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, 2017
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
Santa Barbara, 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” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
x
¨
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
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
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, 2017 (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 $398.7 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, 2018 , the number of shares of the registrant’s Class A common stock outstanding was 14,966,515 and the number of shares of the registrant’s Class B
common stock outstanding was 19,102,408 .
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2018 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 (this“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, 2017
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
Exhibit Index
Signatures
1
2
8
28
28
29
29
30
32
33
48
49
81
81
82
82
82
82
82
82
83
84
85
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended December 31, 2017 , 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, seasonality and other trends affecting our business, capital needs and financing plans, including our potential repurchase of shares, research
and product development plans, services provided, the expansion of these services, 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 Global 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 to the real estate market, which comprises a significant majority of our
revenue, and the legal market, and we intend to enter new vertical markets over time. In 2008, we entered the real estate market with our first product, AppFolio
Property Manager, or APM, a property management solution designed to address the unique operational and business requirements of property management
companies. Recognizing that our customers would benefit from additional business-critical services that they can purchase as needed, we launched a series of
Value+ services beginning in 2009. In 2012, we entered the legal market by acquiring MyCase, a legal practice and case management solution primarily for solo
practitioners and small law firms.
SMBs face a common set of challenges that divert limited time and resources away from serving their clients and growing their businesses. Day-to-day
operations are often managed through inefficient manual processes and disparate software point solutions. This lack of automation and integrated technology
results in 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.
Our mission is to revolutionize vertical industry businesses by providing great software and services. We accomplish this mission by delivering software
solutions and services that provide our customers with a system of record to automate essential business processes, a system of engagement to enhance business
interactions between our customers and their clients and vendors, and, increasingly, a system of intelligence to anticipate, influence, and optimize customer
experiences using data to take action in real time. We have built our software solutions using a modern cloud-based architecture, and our mobile-optimized
software solutions are designed for use across multiple devices and operating systems.
Although specific functionality varies by product, our core solutions address common business operations 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. In addition to
our core solutions, we offer a range of optional, but often business-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. 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, 2017 , 2016 and 2015 , our revenue was $143.8 million , $105.6 million and $75.0 million , respectively. During each
of these years we have derived more than 90% of our revenue from our solutions serving the real estate market. Our revenue has limited seasonality as discussed in
Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report, within the section entitled "Quarterly
Revenue and Cost Trends." We have invested, and intend to continue to invest, heavily in our business to capitalize on our market opportunity.
Our Solutions
AppFolio
Property
Manager
-
Core
Solution
APM is a cloud-based software solution for the real estate market that provides property managers of various sizes (including both third-party managers
and owner-operators) innovative tools and services designed to streamline their property management businesses. Our software solution serves a variety of
property types, including single- and multi-family residential, commercial, community association, and student housing, and is continuously evolving to help our
customers more effectively market, manage and grow their businesses. Core functionality addresses key operational issues, including posting and tracking
vacancies, efficiently leasing vacant properties, facilitating tenant, owner and vendor communications, and accounting, among other things.
2
AppFolio
Property
Manager
-
Value+
Services
In addition to our core solution, we offer the following optional Value+ services to our APM customers. These Value+ services are integrated with our
software solution and built to support workflows essential to our customers’ businesses.
Website Services. We deliver and maintain professionally designed and architected websites that showcase our customers’ businesses. Our websites are
fully-integrated with APM functionality, including 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 guest cards that are completed by prospective tenants who visit the websites in
connection with posted vacancies.
Electronic Payment Services. Our payments platform allows property managers to streamline their payables and receivables online. Our customers can
collect rental application fees, rent payments, and other tenant charges all through a secure online portal, as well as receive owner contributions. They can quickly
and conveniently pay owners, vendors and even their own management companies through APM.
Tenant Screening Services. We offer instant background screening and credit checks for use in connection with the rental application process,
leveraging an automated nationwide eviction and criminal records search. Customers also have the option to access and/or contribute to Experian Rent Bureau
rental payments history data, updated every 24 hours, to identify quality residents and reduce the risk of bad debts.
Insurance. We offer two insurance products — legal liability to landlord insurance and renters insurance — that can be tailored to help property
managers get the maximum protection for their properties and meet renters’ needs, whether proof of insurance is required or not. Customers can instantly enroll
residents in legal liability to landlord, which offers owners and investors increased protection against resident-caused damage. Individual renters also have the
option to purchase renters insurance to protect their personal belongings, as well as the property itself from unexpected damages.
Contact Center. Our contact center is staffed 24 hours a day, 7 days a week, and serves as an extension of our property manager customers’ offices to
resolve or route incoming maintenance requests. Contact center agents are able to enter non-emergency work orders directly into APM’s property maintenance
software for a property manager’s approval and dispatch vendors immediately in case of an emergency.
Premium Leads. Our customers have the option to upgrade a property vacancy listing to premium status, thereby instantly syndicating it to dozens of
pay-to-list websites, including featured placement on many free sites. Customers also receive advanced call tracking and only pay for verified leads that they
receive through the service.
Tenant Debt Collections. Our customers may choose to utilize a nationwide contingency-based debt collection service provided by a nationally-licensed
third party provider. Property managers are able to electronically send past due tenant debt from their APM database directly to the collections service for
processing. The service also includes reporting unpaid balances to three major credit bureaus.
MyCase
-
Core
Solution
Our legal software solution, MyCase, enables solo practitioners and small law firms to more efficiently administer their practice and manage their
caseload. MyCase is continuously evolving to help our customers more effectively market, manage and grow their businesses, and contains core functionality that
addresses key operational issues, including managing calendars, contacts and documents, time tracking, billing and collections, communicating with clients and
sharing sensitive and privileged materials.
MyCase
-
Value+
Services
In addition to our core solution for MyCase, we offer the following optional Value+ services to our legal customers.
Website Services. We deliver and maintain professionally designed and architected websites that practitioners and their clients can utilize to access case
and matter information, communicate, and manage bills. Our websites are fully-integrated with the MyCase platform and designed to improve the effectiveness of
law firm marketing, streamline daily business tasks, and increase mobile presence.
3
Electronic Payment Services. Our payments platform allows practitioners to streamline billing and receivables online. Our customers can quickly and
conveniently bill their clients and receive payments electronically through MyCase's secure online portal.
Our Customers
As of December 31, 2017 , we had 11,708 property manager customers that directly and indirectly accounted for more than 90% of our annual revenue.
Our property manager customers typically manage portfolios ranging from 50 to 3,000 units, and include third-party managers and owner-operators who manage
single- and multi-family residences, commercial properties, community associations and student housing, as well as mixed real estate portfolios.
We also had 9,349 solo practitioners and small law firms - the latter typically with fewer than 20 lawyers - that directly and indirectly accounted for less than
10% of our annual revenue.
We define our customer base as the number of customers subscribing to our core solutions, exclusive of free trial periods with respect to MyCase. No
individual customer represented 10% or more of our total revenue for our fiscal year ended December 31, 2017 .
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, 2017 , we had 672 employees, and we consider our relationship with them to be very 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.
Our Growth Strategy
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, rather than the realization of short-term financial or business metrics, or short-term stockholder value. Our growth strategy is to
provide increasingly valuable cloud-based business management software solutions to SMBs within each specific vertical we choose to target. Key components of
our 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
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 rather than build certain functionality to serve our existing verticals or facilitate our 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 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 have made, and will continue to make, significant investments that expand our core
functionality and add new Value+ services in existing vertical markets to meet the evolving needs
4
and requirements of our customers. We expect our customers will continue to use our technology to manage their businesses 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.
Enter
New
Adjacent
Markets
. We continue to evaluate adjacent markets based on our 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 continue to review potential opportunities to expand into additional vertical markets. In that regard, we use
market validation techniques to assess the scope and nature of business challenges in any potential new vertical, as well as the likelihood that our target
customers may purchase a cloud-based solution to solve their problems in that vertical, and their potential spend on such solutions. Any new 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.
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, and use a variety of marketing techniques to
promote our software solutions. Our sales development team acts in partnership with our marketing organization 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 interactive sales methodology allows our sales team to quickly build relationships, assess our customers’ 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
through a variety of channels, including email, webinars, training, sales outreach and from within our software solution via in-app messaging.
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 relationship to
help them navigate their digital transformation. We design our software solutions to be simple and easy to implement, use and manage, and offer unlimited training
and support 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 onboarding team strives to ensure that customers are prepared to run their businesses on our platform and provide a seamless onboarding experience.
As a result of our assistance with data migration matters, 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,
as appropriate. We provide a dedicated team throughout the onboarding process and beyond, and share insights on best practices in both of our targeted verticals.
In addition, certain members of our Value+ teams are focused on guiding our customers through the adoption and utilization of our Value+ services.
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 platform. Our servers are located in state-of-the-art data
centers operated by third-party service providers. Physical security
5
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 using Amazon’s Simple Storage Service 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 in order to release new code frequently. We believe that
it is easier for our customers to adjust to 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 in anticipating 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 $16.6 million , $12.6 million and $9.6 million for the years ended December 31, 2017 , 2016 and
2015 , respectively.
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 believe our
competitors fall into the following primary categories:
• On-premise or cloud-based vertical market business management software providers that serve companies of all sizes in our markets; and
• On-premise or cloud-based horizontal business management software providers that offer broad solutions across multiple verticals.
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;
6
▪
▪
▪
▪
▪
▪
level of customer satisfaction;
size of customer base and level of user adoption and usage;
brand awareness and reputation;
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 factors described above. However, some of our competitors may have greater financial, technical and other
resources, greater name recognition and larger sales and marketing budgets; therefore, we may not always compare favorably with respect to some or all of the
foregoing factors.
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, 2018, we had twelve issued United States patents that directly relate to our
technology and expire between 2026 and 2033. 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” 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.
Seasonality
We experience limited seasonality in our Value+ services revenue, primarily with respect to the screening services we provide to our property manager
customers. These customers historically have processed fewer applications for new tenants during the fourth quarter holiday season; therefore, revenue associated
with 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 sequential revenue growth or a sequential decline in revenue in the fourth quarter of each of our most recent fiscal years. We expect
this seasonality to continue in the foreseeable future.
Segments
We have one operating and reportable segment consisting of various products and services that are all related to our cloud-based business management
software and Value + platforms for various vertical markets. For our revenue, net loss and total assets, see our Consolidated Financial Statements included in Part
II, Item 8 of this Annual Report.
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, Santa Barbara, 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
7
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.
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
We
manage
our
business
towards
the
achievement
of
long-term
growth,
which
may
not
be
consistent
with
the
short-term
expectations
of
some
investors.
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.
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. 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
8
functionality to our customers, delays or difficulties in introducing new Value+ services or other 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 adversely affect our
operating results, and preclude us from achieving our strategic objectives.
We
have
a
limited
operating
history
and
limited
experience
selling
our
solutions.
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 in 2008 we entered the real estate market with our first product, APM, to serve property managers. In 2012, we entered the
legal vertical through the acquisition of MyCase. 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 made substantial investments 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 may not
be consistently profitable. 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 an amount that is 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 continue to achieve profitability in the near term or that we will sustain profitability over any
particular period of time. Any additional operating losses will have a negative impact on our stockholders’ equity.
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, system of engagement and, increasingly, the system of intelligence 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
9
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
due
to
malicious
activities
or
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, this 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.
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
10
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.
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 with respect to 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 future regulatory requirements.
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 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.
11
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.
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 real estate and legal markets 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
12
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 real estate and legal
markets, 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, 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.
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;
13
▪
▪
▪
▪
▪
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, which tend to incrementally rise over time, 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.
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. We could lose property manager customers as a result of
numerous factors, including:
▪
▪
▪
▪
▪
▪
the expiration and non-renewal of subscriptions 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
14
▪
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. 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 and background and credit check 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. Further, our third-party data center providers could experience significant
outages outside of our control that could adversely affect our business.
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 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, this 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 or 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 rely on these organizations and service providers to provide us
with accurate and timely information, and we have significantly less
15
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 provide us with accurate and timely information, to fulfill
their contractual obligations of us, or to renew their contracts with us, could result in direct liability to us, 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 expenses. 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 real estate
and legal verticals may hinder new entrants that are unable to invest the necessary 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
16
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 cost 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
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, this 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.
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 our ability to expand into new verticals, beyond the real estate and legal markets. However, we may be
unable to identify new verticals that meet our criteria for selecting industries that cloud-based
17
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.
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
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;
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.
18
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
legal
liability
to
landlord
insurance,
if
insurance
premiums
decline
or
if
insureds
experience
greater
than
expected
losses,
our
operating
results
could
be
harmed.
We generate revenue by offering legal liability to landlord insurance through a wholly owned subsidiary. Some of our property manager customers
require residents to provide proof of legal liability to landlord insurance and offer to enroll residents in their legal liability to landlord insurance policy. 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 legal liability to landlord 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 legal liability to landlord 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 legal liability to landlord 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 resulting liability under the policies. To the extent we are required to pay out amounts to insureds that are significantly higher than our current reserves,
this could have a material adverse effect on our operating results.
Our
insurance
business
is
subject
to
state
governmental
regulation,
which
could
limit
the
growth
of
our
insurance
business
and
impose
additional
costs
on
us.
Our insurance-related wholly owned subsidiaries and third-party service providers maintain licenses with a number of individual state departments of
insurance. Collectively, we are subject to state governmental regulation and supervision in connection with the operation of our insurance business, which includes
both our legal liability to landlord insurance and more recent renters insurance businesses. 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 and
agencies, 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.
19
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 real estate and legal markets. Demand for our software solutions could be affected by factors that are
unique to and adversely affect our targeted verticals. In particular, the real estate and legal markets 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 real estate 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 real estate and legal market customers could be adversely affected by specific
factors that affect the real estate or legal markets.
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
real
estate
and
legal
markets,
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 real estate and legal markets. 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 not to 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
20
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 which are out of our control 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 we 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
term
of
each
subscription
agreement,
downturns
or
upturns
in
new
business
may
not
be
immediately
reflected
in
our
operating
results.
We recognize revenue from customers ratably over the term of each subscription agreement, which typically ranges 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, 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 continue
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 expend significant resources. Litigation brought to protect and
enforce our intellectual property rights could be costly, time-consuming and distracting to
21
management, and could result in the impairment or loss of portions of our intellectual property or require us to pay costly royalties. 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 legally 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
both
third-party
and
open
source
software,
which
may
pose
risks
to
our
proprietary
source
code
and/or
introduce
security
vulnerabilities,
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 United States 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 of 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.
We also use third-party commercial software in our software solutions and expect to continue to do so in the future. Third-party commercial software is
developed outside of our direct control, and may introduce security vulnerabilities that may be difficult to anticipate or mitigate. Further, there is no guarantee that
third-party software developers will continue active work on the third-party software that we use. Should development of in-use third-party software cease,
significant engineering effort may be required to create an in-house solution. These risks could also 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, including laws impacting net neutrality, could decrease the demand for our software
solutions and services and/or increase our cost of doing business, or require us to modify our software solutions to comply with or otherwise address any new or
changed laws or regulations.
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
22
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 decrease.
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 worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Federal, state and foreign government bodies
and agencies have in the past adopted, and 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/or delaying or impeding our deployment of new or existing 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
that
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 as administrative agent, and the lenders that are parties thereto, which we refer to as our 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 financing agreements that we may enter into. If not waived, defaults could cause any outstanding indebtedness
under our Credit Agreement and any future financing agreements that we may enter into to become immediately due and payable.
23
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.
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, 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 of 2002 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 Global Market 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 Jumpstart Our Business Startups, or 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:
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▪
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.
24
Our
ability
to
use
our
net
operating
loss
carryforwards
and
certain
other
tax
attributes
may
be
limited.
As of December 31, 2017 , we had United States federal net operating loss carryforwards of approximately $73.5 million and state net operating loss
carryforwards of approximately $48.0 million , which begin to expire in 2027 and 2023 , respectively. As of December 31, 2017 we also had federal and state
research and development credit carryforwards of $5.0 million and $5.4 million , respectively. The federal credits carryforwards will begin to expire in 2027 ,
while the state credit carryforwards apply indefinitely. Under Section 382 of the Internal Revenue Code of 1986, as amended, 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. 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 could 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, are subject to interpretation by the Financial Accounting Standards Board, 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.
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 2017 , the share price of our Class A common stock on the NASDAQ
Global Market fluctuated between $21.63 and $52.25 .
25
There are numerous factors that could cause fluctuations in the market price of our Class A common stock, including:
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▪
▪
▪
▪
▪
▪
▪
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▪
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;
any future announcements to repurchase our Class A common stock;
failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who 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;
public 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, 2017 , the holders of the
outstanding shares of our Class B common stock, including our executive officers, directors, and principal stockholders, collectively hold approximately 93% 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.
26
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.
We
cannot
predict
the
impact
that
our
capital
structure
may
have
on
our
stock
price.
In July 2017, S&P Dow Jones, a provider of widely followed stock indices, announced that companies with multiple share classes, such as ours, will not
be eligible for inclusion in certain of their indices. As a result, our Class A common stock will likely not be eligible for those stock indices. Additionally, FTSE
Russell, another provider of widely followed stock indices, recently stated that it plans to require new constituents of its indices to have at least five percent of their
voting rights in the hands of public stockholders. As of December 31, 2017, the holders of the outstanding shares of our Class B common stock, including our
executive officers, directors, and principal stockholders, collectively hold approximately 93% of the combined voting power of our outstanding capital stock. Many
investment funds are precluded from investing in companies that are not included in such indices, and these funds would be unable to purchase our Class A
common stock. We cannot assure you that other stock indices will not take a similar approach to S&P Dow Jones or FTSE Russell in the future. Exclusion from
indices could make our Class A common stock less attractive to investors and, as a result, the market price of our Class A common stock could be adversely
affected.
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:
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▪
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 our 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 our board of directors;
prohibit our stockholders from filling vacancies on our board of directors;
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, 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
27
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, 2017 , 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, 2017 , we had 0.6 million restricted stock units, or RSUs, 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 RSUs, 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.
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 use in 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.
28
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.
29
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 intraday sales prices per share of our Class A common
stock as reported on the NASDAQ Global Market for the periods indicated:
Year ended December 31, 2017:
First quarter
Second quarter
Third quarter
Fourth quarter
Year ended December 31, 2016:
First quarter
Second quarter
Third quarter
Fourth quarter
Holders
of
Record
High
Low
27.90 $
35.20 $
48.40 $
52.25 $
High
Low
15.19 $
15.57 $
19.98 $
24.50 $
21.63
25.05
31.15
39.60
11.07
12.07
14.12
18.27
$
$
$
$
$
$
$
$
As of February 1, 2018, there were 30 holders of record of our Class A common stock and 116 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 use in 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.
Stock
Repurchase
Program
Our board of directors may, from time to time, authorize our management to repurchase shares of our Class A common stock in open market transactions,
privately negotiated transactions or otherwise.
30
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 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 and the NASDAQ Computer Index, and assumes the reinvestment of any dividends.
The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common
stock.
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.
31
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, 2017 , 2016 and 2015 and the selected Consolidated Balance Sheet data as of December 31,
2017 and 2016 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 years ended December 31, 2014 and 2013 and the selected Consolidated Balance Sheet data as of December 31, 2015 ,
2014 and 2013 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 of this Annual Report 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
Income (loss) from operations
Other income (expense), net
Interest income (expense), net
Year Ended December 31,
2017
2016
2015
2014
2013
(in thousands, except per share data)
$
143,803 $
105,586 $
74,977 $
47,671 $
26,542
55,283
28,709
16,578
21,199
12,699
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
134,468
114,009
89,980
56,230
9,335
(8,423)
(15,003)
(8,559)
(96)
535
(37)
246
5
(595)
(121)
59
13,616
10,337
5,057
2,286
2,850
34,146
(7,604)
287
12
Income (loss) before provision for income taxes
9,774
(8,214)
(15,593)
(8,621)
(7,305)
Provision for income taxes
Net income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
(1) Includes stock-based compensation expense as follows (in thousands):
58
67
75
—
—
$
9,716 $
(8,281) $
(15,668) $
(8,621) $
(7,305)
0.29
0.28
(0.25)
(0.25)
(0.73)
(0.73)
33,849
35,151
33,561
33,561
21,336
21,336
(0.98)
(0.98)
8,757
8,757
(0.87)
(0.87)
8,437
8,437
32
Year Ended December 31,
2017
2016
2015
2014
2013
(in thousands)
Stock-based compensation expense included in Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)
$
725 $
471 $
124 $
68 $
Sales and marketing
Research and product development
General and administrative
723
657
442
382
3,991
3,006
115
41
727
48
19
757
63
39
49
96
Total stock-based compensation expense
$
6,096 $
4,301 $
1,007 $
892 $
247
Consolidated Balance Sheet Data:
Cash and cash equivalents and investment securities (1)
Total assets
Deferred revenue
Convertible preferred stock
2017
2016
2015
2014
2013
December 31,
(in thousands)
$ 68,310 $ 52,860 $
56,715 $
5,412 $
110,248
92,583
90,481
25,434
7,080
7,638
4,953
3,780
—
—
—
63,166
11,269
27,707
2,943
63,166
Total stockholders’ equity (deficit)
(43,959)
(1) Amounts for the years ended December 31, 2017, 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 and 2013.
(51,467)
85,079
72,697
69,682
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 to the real estate market, which comprises a significant majority of our
revenue, as well as to the legal market, and we intend to enter new vertical markets over time. 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.
In 2008, we entered the real estate market with our first product, AppFolio Property Manager, or APM, a property management solution designed to
address the unique operational and business requirements of property management companies. In 2012, we entered the legal market by acquiring MyCase, a legal
practice and case management solution primarily for solo practitioners and small law firms. Recognizing that our customers would benefit from additional
business-critical services that they can purchase as needed, we launched a series of Value+ services beginning in 2009. Through our market validation approach
and ongoing investment in product development, we continuously update our software solutions with new and innovative core functionality and Value+ services,
as well as assess opportunities in adjacent markets and new verticals.
Our solutions are designed to be a system of record to automate essential business processes, a system of engagement to enhance business interactions
between our customers and their clients and vendors, and, increasingly, a system of intelligence to anticipate, influence, and optimize customer experiences using
data to take action in real time.
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
33
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.
Our property management software solution for the real estate market provides property managers of various sizes (including both third-party managers
and owner-operators) innovative tools and services designed to streamline their property management businesses. Our software solution serves a variety of
property types, including single- and multi-family residential, commercial, community association, and student housing, and is continuously evolving to help our
customers more effectively market, manage and grow their businesses. Core functionality addresses key operational issues, including posting and tracking
vacancies, efficiently leasing vacant properties, facilitating tenant, owner and vendor communications, and accounting, among other things.
Today our property manager customers directly and indirectly account for more than 90% of our annual revenue. We define our property manager
customer base as the number of customers subscribing to our core solutions. Customer count and property manager units under management are summarized in the
table below:
2017
2016
Quarter Ended
Property manager
Property manager units under
management (in millions)
11,708
11,258
10,820
10,468
3.25
3.08
2.93
2.83
10,038
2.68
9,612
2.53
9,275
2.41
8,816
2.30
December 31,
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
Our legal software solution, MyCase, enables solo practitioners and small law firms to more efficiently administer their practice and manage their
caseload. MyCase is continuously evolving to help our customers more effectively market, manage and grow their businesses, and contains core functionality that
addresses key operational issues, including managing calendars, contacts and documents, time tracking, billing and collections, communicating with clients and
sharing sensitive and privileged materials.
Our legal customers directly and indirectly account for less than 10% of our annual revenue. We define our legal customer base as the number of
customers subscribing to our core solutions, exclusive of free trial periods. Law firm customer count is summarized in the table below:
2017
2016
Quarter Ended
Law firm
9,349
9,128 (1)
8,913
8,676
8,135
7,799
7,349
6,834
December 31,
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
(1) This customer count has been corrected from the previously-reported count of 9,214.
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. We intend to continue to invest in growth across our organization as we expand in our current markets, adjacent markets and enter
into new verticals. 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, but this trend may be interrupted from time to time as a result of accelerated
investment opportunities occurring in advance of realization of revenue.
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. Accordingly, 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.
Key Components of Results of Operations
Revenue
We charge our customers on a subscription basis for our core solutions and certain 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
34
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 a number of factors, including the
change in the number and type of our customers, the size and needs of our customers’ businesses, our customer renewal rates, and the level of adoption of our
Value+ subscription services by new and existing customers.
We also charge our customers usage-based fees for using certain Value+ services, although fees for electronic payment processing are paid by either our
customers or 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 a number of factors, including the number of new and existing customers that
adopt and utilize our Value+ services, the size and needs of our customers and our customer renewal rates.
We experience some seasonality in our Value+ services revenue, primarily with respect to the screening services we provide to our property manager
customers. These customers historically have processed fewer applications for new tenants during the fourth quarter holiday season; therefore, revenue associated
with 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 sequential revenue growth or a sequential decline in revenue in the fourth quarter of each of our most recent fiscal years. We expect
this seasonality to continue in the foreseeable future.
We also offer assistance to our customers with on-boarding to our core solutions, as well as website design services. 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 o ther revenue .
Costs
and
Operating
Expenses
Cost of Revenue . Cost of revenue consists of fees paid to third-party service providers, 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), 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. 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, and the creation of industry-
related content and collateral. Sales commissions and other incremental costs to acquire customers and grow adoption and utilization of our Value+ services by
new and existing customers are expensed as incurred. We focus our sales and marketing efforts on generating awareness of our software solutions, creating sales
leads, establishing and promoting our brands, and cultivating an educated community of successful and vocal customers. We intend to continue to invest in sales
and marketing as we grow to increase the size of our customer base and increase the adoption and utilization of Value+ services by our new and existing
customers.
Research and Product Development. Research and product development expense consists of personnel-related costs (including salaries, incentive-based
compensation, benefits, and stock-based compensation) for our employees focused on research and product development, 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 and services. 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 services, and expand into adjacent markets and new verticals.
General and Administrative. General and administrative expense consists of personnel-related costs (including salaries, incentive-based compensation,
benefits, and stock-based compensation) for employees in our executive, finance, information technology, or IT, human resources, corporate development, legal
and administrative organizations. In addition, general and
35
administrative expense includes fees for third-party professional services (including audit, legal, tax, and consulting services), other corporate expenses, and
allocated shared costs. We intend to incur incremental general and administrative costs associated with supporting the growth of our business.
Depreciation and Amortization. Depreciation and amortization expense includes depreciation of property and equipment, amortization of capitalized
software development costs and amortization of intangible assets. We depreciate or amortize property and equipment, software development costs and intangible
assets over their expected useful lives on a straight-line basis, which approximates the pattern in which the economic benefits of the assets are consumed. As we
expand our facilities footprint and increase our base of employees, we expect to have increased property and equipment expenditures and incremental depreciation
expense. In addition, 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 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. Interest expense includes
interest paid on outstanding borrowings under our Credit Agreement.
Results of Operations for the Years Ended December 31, 2017 , 2016 , and 2015
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:
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
Income (loss) from operations
Other income (expense), net
Interest income (expense), net
Income (loss) before provision for income taxes
Provision for income taxes
Net income (loss)
Year Ended December 31,
2017
2016
2015
Amount
%
Amount
%
Amount
%
$
143,803
100.0 % $
105,586
100.0 % $
74,977
100.0 %
55,283
28,709
16,578
21,199
12,699
134,468
9,335
(96)
535
9,774
58
38.4
20.0
11.5
14.7
8.8
93.5
6.5
(0.1)
0.4
6.8
—
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
(8,423)
(8.0)
(15,003)
(37)
246
(8,214)
67
—
0.2
(7.8)
0.1
5
(595)
(15,593)
(20.8)
75
0.1
45.2
34.8
12.7
19.1
8.1
120.0
(20.0)
—
(0.8)
$
9,716
6.8 % $
(8,281)
(7.8)% $
(15,668)
(20.9)%
(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
36
Year Ended December 31,
2017
2016
2015
$
$
725 $
471 $
723
657
442
382
3,991
3,006
124
115
41
727
6,096 $
4,301 $
1,007
Revenue
Core solutions
Value+ services
Other
Total revenues
Year Ended December 31,
2017
2016
2015
2016 to 2017 %
Change
2015 to 2016 %
Change
(dollars in thousands)
$
$
57,132 $
43,775 $
80,847
5,824
56,965
4,846
143,803 $
105,586 $
32,119
37,998
4,860
74,977
31%
42%
20%
36%
36 %
50 %
— %
41 %
Fiscal 2017 Compared to Fiscal 2016
Revenue increased $38.2 million , or 36% , in 2017 compared to 2016 , the substantial majority due to the growth in the number of property manager
customers and units under management. We experienced a 17% year over year increase in the number of property manager customers and a 21% year over year
increase in the number of property management units under management. Revenue from our Value+ services increased by $23.9 million , or 42% , in 2017
compared to 2016, mainly driven by increased usage of our electronic payments services and screening services by a larger property manager customer and unit
base. We also experienced growth in each of our other Value+ services during that period. Core solutions revenue increased $13.4 million , or 31% , in 2017
compared to 2016, mainly attributed to the growth in the number of our property manager customers, units under management, and strong customer renewal rates.
In each of 2017 and 2016 , we derived more than 90% of our revenue from our property manager customers.
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 the prior year. The increase in Value+ services was mainly driven by increased usage of our electronic payments services 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 legal liability to landlord 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 and 2015, we derived more than 90% of our revenue from our property manager customers.
Cost
of
Revenue
(Exclusive
of
Depreciation
and
Amortization)
Cost of revenue (exclusive of depreciation and amortization)
$
55,283
$
44,630
(dollars in thousands)
$
33,903
24%
32%
Percentage of revenue
38.4%
42.3%
45.2%
Year Ended December 31,
2017
2016
2015
2016 to 2017 %
Change
2015 to 2016 %
Change
Fiscal 2017 Compared to Fiscal 2016
Cost of revenue (exclusive of depreciation and amortization) increased $10.7 million , or 24% , in 2017 compared to 2016 based on the 36% increase in
revenue over the same period. The increase was primarily due to increased expenditures to third parties of $7.0 million directly associated with the increased
adoption and utilization of our Value+ services, as evidenced by the 42% increase in Value+ services revenues. There was also an increase in personnel-related
costs of $2.3 million due to an increase in headcount to support the continued growth of our business, as well as increased allocated and other costs of $1.3 million
driven by expanded facilities, IT and other expenses supporting our growth.
37
As a percentage of revenue, cost of revenue (exclusive of depreciation and amortization) improved to 38.4% , from 42.3% for the year ended December
31, 2017 compared to the year ended December 31, 2016. This improvement was primarily driven by our ability to increase revenue with a more moderate increase
in personnel-related costs, and a slight improvement in pricing with our third-party service providers as we continue to grow.
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, IT 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.
Sales
and
Marketing
Sales and marketing
Percentage of revenue
Fiscal 2017 Compared to Fiscal 2016
Year Ended December 31,
2017
2016
2015
2016 to 2017 %
Change
2015 to 2016 %
Change
$
28,709
(dollars in thousands)
$
28,827
$
26,076
— %
11%
20.0%
27.3%
34.8%
Sales and marketing expense remained relatively flat year over year as we focused upmarket in the SMB space and acquired fewer yet larger property
manager customers. We intend to continue to invest in sales and marketing as we grow to increase the size of our customer base and increase the adoption and
utilization of our Value+ services by our new and existing customers.
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, IT and other shared expenses supporting our growth.
Research
and
Product
Development
Research and product development
Percentage of revenue
Year Ended December 31,
2017
2016
2015
2016 to 2017 %
Change
2015 to 2016 %
Change
$
16,578
$
12,638
(dollars in thousands)
$
9,554
11.5%
12.0%
12.7%
31%
32%
38
Fiscal 2017 Compared to Fiscal 2016
Research and product development expense increased $3.9 million , or 31% , in 2017 compared to 2016. The increase was primarily the result of an
increase in personnel-related costs, net of capitalized software development costs of $3.7 million, due to headcount growth within our research and product
development organizations. We intend to continue to invest in research and product development as we continue to introduce additional core functionality to our
existing customers, roll out new Value+ services to attract new customers and expand offerings to existing customers, develop new products to serve new or
existing customers and expand into adjacent markets or new verticals.
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, IT and other shared expenses supporting our growth.
General
and
Administrative
General and administrative
Percentage of revenue
Fiscal 2017 Compared to Fiscal 2016
Year Ended December 31,
2017
2016
2015
2016 to 2017 %
Change
2015 to 2016 %
Change
$
21,199
$
17,979
(dollars in thousands)
$
14,343
14.7%
17.0%
19.1%
18%
25%
General and administrative expense increased $3.2 million , or 18% , in 2017 compared to 2016. The increase was primarily the result of an increase in
personnel-related costs due to headcount growth and an increase in incentive-based compensation. The increase in incentive-based compensation is primarily due
to the stock option modification of the Company's former Chief Executive Officer who announced his retirement on August 17, 2017.
Fiscal 2016 Compared to Fiscal 2015
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.
Depreciation
and
Amortization
Depreciation and amortization
Percentage of revenue
Fiscal 2017 Compared to Fiscal 2016
Year Ended December 31,
2017
2016
2015
2016 to 2017 %
Change
2015 to 2016 %
Change
$
12,699
$
9,935
(dollars in thousands)
$
6,104
8.8%
9.4%
8.1%
28%
63%
Depreciation and amortization expense increased $2.8 million , or 28% , in 2017 compared to 2016. The increase was the result of increased amortization
expense associated with higher capitalized software development balances.
Fiscal 2016 Compared to Fiscal 2015
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.
39
Interest
Income,
net
Interest income (expense), net
Percentage of revenue
Fiscal 2017 Compared to Fiscal 2016
Year Ended December 31,
2017
2016
2015
2016 to 2017 %
Change
2015 to 2016 %
Change
$
535
$
0.4%
(dollars in thousands)
$
(595)
246
0.2%
(0.8)%
117%
N/A
Interest income, net increased by $0.3 million in 2017 compared to 2016. The increase is primarily the result of higher investment security balances in the
more recent period.
Fiscal 2016 Compared to Fiscal 2015
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.
Provision
for
Income
Taxes
Provision for income taxes
Percentage of revenue
Year Ended December 31,
2017
2016
2015
2016 to 2017 %
Change
2015 to 2016 %
Change
$
58
$
—%
(dollars in thousands)
$
75
67
0.1%
0.1%
(13)%
(11)%
The provision for income taxes relates 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.
40
Quarterly Results of Operations
The following table sets forth selected unaudited quarterly consolidated statements of operations data for each of the eight quarters during the years ended
December 31, 2017 and 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.
2017
2016
Quarter Ended
December 31,
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
(in thousands, except per share data)
$
37,897 $
37,903
$
35,877
$
32,126 $
28,010 $
28,162 $
26,203 $
23,211
14,536
7,153
4,580
5,889
3,352
35,510
2,387
(3)
158
2,542
(35)
2,577 $
14,053
13,701
7,257
4,367
5,405
3,237
34,319
3,584
(5)
155
3,734
52
7,192
4,002
5,101
3,114
33,110
2,767
(60)
120
2,827
30
3,682
$
2,797
$
12,993
7,107
3,629
4,804
2,996
31,529
597
(28)
102
671
11
660 $
11,243
6,730
3,107
5,399
2,823
29,302
(1,292)
(3)
25
(1,270)
19
(1,289) $
11,645
6,979
3,464
4,642
2,636
29,366
(1,204)
(12)
102
(1,114)
11
(1,125) $
11,212
7,567
3,024
4,389
2,359
28,551
(2,348)
2
95
(2,251)
13
(2,264) $
10,530
7,551
3,043
3,549
2,117
26,790
(3,579)
(24)
24
(3,579)
24
(3,603)
0.08 $
0.07 $
0.11
0.10
$
$
0.08
0.08
$
$
0.02 $
0.02 $
(0.04) $
(0.04) $
(0.03) $
(0.03) $
(0.07) $
(0.07) $
(0.11)
(0.11)
$
$
$
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
Income (loss) from operations
Other income (expense), net
Interest income, net
Income (loss) before provision for income taxes
Income tax (benefit) provision
Net income (loss)
Net income (loss) per common share:
Basic
Diluted
(1) Includes stock-based compensation expense as follows (in thousands):
2017
2016
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
$
$
198 $
207
186
1,201
1,792
$
189 $
186
173
1,040
1,588 $
209 $
210
182
1,018
1,619 $
129 $
120
116
732
1,097 $
150 $
146
118
1,043
1,457 $
138 $
124
109
918
1,289 $
138 $
130
104
720
1,092 $
45
42
51
325
463
41
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
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
Income (loss) from operations
Other income (expense), net
Interest income, net
Income (loss) before provision for income
taxes
Provision for income taxes
Net income (loss)
2017
2016
Quarter Ended
December 31,
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
38.4
18.9
12.1
15.5
8.8
93.7
6.3
—
0.4
6.7
(0.1)
6.8 %
37.1
19.1
11.5
14.3
8.5
90.5
9.5
—
0.4
9.9
0.1
9.7 %
38.2
20.0
11.2
14.2
8.7
92.3
7.7
(0.2)
0.3
7.9
0.1
7.8 %
40.4
22.1
11.3
15.0
9.3
98.1
1.9
(0.1)
0.3
2.1
—
2.1 %
40.1
24.0
11.1
19.3
10.1
41.4
24.8
12.3
16.5
9.4
42.8
28.9
11.5
16.7
9.0
104.6
104.3
109.0
(4.6)
—
0.1
(4.5)
0.1
(4.6)%
(4.3)
—
0.4
(4.0)
—
(4.0)%
(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)%
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 Value+ services revenue, primarily with respect to the screening services we provide to our property manager customers. These customers historically have
processed fewer applications for new tenants during the fourth quarter holiday season; therefore, revenue associated with 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 sequential
revenue growth or a sequential decline in revenue in the fourth quarter of each of our most recent fiscal years. We expect this seasonality to continue in the
foreseeable future.
Overall, total costs and operating expenses as a percentage of revenue have improved during 2017 when compared to 2016, as we continue to realize
operating leverage. Cost of revenue (exclusive of depreciation and amortization) fluctuated each quarter based on the mix of Value+ services and related third
party costs. Research and product development costs fluctuated each quarter based on the amount of software development costs that were capitalized each quarter.
General and administrative expenses fluctuated each quarter primarily due to the impact of increased compensation due to an increase in headcount and incentive
based compensation.
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.
Liquidity and Capital Resources
Cash
and
Cash
Equivalents
As of December 31, 2017 and 2016 , our principal sources of liquidity were cash and cash equivalents and investment securities-current and investment
securities-noncurrent, which had an aggregate balance of $ 68.3 million and $52.9 million , respectively.
42
Working
Capital
As of December 31, 2017 , we had working capital of $29.9 million , compared to working capital of $10.9 million as of December 31, 2016 . The
increase in our working capital was primarily due to an increase in the current portion of investment securities, cash and cash equivalents, prepaid expenses and
accounts receivable and a decline in deferred revenue, offset by increases in our accrued employee expenses and accrued expenses from the continued growth of
our business.
Revolving
Facility
As of December 31, 2017 , we had a $25.0 million revolving line of credit, which we refer to as our Revolving Facility, under the terms of our Credit
Agreement with Wells Fargo, as administrative agent, and the lenders that are parties thereto. As of both December 31, 2017 and 2016 , we had no outstanding
balance under our Revolving Facility. For additional information regarding our Credit Agreement refer to Note 7, Long-term Debt of our Consolidated Financial
Statements included elsewhere in this Annual Report.
Liquidity
Requirements
We believe that our existing cash and cash equivalents, investment securities, available borrowing capacity of $25.0 million under our 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 twelve 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 markets adjacent to
those we serve today or entirely new verticals. Furthermore, our board of directors may, from time to time, authorize our management to repurchase shares of our
Class A common stock in open market transactions, privately negotiated transactions or otherwise.
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 (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash
Provided
by
(Used
in)
Operating
Activities
Year Ended
December 31,
2017
2016
2015
$
29,371 $
11,500 $
(22,828)
(1,133)
(13,065)
201
$
5,410 $
(1,364) $
(6,844)
(59,367)
72,862
6,651
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, 2017 , cash provided by operating activities was $29.4 million resulting from our net income of $9.7 million , adjusted
by non-cash charges of $18.9 million and a net increase in our operating assets and liabilities of $0.7 million . The non-cash charges primarily consist of $12.7
million of depreciation and amortization of our property and equipment and capitalized software and $6.1 million of stock-based compensation. The net increase in
our operating assets and liabilities was mostly attributable to a $3.2 million increase in accrued employee expenses related to an overall increase in personnel-
related costs. The increase in our operating assets and liabilities was partially offset by an increase in prepaid expenses and other current assets of $1.0 million , a
$0.9 million increase in accounts receivable, and a $0.6 million decrease in deferred revenue.
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
43
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 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.
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 capital expenditures.
For the year ended December 31, 2017 , investing activities used $22.8 million in cash primarily as a result of $26.6 million of investment securities
purchased offset by $16.5 million of maturities. In addition, we had an increase in capitalized software development costs of $10.5 million for the continued
investment in our software development, and capital expenditures of $2.2 million to purchase property and equipment for the continued growth and expansion of
our business.
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.
Cash
(Used
in)
Provided
by
Financing
Activities
Cash (used in) provided by financing activities is generally comprised of proceeds from our IPO, proceeds from the exercise of stock options and
restricted stock awards, or RSAs, proceeds from the issuance of debt or draws from our Revolving Facility and principal repayments of our term loan and on our
Revolving Facility.
For the year ended December 31, 2017 , financing activities used $1.1 million in cash primarily as a result of tax withholdings from RSU net settlements
offset by proceeds from stock option exercises.
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 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.
44
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, 2017 :
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
$
9,129 $
2,446 $
5,021 $
1,662 $
—
At December 31, 2017 , liabilities for unrecognized tax benefits of $2.1 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.
For additional information regarding our contractual obligations, commitments and indemnification arrangements refer to Note 8, Commitments and
Contingencies of our Consolidated Financial Statements included elsewhere in this Annual Report.
Off-Balance Sheet Arrangements
As of December 31, 2017 , 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 generally accepted accounting
principles in the United States. 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
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 included elsewhere in this Annual Report.
Revenue
Recognition
We generate revenue primarily from our customers for subscriptions to access 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 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 our customers or the clients of our customers at the time the electronic payment is processed.
45
Our legal software core solution offers 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 ASC 350 , Intangibles-Goodwill and Other .
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.
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, 2017 , we determined our goodwill was not impaired as the fair value of our reporting unit significantly exceeded its carrying value.
46
Stock-Based
Compensation
We account for stock-based compensation awards granted to employees and directors by recording compensation expense based on each award's grant-
date estimated fair value, in accordance with ASC 718, Compensation-Stock Compensation over the vesting period. We estimate the fair value of RSAs, RSUs and
performance based RSUs, or PSUs, 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, or PSOs, 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 RSAs 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 Class A 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-Scholes 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 that 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 .
47
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 RSUs. The RSUs vest 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 values of the PSOs are estimated using the Black-Scholes option-pricing model and the PSUs' fair
values are 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 or adjusted gross margin target 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 relevant performance
metric once such calculation is reviewed and approved by our board of directors.
Income
Taxes
We account for income taxes in accordance with ASC 740, Income Taxes , which 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 basis 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 included elsewhere in this Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest
Rate
Risk
At December 31, 2017 , we had cash and cash equivalents of $16.1 million consisting of bank deposits and money market funds and $52.2 million of
investment securities which consist of corporate bonds, United States government agency securities and certificates of deposit. The primary objective of investing
in securities is to support our liquidity and capital needs. We did not purchase these investments for trading or speculative purposes and have not used any
derivative financial instruments to manage our interest rate risk exposure.
Our investment securities are exposed to market risk due to interest rate fluctuations. While fluctuations in interest rates do not impact our interest income
from our investment securities as all of these securities have fixed interest rates, changes in interest rates may impact the fair value of the investment securities.
Since our investment securities are held as available for sale, all changes in fair value impact our other comprehensive income unless an investment security is
considered impaired in which case changes in fair value are reported in other expense. As of December 31, 2017 , a hypothetical 100 basis point decrease in
interest rates would have resulted in an approximate increase in fair value of $0.5 million and a hypothetical 100 basis point increase in interest rates would have
resulted in an approximate decrease in fair value 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, 2017 .
The borrowings under our Revolving Facility are at variable interest rates. However, there was no outstanding balance under our Revolving Facility as of
December 31, 2017 . Accordingly, a hypothetical change in interest rates would not have impacted our debt service obligations as of December 31, 2017 .
Inflation
Risk
We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in inflation rates.
48
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 Income (Loss)
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
50
51
52
53
54
55
57
The supplementary financial information required by this Item 8 is included in Item 7 of this Annual Report in the section entitled
"Quarterly Results of Operations."
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of AppFolio, Inc.
Opinion
on
the
Financial
Statements
We have audited the accompanying consolidated balance sheets of AppFolio, Inc. and its subsidiaries as of December 31, 2017 and 2016, and the related
consolidated statements of operations, comprehensive income (loss), convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the
three years in the period ended December 31, 2017, including the related notes (collectively referred to as the "consolidated financial statements"). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles
generally accepted in the United States of America.
Basis
for
Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 26, 2018
We have served as the Company's auditor since 2012.
50
APPFOLIO, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
December 31,
2017
2016
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 8)
Stockholders’ equity:
Preferred stock, $0.0001 par value, 25,000 authorized and no shares issued and outstanding as of December 31,
2017 and 2016
Class A common stock, $0.0001 par value, 250,000 shares authorized as of December 31, 2017 and 2016; 14,879
and 11,691 shares issued and outstanding as of December 31, 2017 and 2016, respectively
Class B common stock, $0.0001 par value, 50,000 shares authorized as of December 31, 2017 and 2016; 19,102
and 22,028 shares issued and outstanding as of December 31, 2017 and 2016, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
16,109 $
$
$
29,800
3,387
4,546
53,842
22,401
6,696
17,609
6,737
1,725
1,238
110,248 $
610 $
10,710
4,289
7,080
1,223
23,912
1,257
25,169
—
1
3
152,531
(209)
(67,247)
85,079
$
110,248 $
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
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
51
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
Income (loss) from operations
Other income (expense), net
Interest income (expense), net
Income (loss) before provision for income taxes
Provision for income taxes
Net income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Year Ended December 31,
2017
2016
2015
$
143,803 $
105,586 $
74,977
55,283
28,709
16,578
21,199
12,699
134,468
9,335
(96)
535
9,774
58
$
9,716 $
0.29
0.28
33,849
35,151
44,630
28,827
12,638
17,979
9,935
114,009
(8,423)
(37)
246
(8,214)
67
(8,281) $
(0.25)
(0.25)
33,561
33,561
33,903
26,076
9,554
14,343
6,104
89,980
(15,003)
5
(595)
(15,593)
75
(15,668)
(0.73)
(0.73)
21,336
21,336
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
52
APPFOLIO, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income (loss)
Other comprehensive income (loss):
Changes in unrealized gains (losses) on investment securities
Comprehensive income (loss)
Year Ended December 31,
2017
2016
2015
9,716 $
(8,281) $
(15,668)
(158)
9,558 $
102
(8,179) $
(153)
(15,821)
$
$
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
53
APPFOLIO, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
Convertible
Common Stock
Common Stock
Preferred Stock
Class A
Class B
Shares
Amount
Shares
Amount
Shares
Amount
Accumulated
Additional
Other
Paid-in
Capital
Comprehensive
Accumulated
Loss
Deficit
Total
68,027 $
—
63,166
—
— $
2
—
—
—
—
—
—
9,042 $
315
1 $
1,546 $
357
—
—
1,103
— $
—
—
(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
—
—
— 11,691
165
—
—
—
—
—
88
—
—
—
—
1
—
—
—
—
—
—
—
22,028
—
—
—
—
—
2,926
—
(2,926)
—
—
—
9
—
—
—
—
—
—
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
3
—
—
75,358
—
—
—
—
141,528
352
4,495
127
190
—
—
—
—
146,692
663
6,618
—
(1,559)
117
—
—
—
—
—
—
—
(153)
—
—
—
—
—
75,359
—
—
(153)
(15,668)
(15,668)
(153)
(68,682)
—
—
—
—
—
—
102
—
(51)
—
—
—
—
—
—
(158)
—
—
—
—
—
—
—
—
(8,281)
(76,963)
—
—
—
—
—
—
—
9,716
72,697
352
4,495
127
190
—
—
102
(8,281)
69,682
663
6,618
(1,559)
117
—
—
(158)
9,716
— $
— 14,879 $
1
19,102 $
3 $
152,531 $
(209)
$
(67,247)
$
85,079
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
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
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
loss
Net income
Balance at December
31, 2017
54
APPFOLIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in ) operating activities:
Year Ended December 31,
2017
2016
2015
$
9,716 $
(8,281) $
(15,668)
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
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 (used in) provided by financing activities
55
12,699
(39)
63
97
6,096
—
(876)
(1,009)
(84)
(100)
3,243
271
(558)
(148)
29,371
(2,213)
(10,455)
(26,648)
15
16,474
—
(1)
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)
(22,828)
(13,065)
663
—
—
(1,796)
—
—
—
—
118
(118)
—
(1,133)
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
APPFOLIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Net increase (decrease) 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,
2017
2016
2015
5,410
(1,364)
10,699
16,109 $
12,063
10,699 $
182 $
30
21 $
374
759
—
191 $
27
261 $
458
431
—
6,651
5,412
12,063
797
91
1,220
290
166
63,166
$
$
$
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
56
NOTES TO CONSOLIDATED AUDITED FINANCIAL STATEMENTS
APPFOLIO, INC.
1. Nature of Business
AppFolio, Inc. (“we”, the "Company" or “AppFolio”) provides industry-specific, cloud-based software solutions to the real estate market, which
comprises a significant majority of our revenue, as well as to the legal market, and we intend to enter new vertical markets over time. We serve small and medium-
sized businesses (“SMBs”) in the property management industry and solo practitioners and small law firms in the legal industry. We refer to solo practitioners and
small law firms as SMBs in connection with our legal vertical in these financial statements. Our solutions are designed to be a system of record to automate
essential business processes, a system of engagement to enhance business interactions between our customers and their clients and vendors, and, increasingly, a
system of intelligence to anticipate, influence, and optimize customer experiences using data to take action in real time.
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.
Use
of
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of 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.
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, 2017 and 2016 or revenue for the years ended December 31, 2017 , 2016 and 2015 .
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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, 2017 and 2016 , is comprised of certificates of deposits relating to collateral requirements for customer
automated clearing house 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, United States government agency securities ("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 an 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, 2017 , 2016 and 2015 , our allowance for doubtful accounts was not material.
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
58
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. An impairment charge would be recognized when the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair
value. The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the
use and eventual disposition of the asset or asset group. There were no impairment charges related to the identified long-lived assets for the years ended
December 31, 2017 , 2016 and 2015 .
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
59
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, 2017 and 2016 ,
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 generate revenue primarily from our customers for subscriptions to access 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 until the revenue is earned.
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.
We charge our customers on a subscription basis for certain of our Value+ services. Our subscription fees are designed to scale to the size of our
customers’ businesses. Subscription Value+ services include website hosting services and contact center services. We also charge our customers usage-based fees
for using certain Value+ services. Usage-based Value+ services include fees for electronic payment processing, applicant screening services, our legal liability to
landlord insurance program, collections, online vacancy advertising services and renters insurance. 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. Revenue from Value+ services is impacted by a number of factors,
including the number of new and existing customers that adopt and utilize our Value+ service, the size and needs of our customers and our customer renewal rates.
Other revenue includes revenue from one-time services related to on-boarding customers to our core solutions, website design services and online
vacancy advertising services offered to legacy RentLinx customers.
Our legal software core solution offers 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 are instead recognized in accordance with Staff Accounting Bulletin 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
60
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. 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 (ASC Topic 605, Revenue Recognition ). 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 ("VSOE"), (ii) third-party evidence of fair value ("TPE"), or
(iii) management’s best estimate of the selling price ("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 fees paid to third-party service providers, 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), 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, and the creation of industry-related content and
collateral. Sales commissions and other incremental costs to acquire customers and grow adoption and utilization of our Value+ services by new and existing
customers are expensed as incurred. We focus our sales and marketing efforts on generating awareness of our software solutions, creating sales leads, establishing
and promoting our brands, and cultivating an educated community of successful and vocal customers. Advertising expenses were $3.6 million for each of the years
ended December 31, 2017 , 2016 and 2015 , 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 and services. 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.
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, human resources, corporate development, legal and administrative organizations.
In addition, general and administrative expense includes fees for
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third-party professional services (including audit, legal, tax, and consulting 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 each award's grant-
date estimated fair value, in accordance with ASC 718, Compensation-Stock Compensation over the vesting period. We estimate the fair value of restricted stock
awards ("RSAs"), restricted stock units ("RSUs") and performance based RSUs ("PSUs") 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 ("PSOs") 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 Class A 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-Scholes 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 that 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 .
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 RSUs. The RSUs vest in equal tranches over four annual periods and 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
62
In 2016, we began granting PSOs and PSUs. The fair values of the PSOs are estimated using the Black-Scholes option-pricing model and the PSUs fair
values are 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 or adjusted gross margin target 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 relevant performance
metric once such calculation is reviewed and approved by our board of directors.
Income
Taxes
We account for income taxes in accordance with ASC 740, which 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.
Net
Income
(Loss)
per
Share
The net income (loss) per common share was the same for our Class A and Class B common shares because they are entitled to the same liquidation and
dividend rights and are therefore combined in the table below. The following table presents a reconciliation of our weighted average number of Class A and Class
B common shares used to compute net income (loss) per share (in thousands):
Weighted average common shares outstanding
Less: Weighted average unvested restricted shares subject to repurchase
Weighted average common shares outstanding; basic
Weighted average common shares outstanding; basic
Plus: Weighted average options, RSUs and restricted shares used to compute diluted net income per share
Weighted average common shares outstanding; diluted
Year Ended December 31,
2017
33,876
27
2016
33,639
78
33,849
33,561
33,849
1,302
35,151
33,561
—
33,561
2015
21,486
150
21,336
21,336
—
21,336
Approximately 548,000 shares of PSOs and PSUs are not included in the computations of diluted and anti-dilutive shares for the year ended
December 31, 2017 , as they are considered contingently issuable upon the satisfaction of pre-defined performance measures and their respective performance
measures have not been met.
For the years ended December 31, 2016 and 2015 , we reported a net loss and therefore all potentially dilutive common shares are anti-dilutive and have
been excluded from the calculation of net loss per share. The following table presents the number of anti-dilutive common shares excluded from the calculation of
weighted average number of shares used to compute diluted net income (loss) per share for the years ended December 31, 2017 , 2016 , and 2015 (in thousands):
63
Options to purchase common stock
Unvested RSAs
Unvested RSUs
Contingent RSUs (1)
Total shares excluded from net loss per share attributable to common stockholders
December 31,
2017
2016
2015
—
—
21
6
27
1,718
46
496
34
1,171
120
17
49
2,294
1,357
(1) The reported shares are based on fixed price RSU commitments for which the number of shares has not been determined at the grant date. The number of
shares have been determined by dividing the fixed price commitment to issue shares in the future by the closing price of our common stock as of the applicable
reporting period date.
Recently
Adopted
Accounting
Pronouncements
Under the Jumpstart our Business Startups Act (the “JOBS Act”), we meet the definition of an emerging growth company. We have irrevocably elected to
opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, Compensation - Stock
Compensation (Topic 781), Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which amends and simplifies the accounting for
share-based payment awards in three areas: (i) income tax consequences, (ii) classification of awards as either equity or liabilities, and (iii) classification on the
statement of cash flows. ASU 2016-09 also provides an accounting policy election to account for forfeitures as they occur. We adopted this guidance on January 1,
2017. The impact on the Company’s consolidated financial statements was not material due to the full valuation allowance on our deferred tax assets. We have
elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized each period.
Recent
Accounting
Pronouncements
Not
Yet
Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers , as amended, which requires an entity to recognize the
amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers (the “new revenue standard”). The new revenue
standard also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers , which discusses the deferral of incremental costs of
obtaining a contract with a customer. The new revenue standard will be effective on January 1, 2018. The standard permits the use of either a full retrospective or
modified retrospective transition method.
The Company will adopt the new revenue standard as of January 1, 2018, using the modified retrospective transition method applied to those contracts
which were not completed as of that date. Upon adoption, we will recognize the cumulative effect of adopting this guidance as an adjustment to our opening
balance of accumulated deficit. Prior periods will not be retrospectively adjusted.
We do not expect a material impact on our revenue upon adoption. The primary impact of adopting the new revenue standard relates to the deferral of
incremental costs of obtaining contracts. We have substantially completed our assessment of the impacts of the new revenue standard on incremental costs of
obtaining contracts and we expect to record an adjustment to decrease accumulated deficit as of January 1, 2018 for approximately $3.0 million related to the
accounting for the cost of sales commissions. Historically, sales commissions and other incremental costs to obtain contracts are expensed as incurred. Under the
new revenue standard, such costs will be deferred and recognized over the period of benefit which we have determined to be three years . The Company is in the
process of implementing the necessary changes to its accounting policies, processes, internal controls and information systems that will be required to meet the
new revenue standard’s reporting and disclosure requirements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). Under ASU 2016-02, an entity will be required to recognize
right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting
guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about
leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public
companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and
requires a modified retrospective adoption, with early adoption permitted. There are additional optional practical expedients that an entity may elect to apply. We
anticipate this standard will have a material impact on our consolidated
64
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. We are in the process of implementing changes to our processes in conjunction with our
review of existing lease agreements. We will adopt ASU 2016-02 effective January 1, 2019 and expect to elect certain available transitional practical expedients.
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 do not expect the
adoption of this guidance to have a material impact 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 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 November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"), which provides
amendments to current guidance to address the classification and presentation of changes in restricted cash in the statement of cash flows. ASU 2016-18 is
effective on January 1, 2018 and early adoption is permitted. We expect that adoption will change the current presentation of restricted cash on our statement of
cash flows as well as require additional disclosures to reconcile cash and cash equivalents per the balance sheet to cash and cash equivalents on the statement of
cash flows.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU
2017-04"), which eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value
of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s
fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax
deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. ASU 2017-04
also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative
test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the
quantitative impairment test is necessary. ASU 2017-04 is effective for public entities for fiscal years beginning after December 15, 2019. Early adoption is
permitted for interim or annual goodwill impairment tests performed on dates after January 1, 2017. We do not expect the adoption of this guidance to have a
material impact on our financial condition, results of operations, cash flows or disclosures.
In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on
Purchased Callable Debt Securities (“ASU 2017-08”) . ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium.
Specifically, ASU 2017-08 requires the premium to be amortized to the earliest call date. ASU 2017-08 does not require an accounting change for securities held at
a discount; the discount continues to be amortized to maturity. For public companies, ASU 2017-08 is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The amendments should be applied on a
modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We do not expect the
adoption of this guidance to have a material impact on our financial condition, results of operations, cash flows or disclosures since our current accounting policy is
in accordance with ASU 2017-08.
65
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09") .
ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will
reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not
apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument
are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance
is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We do not expect
the adoption of this guidance to have a material impact on our financial condition, results of operations, cash flows or disclosures.
3. Investment Securities and Fair Value Measurements
Investment
Securities
Investment securities classified as available-for-sale consisted of the following at December 31, 2017 and 2016 (in thousands):
December 31, 2017
Amortized Cost
Gross Unrealized Gains
Corporate bonds
Agency securities
Certificates of deposit
Total available-for-sale investment securities
Corporate bonds
Agency securities
Certificates of deposit
Total available-for-sale investment securities
$
$
$
$
38,383 $
11,045
2,982
52,410 $
30,492 $
6,248
5,472
42,212 $
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses Estimated Fair Value
38,217
(166) $
— $
—
1
1 $
(42)
(2)
(210) $
11,003
2,981
52,201
December 31, 2016
Gross Unrealized Losses Estimated Fair Value
30,445
(56)
$
9 $
—
16
25 $
(20)
—
(76)
$
6,228
5,488
42,161
As of December 31, 2017 , the unrealized losses on investment securities which have been in a net loss position for twelve months or greater were not
material. These unrealized losses are considered temporary and there were no impairments considered to be "other-than-temporary" based on our evaluation of
available evidence, which includes our intent to hold these investments to maturity or a recovery of the cost basis.
At December 31, 2017 and 2016 , 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, 2017
December 31, 2016
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
29,850 $
22,560
52,410 $
29,800 $
22,401
52,201 $
15,475 $
26,737
42,212 $
15,473
26,688
42,161
$
$
66
During the years ended December 31, 2017 and 2016 , we had sales and maturities (which include calls) of investment securities, as follows (in
thousands):
Corporate bonds
Agency securities
Certificates of deposit
Corporate bonds
Agency securities
Certificates of deposit
Treasury bills
Year Ended December 31, 2017
Gross Proceeds from
Sales
Gross Realized Gains Gross Realized Losses
$
— $
— $
1
—
1 $
—
—
— $
$
Year Ended December 31, 2016
— $
15
—
15 $
Gross Realized Gains Gross Realized Losses
$
7 $
— $
Gross Proceeds
from Sales
7,554 $
3,005
—
2,000
—
—
—
— $
12,559 $
5
—
—
12 $
$
Gross Proceeds
from Maturities
10,690
3,294
2,490
16,474
Gross Proceeds
from Maturities
2,480
11,557
1,245
6,055
21,337
For the years ended December 31, 2017 , 2016 and 2015 we received interest income net of the amortization and accretion of the premium and discount
of $0.7 million , $0.5 million , and $0.2 million , respectively.
Fair
Value
Measurements
Recurring Fair Value Measurements
Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016 , 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, 2017
5,524 $
— $
— $
5,524
—
—
2,981
8,505 $
38,217
11,003
—
49,220 $
—
—
—
— $
38,217
11,003
2,981
57,725
$
$
67
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
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,
2017 . The valuation techniques for the items in the table above are as follows:
Cash
Equivalents
As of December 31, 2017 and 2016 , cash equivalents include cash invested in money market funds. Fair value is based on market prices for identical
assets.
Available-for-Sale
Investment
Securities
The fair value of our corporate bonds and agency 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. The fair value of our certificates of deposit is based on market prices
for identical assets.
Non-Recurring
Fair
Value
Measurements
Certain assets, including goodwill, intangible assets and our note receivable with SecureDocs, are also subject to measurement at fair value on a non-
recurring basis using Level 3 measurement, but only when they are deemed to be impaired as a result of an impairment review. For the years ended December 31,
2017 and 2016 , no impairments were identified on those assets required to be measured at fair value on a non-recurring basis.
4. Property and Equipment
Property and equipment consists of the following as of December 31, 2017 and 2016 (in thousands):
Data center and computer equipment
Furniture and fixtures
Office equipment
Leasehold improvements
Gross property and equipment
Less: Accumulated depreciation
Total property and equipment, net
December 31,
2017
2016
5,233 $
2,415
763
5,029
13,440
(6,744)
6,696 $
4,913
2,465
726
4,035
12,139
(5,062)
7,077
$
$
Depreciation expense for property and equipment totaled $2.3 million , $2.3 million , and $1.4 million for the years ended December 31, 2017 , 2016 and
2015 , respectively.
68
5. 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,
2017
2016
$
$
44,626 $
(27,017)
17,609 $
33,545
(18,006)
15,539
Capitalized software development costs were $11.1 million , $11.8 million and $8.0 million for the years ended December 31, 2017 , 2016 and 2015 ,
respectively. Amortization expense with respect to software development costs totaled $9.0 million , $6.2 million and $3.5 million for the years ended
December 31, 2017 , 2016 , and 2015 , respectively.
Future amortization expense with respect to capitalized software development costs as of December 31, 2017 is estimated as follows (in thousands):
Years Ending December 31,
2018
2019
2020
2021
Total amortization expense
6. Intangible Assets
$
$
9,309
6,061
2,210
29
17,609
Intangible assets consisted of the following as of December 31, 2017 and 2016 (in thousands, except years):
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, 2017
$
$
790 $
4,811
930
680
40
273
285
(538) $
(3,871)
(539)
(623)
(37)
(273)
(203)
252
940
391
57
3
—
82
7,809 $
(6,084) $
1,725
5.0
6.0
9.0
3.0
3.0
5.0
5.0
5.9
69
Gross Carrying
Value
Accumulated
Amortization
Net Carrying
Value
Weighted Average Useful
Life in Years
December 31, 2016
Customer relationships
$
Technology
Trademarks
Partner relationships
Non-compete agreements
Domain names
Patents
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
Amortization expense totaled $1.4 million , $1.4 million and $1.3 million for the years ended December 31, 2017 , 2016 and 2015 , respectively.
Amortization expense for each of the five fiscal years through December 31, 2022 is estimated as follows (in thousands):
Years Ending December 31,
2018
2019
2020
2021
2022
Total amortization expense
7. Long-term Debt
Credit
Agreement
$
$
929
352
259
124
61
1,725
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 (the "Original Revolving Facility") with Wells Fargo, as administrative agent, and the lenders that are parties thereto ("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 with Wells Fargo (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 the Revolving Facility, and cancel it in full at any time without
premium or penalty.
70
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 our business and properties, and maintain adequate insurance. The negative covenants restrict us
from, among other things, incurring additional indebtedness, prepaying certain types of indebtedness, encumbering or disposing of our 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, 2017 , we were in
compliance with the financial covenants of the Credit Agreement.
As of December 31, 2017 and 2016 , there was no outstanding balance 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 at December 31, 2017 and 2016 were recorded in other assets .
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 .
8. Commitments and Contingencies
Lease
Obligations
As of December 31, 2017 , we had operating lease obligations of approximately $9.1 million through 2022. A summary of our future minimum payments
for obligations under non-cancellable operating leases is as follows (in thousands):
Years Ending December 31,
2018
2019
2020
2021
2022
Total lease commitments
$
$
2,446
2,509
2,512
1,483
179
9,129
We recorded rent expense of $2.1 million , $2.0 million and $1.2 million for the years ended December 31, 2017 , 2016 and 2015 , respectively.
Insurance
We have a wholly owned subsidiary, Terra Mar Insurance Company, Inc., which was established to provide our customers with the option to purchase
legal liability to landlord 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 legal liability to landlord 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, 2017 and 2016 was $0.5 million and
$0.3 million , respectively, and is included in other current liabilities on the Consolidated Balance Sheets.
Included in other current assets as of December 31, 2017 and 2016 are $1.8 million and $1.2 million , respectively, of deposits held with a third party
related to requirements to maintain collateral for our insurance services.
71
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 any legal claims been brought against us, in connection with these indemnification arrangements. As of December 31, 2017 and 2016 , we had not
accrued a liability for these indemnification arrangements because we determined that the likelihood of incurring a payment obligation, if any, in connection with
these indemnification arrangements is not probable or reasonably possible, and the amount or range of amounts of any such liability is not reasonably estimable.
9. 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, 2017 , there were 14,879,000 shares of Class A common stock outstanding, 19,102,000 shares of Class B common stock 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 . Upon the closing of our initial public offering ("IPO"), all shares of our convertible preferred stock and common stock held prior to the
offering were converted into shares of Class B common stock. Currently, 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
72
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.
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 consisting of Series A convertible preferred stock, Series B convertible preferred stock, Series B-1
convertible preferred stock, Series B-2 convertible preferred stock and Series B-3 convertible preferred stock (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.
10. 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 (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 2015 Plan increase by the lesser of (i) the number of shares of our Class A common stock subject to
awards granted under the 2015 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, 2017 , we have reserved an aggregate of 3,441,355 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, 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, and RSAs have been issued during 2017 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
73
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. Following our IPO, our board of directors determined not to make any further awards
under the 2007 Plan. The 2007 Plan will continue to govern outstanding awards granted under the 2007 Plan. As of December 31, 2017 , options to purchase an
aggregate of 677,417 shares of our Class B common stock remained outstanding under the 2007 Plan. The 2007 Plan is 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 .
A summary of our stock option activity for the year ended December 31, 2017 is as follows (number of shares in thousands):
Options outstanding as of December 31, 2016
Options granted
Options exercised
Options cancelled/forfeited
Options outstanding as of December 31, 2017
As of December 31, 2017:
Options vested or expected to vest
Options exercisable (1)
Number of
Shares
Weighted
Average
Exercise
Price per Share
Weighted
Average
Remaining
Contractual Life
in Years
1,718 $
172
(165)
(33)
1,692 $
8.75
24.77
4.02
10.17
10.81
1,688 $
10.82
8.2
7.3
7.3
6.4
(1) Included in the options exercisable is 65,000 shares which have an early exercise option. The weighted average exercise price of these options is $5.64
830 $
7.22
per share and the weighted average contractual life in years is 7.1 years .
During the year ended December 31, 2017 , we granted PSOs to purchase up to 172,000 shares of our Class A common stock. The PSOs have a
weighted average exercise price of $24.77 per share. Vesting of the PSOs is based on the achievement of pre-established performance metrics for the year ended
December 31, 2019, and continued employment throughout the performance period. Of the PSOs granted during 2017, 132,000 shares would vest based upon the
maximum payout of 100% when the 2019 free cash flow performance metric meets the maximum achievement of 150% . For performance at 100% of the
targeted 2019 free cash flow metric, approximately 61% of the PSOs would vest. For performance at 80% of the targeted metric, approximately 48% of the
PSOs would vest. For performance below 80% of the 2019 targeted metric, no PSOs would vest, all previously recognized compensation expense for the PSOs
would be reversed, and no compensation expense would be recognized. The remaining 40,000 PSOs granted during 2017 have a pre-established adjusted gross
margin target for 2019. PSOs tied to the gross margin performance metric have two levels of vesting, with 50% vesting based upon the achievement of 110% of
the targeted amount and the remaining 50% vesting upon the achievement of 115% of the targeted amount. If the 110% performance target is not met, no
shares would vest and all previously recognized expense for those PSOs would be reversed and no compensation expense would be recognized.
74
Included in the options outstanding as of December 31, 2017 are 500,000 PSOs granted in 2016, which vest based on the achievement of a pre-
established free cash flow performance metric for the years ended December 31, 2017 and 2018. The number of PSOs granted in 2016 related to the performance
metrics for the years ended December 31, 2017 and 2018, assumes achievement of the performance metric at the maximum level, which is 150% of the targeted
performance metric. For performance at 100% of the targeted metric, approximately 67% of the PSOs would vest. For performance at 80% of the targeted
metric, approximately 53% would vest. For performance below 50% of the 2017 targeted metric or 80% of the 2018 targeted metric, no PSOs would vest, all
previously recognized compensation expense for PSOs would be reversed, and no compensation expense would be recognized.
During the year ended December 31, 2017 , 247,000 of the PSOs vested based on the achievement of 148% of the pre-established free cash flow
performance metric for the year ended December 31, 2016, and 3,000 PSOs were cancelled as a result of the PSOs being granted at 150% of the target metric.
During the year ended December 31, 2016, $1.0 million of expense was recognized related to the PSOs that vested during the year ended December 31, 2017 .
We recognize expense for the PSOs based on the grant date fair value of the PSOs that we determine are probable of vesting. Adjustments to
compensation expense are made each period based on changes in our estimate of the number of PSOs that are probable of vesting.
Our stock-based compensation expense for stock options for the years ended December 31, 2017 , 2016 and 2015 was $2.9 million , $2.4 million , and
$0.7 million , respectively.
The fair value of stock options granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following table summarizes
information relating to our stock options granted during the years ended December 31, 2017 , 2016 and 2015 :
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,
2017
2016
2015
172
24.77
9.58
$
$
750
12.85
4.85
$
$
$
$
2.02%
6.4
35%
—
1.45%
5.9
37%
—
359
9.53
6.89
1.58%
6.2
46%
—
As of December 31, 2017 , the total remaining stock-based compensation expense for unvested stock options was $1.8 million , which is expected to be
recognized over a weighted average period of 1.2 years.
The total intrinsic value of options exercised in 2017 , 2016 and 2015 was $4.6 million , $1.9 million , and $3.1 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, 2017 , the total intrinsic value of all outstanding options was $51.9 million . The total intrinsic value of exercisable options as of
December 31, 2017 was $28.4 million . The total intrinsic value of options vested and expected to vest as of December 31, 2017 was $51.8 million .
The excess tax benefit realized from option exercises during the year ended December 31, 2017 and 2016 was $5.2 million and $0.2 million , respectively.
There were no excess tax benefits realized for the tax deductions from stock options exercised during the year ended December 31, 2015.
75
Restricted
Stock
Units
A summary of activity in connection with our RSUs for the year ended December 31, 2017 is as follows (number of shares in thousands):
Unvested as of December 31, 2016
Granted
Vested
Forfeited
Unvested as of December 31, 2017
Number of Shares
Weighted- Average Grant Date
Fair Value per Share
$
496
315
(150)
(63)
598
$
13.34
26.10
13.31
16.59
19.75
During the year ended December 31, 2017 , we granted a total of 315,000 RSUs and PSUs: 202,000 RSUs vest annually over four years; 100,000
PSUs vest based upon achievement of a pre-established free cash flow performance metric for each of the years ended December 31, 2017, 2018, and 2019, and
continued employment throughout the performance period; and 13,000 PSUs were granted and vested as a result of the attainment of the 2016 performance
metric. 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 165% of the initial target awards. For performance at 150%
of the targeted metric, 150% to 165% of the PSUs would vest. For performance below 80% of the targeted metric, no PSUs would vest, no compensation
expense would be recognized, and all previously recognized compensation expense for PSUs would be reversed.
During the year ended December 31, 2017 , 41,000 of the PSUs vested based on the achievement of 148% of the pre-established free cash flow
performance metric for the year ended December 31, 2016, and an additional 13,000 PSUs were granted and vested as a result of the attainment of the 2016
performance metric as approved by our board of directors. During the year ended December 31, 2016, $0.5 million of expense was recognized related to the PSUs
that vested during the year ended December 31, 2017 .
Included in the unvested RSUs and PSUs as of December 31, 2017 are 56,000 PSUs granted in 2016, which vest based on the achievement of a pre-
established free cash flow performance metric for the years ended December 31, 2017 and 2018, and continued employment throughout the performance period.
The number of PSUs granted in 2016 relates to the performance metrics for the years ended December 31, 2017 and 2018, and 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 below 50% of the
targeted metric for 2017 or 80% of the targeted metric for 2018, no PSUs would vest, no compensation expense would be recognized, and all previously
recognized compensation expense for PSUs would be reversed.
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. Our stock-based compensation
expense for the RSUs and PSUs for the years ended December 31, 2017 , 2016 , and 2015 , was $3.6 million , $1.8 million and $0.1 million , respectively.
As of December 31, 2017 , the total remaining stock-based compensation expense for these RSUs was $8.3 million , which is expected to be recognized over
a weighted average period of 2.4 years .
76
Restricted
Stock
Awards
A summary of activity in connection with our RSAs for the year ended December 31, 2017 is as follows (number of shares in thousands):
Unvested as of December 31, 2016
Granted
Vested
Forfeited
Unvested as of December 31, 2017
Number of Shares
Weighted- Average Grant Date
Fair Value per Share
$
46
9
(39)
—
16
$
8.55
33.30
9.24
—
20.93
We have the right to repurchase any unvested RSAs. RSAs vest over a four -year period for employees and over a one -year period for non-employee
directors. For the years ended December 31, 2017 , 2016 and 2015 , we recognized stock-based compensation expense for RSAs of $358,000 , $454,000 and
$381,000 , respectively. During 2017 , the grant date fair value of the shares vested was $354,000 .
As of December 31, 2017 , the total remaining stock-based compensation expense for unvested RSAs was $0.2 million , which is expected to be
recognized over a weighted average period of 0.6 years .
11. Income Taxes
For the years ended December 31, 2017 , 2016 and 2015 , we recorded income tax expense of $58,000 , $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.
Our effective tax rate differs from the United States 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 ("NOLs". Set forth below is a reconciliation of the components that caused our
provision for income taxes to differ from amounts computed by applying the United States federal statutory rate of 34% for the years ended December 31, 2017 ,
2016 and 2015 :
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
Change in federal rate
Research and development tax credits
Provision for income taxes
Year Ended December 31,
2017
2016
2015
34 %
34 %
34 %
(14)
(15)
2
—
(60)
74
(20)
1 %
7
(4)
(2)
(1)
(42)
—
7
(1)%
3
(2)
(1)
—
(38)
—
3
(1)%
77
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
December 31,
2017
2016
$
19,519 $
8,278
2,493
30,290
(23,827)
6,463
(4,293)
(6)
(1,693)
(549)
(6,541)
$
(78) $
31,436
4,032
2,771
38,239
(29,417)
8,822
(5,820)
(403)
(2,040)
(632)
(8,895)
(73)
As of December 31, 2017 , we had federal net operating loss carryforwards of $73.5 million , which will begin to expire in 2027 . As of December 31, 2017 ,
we had state net operating loss carryforwards of $48.0 million , which will begin to expire in 2023 . As of December 31, 2017 we also had federal and state
research and development credit carryforwards of $5.0 million and $5.4 million , respectively. The federal credit carryforwards will begin to expire in 2027 , while
the majority of the state credits carryforward indefinitely.
The Internal Revenue Code of 1986, as amended (“IRC”), imposes substantial restrictions on the utilization of NOLs and other tax attributes in the event
of an “ownership change” of a corporation. Accordingly, a company’s ability to use pre-change NOLs and may be limited as prescribed under IRC Section 382.
Events which may cause limitation in the amount of the NOLs 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. The Company has undertaken a NOL/382 analysis and has determined that there are no limitations on the NOL
carryforwards at December 31, 2016.
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 in the future. A significant piece of objective negative evidence evaluated was the cumulative loss incurred through December 31, 2017 . Such
objective evidence limits the ability to consider other subjective positive evidence such as current year taxable income and future income projections. On the basis
of this evaluation, as of December 31, 2017 , a valuation allowance of $23.8 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, 2017 , 2016 and 2015 was as follows (in thousands):
Valuation allowance, at beginning of year
Increase (decrease) in valuation allowance
Valuation allowance, at end of year
Year Ended December 31,
2017
2016
2015
$
$
29,417 $
(5,590)
23,827 $
25,926 $
3,491
29,417 $
19,900
6,026
25,926
78
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,
2017
2016
2015
$
$
4,032 $
(2,210)
283
2,105 $
2,867 $
—
1,165
4,032 $
2,014
—
853
2,867
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, 2017 and 2016 , 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 twelve 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.
On December 22, 2017, the United States government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the
"Tax Act"). The Tax Act significantly revises the existing tax law by, among other things, lowering the United States corporate income tax rate from 35% to 21%
beginning in 2018. The Company reviewed and incorporated the impact of the Tax Act in its tax calculations and disclosures. The primary impact on the Company
stems from the re-measurement of its deferred taxes at the new corporate tax rate of 21%, which reduced the Company's net deferred tax assets, before valuation
allowance, by $7.2 million . Due to the full valuation allowance, the change in deferred taxes was fully offset by the change in valuation allowance, except for an
immaterial amount that is reflected in income tax expense related to the rate re-measurement of the tax deductible goodwill. The Tax Act did not have a significant
impact on the Company's Consolidated Financial Statements for the year ended December 31, 2017.
79
12. Revenue and Other Information
The following table presents our revenue categories for the years ended December 31, 2017 , 2016 and 2015 (in thousands):
Core solutions
Value+ services
Other
Total revenues
Year Ended December 31,
2017
2016
2015
$
57,132 $
43,775 $
80,847
5,824
56,965
4,846
$
143,803 $
105,586 $
32,119
37,998
4,860
74,977
Our revenue is generated primarily from United States customers. All of our property and equipment is located in the United States.
13. 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 $0.8
million and $1.1 million for the years ended December 31, 2017 and 2016 . No cash contributions to the plan were made during the year ended December 31,
2015. Contribution expense recognized for the 401(k) plan was $0.8 million , $0.7 million , and $0.4 million for the years ended December 31, 2017 , 2016 , and
2015 , respectively.
14. Subsequent Events
On February 20, 2018, our board of directors adopted a Long-Term Executive Cash Incentive Plan, pursuant to which it may grant performance awards
(“Performance Awards”) that are intended to reward our executive officers for their individual contributions to our achievement of one or more long-term company
performance goals and objectives over a specified period of time, and granted Performance Awards to Jason Randall, our Chief Executive Officer, and Ida Kane,
our Chief Financial Officer (the “Recipients”). The Performance Awards are being granted in lieu of additional equity incentive awards to the Recipients.
80
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, 2017 , 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, 2017 , 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, 2017 . 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, 2017 .
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
Throughout 2017, in order to facilitate our adoption of the new revenue recognition accounting standard on January 1, 2018, we implemented internal
controls to help ensure we properly evaluated our customer contracts and assessed the impact to our consolidated financial statements. We expect to continue to
implement additional internal controls related to the adoption of this standard in the first quarter of 2018.
81
There were no other 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, 2017 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Adoption of Long-Term Cash Bonus Plan
On February 20, 2018, our board of directors, upon recommendation of our compensation committee, adopted the Long-Term Executive Cash Incentive
Plan (the "Long-Term Cash Bonus Plan"), which establishes the terms upon which long-term cash incentive bonuses may become payable to our executive officers
from time to time as determined by our board of directors. The purpose of the Long-Term Cash Bonus Plan is to align the long-term executive incentive
compensation to our long-term goals and objectives.
Pursuant to the Long-Term Cash Bonus Plan, our board of directors has the discretion to grant performance awards ("Performance Awards") that are
intended to reward Long-Term Cash Bonus Plan participants for their individual contributions to our achievement of one or more long-term company performance
goals and objectives ("Company Performance Objectives") over a specified period of time (the "Performance Period"). Each of the Performance Awards will be
granted pursuant to a Long-Term Cash Incentive Award Offer (the "Award Agreement") that will set forth the relevant Company Performance Objectives and
Performance Period, as well as the cash bonus amount payable upon achievement of the Company Performance Objectives.
The right to receive a Performance Award, and the payment of any cash bonus pursuant to a Performance Award, will be contingent upon a Long-Term
Cash Bonus Plan participant remaining continuously employed an our executive officer through the last day of the Performance Period, subject to limited
exceptions.
Grant of Long-Term Performance Awards to Chief Executive Officer and Chief Financial Officer
On February 20, 2018, our board of directors granted Performance Awards under the Long-Term Cash Bonus Plan to Jason Randall, our Chief Executive
Officer, and Ida Kane, our Chief Financial Officer (the "Recipients"). No Performance Awards have been granted to any other of our executive officers or
employees.
The Performance Awards establish our baseline "economic value"on a per share basis ("EVPS"). The Performance Awards then measure growth in EVPS
over time. The Performance Awards are generally designed to reward the Recipients for their contributions towards achieving profitable growth that results in
increases in EVPS over the next eight years. Pursuant to the Performance Awards, the Recipients will be eligible to earn cash bonuses based on the actual increase
in EVPS measured as of the end of three separate Performance Periods, measured as of December 31, 2023, December 31, 2024 and December 31, 2025. If the
actual increase in EVPS at the end of any Performance Period reflects the achievement of a low internal rate of return, no cash bonuses will be paid pursuant to the
Performance Awards for that year. However, if actual increases in EVPS as of the end of any Performance Period reflect the achievement of a high internal rate of
return, and therefore significant economic value added, the cash bonuses paid to the Recipients would be significant. Because the actual amount of the cash
bonuses to be paid under the Performance Awards, if any, is dependent on our performance relative to an internal rate of return that results in increases in EVPS
over a period of multiple years into the future, the bonus amounts are highly speculative and we are currently unable to predict a reasonable range of the amounts
with any degree of certainty.
The Performance Awards are designed to provide long-term incentives for participants to achieve our long-term goals and objectives which we believe
will positively impact long-term stockholder value. The Performance Awards are being granted in lieu of the grant of additional equity incentive awards to the
Recipients. Accordingly, our compensation committee currently does not intend to issue additional equity awards to the Recipients until the Performance Awards
have expired.
The Performance Awards provide that cash bonuses may be accelerated if: (i) we undergo a "change in control" (as determined by our board of directors),
(ii) the Participant has been continuously employed by us through the date of the change in control, and (iii) within one hundred and eighty (180) days after the
change in control the Participant is either involuntarily terminated by us or voluntarily resigns from his or her employment with us. The amount of the cash bonus
to be paid under these circumstances is dependent upon the year in which the change in control occurs (assuming the other conditions are met). If the change in
control occurs during 2018, each Recipient will be entitled to a cash bonus of $1,000,000, which amount will increase by $1,000,000 per year for each year
thereafter through 2022, with the amount for 2022 then continuing to be payable in 2023 with no additional increase.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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, 2017 , 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.
82
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.
83
EXHIBIT INDEX
Incorporated by Reference
Exhibit Description
Form
File No.
Exhibit
Filing Date
Filed
Herewith
Exhibit
Number
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#
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.
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
10-K
001-37468
10.2
2/27/2017
S-1/A
333-204262
10.2
6/4/2015
10-Q
001-37468
10.2
11/9/2015
10-K
001-37468
10.2
2/29/2016
2015 Stock Incentive Plan and related form agreements.
S-1/A
333-204262
2015 Employee Stock Purchase Plan.
Long-Term Cash Incentive Plan.
10.10#
Form of Long-Term Cash Incentive Award Offer.
10.11
10.12
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.
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
X
X
S-1/A
333-204262
S-1/A
333-204262
S-1
S-1
333-204262
333-204262
84
Exhibit Description
Form
File No.
Exhibit
Filing Date
Filed
Herewith
Incorporated by Reference
Exhibit
Number
10.13
10.14
21.1
23.1
24.1
31.1
31.2
32.1*
10-Q
001-37468
10.1
11/9/2015
8-K
001-37468
10.1
8/7/2017
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.
Resignation Agreement and General Release of Claims by
and between the registrant and Brian Donahoo, dated August
3, 2017.
Subsidiaries of the registrant.
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
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.
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 26, 2018
AppFolio, Inc.
By: /s/ Ida Kane
Ida Kane
Chief Financial Officer
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below hereby constitutes and appoints Jason Randall 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/ Jason Randall
Jason Randall
/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 26, 2018
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 26, 2018
Chairman of the Board
February 26, 2018
Director
Director
Director
Director
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
Chief Strategist and Director
February 26, 2018
APPFOLIO, INC.
LONG-TERM EXECUTIVE CASH INCENTIVE PLAN
Exhibit 10.9
The AppFolio, Inc. Long-Term Executive Cash Incentive Plan (this " Incentive
Plan'
) has been designed to further the long-term goals and
objectives of AppFolio, Inc. (the " Company"
) adopted by the Board of Directors (the " Board"
). This Incentive Plan was adopted by the
independent members of the Board, upon the recommendation of the Compensation Committee of the Board (the " Compensation
Committee"
), effective as of February 20, 2018 (the " Effective
Date"
).
Section 1. Purpose of this Incentive Plan
The purpose of this Incentive Plan is (a) to enhance the Company’s ability to retain the services of qualified employees upon whose
judgment, initiative and efforts the successful conduct and development of the Company’s business largely depends, (b) to provide additional
incentives to such persons to devote their utmost effort and skill to the advancement and betterment of the Company and (c) to provide long-
term incentives for Participants to achieve the Company’s long-term goals and objectives and to increase the value of the Company in the
long term.
Section 2. Performance Period
This Incentive Plan is primarily intended to reward employees selected by the Board for their individual contributions to the
Company’s achievement with respect to one or more long-term Company performance goals and objectives for a period of time or times to be
determined by the Board (each, a " Performance
Period"
).
Section 3. Eligibility
Employees eligible for an award under this Incentive Plan (a " Performance
Award"
) will be limited to executive officers
specifically identified by the Board (each, a " Participant"
).
Section 4. Performance Awards
The Performance Awards, and the terms thereof, for each Participant will be determined by the Board. Each Performance Award will
be subject to the terms and conditions of this Incentive Plan and the attainment of one or more Performance Goals as provided in Section 5
below.
Section 5. Performance Goals .
The Board shall (i) set one or more performance goals (each, a " Performance
Goal"
and collectively, the " Performance
Goals"
)
(which may be corporate and/or individual) for each Participant (which need not be identical for each Participant) for a Performance Period
or any year, years or other periods thereof and (ii) establish the cash amount or amounts of any payments to be made if Performance Goals
are achieved.
Section 6. Continuous Employment
This Incentive Plan is primarily intended to reward Participants for their individual contributions to the Company’s long-term growth
and success, and the achievement by the Company of some or all of its long-term goals and objectives. Accordingly, the right to receive a
Performance Award and payment thereunder shall be contingent upon, and only be earned based on, a Participant remaining continuously
employed as an executive officer of the Company (except for vacations, illness (not including disability) or leaves of absence which are
approved in writing by the Board) through the last day of the Performance Period for such Performance Award (the "Date of Determination").
Accordingly, if a Participant ceases at any time and for any reason to be continuously employed as an executive officer of the Company
(except for vacations, illness (not including disability) or leaves of absence which are approved in
writing by the Board) prior to a Date of Determination for a Performance Award, then such Participant shall not be entitled to receive any
payment under such Performance Award, or any other payment or remuneration under this Incentive Plan, including on any accrued or
prorata basis even if a Performance Award would have been wholly or partially achieved if calculated at the time employment of a Participant
was terminated with the Company.
Section 7. Award Determination
7.1 As soon as practicable after a Date of Determination, the Compensation Committee will determine the amount, if any, of the
Performance Award to be paid to each Participant (after giving effect to any annual, semi-annual, quarterly or other periodic payments of the
Performance Award approved by the Compensation Committee and paid to the Participant during the Performance Period), based on the
attainment of the Performance Goal(s) as determined by the Compensation Committee in its sole discretion; provided the Compensation
Committee may, in its sole discretion, make annual, semi-annual, quarterly or other periodic advances of a portion of the Performance Award
prior to the end of the Performance Period to one or more Participants based on the Compensation Committee’s determination of the
Company’s achievement of the applicable Performance Goals as of such time; provided further, if it is ultimately determined by the
Compensation Committee, in its sole discretion, that Participant was not entitled to all or a portion of any annual, semi-annual, quarterly or
other periodic payment as a result of the Company’s failure to achieve one or more Performance Goals for the Performance Period, or for any
reason (such portion, the ì Overpayment
î), the Participant shall immediately repay to the Company the Overpayment amount or make such
other arrangements acceptable to the Company for the recoupment of the Overpayment.
7.2 The Board shall have the discretion to adjust the Performance Goals (including the calculation of the Company’s achievement
relevant to any particular Performance Goal) and other provisions applicable to Performance Awards to the extent, if any, it determines that
the adjustment is necessary or advisable to preserve the intended incentives and benefits to reflect (a) the impact of any material corporate
transaction (such as a reorganization, combination, merger, acquisition, recapitalization, or any combination of the foregoing), (b) any change
in accounting policies or practices, (c) the effects of any non-cash charges to the Company’s earnings, (d) the effects of any non-recurring or
one-time charges to the Company’s earnings, or (e) any other similar special circumstances as determined by the Board in its sole discretion.
7.3 Payments will be made at such time as determined by the Compensation Committee after determination of the amounts of the
Performance Awards, if any (but in no event later than the expiration of the short-term deferral period set forth in Treasury
Regulation ß 1.409A‑1(b)(4)). A Participant does not earn, and shall have no right to receive, any Performance Award payment under this
Incentive Plan until the date on which the Compensation Committee determines that a payment under a Performance Award is due and
payable.
7.4 The Board has the discretion to amend this Incentive Plan as it deems appropriate.
7.5 All determinations and decisions made by the Board or the Compensation Committee pursuant to the provisions of this
Incentive Plan shall be final, conclusive and binding on all persons, and shall be given the maximum deference permitted by law. Nothing in
this Incentive Plan is intended to limit the compensation awards or other amounts that may be earned by or become payable to any Company
employees pursuant to any other compensation plans or arrangements approved by the Board or Compensation Committee.
Section 8. No Segregation of Assets.
This Incentive Plan shall not be funded in any way. The Company shall not be required to establish any special or separate fund or to make
any other segregation of assets to assure the payment of Performance Awards or other benefits under this Incentive Plan. To the extent any
person acquires a right to receive payment under this Incentive Plan, such right will be no greater than the right of an unsecured general
creditor of the Company.
APPFOLIO, INC.
LONG-TERM CASH INCENTIVE AWARDS OFFER
Exhibit 10.10
AppFolio, Inc. (the "Company") hereby offers to each of [ ] ("[ ]") and [ ] ("[ ]") the long-term cash incentive awards, as set forth
below, on this [ ] day of [ ] 20[ ].
A. The Company has heretofore adopted a Long-Term Executive Cash Incentive Plan on February 20, 2018 (the "Incentive Plan").
All capitalized terms herein shall have the meaning set forth in the Incentive Plan.
B. The awards offered herein to [ ] and [ ] are pursuant to the Incentive Plan.
RECITALS
[ ] and [ ] are each hereby offered Performance Awards, as provided herein.
AWARDS
The Performance Awards shall be for three Performance Periods, each commencing on [ ] and ending, respectively, on [ ], [
1.
2.
] and [ ] (each such ending date a "Date of Determination").
3.
Promptly after each Date of Determination the Compensation Committee shall calculate the Internal Rate of Return (the
"IRR") for the Performance Period in accordance with the formula set forth in [ ].
4.
Promptly after the Compensation Committee has calculated this IRR, it shall instruct the Company to pay in cash to [ ] and
[ ] the amounts, if any, determined pursuant to the Payout Formula set forth in [ ] (a "Payment Amount").
5.
If (i) there is a Change of Control, as defined [ ], and (ii) [ ] and/or [ ] is employed by the Company at the time of such
Change of Control as provided in Section 6 of the Incentive Plan, and (iii) within 180 days of such Change of Control, [ ]’s or [ ]’s
employment with the Company is terminated either by the Company with or without cause, or by their voluntary resignation, the terminated
or resigning party shall have the option for 60 days after such termination or resignation to receive a one-time cash payment as set forth in [ ],
in lieu of the Performance Award granted to them hereunder. As a condition to receiving this cash payment, the recipient thereof shall
execute such documents as reasonably requested by the Company to document the release of all rights he or she would otherwise have with
respect to his or her respective Performance Awards. If a Change of Control occurs after a Date of Determination, and [ ] and/or [ ] elect such
one-time payment, in addition to such one-time payment they shall be entitled to retain any payments theretofore made to them for any Dates
of Determination preceding such Change of Control.
6.
[ ] and [ ] each acknowledges and agrees that, if they accept the Performance Awards offered to them herein, they shall not
be eligible for any additional equity or RSU grants during, or for, the Performance Periods.
7.
These Performance Awards shall be subject to, and administered in accordance with, the Incentive Plan.
If you accept the Performance Award granted to you herein, please so indicate below.
APPFOLIO, INC.
By:______________________________
ACCEPTED:
____________________________________
[ ]
____________________________________
[ ]
List of Subsidiaries of the Registrant
Subsidiary
MyCase, Inc.
Terra Mar Insurance Company, Inc.
RentLinx LLC
Mesa Insurance Solutions, Inc.
Exhibit 21.1
Jurisdiction
California
Hawaii
Michigan
California
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. 333-216274, No. 333-206179, and No. 333-209792) of
AppFolio, Inc. of our report dated February 26, 2018 relating to the financial statements, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 26, 2018
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Jason Randall, 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 26, 2018
/s/ Jason Randall
Jason Randall
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 26, 2018
/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, 2017 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”):
I, Jason Randall, 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 26, 2018
By:
/s/ Jason Randall
Jason Randall
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 26, 2018
By:
/s/ Ida Kane
Ida Kane
Chief Financial Officer