system of record to automate essential business processes and the system of
engagement to enhance business interactions between our customers and their clients and vendors. Our mobile-optimized software solutions have a user-friendly
interface across multiple devices, enabling our customers to work at any time and from anywhere. Our property management software provides small and medium-
sized property managers with an end-to-end solution to their business needs, enabling them to manage properties quickly and easily in a single, integrated
environment. Our legal software provides solo practitioners and small law firms with a streamlined practice and case management solution, allowing them to
manage their practices and case load within a flexible system. We also offer optional, but often mission-critical, Value+ services, such as our professionally
designed websites, and electronic payment services which are seamlessly built into our core solutions.
2. Summary of Significant Accounting Policies
Basis
of
Presentation
and
Significant
Accounting
Policies
The accompanying Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of
America (“GAAP”).
Principles
of
Consolidation
The accompanying Consolidated Financial Statements include the operations of AppFolio, Inc. and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
Our investment in SecureDocs, Inc. (“SecureDocs”) is accounted for under the equity method of accounting as we have the ability to exert significant
influence, but do not control and are not the primary beneficiary of the entity. Our investment in SecureDocs and our share of its losses are not material
individually or in the aggregate to our financial position, results of operations or cash flows for any period presented.
Reclassifications
We reclassified certain amounts in our Consolidated Statements of Cash Flows within the cash from investing activities section in the prior year to
conform to the current year's presentation.
Use
of
Estimates
The preparation of financial statements is 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 revenues
and expenses during the reporting period. Actual results could differ materially from those estimates. On an ongoing basis, management evaluates its estimates
based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Segment
Information
Our chief operating decision maker reviews financial information presented on an aggregated and consolidated basis, together with revenue information
for our core solutions, Value+ and other service offerings, principally to make decisions about how to allocate resources and to measure our performance.
Accordingly, management has determined that we have one reportable and operating segment.
Concentrations
of
Credit
Risk
Financial instruments that potentially subject us to credit risk consist principally of cash, accounts receivable, investment securities and notes receivable.
At times, we maintain cash balances at financial institutions in excess of amounts insured by United States government agencies or payable by the United States
government directly. We place our cash with high credit, quality financial institutions. We invest in investment securities with a minimum rating of A by Standard
& Poor's and A-1 by Moody's and regularly monitor our investment security portfolio for changes in credit ratings.
63
Concentrations of credit risk with respect to accounts receivable and revenue are limited due to a large, diverse customer base. No individual customer
represented 10% or more of accounts receivable as of December 31, 2016 and 2015 or revenue for the years ended December 31, 2016, 2015 and 2014.
Fair
Value
Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Accounting
Standard Codification (“ASC”) 820, Fair
Value
Measurements
and
Disclosures
(“ASC 820”), describes a fair value hierarchy based on three levels of inputs, of
which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
Level
1
- Quoted prices in active markets for identical assets or liabilities or funds.
Level
2
- Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities.
Level
3
- Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Cash
and
Cash
Equivalents
and
Restricted
Cash
We consider all highly liquid investments, readily convertible to cash, and which have a remaining maturity date of three months or less at the date of
purchase, to be cash equivalents. Cash and cash equivalents are recorded at fair value and consist primarily of bank deposits and money market funds.
Restricted cash of $0.4 million as of December 31, 2016 and 2015, is comprised of certificates of deposits relating to collateral requirements for customer
automated clearing house (“ACH”) and credit card chargebacks and minimum collateral requirements for our insurance services, which are recorded in other long
term assets.
Investment
Securities
Our investment securities currently consist of corporate bonds, U.S. government agency securities (referred to as "Agency Securities") and certificates of
deposit. We classify investment securities as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. All
investments are recorded at estimated fair value. Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive
income (loss), a component of stockholders’ equity. We classify our investments as current when the period of time between the reporting date and the contractual
maturity is twelve months or less and as noncurrent when the period of time between the reporting date and the contractual maturity is more than twelve months.
We evaluate our investments to assess whether those with unrealized loss positions are other than temporarily impaired. We consider impairments to be
other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Declines in
value judged to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net in the
Consolidated Statements of Operations.
Accounts
Receivable
Accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. The allowance for doubtful accounts is based on
historical loss experience, the number of days that receivables are past due, and an evaluation of the potential risk of loss associated with delinquent accounts.
Accounts receivable considered uncollectable are charged against the allowance for doubtful accounts when identified. We do not have any off-balance sheet credit
exposure related to our customers. As of December 31, 2016, 2015 and 2014, our allowance for doubtful accounts was not material.
64
Property
and
Equipment
Property and equipment is stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful
lives of assets. The estimated useful lives of our property and equipment are as follows:
Data center and computer equipment
Asset Type
Furniture and fixtures
Office equipment
Leasehold improvements
Depreciation Period
3 years
7 years
2 to 5 years
Shorter of remaining life of lease or asset life
Repair and maintenance costs are expensed as incurred. Renewals and improvements are capitalized. Assets disposed of or retired are removed from the
cost and accumulated depreciation accounts and any resulting gain or loss is reflected in our results of operations.
Leases
Leases are evaluated and classified as either operating or capital leases. All of our office space leases are operating leases.
Rent expense under operating leases is recognized on a straight-line basis over the lease term. The difference between recognized rent expense and the
rent payment amount is recorded as an increase or decrease in deferred rent liability. If the lease has tenant allowances from the lessor for certain improvements
made to the leased property, these allowances are capitalized as leasehold improvements. Tenant allowances and rent holidays in lease agreements are recognized
as a deferred rent credit, which is amortized on a straight-line basis over the lease term as a reduction of rent expense.
Internal-Use
Software
We account for the costs of computer software obtained or developed for internal use in accordance with ASC 350 ,
Intangibles-Goodwill
and
Other
(“ASC 350”). These include costs incurred in connection with the development of our internal-use software solutions when (i) the preliminary project stage is
completed, (ii) management has authorized further funding for the completion of the project and (iii) it is probable that the project will be completed and
performed as intended. These capitalized costs include personnel and related expenses for employees who are directly associated with and who devote time to
internal-use software projects and, when material, interest costs incurred during the development. Capitalization of these costs ceases once the project is
substantially complete and the software is ready for its intended purpose. Costs incurred for significant upgrades and enhancements to our software solutions are
also capitalized. Costs incurred for post-configuration training, maintenance and minor modifications or enhancements are expensed as incurred. Capitalized
software development costs are amortized using the straight-line method over an estimated useful life of three years . We do not transfer ownership of our
software, or lease our software, to third parties.
Intangible
Assets
Intangible assets primarily consist of customer and partner relationships, acquired technology, trademarks, domain names and patents, which are recorded
at cost, less accumulated amortization. We determine the appropriate useful life of our intangible assets by performing an analysis of expected cash flows of the
acquired assets. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the
economic benefits are consumed.
Impairment
of
Long-Lived
Assets
We assess the recoverability of our long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may not be
recoverable. Such events or changes in circumstances may include a significant adverse change in the extent or manner in which a long-lived asset is being used, a
significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, an accumulation of costs significantly in
excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate
continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise
disposed of significantly before the end of its previously estimated useful life. Impairment testing is performed at an asset level that represents the lowest level for
which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We assess recoverability of long-lived assets by determining
whether the carrying value of an asset can be recovered through projected undiscounted cash flows over its remaining life. If the carrying value of an asset exceeds
the forecasted undiscounted cash flows, an impairment loss is recognized, measured as the amount by which the carrying value exceeds estimated fair value. An
impairment loss is charged to operations in the period in which management determines such
65
impairment. There were no impairment charges related to the identified long-lived assets for the years ended December 31, 2016, 2015 and 2014.
Business
Combinations
The results of a business acquired in a business combination are included in our consolidated financial statements from the date of acquisition. We allocate
the purchase price, including the fair value of contingent consideration, to the identifiable assets and liabilities of the acquired business at their acquisition date fair
values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill.
Determining the fair value of assets acquired and liabilities assumed requires management to make significant judgments and estimates, including the
selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies.
Acquisition-related transaction costs are not included as a component of consideration transferred, but are accounted for as an operating expense in the
period in which the costs are incurred.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. We test goodwill for impairment
in accordance with the provisions of ASC 350. Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in
circumstances indicate that goodwill might be impaired. Events or changes in circumstances which could trigger an impairment review include a significant
adverse change in legal factors or in the business climate, unanticipated competition, loss of key personnel, significant changes in the use of the acquired assets or
our strategy, significant negative industry or economic trends, or significant underperformance relative to expected historical or projected future results of
operations.
ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a
determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or
circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment
testing is not required. However, if an entity concludes otherwise, then it is required to perform the first of a two-step impairment test.
The first step involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds
book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value,
then the carrying amount of the goodwill is compared with its implied fair value. The estimate of implied fair value of goodwill may require valuations of certain
internally generated and unrecognized intangible assets. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to the excess.
We have one reporting unit and we test for goodwill impairment annually during the fourth quarter of the calendar year. At December 31, 2016 and 2015,
we determined our goodwill of $6.7 million was not impaired as the fair value of our reporting unit significantly exceeded its carrying value based on the results of
our annual impairment tests.
Revenue
Recognition
We primarily generate revenue from our customers for subscriptions to access to our core solutions and Value+ services for our cloud-based property
management and legal software solutions. Subscription fees for our core solutions are charged on a per-unit per-month basis for our property management software
solution and on a per-user per-month basis for our legal software solution. We recognize subscription revenue on a straight-line basis over the terms of the
subscription agreements, which range from one month to one year. We generally invoice our customers for subscription services in monthly, quarterly or annual
installments, typically in advance of the subscription period. Any revenues which are billed in advance are recorded as deferred revenue.
We charge our customers on a subscription basis for our core solutions and many of our Value+ services. Our subscription fees are designed to scale to the
size of our customers’ businesses. We also charge our customers usage-based fees for using certain Value+ services, including electronic payment processing.
Usage-based fees are charged on a flat fee per transaction basis with no minimum usage commitments. We recognize revenue for usage-based services in the
period the service is rendered. We generally invoice our customers for usage-based services on a monthly basis for services rendered in the preceding month with
the exception of fees for electronic payment processing, which are generally paid by the clients of our customers at the time the electronic payment is processed.
66
Our legal software core solution offers their customers a free-trial period to try our software. Revenue is not recognized until the free-trial period is complete
and the customer has entered into a subscription agreement with us.
Our customers do not have rights to the underlying software code of our solutions, and accordingly, the Company's revenue arrangements are outside the
scope of the software revenue recognition guidance, and recognized in accordance with Staff Accounting Bulletin ("SAB") Topic 13. We recognize revenue when
(i) there is persuasive evidence of an arrangement, (ii) our software solutions have been made available or delivered, or services have been performed, (iii) the
amount of fees is fixed or determinable, and (iv) collectability is reasonably assured. Evidence of an arrangement generally consists of either a signed customer
contract or an online click-through agreement. We consider that delivery of a solution or website has commenced once we provide the customer with access to use
the solution or website. Fees are fixed based on rates specified in the subscription agreements, which do not provide for any refunds or adjustments. If collectability
is not considered reasonably assured, revenue is deferred until the fees are collected. Some of our subscription agreements contain minimum cancellation fees in
the event that the customer cancels the subscription early.
For multiple-deliverable arrangements, we first assess whether each deliverable has value to the customer on a standalone basis. We have determined that the
subscription services related to our core solutions have value on a standalone basis because, once access is provided, they are fully functional and do not require
additional development, modification or customization. Our Value+ services have value on a standalone basis as the services are sold separately by other vendors
and are not essential to the functionality of the other deliverables. Usage-based services have value to the customer on a standalone basis as they are sold separately
by other vendors and are not essential to the functionality of the other deliverables. The usage-based services are typically entered into subsequent to the initial
customer arrangement. In multiple-deliverable arrangements that contain usage-based services, the customer has the option to purchase the services on an ad hoc
basis, and payments are made when the services are rendered.
Based on the standalone value of the deliverables, and since our customers do not have a general right of return, we allocate revenue among the separate non-
contingent deliverables in a multiple-deliverable arrangement under the relative selling price method using the selling price hierarchy within the revenue
accounting guidance (ASU 2009-13, Revenue
Recognition
, Topic 605). The selling price hierarchy requires the selling price of each deliverable in a multiple-
deliverable arrangement to be based on, in descending order, (i) vendor-specific objective evidence of fair value, or VSOE, (ii) third-party evidence of fair value,
or TPE, or (iii) management’s best estimate of the selling price, or BESP.
For our property manager core solution, we have established VSOE based on our consistent historical pricing and discounting practices for customer
renewals where the customer only subscribes to our core solutions, and based on the price established by management for elements not yet being sold separately. In
establishing VSOE, the substantial majority of the selling prices for our core solutions fall within a reasonably narrow pricing range, and the price once established
by management for elements not yet being sold separately are not offered at a discount. For our legal software core solution, we utilize BESP to allocate revenue
among the separate non-contingent deliverables, as we have been unable to establish VSOE due to our discounting practices, and we have been unable to obtain
TPE.
After the contract value is allocated to each non-contingent deliverable in a multiple-deliverable arrangement based on the relative selling price, revenue is
recognized for each deliverable based on the pattern in which the revenue is earned. For subscriptions services, revenue is recognized on a straight-line basis over
the subscription period. For usage-based services, revenue is recognized as the services are rendered. For one-time services, revenue is recognized upon completion
of the related services. Sales commissions and other incremental costs to acquire contracts are expensed as incurred.
Cost
of
Revenue
Cost of revenue consists of personnel-related costs (including salaries, incentive-based compensation, benefits, and stock-based compensation) for our
employees focused on customer service and the support of our operations, platform infrastructure costs (such as data center operations and hosting-related costs),
fees paid to third-party service providers, payment processing fees, and allocated shared costs. We typically allocate shared costs across our organization based on
headcount within the applicable part of our organization. Cost of revenue excludes depreciation of property and equipment, and amortization of capitalized
software development costs and intangible assets.
Sales
and
Marketing
Sales and marketing expense consists of personnel-related costs (including salaries, sales commissions, incentive-based compensation, benefits, and
stock-based compensation) for our employees focused on sales and marketing, costs associated with sales and marketing activities, and allocated shared costs.
Marketing activities include advertising, online lead generation, lead nurturing, customer and industry events, industry-related content creation and collateral
creation. Sales commissions and other incremental costs to acquire customers and grow adoption and utilization of our Value+ services by new and existing
customers are expensed as incurred. We focus our sales and marketing efforts on generating awareness of our software solutions, creating sales leads, establishing
and promoting our brands, and cultivating an educated community of successful and vocal customers.
67
Advertising expenses were $3.6 million , $3.6 million and $2.1 million for the years ended December 31, 2016, 2015 and 2014, respectively, and are expensed as
incurred.
Research
and
Product
Development
Research and product development expense consists of personnel-related costs (including salaries, incentive-based compensation, benefits, and stock-
based compensation) for our employees focused on research and product development, fees for third-party development resources, and allocated shared costs. Our
research and product development efforts are focused on enhancing the ease of use and functionality of our existing software solutions by adding new core
functionality, Value+ services and other improvements, as well as developing new products. We capitalize the portion of our software development costs that
meets the criteria for capitalization. Amortization of software development costs is included in depreciation and amortization expense.
General
and
Administrative
General and administrative expense consists of personnel-related costs (including salaries, incentive-based compensation, benefits, and stock-based
compensation) for employees in our executive, finance, information technology, or IT, human resources, legal and administrative organizations. In addition,
general and administrative expense includes fees for third-party professional services (including consulting, legal and audit services), other corporate expenses, and
allocated shared 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.
Stock-Based
Compensation
We account for stock-based compensation awards granted to employees and directors by recording compensation expense based on the awards’ grant-date
estimated fair value, in accordance with ASC 718, Compensation-Stock
Compensation
(“ASC 718”) over the vesting period. We estimate the fair value of
restricted stock awards ("RSA"), restricted stock units ("RSU") and performance based RSUs ("PSU") based on the fair value of our common stock on the date of
grant. We estimate the fair value of stock options and performance based stock options ("PSO") using the Black-Scholes option-pricing model. Determining the
fair value of stock options under this model requires highly subjective assumptions, including the fair value of the underlying common stock, the risk-free interest
rate, the expected term of the award, the expected volatility of the price of our common stock, and the expected dividend yield of our common stock. These
estimates involve inherent uncertainties and the application of management’s judgment. If we had made different assumptions, our stock-based compensation
expense could have been materially different.
Prior to our IPO, there was no public market for our common stock and our board of directors determined the fair value of our common stock at the time
of the grant of stock options and restricted stock awards by considering a number of objective and subjective factors, including our actual operating and financial
performance, market conditions and performance of comparable publicly traded companies, developments and milestones in our company, the likelihood of
achieving a liquidity event and transactions involving our convertible preferred stock, among other factors. The fair value of the underlying common stock was
determined by our board of directors in accordance with applicable elements of the practice aid issued by the American Institute of Certified Public Accountants
Valuation
of
Privately
Held
Company
Equity
Securities
Issued
as
Compensation
. In valuing our common stock at various dates, our board of directors determined
our equity value generally using the income approach and the market comparable approach valuation methods. Once we determined our equity value, we used an
option pricing method or the Probability Weighted Expected Return Method to allocate the equity value to preferred stock and common stock. Application of these
approaches and methods involves the use of estimates, judgments and assumptions, such as future revenue, expenses and cash flows, selections of comparable
companies, probabilities and timing of exit events, and other factors.
Since our IPO in June 2015, the fair value of our common stock is based on the closing price of our common stock, as quoted on the NASDAQ Global
Market, on the date of grant and we utilized the following assumptions and estimates when utilizing the Black-Sholes option-pricing model when calculating the
fair value of our options and PSOs:
▪
Risk-Free
Interest
Rate
- The risk free interest rate assumption is based upon observed interest rates on United States government securities
appropriate for the expected term of the stock option.
▪ Expected
Term
-
Given we do not have sufficient exercise history to develop reasonable expectations about future exercise patterns and post-vesting
employment termination behavior, we determine the expected term using the
68
simplified method, which is calculated as the midpoint of the stock option vesting term and the expiration date of the stock option.
▪ Expected
Volatility
- We determine the expected volatility based on the historical average volatilities of publicly traded industry peers. We intend to
continue to consistently apply this methodology using the same or similar public companies until a sufficient amount of historical
information regarding the volatility of our own common stock price becomes available, unless circumstances change such that the
identified companies are no longer similar to us, in which case, more suitable companies whose stock prices are publicly available would
be utilized in the calculation.
▪ Expected
Dividend
Yield
- We have not paid and do not anticipate paying any cash dividends in the foreseeable future and, therefore, we use an
expected dividend yield of zero .
Forfeiture
Rate
In addition to the assumptions used in the Black-Scholes option-pricing model, we also estimate a forfeiture rate to calculate our stock-based
compensation expense for our options and awards. The forfeiture rate is based on an analysis of actual forfeitures. We will continue to evaluate the appropriateness
of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors. Changes in the estimated forfeiture rate can have a
significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the estimated forfeiture rate is
changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to our stock-based
compensation expense recognized in our consolidated financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an
adjustment is made that will result in an increase to our stock-based compensation expense recognized in our consolidated financial statements.
Restricted
Stock
Units
In September 2015, we began granting restricted stock units ("RSUs"). The vesting of RSUs is in equal tranches over four annual periods. The RSUs are
expensed on a straight-line basis over the vesting period. The shares underlying the RSU grants are not issued and outstanding until the applicable vesting date.
Performance
Based
Equity
Awards
In 2016, we began granting PSOs and PSUs. The fair value of the PSOs are estimated using the Black-Scholes option-pricing model and the PSUs fair
value is based on the fair value of our common stock on the date of grant. The vesting of the PSOs and PSUs is based on achievement of a pre-established free cash
flow performance metric and continued employment throughout the performance period. We recognize expense for the PSOs and PSUs based on the grant date fair
value to the extent vesting of the award is probable. Adjustments to compensation expense are made each period based on changes in our estimate of the number of
PSOs and PSUs that are probable of vesting. PSOs and PSUs will vest upon achievement of the performance metric once such calculation is reviewed and
approved by the Board of Directors.
Income
Taxes
We account for income taxes in accordance with ASC 740, Income
Taxes
(“ASC 740”). ASC 740 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred
income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the consolidated statements of
operations in the period that includes the enactment date. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will
not be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in our consolidated financial statements from such positions are then
measured based on the largest benefit that has a greater than 50% likelihood of being realized. We recognize interest and penalties accrued with respect to
uncertain tax positions, if any, in our provision for income taxes in the consolidated statements of operations.
69
Net
Loss
per
Share
The following table presents a reconciliation of our weighted average number of Class A and Class B common shares used to compute net loss per share
(in thousands):
Weighted average shares outstanding
Less: Weighted average unvested restricted shares subject to repurchase
Weighted average number of shares used to compute basic and diluted net loss per share
Year Ended December 31,
2016
33,639
78
2015
21,486
150
33,561
21,336
2014
8,998
241
8,757
Because we reported net losses for all periods presented, all potentially dilutive common stock equivalents are antidilutive for those periods and have been
excluded from the calculation of net loss per share. The diluted net loss per a common share were the same for Class A and Class B common shares because they
are entitled to the same liquidation and dividend rights.
The following table presents the number of anti-dilutive shares excluded from the calculation of diluted net loss per share as of December 31, 2016 and
2015 (in thousands):
Options to purchase common stock
Unvested restricted stock awards
Unvested restricted stock units
Contingent restricted stock units (1)
Total shares excluded from net loss per share attributable to common stockholders
December 31,
2016
2015
1,718
46
496
34
2,294
1,171
120
17
49
1,357
(1) The reported shares are based on a fixed price RSU commitment for which the number of shares has not been determined at the grant date and
performance based RSUs which have met the performance metric but, have not be issued. The RSUs disclosed with a fixed price in the table above are based on
the closing price of our stock at December 31, 2016 divided by the future fixed price commitment to issue shares in the future. For additional information regarding
the RSUs granted refer to Note 11, Stock-Based
Compensation
.
Recent
Accounting
Pronouncements
Under the Jumpstart our Business Startups Act (the “JOBS Act”), we meet the definition of an emerging growth company. We have irrevocably elected to
opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue
from
Contracts
with
Customers
(Topic 606) (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of
promised goods or services to customers. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue
from
Contracts
with
Customers
(Topic
606):
Principal
versus
Agent
Considerations
(“ASU 2016-08”); ASU No. 2016-10, Revenue
from
Contracts
with
Customers
(Topic
606):
Identifying
Performance
Obligations
and
Licensing
(“ASU 2016-10”); ASU No. 2016-12, Revenue
from
Contracts
with
Customers
(Topic
606):
Narrow-Scope
Improvements
and
Practical
Expedients
(“ASU 2016-12”); and ASU No. 2016-20, Technical
Corrections
and
Improvements
to
Topic
606,
Revenue
from
Contracts
with
Customers
(“ASU 2016-20”). The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09
(collectively, the “new revenue standards”). The new revenue standards will be effective for the Company on January 1, 2018. Early adoption is permitted as of
January 1, 2017. The Company expects to adopt ASU 2014-09 on January 1, 2018. The standard permits the use of either a retrospective or cumulative effect
transition method. We have not yet selected a transition method and we are currently evaluating the effect that the new revenue standards will have on our
consolidated financial statements and related disclosures. Based on our preliminary assessments, we do not expect there will be a material impact to our revenues
upon adoption. We are continuing to evaluate the impact to our revenues related to our pending adoption of Topic 606 and our preliminary assessments are subject
to change. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to recognition of costs
related to obtaining customer contracts. Under current GAAP, sales commissions and other incremental costs to acquire contracts are expensed as incurred. Under
the new revenue standards, such costs will be deferred and
70
recognized over a period of time. We are still evaluating the new revenue standards and assessing the impact this identified difference in accounting treatment may
have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases
(Topic 842) ("ASU 2016-02"). Under ASU 2016-02, an entity will be required to recognize
right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting
guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about
leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public
companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and
requires a modified retrospective adoption, with early adoption permitted. We anticipate this standard will have a material impact on our consolidated financial
statements. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to our accounting and
reporting of our operating leases on our balance sheet.
In March 2016, the FASB issued ASU No. 2016-09, Compensation
-
Stock
Compensation
(Topic
781),
Improvements
to
Employee
Share-Based
Payment
Accounting
("ASU 2016-09"), which amends and simplifies the accounting for share-based payment awards in three areas; (1) income tax consequences, (2)
classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. ASU 2016-19 also provides an accounting policy
election to account for forfeitures as they occur. For public companies, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and
interim periods within those annual periods. We do not expect the adoption of ASU 2016-09 on January 1, 2017, to have a material impact on our consolidated
financial statements due to the full valuation allowance on our deferred tax assets. We have elected to continue to estimate forfeitures expected to occur to
determine the amount of compensation cost to be recognized each period.
In June 2016, the FASB issued ASU No. 2016-13, Financial
Instruments
-
Credit
Losses
(Topic
326):
Measurement
of
Credit
Losses
on
Financial
Instruments
("ASU 2016-13"), which amends the current accounting guidance and requires the measurement of all expected losses based on historical experience,
current conditions and reasonable and supportable forecasts. This guidance amends the accounting for credit losses for available-for-sale securities and purchased
financial assets with credit deterioration. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual
periods. Early adoption is permitted for any interim or annual period after December 15, 2018. We do not expect the adoption of this guidance to have a material
impact on our financial condition, results of operations, cash flows or disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement
of
Cash
Flows
(Topic
230):
Classification
of
Certain
Cash
Receipts
and
Cash
Payments
("ASU 2016-15"), which provides cash flow statement classification guidance for debt prepayment or debt extinguishment costs; settlement of zero-coupon debt
instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent
consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life
insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization
transactions; and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We have not yet determined
the effect of this guidance on our statement of cash flows.
In October 2016, the FASB issued ASU No. 2016-16, Income
Taxes
(Topic
740):
Intra-Entity
Transfers
of
Assets
Other
Than
Inventory
(ASU 2016-16),
which changes the timing of when certain intercompany transactions are recognized within the provision for income taxes. ASU 2016-16 is effective on January 1,
2018. Early adoption is permitted. We have not yet determined the effect of this guidance on our financial condition, results of operations, cash flows or
disclosures.
In November 2016, the FASB issued ASU 2016-18, Statement
of
Cash
Flows
(Topic
230):
Restricted
Cash
(ASU 2016-18), which provides
amendments to current guidance to address the classification and presentation of changes in restricted cash in the statement of cash flows. ASU 2014-09 is
effective on January 1, 2018 and early adoption is permitted. We are still evaluating the effect of this guidance on our financial statements, although we expect that
adoption will change the current presentation of restricted cash on our statement of cash flows as well as require additional disclosures to reconcile cash and cash
equivalents per the balance sheet to cash and cash equivalents on the statement of cash flows.
71
3. Acquisition of RentLinx
On April 1, 2015, we completed the acquisition of all of the membership interests of RentLinx, LLC (“RentLinx”), a San Diego, California-based
company focused on developing a software platform that allows customers to advertise rental houses and apartments online. We acquired RentLinx to expand the
Value+ services offered to our property manager customers, giving them the ability to better spend, track and optimize their marketing investments.
We paid the sellers $4.1 million , of which $0.5 million was placed into escrow to cover potential indemnification claims relating to breaches of
representations, warranties and covenants. We also agreed to pay an additional amount of approximately $1.1 million to certain individuals subject to their
continued employment with us, which was recorded as an expense over the service period and was paid in October 2015. All transaction costs were expensed in the
period incurred and were approximately $0.3 million .
The goodwill related to our RentLinx acquisition is attributable to synergies expected from the acquisition and assembled workforce. The goodwill is
deductible for income tax purposes.
The following table summarizes the purchase price allocation (in thousands):
Net current assets
Intangible assets:
Developed technology
Partner relationships
Customer and website relationships
Other intangible assets
Goodwill
Purchase consideration, paid in cash
$
$
Amount
Estimated Useful Life
114
810
680
560
170
1,739
4,073
6 years
3 years
5 years
3 years
Indefinite
As of the date of acquisition, we did not provide pro forma or current period financial information as it was not material to our Consolidated Financial
Statements.
72
4. Investment Securities and Fair Value Measurements
Investment
Securities
Investment securities classified as available-for-sale consisted of the following at December 31, 2016 and 2015 (in thousands):
December 31, 2016
Amortized Cost
Gross Unrealized Gains
Corporate bonds
Agency securities
Certificates of deposit
Total available-for-sale investment securities
$
$
$
30,492 $
6,248
5,472 $
42,212 $
Gross Unrealized Losses Estimated Fair Value
30,445
(56)
$
9 $
—
16 $
25 $
(20)
—
(76)
$
6,228
5,488
42,161
Corporate bonds
Agency securities
Certificates of deposit
Total available-for-sale investment securities
December 31, 2015
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Estimated Fair
Value
$
$
30,568 $
8,012
6,225
44,805 $
— $
—
—
— $
(126) $
(12)
(15)
(153) $
30,442
8,000
6,210
44,652
We had certain investment securities in an unrealized loss position at December 31, 2016 and 2015, and none of these securities have been in a continuous
unrealized loss position for more than 12 months. These unrealized loss positions are considered temporary and there were no impairments considered "other-than-
temporary" as it is more likely than not we will hold the securities until maturity or a recovery of the cost basis.
At December 31, 2016 and 2015, the contractual maturities of our investments did not exceed 36 months . The fair values of available-for-sale
investments, by remaining contractual maturity, are as follows (in thousands):
December 31, 2016
December 31, 2015
Amortized Cost
Estimated Fair
Value
Amortized Cost
Estimated Fair
Value
Due in 1 year or less
Due after 1 year through 3 years
Total available-for-sale investment securities
15,475 $
26,737
42,212 $
15,473 $
26,688
42,161 $
10,249 $
34,557
44,806 $
10,235
34,417
44,652
$
$
73
During the years ended December 31, 2016 and 2015, we had sales and maturities (which include calls) of investment securities, as follows (in
thousands):
Agency securities
Corporate bonds
Treasury bills
Certificates of deposit
Agency securities
Corporate bonds
Gross Realized Gains Gross Realized Losses
$
5
— $
Year Ended December 31, 2016
Gross Proceeds
from Sales
Gross Proceeds from
Maturities
7
—
—
12 $
$
—
—
—
3,005
7,554
2,000
—
— $
12,559 $
Year Ended December 31, 2015
11,557
2,480
6,055
1,245
21,337
Gross Realized Gains Gross Realized Losses
$
—
(2)
$
$
21
21 $
—
(2)
$
Gross Proceeds from
Sales
Gross Proceeds from
Maturities
1,500
2,600
4,100 $
7,500
18,636
26,136
For the years ended December 31, 2016 and 2015, we received interest income net of the amortization and accretion of the premium and discount of $0.5
million and $0.2 million , respectively. We did not have investment securities during the year ended December 31, 2014.
Fair
Value
Measurements
Recurring
Fair
Value
Measurements
Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 and 2015, by level within
the fair value hierarchy (in thousands):
Cash equivalents:
Money market funds
Available-for-sale investment securities:
Corporate bonds
Agency securities
Certificates of deposit
Total Assets
Level 1
Level 2
Level 3
Total Fair
Value
December 31, 2016
4,849 $
— $
— $
4,849
—
—
5,488
10,337 $
30,445
6,228
—
36,673 $
—
—
—
— $
30,445
6,228
5,488
47,010
$
$
74
Cash equivalents:
Money market funds
Available-for-sale investment securities:
Corporate bonds
Agency securities
Certificates of deposit
Total Assets
Level 1
Level 2
Level 3
Total Fair
Value
December 31, 2015
$
$
7,102 $
— $
— $
7,102
—
—
6,210
13,312 $
30,442
8,000
—
38,442 $
—
—
—
— $
30,442
8,000
6,210
51,754
The carrying amounts of cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate fair value because of
the short maturity of these items.
There were no changes to our valuation techniques used to measure asset and liability fair values on a recurring basis during the year ended December 31,
2016. The valuation techniques for the items in the table above are as follows:
Cash
Equivalents
As of December 31, 2016 and 2015, cash equivalents include cash invested in money market funds. Market prices are based on market prices for identical
assets.
Available-for-Sale
-
Investment
Securities
The fair value of our investment securities is based on pricing determined using inputs other than quoted prices that are observable either directly or
indirectly such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or
debt, broker and dealer quotes, as well as other relevant economic measures.
Contingent
Consideration
Contingent consideration payable in connection with acquisitions is measured at fair value each period and is based on significant inputs not observable in
the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions we believe would
be made by a market participant. We assessed these estimates on an on-going basis as additional data impacting the assumptions became available. Changes in the
fair value of contingent consideration related to updated assumptions and estimates were recognized within general and administrative expense in the Consolidated
Statements of Operations. We determined the fair value of the contingent consideration using the probability weighted discounted cash flow method. The
significant inputs used in the fair value measurement of contingent consideration were the probability of achieving revenue thresholds and determining discount
rates.
The following table summarizes the changes in contingent consideration liability (in thousands):
Fair value, at beginning of period
Change in fair value recorded in general and administrative expenses
Payment of contingent consideration
Fair value, at end of period
Non-Recurring
Fair
Value
Measurements
Year Ended December 31,
2015
2014
$
2,429 $
2,403
—
(2,429)
26
—
$
— $
2,429
Certain assets, including goodwill, intangible assets and our note receivable with SecureDocs are also subject to measurement at fair value on a non-
recurring basis using Level 3 measurement when they are deemed to be impaired as a result of an impairment review. For the years ended December 31, 2016 and
2015, no impairments were identified on those assets required to be measured at fair value on a non-recurring basis.
75
5. Property and Equipment
Property and equipment consists of the following as of December 31, 2016 and 2015 (in thousands):
Data center and computer equipment
Furniture and fixtures
Office equipment
Leasehold improvements
Construction in process
Gross property and equipment
Less: Accumulated depreciation
Total property and equipment, net
December 31,
2016
2015
$
4,913 $
2,465
726
4,035
—
12,139
(5,062)
$
7,077 $
3,923
1,723
434
878
2,315
9,273
(3,166)
6,107
Depreciation expense for property and equipment totaled $2.3 million , $1.4 million , and $0.9 million for the years ended December 31, 2016, 2015 and
2014, respectively.
As of December 31, 2016, there was no property and equipment under capital lease. As of December 31, 2015, capital leases were included in property
and equipment with a cost basis of $82,000 . Accumulated depreciation on property and equipment under capital leases as of December 31, 2015 was $57,000 .
6. Internal-Use Software Development Costs
Internal-use software development costs were as follows (in thousands):
Internal use software development costs, gross
Less: Accumulated amortization
Internal use software development costs, net
December 31,
2016
2015
$
$
33,545 $
(18,006)
15,539 $
21,894
(11,872)
10,022
Capitalized software development costs were $11.8 million , $8.0 million and $4.6 million for the years ended December 31, 2016 , 2015 and 2014 ,
respectively. Amortization expense with respect to software development costs totaled $6.2 million , $3.5 million and $2.0 million for the years ended
December 31, 2016, 2015, and 2014, respectively.
Future amortization expense with respect to capitalized software development costs as of December 31, 2016 is estimated as follows (in thousands):
Years Ending December 31,
2017
2018
2019
2020
Total amortization expense
$
$
7,510
5,645
2,367
17
15,539
76
7. Intangible Assets and Goodwill
Intangible assets consisted of the following as of December 31, 2016 and 2015 (in thousands, except years):
$
$
$
Customer relationships
Technology
Trademarks
Partner relationships
Non-compete agreements
Domain names
Patents
Customer relationships
Technology
Trademarks
Partner relationships
Non-compete agreements
Domain names
Patents
Gross Carrying
Value
Accumulated
Amortization
Net Carrying
Value
Weighted
Average Useful
Life in Years
December 31, 2016
790 $
4,811
930
680
40
273
284
(392) $
(3,070)
(416)
(397)
(23)
(241)
(164)
7,808 $
(4,703) $
398
1,741
514
283
17
32
120
3,105
5.0
6.0
9.0
3.0
3.0
5.0
5.0
5.9
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Weighted Average Useful
Life in Years
December 31, 2015
790 $
4,811
930
680
40
274
286
(234) $
(2,268)
(293)
(170)
(10)
(199)
(121)
$
7,811 $
(3,295) $
A summary of the activity within our intangible assets since December 31, 2015 is as follows (in thousands):
Intangible assets, net at December 31, 2015
Additions
Dispositions
Amortization
Intangible assets, net at December 31, 2016
77
556
2,543
637
510
30
75
165
4,516
$
$
5.0
6.0
9.0
3.0
3.0
5.0
5.0
5.9
4,516
2
(5)
(1,408)
3,105
Amortization expense totaled $1.4 million , $1.3 million and $0.9 million for the twelve months ended December 31, 2016, 2015 and 2014, respectively.
Amortization expense for each of the five fiscal years through December 31, 2021 and thereafter is estimated as follows (in thousands):
Years Ending December 31,
2017
2018
2019
2020
2021
Thereafter
Total amortization expense
The change in the carrying amount of goodwill is as follows (in thousands):
Goodwill as of December 31, 2014
Acquisition of RentLinx
Goodwill as of December 31, 2015
Activity during fiscal 2016
Goodwill as of December 31, 2016
8. Long-term Debt
Credit
Agreement
$
$
$
$
1,378
928
352
259
123
65
3,105
4,998
1,739
6,737
—
6,737
On March 16, 2015, we entered into a credit facility (the “Original Credit Agreement”) comprised of a $10.0 million term loan (the “Term Loan”), and a
$2.5 million revolving line of credit ("Original Revolving Agreement") with Wells Fargo. In March 2015, we borrowed $10.0 million under the Term Loan and on
July 16, 2015, we made an optional prepayment in full of the Term Loan.
On October 9, 2015, we entered into Amendment Number One to the Original Credit Agreement, which amended the terms of the Original Credit
Agreement, dated March 16, 2015, entered into by and among us, Wells Fargo, as administrative agent, and the lenders that are parties thereto (as amended, the
“Credit Agreement”).
Under the terms of the Credit Agreement, the lenders made available to us a $25.0 million revolving line of credit (the “Revolving Facility”). Subject to
customary terms and conditions, we can seek to increase the principal amount of indebtedness available under the Credit Agreement by up to $10.0 million , in the
form of revolving commitments or term loan debt, although the lenders are under no obligation to make additional amounts available to us. Borrowings under the
Revolving Facility are subject to the satisfaction of customary conditions.
Borrowings under the Revolving Facility bear interest at a fluctuating rate per annum equal to, at our option, (i) a base rate equal to the highest of (a) the
federal funds rate plus 1/2 of 1%, (b) the London Interbank Offered Rate (“LIBOR”) for a one-month interest period plus 1% and (c) the rate of interest in effect
for such day as publicly announced from time to time by Wells Fargo as its prime rate, in each case plus an applicable margin of 1.5% , or (ii) LIBOR for the
applicable interest period plus an applicable margin of 2.5% . Interest is due and payable monthly. We are also required to pay a commitment fee equal to 0.25%
per annum of the unused portion of the Revolving Facility if revolver usage is above $10.0 million , or 0.375% per annum of the unused portion of the Revolving
Facility if revolver usage is less than or equal to $10.0 million .
The Revolving Facility matures on October 9, 2020; however, we can make payments on, and cancel in full, the Revolving Facility at any time without
premium or penalty.
The Credit Agreement contains customary affirmative, negative and financial covenants. The affirmative covenants require us to, among other things,
disclose financial and other information to the lenders, maintain its business and properties, and maintain adequate insurance. The negative covenants restrict us
from, among other things, incurring additional indebtedness,
78
prepaying certain types of indebtedness, encumbering or disposing of its assets, making fundamental changes to our corporate structure, and making certain
dividends and distributions. The financial covenants require us to maintain liquidity of not less than $12.5 million and, to the extent liquidity is determined to be
below $25.0 million , to comply with a maximum senior leverage ratio. At December 31, 2016, we were in compliance with the financial covenants of the Credit
Agreement.
As of December 31, 2016, there was no outstanding balance and as of December 31, 2015, there was an outstanding balance of $12,000 under the Credit
Agreement.
Debt
Financing
Costs
Debt financing costs are deferred and amortized, using the straight-line method for costs related to the Revolving Facility. In conjunction with the
amendment to our Credit Agreement for the Revolving Facility, we incurred costs to process the amendment and we capitalized additional costs of $0.2 million .
These additional costs were added to the unamortized debt financing costs from the Original Revolving Facility of $0.1 million and are amortized using a straight-
line method over the term of the Revolving Facility's commitment within interest expense. The total unamortized debt financing costs for the amended Revolving
Facility of $0.2 million were recorded within Other
assets
at December 31, 2016.
In 2015, we incurred fees to Wells Fargo attributable to the Term Loan of $0.3 million and other third-party debt financing costs of $0.1 million , which were
recorded as a reduction of the carrying amount of the Term Loan. Amortization of such costs was included in interest expense. When the Term Loan was repaid
prior to the maturity date, the unamortized debt financing costs related to the Term Loan of $0.4 million were expensed as interest expense. Total interest expense
for the year ended December 31, 2015 was $0.8 million .
9. Commitments and Contingencies
Lease
Obligations
As of December 31, 2016, we had operating lease obligations of approximately $8.3 million through 2022. A summary of our future minimum payments
for obligations under non-cancellable operating leases were as follows (in thousands):
Years Ending December 31,
2017
2018
2019
2020
2021
Thereafter
Total lease commitments
$
$
2,375
1,769
1,680
1,667
621
180
8,292
We recorded rent expense of $2.0 million , $1.2 million and $1.0 million for the twelve months ended December 31, 2016, 2015 and 2014, respectively.
In February 2017, we signed a lease amendment for 50 Castilian Drive in Santa Barbara, California, our corporate headquarters. This amendment extends
the term from February 2018 to December 2021. The total commitment under this lease extension is $3.1 million . All other terms and conditions from the original
lease and previous amendments remain the same.
Insurance
We have a wholly owned subsidiary, Terra Mar Insurance Company, Inc. (“Terra Mar”), which was established to provide our customers with the option
to purchase tenant liability insurance. If our customers choose to use our insurance services, they are issued an insurance policy underwritten by our third-party
service provider. The policy has a limit of $100,000 per incident for each insured residence. We have entered into a reinsurance agreement with our third-party
service provider and, as a result, we assume a 100% quota share of the tenant liability insurance provided to our customers through our third-party service provider.
Included in cost of revenue we accrue for reported claims and an estimate of losses incurred but not reported by our property manager customers, as we bear the
risk related to claims. Our liability for reported claims and incurred but not reported claims as of December 31, 2016 and 2015 was $0.3 million and $0.5 million ,
respectively, and is included in other
current
liabilities
on the Consolidated Balance Sheets.
79
Included in other
current
assets
as of December 31, 2016 and 2015 are $1.2 million and $1.0 million , respectively, of deposits held with a third party
related to requirements to maintain collateral for our insurance services.
Litigation
From time to time, we may become subject to certain legal proceedings, including without limitation claims and/or litigation matters, arising in the
ordinary course of business. We are not currently a party to any such legal proceedings, nor are we aware of any pending or threatened litigation, that would have a
material adverse effect on our business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
Indemnification
In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, investors, directors and officers with respect
to certain matters, including, but not limited to, losses arising out of our breach of any applicable agreements, services to be provided by us, or intellectual property
infringement claims made by third parties. These indemnification provisions may survive termination of the underlying agreement and the maximum potential
amount of future payments we could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The maximum
potential amount of future payments we could be required to make under these indemnification provisions is indeterminable. We have never paid a material claim,
nor have we been sued in connection with these indemnification arrangements. As of December 31, 2016 and 2015, we had not accrued a liability for these
indemnification arrangements because we have determined that the likelihood of incurring a payment obligation, if any, in connection with these indemnification
arrangements is not probable or reasonably possible and the amount or range of amounts of any such liability is not reasonably estimable.
10. Stockholders’ Equity
Amended
and
Restated
Certificate
of
Incorporation
Upon the effectiveness of the Amended and Restated Certificate of Incorporation of the Company on June 25, 2015, the number of shares of capital stock
that is authorized to be issued was increased to 325,000,000 shares, of which 250,000,000 shares are Class A common stock, 50,000,000 shares are Class B
common stock and 25,000,000 are undesignated preferred stock. The Class A common stock, Class B common stock and preferred stock have a par value of
$0.0001 per share.
At December 31, 2016, there were 11,691,000 of Class A common shares outstanding, 22,028,000 of Class B shares outstanding and no preferred shares
outstanding.
Class
A
Common
Stock
and
Class
B
Common
Stock
Except for voting rights, or as otherwise required by applicable law, the shares of our Class A common stock and Class B common stock have the same
powers, preferences and rights and rank equally, share ratably and are identical in all respects as to all matters. The rights and preferences are as follows:
Dividend
Rights
. Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of outstanding shares of our
Class A common stock and Class B common stock are entitled to receive dividends out of funds legally available at the times and in the amounts that our board of
directors may determine.
Voting
Rights
. The holders of our Class A common stock are entitled to one vote per share, and holders of our Class B common stock are entitled to 10
votes per share. The holders of our Class A common stock and Class B common stock will vote together as a single class on all matters submitted to a vote of our
stockholders, unless otherwise required by Delaware law or our amended and restated certificate of incorporation. Delaware law could require either holders of our
Class A common stock or holders of our Class B common stock to vote separately. In addition, our amended and restated certificate of incorporation requires the
approval of the holders of at least a majority of the outstanding shares of our Class B common stock, voting as a separate class to approve a change-in-control
transaction.
Conversion
. Each share of our Class B common stock is convertible at any time at the option of the holder into one share of our Class A common stock.
In addition, each share of our Class B common stock will convert into one share of our Class A common stock upon any transfer, whether or not for value, except
for certain transfers described in our amended and restated certificate of incorporation, including, without limitation, (i) a transfer by a partnership or limited
liability company that was a registered holder of our Class B common stock at the “effective time,” as defined in our amended and restated certificate of
incorporation, to a partner or member thereof at the effective time or (ii) a transfer to a “qualified recipient,” as defined in our amended and restated certificate of
incorporation.
All the outstanding shares of our Class B common stock will convert automatically into shares of our Class A common stock upon the date when the
number of outstanding shares of our Class B common stock represents less than 10% of all outstanding
80
shares of our Class A common stock and Class B common stock. Once converted into our Class A common stock, our Class B common stock may not be reissued.
Right
to
Receive
Liquidation
Distributions
. Upon our dissolution, liquidation or winding-up, the assets legally available for distribution to our
stockholders are distributable ratably among the holders of our Class A common stock and Class B common stock, subject to prior satisfaction of all outstanding
debt and liabilities and the preferential rights and payment of liquidation preferences, if any, on any outstanding shares of preferred stock.
Reverse
Stock
Split
On June 4, 2015, we effected a one-for-four reverse split of our common stock and a proportional adjustment to the conversion ratio of our convertible
preferred stock. The par value and the number of authorized shares of our common stock and convertible preferred stock were not adjusted as a result of the reverse
split. All share, per share and related information presented in these Consolidated Financial Statements and accompanying notes has been retroactively adjusted,
where applicable, to reflect the impact of the reverse stock split, including an adjustment to the preferred stock conversion ratio.
Initial
Public
Offering
-
Class
A
Common
Stock
On June 30, 2015, we completed an initial public offering (“IPO”) of our Class A common stock. In connection with the offering, we sold 6,200,000
shares of common stock at $12.00 per share for aggregate net proceeds of $65.1 million after underwriting discounts and commissions and offering expenses. Upon
the closing of the offering, all shares of our convertible preferred stock and common stock held prior to the offering were converted into shares of Class B common
stock.
On July 8, 2015, in connection with the exercise of an overallotment option granted to the underwriters, we sold 930,000 additional shares of our Class A
common stock to the underwriters at the public offering price of $12.00 per share, resulting in an additional $10.4 million in net proceeds, after deducting
underwriting discounts and commissions. As a result, the aggregate net proceeds to us from the sale of shares in the IPO were approximately $75.4 million .
Preferred
Stock
Effective upon the filing of our amended and restated certificate of incorporation in June 2015, no shares of preferred stock were outstanding because all
outstanding shares of our convertible preferred stock converted into our Class B common stock.
Pursuant to the terms of our amended and restated certificate of incorporation, our board of directors will be authorized, subject to limitations prescribed
by Delaware law, to issue up to 25,000,000 shares of our preferred stock in one or more series, to establish from time to time the number of shares to be included in
each series, and to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions, in each
case without further action by our stockholders. The number of authorized shares of any series of preferred stock may be increased or decreased, but not below the
number of shares of that series then outstanding, by the affirmative vote of the holders of a majority of the voting power of our outstanding capital stock entitled to
vote thereon, or such other vote as may be required by the certificate of designation establishing the series.
Convertible
Preferred
Stock
Prior
to
IPO
Up until our IPO, we had authorized preferred stock consists of Series A convertible preferred stock (“Series A”), Series B convertible preferred stock
(“Series B”), Series B-1 convertible preferred stock (“Series B-1”), Series B-2 convertible preferred stock (“Series B-2”) and Series B-3 convertible preferred stock
(“Series B-3”) (collectively the “preferred stock prior to IPO”).
Each preferred stockholder was entitled to the number of votes equal to the number of shares of common stock into which each preferred share was
convertible at the time of such vote. The preferred stock was also entitled to receive non-cumulative dividends, when and if declared by our board of directors. No
dividends were declared by our board of directors. In the event of a liquidation, the preferred stock was entitled to receive prior to payment of any amounts to the
common stockholders the greater of (i) the original issuance price plus any declared but unpaid dividends or (ii) such amount per share as would have been payable
had all shares of preferred stock been converted into common stock immediately prior to such liquidation, dissolution or winding up. The preferred stock was
convertible into common stock at the option of the holder or automatically upon a qualified initial public offering. The preferred stock automatically converted to
Class B common upon the Company's initial public offering.
The liquidation preference provisions of the convertible preferred stock prior to IPO are considered contingent redemption provisions because there are
certain elements that were not solely within our control, such as a change in control. Accordingly, we presented the convertible preferred stock prior to IPO within
the mezzanine portion of the consolidated balance sheets.
81
11. Stock-Based Compensation
Stock
Options
2015
Stock
Incentive
Plan
In conjunction with our IPO in 2015, our board of directors and stockholders adopted the 2015 Stock Incentive Plan, or the 2015 Plan. Upon adoption of
the 2015 Plan, 2,000,000 shares of our Class A common stock were reserved and available for grant and issuance. On January 1 of each subsequent calendar year,
the number of shares available for grant and issuance under the Plan increase by the lesser of (i) the number of shares of our Class A common stock subject to
awards granted under the Plan during the preceding calendar year and (ii) such lesser number of shares of our Class A common stock determined by our board of
directors. As of December 31, 2016, we have reserved an aggregate of 2,199,574 shares of our Class A common stock for grant and issuance under the 2015 Plan.
The number of shares of our Class A common stock is also subject to adjustment in the event of a recapitalization, stock split, reclassification, stock dividend or
other change in our capitalization. The 2015 Plan authorizes the award of stock options, stock appreciation rights ("SARs"), RSAs, RSUs, performance awards and
stock bonuses. The 2015 Plan provides for the grant of awards to our employees, directors, consultants and independent contractors, subject to certain exceptions.
RSUs, PSUs, PSOs, stock options, RSAs and RSUs have been issued during 2016 pursuant to the 2015 Plan.
Stock options may vest based on the passage of time or the achievement of performance conditions at the discretion of our compensation committee. Our
compensation committee may provide for stock options to be exercised only as they vest or to be immediately exercisable with any shares issued on exercise being
subject to our right of repurchase that lapses as the shares vest. The maximum term of stock options granted under the 2015 Plan is 10 years . We began granting
stock options with performance conditions in 2016.
RSUs and PSUs represent the right on the part of the holder to receive shares of our Class A common stock at a specified date in the future or the
achievement of performance conditions at the discretion of our compensation committee, subject to forfeiture of that right due to termination of employment. If an
RSU or PSU has not been forfeited, then, on the specified date, we will deliver to the holder of the RSU or PSU shares of our Class A common stock.
2007
Stock
Incentive
Plan
On February 14, 2007, our board of directors adopted the 2007 Stock Incentive Plan (the “2007 Plan”) as an amendment and restatement to an original
2006 Equity Incentive Plan and was most recently amended in July 2014. Under the 2007 Plan, the number of shares of our common stock to be granted or subject
to options or rights may not exceed 4.3 million . The 2007 Plan was administered by our board of directors, which determines the terms and conditions of each
grant. Employees, officers, directors and consultants are eligible to receive stock options and stock awards under the 2007 Plan. The aggregate number of shares
available under the 2007 Plan and the number of shares subject to outstanding options automatically adjusts for any changes in the outstanding common stock by
reason of any recapitalization, spin-off, reorganization, reclassification, stock dividend, stock split, reverse stock split, or similar transaction. The exercise price of
incentive stock options may not be less than the fair value of our common stock at the date of grant. The exercise price of incentive stock options granted to
individuals that own greater than 10% of our voting stock may not be less than 110% of the fair value of our common stock at the date of grant. The term of each
stock option cannot exceed ten years . Our board of directors will determine the vesting terms of all stock options. Generally, our board of directors has granted
options with vesting terms of four years and contractual terms of ten years .
82
A summary of our stock option activity for the year ended December 31, 2016 is as follows (number of shares in thousands):
Options outstanding as of December 31, 2015
Options granted
Options exercised
Options cancelled/forfeited
Options outstanding as of December 31, 2016
As of December 31, 2016:
Options vested or expected to vest
Number of
Shares
Weighted
Average
Exercise
Price per Share
Weighted
Average
Remaining
Contractual Life
in Years
1,171 $
750
(141)
(62)
1,718 $
5.30
12.85
2.49
7.62
8.75
1,702 $
8.75
8.0
8.2
8.2
Options exercisable (1)
6.8
(1) Included in the options exercisable is 83,000 shares which have an early exercise option. The weighted average exercise price of these options is $5.64
548 $
4.66
per share and the weighted average contractual life in years is 8.1 years .
During the year ended December 31, 2016, we granted PSOs to purchase up to 750,000 shares of our Class A common stock. The PSOs have a weighted
average exercise price of $12.85 per share. Vesting of the PSOs is based on achievement of a pre-established free cash flow performance metric for the years ended
December 31, 2016, 2017 and 2018 and continued employment throughout the performance period. We recognize expense for the PSOs based on the grant date
fair value of the PSOs that we determine are probable of vesting. Adjustments to compensation expense are made each period based on changes in our estimate of
the number of PSOs that are probable of vesting. The number of PSOs granted, as included in the above table, assumes achievement of the performance metric at
the maximum level, which is 150% of the targeted performance metric. For performance at 100% of the targeted metric, approximately 67% of the PSOs would
vest. For performance at 80% of the targeted metric, approximately 33% of the PSOs would vest. For performance below 80% of the 2016 and 2018 targeted
metric, no PSOs would vest, no compensation expense would be recognized and all previously recognized compensation expense for PSOs would be reversed. For
performance below 50% of the 2017 targeted metric, no PSOs would vest, no compensation expense would be recognized and all previously recognized
compensation expense for PSOs would be reversed.
The fair value of stock options granted is estimated on the date of grant using the Black-Scholes option-pricing model. Our stock-based compensation
expense for stock options for the years ended December 31, 2016, 2015 and 2014 was $2.4 million $0.7 million , and $0.1 million , respectively.
The following table summarizes information relating to our stock options granted during the years ended December 31, 2016, 2015 and 2014:
Stock options granted (in thousands)
Weighted average exercise price per share
Weighted average grant-date fair value per share
Weighted average Black-Scholes model assumptions:
Risk-free interest rate
Expected term (in years)
Expected volatility
Expected dividend yield
Year Ended December 31,
2016
2015
2014
750
12.85
4.85
$
$
$
$
1.45%
5.9
37%
—
359
9.53
6.89
$
$
1.58%
6.2
46%
—
702
4.60
2.2
1.86%
6.2
48%
—
As of December 31, 2016, the total remaining stock-based compensation expense for unvested stock options was $2.9 million , which is expected to be
recognized over a weighted average period of 1.7 years.
The total intrinsic value of options exercised in 2016, 2015 and 2014 was $1.9 million , $3.1 million , and $0.4 million , respectively. This intrinsic value
represents the difference between the fair value of our common stock on the date of exercise and the exercise price of each option. Based on the fair value of our
common stock as of December 31, 2016, the total intrinsic value
83
of all outstanding options was $25.9 million . The total intrinsic value of exercisable options as of December 31, 2016 was $10.5 million . The total intrinsic value
of options vested and expected to vest as of December 31, 2016 was $25.7 million .
The excess tax benefit realized from option exercises during the year ended December 31, 2016 was $0.2 million . There were no excess tax benefits
realized for the tax deductions from stock options exercised during the years ended December 31, 2015 and 2014.
Restricted
Stock
Awards
A summary of activity in connection with our restricted stock awards for the year ended December 31, 2016 is as follows (number of shares in
thousands):
Unvested as of December 31, 2015
Granted
Vested
Forfeited
Unvested as of December 31, 2016
Number of
Shares
Weighted-
Average
Grant Date
Fair Value per Share
120
$
22
(96)
—
46
$
4.68
13.46
4.86
—
8.55
We have the right to repurchase any unvested restricted stock granted upon termination of employment. Restricted stock vests over a four -year period for
employees and over a one -year period for non-employee directors. For the years ended December 31, 2016, 2015 and 2014, we recognized stock-based
compensation expense for restricted stock awards of $454,000 , $381,000 and $804,000 , respectively. During 2016, the grant date fair value of the shares vested
was $469,000 .
As of December 31, 2016, the total remaining stock-based compensation expense for unvested restricted stock awards was $0.2 million , which is
expected to be recognized over a weighted average period of 0.9 years .
Restricted
Stock
Units
A summary of activity in connection with our RSU for the year ended December 31, 2016 is as follows (number of shares in thousands):
Unvested as of December 31, 2015
Granted
Vested
Forfeited
Unvested as of December 31, 2016
Number of Shares
Weighted- Average
Grant Date
Fair Value per Share
15.45
17 $
536 $
(16) $
(41) $
496 $
13.26
15.45
12.35
13.34
During the year ended December 31, 2016, we granted 449,000 RSUs that vest annually over four years and 87,000 PSUs that vest based upon
achievement of a pre-established free cash flow performance metric for the years ended December 31, 2016, 2017 and 2018 and continued employment throughout
the performance period. We recognize expense for the PSUs based on the grant date fair value of the PSUs that we determine are probable of vesting. Adjustments
to compensation expense are made each period based on changes in our estimate of the number of PSUs that are probable of vesting. The number of PSUs granted,
as included in the above table, assumes achievement of the performance metric at 100% of the targeted performance metric. The actual number of shares to be
issued at the end of the performance period will range from 0% to 150% of the initial target awards. For performance at 150% of the targeted metric, 150% of the
PSUs would vest. For performance at 80% of the targeted metric, approximately 50% of the PSUs would vest. For performance below 80% of targeted metric for
2016 and 2018, no PSUs would vest and no compensation expense would be recognized and all previously recognized compensation expense for PSUs would be
reversed. For performance below 50% of targeted metric for 2017, no PSUs would vest and no compensation expense would be recognized and all previously
recognized compensation expense for PSUs would be reversed.
Our stock-based compensation expense for the RSUs and PSUs for the year ended December 31, 2016 and 2015, was $1.8 million and $70,000 ,
respectively. There were no RSU or PSU grants for the year ended December 31, 2014.
84
As of December 31, 2016, the total remaining stock-based compensation expense for these RSUs was $5.0 million , which is expected to be recognized over
a weighted average period of 2.9 years .
12. Income Taxes
For the years ended December 31, 2016 and 2015, we recorded income tax expense of $67,000 and $75,000 , respectively, associated with state minimum
taxes and the amortization of tax deductible goodwill that is not an available source of income to realize the deferred tax asset. We had no provision for income
taxes for the year ended December 31, 2014, because we incurred losses and maintained a full valuation allowance against our net deferred tax assets.
Our effective tax rate differs from the U.S. Federal statutory rate of 34% primarily because our losses have been offset by a valuation allowance due to
uncertainty as to the realization of the tax benefit of net operating losses. Set forth below is a reconciliation of the components that caused our provision for income
taxes to differ from amounts computed by applying the U.S. Federal statutory rate of 34% for the years ended December 31, 2016, 2015 and 2014:
Income tax benefit at the statutory rate
State and local income taxes, net of federal benefit
Stock-based compensation expense
Meals and entertainment
Permanent differences
Change in valuation allowance
Research and development credits
Provision for income taxes
The components of deferred tax assets (liabilities) were as follows (in thousands):
Deferred income tax assets:
Net operating loss carryforwards
Research and development tax credits
Other
Gross deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Property, equipment and software
Intangible assets
State taxes
Other
Total deferred tax liabilities
Total net deferred tax liabilities
Year Ended December 31,
2016
2015
2014
34 %
34 %
34 %
7
(4)
(2)
(1)
(42)
7
(1)%
3
(2)
(1)
—
(38)
3
(1)%
5
—
(1)
(1)
(41)
4
— %
December 31,
2016
2015
$
31,436 $
4,032
2,771
38,239
(29,417)
8,822
(5,820)
(403)
(2,040)
(632)
(8,895)
$
(73) $
29,178
2,867
1,030
33,075
(25,926)
7,149
(4,208)
(804)
(1,742)
(427)
(7,181)
(32)
As of December 31, 2016, we had federal net operating loss carryforwards of $80.7 million , which will begin to expire in 2027. As of December 31, 2016,
we had state net operating loss carryforwards of $50.5 million , which will begin to expire in 2017. As of December 31, 2016 we also had federal and state research
and development credit carryforwards of $3.9 million and $4.1 million , respectively. The federal credit carryforwards will begin to expire in 2027, while the state
credits carryforward indefinitely.
85
The Internal Revenue Code of 1986, as amended (“IRC”), imposes substantial restrictions on the utilization of net operating losses and other tax attributes
in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use pre-change net operating loss and research tax credits may be
limited as prescribed under IRC Section 382. Events which may cause limitation in the amount of the net operating losses and credits that we utilize in any one
year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Due to the effects of historical equity issuances and
the current year IPO, utilization of our net operating losses may be limited pursuant to IRC Section 382. The IRC Section 382 limitation is not expected to have a
material effect on our financial statements.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing
deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred through December 31, 2016. Such objective
evidence limits the ability to consider other subjective positive evidence such as its future income projections. On the basis of this evaluation, as of December 31,
2016, a valuation allowance of $29.4 million has been recorded since it is more likely than not that the deferred tax assets will not be realized.
The change in the valuation allowance for the years ended December 31, 2016, 2015 and 2014 was as follows (in thousands):
Valuation allowance, at beginning of year
Increase in valuation allowance
Valuation allowance, at end of year
Year Ended December 31,
2016
2015
2014
$
$
25,926 $
3,491
29,417 $
19,900 $
6,026
25,926 $
16,358
3,542
19,900
The following is a reconciliation of the total amounts of unrecognized tax benefits (in thousands):
Unrecognized tax benefit beginning of year
Decreases-tax positions in prior year
Increases-tax positions in current year
Unrecognized tax benefit end of year
Year Ended December 31,
2016
2015
2014
$
$
2,867 $
—
1,165
4,032 $
2,014 $
—
853
2,867 $
1,600
(278)
692
2,014
The unrecognized tax benefits are recorded as a reduction to the deferred tax assets. Since there is a full valuation allowance recorded against the deferred
tax assets, the recognition of previously unrecognized tax benefits on uncertain positions would result in no impact to the effective tax rate.
As of December 31, 2016 and 2015, we had no accrued interest and penalties related to uncertain income tax positions. We do not anticipate that the
amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.
We are subject to taxation in the United States and various states. Due to the net operating loss carryforwards, the Company's federal and state returns are
open to examination by the Internal Revenue Service and state jurisdictions for all years since inception. We are not currently under audit by any taxing authorities.
The Company has excluded excess windfall tax benefits resulting from stock option exercises as components of the Company’s gross deferred tax assets
and corresponding valuation allowance disclosures, as tax attributes related to such windfall tax benefits should not be recognized until they result in a reduction of
taxes payable. The tax effected amount of gross unrealized net operating loss carryforwards, and their corresponding valuation allowances resulting from stock
option exercises was $0.2 million at December 31, 2016; the corresponding gross amount is $0.7 million . When realized, excess windfall tax benefits are credited
to additional paid-in capital. The Company follows the with-and-without allocation approach to determine when such net operating loss carryforwards have been
realized.
86
13. Revenue and Other Information
Our chief operating decision maker reviews separate revenue information for our core solutions, Value+ and other service offerings as a measure of
growth in the number of our customers and growth in the adoption and utilization of our core solutions and Value+ services by new and existing customers. The
following table presents our revenue categories for the years ended December 31, 2016, 2015 and 2014 (in thousands):
Core solutions
Value+ services
Other
Total revenues
Year Ended December 31,
2016
2015
2014
$
43,775 $
32,119 $
56,965
4,846
37,998
4,860
$
105,586 $
74,977 $
22,406
22,525
2,740
47,671
Core solutions revenues includes our subscription fees which are designed to scale to the size of our customers’ businesses. We recognize subscription
revenue ratably over the terms of the subscription agreements, which typically range from one month to one year . Revenue from subscription services is impacted
by the change in the number and type of our customers, the size and needs of our customers’ businesses and our customer renewal rates.
Value+ services revenue includes revenue from subscriptions or usage-based fees. Subscription Value+ services include website hosting services and
contact center services. Usage-based Value+ services include fees for electronic payment processing, resident screening services, tenant liability insurance
program, collections, and online vacancy advertising services based on the RentLinx software platform acquired in April 2015.
Other services revenue includes one-time services related to on-boarding our core solutions, website design services and online vacancy advertising
services offered to legacy RentLinx customers.
Our revenue is generated primarily from U.S. customers. All of our property and equipment is located in the U.S.
14. Retirement Plans
We have a 401(k) retirement and savings plan made available to all employees. The 401(k) plan allows each participant to contribute up to an amount not
to exceed an annual statutory maximum. We may, at our discretion, make matching contributions to the 401(k) plan. Cash contributions to the plan were $1.1
million for the year ended December 31, 2016, and no cash contributions to the plan were made during the years ended December 31, 2015 and 2014. Contribution
expense recognized for the 401(k) plan was $0.7 million , $0.4 million , and $0 , for the years ended December 31, 2016, 2015, and 2014, respectively.
15. Subsequent Events
In February 2017, we signed a lease amendment for 50 Castilian Drive in Santa Barbara, California, our corporate headquarters. This amendment extends
the term from February 2018 to December 2021. The total commitment under this lease extension is $3.1 million . All other terms and conditions from the original
lease and previous amendments remain the same.
87
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 December 31, 2016 , the last day of the period covered by this Annual 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 recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms and that such information 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 have
concluded that, as of December 31, 2016 , our disclosure controls and procedures were effective at the reasonable assurance level.
Inherent
Limitations
on
Effectiveness
of
Disclosure
Control
In designing and evaluating our disclosure controls and procedures, our management recognizes that no evaluation of controls can provide absolute
assurance that all control issues within a company have been detected. In addition, the design of disclosure controls and procedures must reflect the fact that
management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Accordingly, our disclosure
controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure controls system are met.
Management’s
Annual
Report
on
Internal
Control
over
Financial
Reporting
We are responsible for establishing and maintaining internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness
of our internal control over financial reporting as of December 31, 2016 . In making this assessment, our management used the Internal Control – Integrated
Framework (2013) as issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management
concluded that our internal control over financial reporting is effective as of December 31, 2016 .
This Annual Report does not include an attestation report of our registered public accounting firm due to an exemption established by rules of the
Commission for emerging growth companies.
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 Rules 13(a)-15(d) and 15d-
15(d) under the Exchange Act that occurred during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
88
ITEM 9B. OTHER INFORMATION
Execution of Fourth Amendment to Lease Agreement
On February 22, 2017, we entered into a Fourth Amendment to Lease, or the Lease Amendment, with Nassau Land Company, L.P., which amends the terms
of that certain Multi-Tenant Industrial Lease, as amended, or the Lease, originally entered into by and between the parties on April 1, 2011, pursuant to which the
Company leases office space in the building located at 50 Castilian Drive in Santa Barbara, California.
Pursuant to the Lease Amendment, the lease term was extended from February 2018 to December 2021. The Lease Amendment does not change any other
material provisions of the Lease.
The foregoing summary of the Lease Amendment is qualified in its entirety by reference to the full text of the Lease Amendment, which is filed as Exhibit
10.2 to this Annual Report.
89
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this item will be included in the Proxy Statement, which will be filed with the SEC not later than 120 days after the end of
our fiscal year ended December 31, 2016 , and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be included in the Proxy Statement and is incorporated herein by reference.
90
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
The following documents are filed as part of this Annual Report:
1.
Consolidated Financial Statements
PART IV
Our consolidated financial statements are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8, of this Annual
Report.
2.
Financial Statement Schedules
All financial statement schedules have been omitted because they are not required or are not applicable, or the required information is
shown in our consolidated financial statements or the notes thereto.
3.
Exhibits
The documents listed in the Exhibit Index of this Annual Report are filed, furnished or incorporated by reference with this Annual Report,
in each case as indicated therein.
91
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual
Report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
Date:
February 27, 2017
AppFolio, Inc.
By: /s/ Ida Kane
Ida Kane
Chief Financial Officer
(Principal Financial and Accounting Officer)
92
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below hereby constitutes and appoints Brian Donahoo and
Ida Kane, and each or either of them, acting individually, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution
for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the SEC, granting unto said attorney-in-fact and agent, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or
she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or any of them, or their or his or her substitutes, may
lawfully do or cause to be done or by virtue hereof.
Pursuant to the requirements of the Exchange Act, as amended, this Annual Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ Brian Donahoo
Brian Donahoo
/s/ Ida Kane
Ida Kane
/s/ Andreas von Blottnitz
Andreas von Blottnitz
/s/ Timothy Bliss
Timothy Bliss
/s/ Janet Kerr
Janet Kerr
/s/ James Peters
James Peters
/s/ William Rauth
William Rauth
/s/ Klaus Schauser
Klaus Schauser
President, Chief Executive Officer and Director
(Principal Executive Officer)
February 27, 2017
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 27, 2017
Chairman of the Board
February 27, 2017
Director
Director
Director
Director
February 27, 2017
February 27, 2017
February 27, 2017
February 27, 2017
Chief Strategist and Director
February 27, 2017
EXHIBIT INDEX
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
Filing Date
Filed
Herewith
Incorporated by Reference
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6#
10.7#
10.8#
10.9
10.10
10.11
Amended and Restated Certificate of Incorporation of the
registrant as currently in effect.
Amended and Restated Bylaws of the registrant as currently
in effect.
Specimen Certificate for Class A Common Stock.
Amended and Restated Investor Rights Agreement, by and
among the registrant and the investors named therein, dated
November 26, 2013.
Multi-Tenant Industrial Lease, by and between the registrant
and Nassau Land Company, L.P., dated April 1, 2011 ("2011
Lease"), as amended by First Amendment to 2011 Lease,
dated November 11, 2011, Second Amendment to 2011
Lease, dated February 23, 2012, and Third Amendment to
2011 Lease, dated November 5, 2013.
Fourth Amendment to 2011 Lease, by and between the
registrant and Nassau Land Company, L.P., dated February
22, 2017.
Multi-Tenant Industrial Lease, by and between the registrant
and Nassau Land Company, L.P., dated February 17, 2015
("2015 Lease").
First Amendment to 2015 Lease, by and between the
registrant and Nassau Land Company, L.P., dated October 5,
2015.
Second Amendment to 2015 Lease, by and between the
registrant and Nassau Land Company, L.P., dated February
22, 2016.
2007 Stock Incentive Plan, as amended, and related form
agreements.
Form of Indemnification Agreement by and between the
registrant and each of its executive officers and directors.
Credit Agreement, by and among the registrant, Wells Fargo
Bank, N.A., as administrative agent, and the lenders that are
parties thereto, dated March 16, 2015.
Amendment Number One to Credit Agreement, by and
among the registrant, Wells Fargo Bank, N.A., as
administrative agent, and the lenders that are parties thereto,
dated October 9, 2015.
10-Q
001-37468
10-Q
001-37468
S-1/A
333-204262
S-1/A
333-204262
3.1
3.2
4.1
4.2
8/6/2015
8/6/2015
6/4/2015
6/4/2015
S-1/A
333-204262
10.1
6/4/2015
X
S-1/A
333-204262
10.2
6/4/2015
10-Q
001-37468
10.2
11/9/2015
10-K
001-37468
10.4
2/29/2016
S-1/A
333-204262
S-1
S-1
333-204262
333-204262
10.3
10.4
10.5
10.6
10.7
6/4/2015
6/4/2015
6/4/2015
5/18/2015
5/18/2015
10-Q
001-37468
10.1
11/9/2015
2015 Stock Incentive Plan and related form agreements.
S-1/A
333-204262
2015 Employee Stock Purchase Plan.
S-1/A
333-204262
21.1
Subsidiaries of the registrant.
10-K
001-37468
21.1
2/29/2016
Exhibit Description
Form
File No.
Exhibit
Filing Date
Filed
Herewith
Incorporated by Reference
Exhibit
Number
23.1
24.1
31.1
31.2
32.1*
Consent of independent registered public accounting firm.
Power of Attorney (included on the signature page of this
report).
Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as amended.
Certification of Chief Financial Officer pursuant to Rule 13a-
14(a) or Rule 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.
Certifications of Chief Executive Officer and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Document.
X
X
X
X
X
X
X
X
X
X
X
#
*
Indicates a management contract or compensatory plan or arrangement
The certifications attached as Exhibit 32.1 accompany this Annual 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, irrespective of any general
incorporation language contained in any such filing.
Fourth Amendment to Lease
Exhibit 10.11
This Fourth Amendment to Lease (the “ Amendment
”), dated for reference purposes as of February 22, 2017, is made and entered
into by and between NASSAU LAND COMPANY, L.P. , a California limited partnership (the “ Landlord
”), and APPFOLIO, INC., a
Delaware corporation (the “ Tenant
”), with reference to the following facts:
Recitals :
A.
Landlord is the owner of the real property and improvements consisting of approximately 43,277 square feet of
leasable space located in the Castilian Technical Center situated at 50 Castilian Drive, Goleta, California (the “ Project
”).
B.
Landlord and Tenant entered into a Multi-Tenant Industrial Lease, dated April 1, 2011 (the “ Original
Lease
”), as
amended by that certain First Amendment to Lease dated November 11, 2011, and as amended by that certain Second Amendment to
Lease dated February 23, 2012, and as amended by that certain Third Amendment to Lease dated November 5, 2013 (collectively the
“ Existing
Lease
”), whereby Landlord leases to Tenant, and Tenant leases from Landlord Suites 100, 102, and 200 within the Project
and consisting of approximately 32,105 leasable square feet (the “ Premises
”). The Existing Lease, as amended by this Amendment,
is collectively referred to herein as the “ Lease
.”
C.
Landlord is also the owner of the real property and improvements consisting of approximately 35,939 square feet
of leasable space located in the Castilian Technical Center situated at 90 Castilian Drive, Goleta, California, and located adjacent to
the Project (the “ Adjacent
Project
”). Landlord and Tenant have entered into a Multi-Tenant Industrial Lease, dated February 17,
2015, as amended by that certain First Amendment to Lease dated August 17, 2015, and as amended by that certain Second
Amendment to Lease dated February 22, 2016 (the “ Second
Amendment
”, and collectively the “ Adjacent
Lease
”), whereby
Landlord leases to Tenant, and Tenant leases from Landlord Suites 110, 120, 200, and 210 within the Adjacent Project and consisting
of approximately 35,939 leasable square feet (the “ Adjacent
Premises
”).
D.
In connection with the Second Amendment of the Adjacent Lease, Landlord granted Tenant a tenant improvement
allowance in the amount of not to exceed $236,225.00 (the “ Improvement
Allowance
”).
E.
Tenant has not utilized the Improvement Allowance for the Adjacent Premises, and in partial consideration of
extending the term of the Lease, Landlord is willing to allow Tenant to utilize the Improvement Allowance at the Premises instead
and in lieu of at the Adjacent Premises.
F.
Tenant and Landlord have agreed to amend the Lease on the terms contained herein.
G.
thereto in the Lease.
All capitalized terms that appear in this Amendment and are not defined herein shall have the meaning ascribed
Agreements:
Now, Therefore , the parties hereto, intended to be legally bound, do hereby agree and further amend the Existing Lease as follows:
1. Amendment to Lease; Term . Notwithstanding any other provision of the Lease to the contrary, the Term of the Lease shall be
extended forty-six (46) months to December 31, 2021 (the “ Expiration
Date
”).
2. Amendment to Lease; Improvement Allowance . Notwithstanding any other provision of the Lease or Adjacent Lease to the
contrary, Tenant shall have no right to utilize the Improvement Allowance at the Adjacent Premises. Instead, Tenant shall have the
right to utilize the Improvement Allowance for interior improvements
at the Premises on the terms and conditions set forth in Section 3.2 of Exhibit B of the Original Lease. If Tenant does not utilize the
Improvement Allowance by December 31, 2018, the Improvement Allowance shall be null and void and Tenant shall forever lose its
right to utilize the Improvement Allowance.
3. Miscellaneous .
1.
Counterparts; Electronic Signatures . This Amendment may be executed in counterparts, each of which shall be
deemed an original and all of which, taken together, shall be one and the same instrument, binding on each signatory. A copy of this
Amendment that is executed by a party and transmitted by that party to any one or more other parties by facsimile or email shall be
binding on such signatory to the same extent as a copy hereof or thereof containing that party’s original signature.
2.
Interpretation . In the event of any conflict between the terms of this Amendment and the terms of the Original
Lease, or the terms of the Adjacent Lease, the terms of this Amendment shall control. This Amendment is the entire agreement
between the parties with respect to the subject matter hereof and supersedes all prior contemporaneous oral and written agreements
and discussions with respect to the subject matter hereof.
3.
Ratification . Except as expressly modified by Sections 1 and 2, above, the Lease is hereby expressly ratified and
confirmed and remains in full force and effect.
4.
Authority . Landlord and Tenant represent and warrant that all signatories hereto signing in a representative
capacity have been duly authorized by and on behalf of their respective principals to execute this Amendment.
[ signatures
on
next
page
]
In Witness Whereof , the undersigned have executed this Amendment, effective as of the date first written above.
“LANDLORD”:
“TENANT”:
NASSAU LAND COMPANY, L.P.,
a California limited partnership
By: Michael Towbes Construction & Development,
Inc., a California corporation
APPFOLIO, INC.,
a Delaware corporation
Its: General Partner
By: /s/ Craig Zimmerman
Craig Zimmerman, its President
By: /s/ Brian Donahoo
Brian Donahoo, President and CEO
By: /s/ Mike Ziebell
Mike Ziebell, VP Business Operations
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statement on Form S‑8 (No. 333-206179 and No. 333-209792) of AppFolio, Inc. of our
report dated February 27, 2017 relating to the financial statements, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 27, 2017
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Brian Donahoo, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of AppFolio, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act 13a-15(f) and 15d-15(f))
for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation;
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date:
February 27, 2017
/s/ Brian Donahoo
Brian Donahoo
President, Chief Executive Officer and Director
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ida Kane, certify that:
EXHIBIT 31.2
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of AppFolio, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act 13a-15(f) and 15d-15(f))
for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation;
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date:
February 27, 2017
/s/ Ida Kane
Ida Kane
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The following certifications are hereby made in connection with the Annual Report on Form 10-K of AppFolio, Inc. (the “Company”) for the period
ended December 31, 2016 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”):
I, Brian Donahoo, President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, (i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company as of the dates and for the periods presented.
Date:
February 27, 2017
By:
/s/ Brian Donahoo
Brian Donahoo
President, Chief Executive Officer and Director
I, Ida Kane, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge, (i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended, and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company as of the dates and for the periods presented.
Date:
February 27, 2017
By:
/s/ Ida Kane
Ida Kane
Chief Financial Officer