UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-K
_________________
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
☐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
(State of incorporation or organization)
70 Castilian Drive
Santa Barbara, California
(Address of principal executive offices)
26-0359894
(I.R.S. Employer Identification No.)
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
Trading Symbol(s)
APPF
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 ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐No☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
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, 2022 (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 $2.136 billion. 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. The determination of affiliate status for this purpose does not reflect a determination that any of such persons shall be deemed to be an affiliate of the
registrant for any other purpose.
At February 2, 2023, the number of shares of the registrant’s Class A common stock outstanding was 20,649,685 and the number of shares of the registrant’s Class B
common stock outstanding was 14,746,432.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2023 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, 2022
TABLE OF CONTENTS
Section
Page No.
Part I
Part II
Part III
Part IV
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
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
[RESERVED]
Management's Discussion and Analysis of Financial Condition and Results of Operation
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Signatures
1
6
19
19
19
19
19
21
21
28
29
57
58
58
58
59
59
59
59
59
59
62
PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this "Annual Report") contains forward-looking statements within the meaning of federal securities laws,
which statements involve substantial risks and uncertainties. The forward-looking statements made in this Annual Report are based primarily on our current
expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects
and relate only to events as of the date on which the statements are made. In some cases, you can identify forward-looking statements because they contain
words such as “may,” “will,” “should,” “might,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,”
“estimates,” “predicts,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations,
strategy, plans, or intentions. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved
or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. Our forward-looking
statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make. The outcome of
the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors”
and elsewhere in this Annual Report. As such, you should not rely upon forward-looking statements as predictions of future events. Examples of forward-
looking statements include, among others, statements made regarding changes in the competitive environment, responding to customer needs, research and
product development plans, future products and services, growth in the size of our business and number of customers, strategic plans and objectives,
business forecasts and plans, our future or assumed financial condition, results of operations and liquidity, trends affecting our business and industry, capital
needs and financing plans, capital resource allocation plans, share repurchase plans, and commitments and contingencies, including with respect to the
outcome of legal proceedings or regulatory matters. Any forward-looking statement made by us in this Annual Report is based only on information
currently available to us and speaks only as of the date on which it is made. We undertake no obligation to update any forward-looking statements made in
this Annual Report to reflect events or circumstances after the date of this Annual Report or to reflect new information or the occurrence of unanticipated
events, except as required by law.
ITEM 1. BUSINESS
Unless otherwise stated in this Annual Report, references to "AppFolio," "we," "us," and "our" refer to AppFolio, Inc. and its consolidated subsidiaries.
Overview
Founded in 2006, AppFolio is a leading provider of cloud business management solutions for the real estate industry. Our solutions are designed to
enable our property manager customers to digitally transform their businesses, address critical business operations and deliver a better customer experience.
Digital transformation is effectively a requirement for business success in the modern world, and the way we work and live today requires powerful
software solutions.
AppFolio solutions are designed to meet that need in the real estate industry. We help our customers navigate an increasingly interconnected and
growing network of stakeholders in their business ecosystems, including property owners, real estate investment managers, rental prospects, residents, and
service providers, and provide key functionality related to critical transactions across the real estate lifecycle, including screening potential tenants, sending
and receiving payments and even providing insurance-related risk mitigation services. AppFolio’s intuitive interface, coupled with streamlined and
automated workflows, makes it easier for our customers to eliminate redundant and manual processes so they can deliver a great experience for their
network of stakeholders while improving financial and operational performance.
Our platform and mobile-optimized solutions are designed for use across multiple devices and operating systems, and to be (a) a system of record
to centralize and automate essential business processes, (b) a system of engagement to enhance business interactions between our customers and their
network of stakeholders, and (c) a system of intelligence to leverage data to predict and optimize business workflows in order to enable exceptional
customer experiences and increase efficiency across their businesses. Our solutions are offered as a service, and are hosted using a modern cloud-based
architecture.
We rely on strategic partners and third-party service providers to deliver certain aspects of our solutions, and strive to provide a seamlessly
integrated experience for our customers and their stakeholders. We believe our customer-centric culture drives a focus on customer satisfaction that leads to
long-term retention and, ultimately, to our long-term success.
1
Our Core Solutions
Our Platform
AppFolio’s platform addresses important aspects of workflows common to property management and is frequently updated in response to market
trends and customer needs. Further, we believe that partnering and integrating with curated third party solutions to enable important functionality for our
customers and their stakeholders while maintaining an elevated customer experience will benefit our customer base over time. Core functionality of our
services addresses key operational issues, including accounting, business analytics and management, marketing and leasing functionality, maintenance and
operational efficiency, as well as communications with key stakeholders in our customers' business ecosystems.
AppFolio Property Manager
AppFolio Property Manager provides the platform upon which property managers can run their business operations. Property management
companies choose AppFolio Property Manager to leverage the benefits of process automation, an easy-to-use interface, and the optimization of common
workflows. Customers include third-party property managers and owner-operators, who typically manage single- and multi-family residential properties,
including single family homes, multi-family apartments, mobile homes, affordable housing, student housing, senior housing, and others who manage
community association and commercial properties.
AppFolio Property Manager serves as our customers’ system of record with accounting functionality at the core. All critical transactions are
completed and recorded in the system and give our customers access to the data they need to run their business. AppFolio Property Manager is also the
system of engagement that customers use to interact with key stakeholders in their business ecosystems, including residents living at their properties,
owners and investors owning those properties, and vendors providing products and services to the properties. Both aspects of the system are inherently
interconnected so that the day-to-day interactions, such as residents paying rent through the AppFolio Property Manager mobile app, are instantly reflected
in the system of record. AppFolio Property Manager's mobile capabilities enable our customers' teams to be productive regardless of their location,
responding to leasing inquiries, addressing work orders, or completing inspections on the go. Due to their distributed nature, this is especially relevant for
our property management customers with a significant portion of single-family or small multi-family properties.
2
AppFolio Property Manager Plus
We continue to serve customers with larger and more complex portfolios with AppFolio Property Manager Plus, recognizing the evolving needs
these customers have for deeper business insights, automation, and more advanced experiences. These customers typically have a more diverse mix of
property types, a wider geographical dispersion of their properties, and the larger teams necessary to manage those types of portfolios. AppFolio Property
Manager Plus is designed to solve these challenges in multiple ways: customizable workflows allow customers to digitize their existing processes;
performance insights help drive efficiency; intelligent revenue management helps maximize real estate asset potential; integrations with a growing list of
technology partners open new and diverse technologies and experiences; dedicated strategic account managers help customers realize the full benefit of our
platform and solutions.
Value Added Services
AppFolio Property Manager’s optional but often mission-critical Value Added Services are designed to enhance, automate and streamline
business-critical processes and workflows. These services build on functionality and workflows in our core solutions and generally fall into the categories
of marketing and leasing, electronic payment services, business optimization, and risk mitigation (e.g., insurance-related services). We strive for a seamless
experience for our customers that increases their efficiency while not sacrificing ease of use of AppFolio Property Manager and AppFolio Property
Manager Plus, whether services are offered by AppFolio or by a third-party partner. Utilization and adoption of our Value Added Services is typically
higher for residential properties than community association or commercial properties because of the unique and complex needs of the residential rental
lifecycle.
We empower our customers and their network of stakeholders with a wide variety of Value Added Services, primarily:
•
•
•
Payments. Our electronic payment services allow property managers to streamline their receivables and payables through a variety of online
payment options. Customers can collect funds through our secure online portal, our mobile application and/or via electronic cash payments from
various stakeholders, including applicants, residents and property owners. Types of funds that may be collected include rental application fees,
security deposits, rent payments, and other tenant charges; contributions from property owners; and periodic dues from those living in community
associations. Customers can also electronically send funds to various stakeholders, including distributions to property owners, payments to service
providers, and even payment to their own management company.
Screening. Our tenant screening services include background screening, credit checks, income verification, and a streamlined rental history
verification process for use in connection with the rental application process.
Insurance. Through our FolioGuard™ brand, we offer risk mitigation products for residents and property managers. FolioGuard Smart Ensure,
our liability to landlord insurance product, allows property management customers to enforce insurance coverage requirements within their leases
by tracking coverage of their units and adding uncovered units to a qualifying liability to landlord insurance policy via a licensed insurance broker.
FolioGuard Renters Insurance protects the personal belongings of renters, as well as the property itself, from certain unexpected damages.
We experience some seasonality in our Value Added Services revenue. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional details regarding seasonality of revenue.
Our Growth Strategy
Our growth strategy is to provide increasingly valuable business management solutions to new and existing customers in the real estate industry.
We are leveraging our growing footprint to expand within the property management market. Key components of our near and extended term growth
strategy include:
Keep Our Existing Customers Happy. We believe customer success is essential to our long-term success, and we strive to have loyal and engaged
long-term customer relationships. We place significant emphasis on customer experience to differentiate our solutions from competing products. This
emphasis will continue to be a critical component of our growth strategy in the future. We believe that maintaining our focus on customer success will lead
to new product innovation, the referral of new customers from existing satisfied customers, and greater adoption and utilization of our solutions.
Acquire New Customers. We believe new customer acquisition is essential to our long-term success. We expect to continue to grow our base of
customers, and thus the number of units managed on our platform, with continued investments in the development of increasingly valuable business
management solutions across not only the existing property types we currently serve but new ones as well, innovative sales and marketing programs,
including evolving real estate industry thought leadership and education, and the referral power of satisfied customers. To continue to attract larger
customers, we may increase our utilization of partnerships and integrations with select third parties to deliver key functionality.
3
Expand Adoption and Use by Existing Customers. We have made, and will continue to make, significant investments in our solutions that expand
functionality and enhance or add new capabilities to meet the current and evolving needs of our customers. 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 strategy. We expect our
satisfied customers will expand their adoption and usage of our Value Added Services to adapt our platform to their specific operational requirements. In
addition, as our customers grow, we expect they will continue to use our solutions to manage their larger businesses. To facilitate the continued use of our
solutions by larger customers, we may increase our utilization of partnerships and integrations with select third parties to deliver key functionality while
maintaining an elevated customer experience.
Our Customers
We define customers as those paying for a subscription to our core solutions. As of December 31, 2022, we had 18,441 property management
customers. No individual customer represented 10% or more of our total revenue for fiscal 2022.
Customer Service
We believe our success is tied to long-term customer relationships, not a one-time sale. Our team is structured to deliver ongoing service; this
includes ongoing live and on-demand training, a library of resources, and personalized account management. We regularly measure our Net Promoter Score
and solicit customer feedback in a variety of ways in an effort to continue to better serve our customers. Our solutions are designed to be easy to use and
manage, and we offer training and support at no extra charge.
Onboarding consists of a dedicated team that works to ensure that customers are prepared to run their businesses on our platform. As a result of
our assistance with data migration matters, we are able to provide valuable insights into data integrity and work with our customers to help resolve any
issues in their underlying business processes. We also assist our customers with the configuration of our products for particular property types, as
appropriate. We share insights on best practices for the markets we serve and dedicate resources to guide our customers through the adoption and utilization
of our Value Added Services.
Sales and Marketing
We leverage a modern and scalable marketing approach along with marketing automation technology to attract and engage prospects and build
brand recognition as an industry leader. We participate in industry thought leadership and education, and we use a variety of inbound and outbound
marketing techniques to promote AppFolio solutions.
Our business development team acts in partnership with our marketing and sales teams to reach potential customers, generate sales opportunities,
and accelerate the time from evaluation to close. Our sales representatives assist prospective customers as they evaluate our products. 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, where applicable, Value Added Services.
Technology and Operations
Our products are powered by a highly scalable computing platform and are designed with a strong focus on data security and availability. We take
great care to keep our application framework and the rest of our software stack current in order to mitigate known security vulnerabilities. Our computing
platform and cloud infrastructure are primarily powered by Amazon Web Services’ Elastic Compute Cloud (EC2) platform. In order to ensure that data is
not lost and that customer requests can be satisfied, production assets are securely replicated and regularly backed up to multiple geographic regions.
We monitor our production infrastructure to ensure high performance and availability, and our architecture allows our operators significant flexibility
in achieving these goals. In particular, we have fine-grained control over the specific server and region on which each customer's data resides, and
can move such data between different geographic regions in order to avoid service disruption or to increase service performance.
All sensitive data in our systems, including passwords, Social Security numbers, and tax identification numbers, is encrypted during transmission,
and before being written to disk. We regularly evaluate our product and infrastructure security, including through third-party penetration testing. In
addition, our products 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 staff in a secure and controlled environment, while leadership retains visibility across the entire
system. Some sensitive customer actions require secondary verification via two-factor authentication, and any customer can enable two-factor
authentication for logging into their account.
4
Research and Product Development
We rely heavily on input from our customers and prospective customers in developing products that meet their needs and in anticipating
developments in their businesses. We perform research and market validation efforts to guide our product roadmap. We believe that it is easier for our
customers to adjust to continuous updates to our platform, which incrementally change and improve their user experience than to adapt to infrequent, but
more drastic, upgrades.
Competition
The overall market for business management solutions in the real estate and other industries is global, highly competitive, and continually
evolving to respond to changes in technology, operational requirements, and ever-changing laws and regulations. We believe our competitors primarily fall
into the following categories:
• On-premise or cloud-based real estate business management service providers that serve companies of all sizes in our markets; and
• On-premise or cloud-based horizontal business management service providers that offer broad solutions across multiple industries.
We also experience competition from numerous cloud-based solutions providers that focus almost exclusively on one or more point solutions in
the real estate industry or in other industries. Continued consolidation among cloud-based solution providers could significantly increase competition.
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. Further, the barrier to entry for competition
in one or more areas we serve may be low, which could lead to competition from new entrants who solve similar problems in different ways.
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 Added Services. We may pursue additional patent protection to the extent we believe it would
be beneficial and cost-effective.
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
products and use information that we regard as proprietary to create products and services that compete with ours.
Human Capital
We believe our people are at the heart of our success. Our employees’ dedication to and passion for creating and delivering transformative
solutions provides us with a competitive advantage and creates long-lasting relationships with our customers. We believe our efforts in creating and
maintaining strong connections — with our customers, partners, and team members — differentiates AppFolio as a great place to work. This has led to
recognition that demonstrates our valued company culture and workplace: In 2022, Fortune recognized AppFolio as one of the Best Workplaces in
Technology, and the Glassdoor Employees’ Choice Awards listed AppFolio as one of the Best Places to Work.
Our company culture, driven by the following six core values, fuels our dedication and passion:
Simpler Is Better
•
• Great, Innovative Products Are Key To A Great Business
• Great People Make A Great Company
•
•
• We Do The Right Thing; It’s Good For Business
Listening To Customers Is In Our DNA
Small, Focused Teams Keep Us Agile
As of December 31, 2022, we had 1,785 employees. We routinely engage temporary employees and consultants. Approximately 3% of our
workforce is represented by a union, the Communications Workers of America. While it is our firm belief that a direct relationship between employee and
employer is best, we recognize the decision made by these employees. We consider our relationships with our employees and consultants to be strong. To
maintain this strong relationship and attract new talent, our human capital management efforts focus on the following initiatives:
5
Diversity, Equity, and Inclusion. Diversity is core to our values and, we believe, necessary to drive innovation and collective growth. Our
commitment to diversity, equity and inclusion starts at the leadership level and cascades to our talented employees. AppFolio’s employee-led resource
groups aim to create an environment where everyone is valued for their uniqueness, while also feeling part of the larger whole. We work hard to make sure
our employees’ voices are heard, from our practice of small, focused teams to setting annual company initiatives together as an organization.
When we conducted a voluntary survey of our workforce in 2022, of those who elected to share, approximately 54% identified as men, 45%
identified as women, and less than 1% identified as nonbinary. Additionally approximately 65% identified as White, 12% identified as Asian, 11%
identified as Hispanic or Latino, 5% identified as Black or African American, less than 1% identified as American Indian or Alaska Native, less than 1%
identified as Native Hawaiian or Other Pacific Islander, and 6% identified as two or more races.
Our recruiting practices focus on attracting and hiring employees with diverse backgrounds, experiences, and approaches at all levels of the
company. We have key partnerships with universities and professional organizations and provide ongoing education to our hiring teams that are focused on
closing the diversity gap and growing our team.
Employee Development. We invest significant resources to develop the talent needed to remain at the forefront of innovation and make us an
employer of choice. Employees throughout our organization have access to tailored training and learning programs designed both for our entire employee
base as well as for distinct employee audiences. Our annual engagement survey provides a platform for employees to provide anonymous feedback directly
to their managers and our executives.
Societal Impact. We believe in making an impactful contribution to the causes and communities that are meaningful to our employees in the
context of the real estate industry. We encourage employee volunteerism through our employee-led Give Back Committee and company-wide benefit of
eight hours of paid volunteer time off annually. Our corporate philanthropy program “AppFolio Gives Back” supports housing affordability, an ongoing
challenge in the real estate industry, through a combination of employee fundraising, team volunteering, and a corporate matching gift program.
Environmental Stewardship. We believe in a culture of environmental stewardship, and through our employee-led “Green Team” we strive to
have a positive impact on our environment both in the workplace and at home by educating employees on environmental issues and encouraging action.
Compensation and Benefits. Our compensation and benefits programs support the wellness of our employees and their families so they feel they
can live their best lives both at work and at home. Our competitive compensation packages may include base salary, commission or annual performance-
based bonuses, and stock-based compensation. We also offer paid parental leave, paid sabbaticals, paid leave to care for family members, and access to
fertility networks and discounts on fertility care. We review our programs periodically to ensure they remain competitive.
Health, Safety, and Wellness. We are committed to providing a safe workplace for our employees and assisting them in maintaining a healthy
work-life balance. We regularly solicit feedback to assess the well-being and needs of our employees and offer resources focused on mental health and
physical wellness. We have embraced Together@AppFolio, our hybrid work model, where many of our employees work out of one of our offices several
days a week and others work remotely.
Available Information
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
You should consider carefully the risks described below, together with all of the other information included in this Annual Report, as well as in our
other filings with the SEC, in evaluating our business and/or an investment in our Class A common stock. If any of the following risks actually occur, our
business, financial condition, operating results and future prospects could be materially and adversely affected. In that case, the trading price of our Class A
common stock may decline and you might lose all or part of your investment. The risks described below are not the only ones we face. Additional risks that
we currently do not know about or that we currently believe to be immaterial may also impair our business, financial condition, operating results and
prospects.
Please be advised that certain of the risks and uncertainties described below contain “forward-looking statements.” See the section of this Annual
Report entitled “Forward-Looking Statements” for additional information.
6
Risks Related to Growing Our Business
If we fail to manage our growth effectively, our costs and operating expenses may increase without corresponding increases in revenue, which would
adversely affect our operating results.
We have experienced, and anticipate that we will continue to experience, significant growth in the size, complexity, and diversity of our business.
This growth has placed, and we expect that it will continue to place, a significant strain on our administrative, operational, and financial resources. Our
future success depends, in part, on our ability to manage this growth effectively. For example, to grow our customer base and facilitate the continuous
launch and refinement of our products and services we invest significantly in our sales, marketing, and product development organizations as well as
software and systems to support the efficient operation of such organizations. There is no guarantee that these or similar expenditures to support our growth
will be successful. If we are unable to manage our growth successfully and efficiently, it could result in increased costs and operating expenses without
corresponding increases in revenue, which would adversely affect our operating results.
If we do not accurately predict and respond promptly to rapidly evolving technological developments and customer needs, the demand for our products
and our business and operating results may be harmed.
Customer demands are constantly changing in response to new technology and other market factors. To compete effectively, we must identify and
innovate in the right technologies, accurately predict our customers’ evolving needs, and continually improve our own technology platform. If we fail to
execute against any of the foregoing, our business and operating results may be harmed. In addition, the widespread adoption of quickly evolving
disruptive technology products may significantly impact the real estate industry, even if such products are not specifically designed to apply directly to the
real estate industry. The adoption of such new technologies could significantly reduce the volume or demand of our customers, thereby reducing our
revenue, which could materially impact our business, financial condition and operating results.
We participate in an intensely competitive market and our business could be harmed if we do not compete effectively.
The market for cloud-based business management solutions has relatively low barriers to entry and is global, highly competitive and continually
evolving in response to a number of factors, including changes in technology, operational requirements, and laws and regulations. We compete with both
other real estate industry cloud-based solution providers and providers of broad cloud-based solutions across multiple industries. We also face competition
from numerous cloud-based solution providers that focus almost exclusively on one or more point solutions. Our competitors include established vendors,
as well as newer entrants in the market. Our established competitors may have greater name recognition, longer operating histories, and significantly
greater resources, which allows them to respond more quickly and effectively to new or changing opportunities or challenges, technologies, operational
requirements and industry standards. Our competitors who are new entrants to the market, and generally smaller, may have more nimble operations due to
having fewer products and less overhead and may be willing to take legal and operational risks, which allows them to launch products and meet customer
demand more quickly and efficiently. Regardless of size, our current and potential competitors may develop, market and sell new technologies with
comparable functionality to our solutions, which could cause us to lose customers, slow the rate of growth of new customers and/or cause us to decrease
our prices to remain competitive, which could harm our business.
In addition, we have introduced and expect to continue to introduce variations to our pricing model that are intended to provide broader usage and
better align the cost of our services to the value they provide our customers. Although we believe that these pricing changes will increase customer
adoption and revenue, it is possible that they will not and may make our services less appealing, which could negatively impact our business, revenue, and
operating results.
If we are unable to successfully expand sales of our solutions to new markets and new industries, our business and operating results may suffer.
Our growth strategy includes expanding sales of our solutions to new markets and, potentially, new industries. These new markets and industries,
include larger customers within the real estate space, housing types outside of multi-family and single-family residential, and industries other than real
estate. Acceptance of our current and future solutions in new markets and industries will depend on numerous factors, including our ability to provide more
sophisticated functionality and features, the pricing of our solutions relative to competitive products, perceptions about the security, privacy and availability
of our solutions relative to competitive products, and the time-to-market of updates and enhancements to our services and products. There is no guarantee
we will be successful in achieving all or any of the foregoing. Additionally, sales to new markets and industries will involve risks that are not present, or are
present to a lesser extent, in sales to the markets and industry we currently serve, and such risks may include new regulatory regimes, longer sale cycles,
increased chance of litigation with customers, increased risk and impact of reputational harm, and increased competition. We may not be able to sufficiently
mitigate such risks, which would impact our ability to successfully expand our business. If we are unable to successfully expand sales of our solutions to
new markets and, potentially, industries, our revenue may increase at a slower rate than we expect and may even decline, which could adversely affect our
operating results.
7
Our business depends substantially on existing customers renewing their subscriptions with us and expanding their use of our Value Added Services,
and a decline in either could adversely affect our operating results.
For us to maintain or increase our revenue and improve our operating results, it is important that our existing customers continue to use our core
solutions, as well as increase their adoption and utilization of our Value Added Services. Our customers may not renew their subscriptions with us, continue
to broaden their adoption and utilization of our Value Added Services, or use our Value Added 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 Added Services, our revenue may increase at a slower
rate than we expect and may decline, which could adversely affect our financial condition and operating results. A reduction in the number of our existing
customers, even if offset by an increase in new customers, could reduce our revenue and operating margins.
Our inability to effectively maintain and enhance our brands could adversely affect our ability to attract new customers and negatively affect our
business and operating results.
Maintaining and enhancing our brands is critical to achieving widespread awareness and acceptance of our solutions as well as maintaining and
expanding our customer base. We expect the importance of brand recognition will increase, as competition for our products and services increases. If we do
not continue to build awareness of our brands, we will be at a competitive disadvantage compared to companies whose brands are, or become, more
recognizable than ours. Maintaining and enhancing our brands requires us to make substantial investments, and these investments may not result in
commensurate increases in our revenue. In addition, new and existing technologies, industry trends, and laws that restrict online advertising or affect our
ability to customize and target advertising may require us to significantly increase our marketing costs to generate and capture demand and maintain our
brand awareness, level of sales, and operating results. If we fail to successfully maintain and enhance our brands, or if we make investments that are not
offset by increased revenue, our operating results could be adversely affected.
We manage our business to achieve long-term growth, which may not be consistent with the short-term expectations of some investors.
We make product decisions and pursue opportunities that 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 results of operation and our stock
price from period to period. In addition, notwithstanding our intention to make strategic decisions that positively impact long-term value, the decisions we
make may not produce the long-term benefits we expect, which could materially affect our business, financial condition and results of operation.
8
Our acquisition of other companies or technologies may subject us to risks.
We have acquired, and may in the future acquire, other companies or technologies to complement or expand our products and solutions, optimize
our technical capabilities, enhance our ability to compete, or otherwise offer growth or strategic opportunities. We have limited experience and success in
acquiring other businesses and we may not be able to effectively integrate acquired assets, technologies, personnel and operations or achieve the anticipated
synergies or other benefits from the acquired business due to the inherent risks associated with acquisitions. If an acquisition fails to meet our expectations
in terms of its contribution to our overall business strategy or results of operation, or if the costs of acquiring or integrating the acquired business exceed
our estimates, our business, results of operation, strategic objectives, and financial condition may suffer.
Risks Related to Attracting and Retaining Talent
We depend on highly skilled personnel and, if we are unable to retain or hire additional qualified personnel or if we lose key members of our
management team, we may not be able to achieve our strategic objectives and 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. 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, to continue to enhance our products and solutions, add new and innovative core functionality and/or Value Added 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 software
engineers. Further, for us to achieve broader market acceptance of our products and solutions, grow our customer base, and pursue new markets consistent
with our strategic plan, we will need to continue to increase the size of our sales, marketing and customer service and support organizations. Competition
for personnel is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Identifying,
recruiting, training and retaining qualified personnel is difficult and requires a significant investment of time and resources.
Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. As
a result, we may have greater difficulty hiring and retaining skilled personnel than our competitors. 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, we are
unable to offer equity awards in competitive amounts, 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 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.
Our corporate culture has contributed to our success and, if we cannot continue to foster this culture, 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. As we grow, we may find it difficult to maintain our corporate culture. This difficulty may be exacerbated by our
current commitment to remote work, which makes it more challenging for employees to interact and connect.
9
Risks Related to Cybersecurity and Data Privacy
Security vulnerabilities in our products or a breach of our security controls could result in the loss, theft, misuse, unauthorized disclosure, or
unauthorized access to customer or employee data, or other confidential or sensitive information, which could harm our customer and/or employee
relationships, expose us to litigation or harm our reputation.
Our business involves the storage and transmission of a significant amount of confidential and sensitive information, including sensitive and
proprietary data and personal information collected by or on behalf of our customers, the personal information of our employees, customers, and
prospective customers and our proprietary financial, operational and strategic information. Like many other businesses, we have experienced, and are
continually at risk of being subject to, cyber attacks and data security incidents. As our business grows, the number of individuals using our products, as
well as the amount of information we collect and store, is increasing, and our brands are becoming more widely recognized, which makes us a greater
target for malicious activity. We have incurred, and expect to continue to incur, significant expenses in connection with our efforts to keep our systems,
products and networks protected and up to date. However, there can be no assurance that the security measures we employ will prevent malicious or
unauthorized access to our systems or information. Furthermore, no security program can entirely eliminate the risk of human error, such as an employee or
contractor’s failure to follow one or more security protocols. Therefore, despite our significant efforts to keep our systems, products and networks protected
and up to date, we may be unable to anticipate new modes for cyber attacks, detect security incidents or react to them 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 service
providers and partners also collect and/or store our sensitive information and our customers’ data on our behalf, and these service providers and partners
have been, and continue to be, subject to similar threats of cyber attacks and other malicious Internet-based activities. Our contracts with these third parties
may not provide us with adequate remedies in the event of such an incident which could also expose us to risk of loss, litigation, and potential liability.
If our security measures, or the security measures of our third-party service providers or partners, are breached as a result of 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 human error or
neglect, product defect or otherwise, and this results in the loss, theft, misuse, unauthorized disclosure, or unauthorized access to customer data or other
sensitive information, we could incur liability to our customers and to individuals or organizations whose information was being stored by us or our
customers, as well as fines and actions from payment processing networks or by governmental bodies. If we experience a widespread security breach, our
insurance coverage may not offset liabilities actually incurred and insurance may not continue to be available to us on reasonable terms, or at all. In
addition, security breaches 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 products and solutions. Furthermore, the perception by our current or potential customers that our products could be
vulnerable to exploitation or that our security measures are inadequate, even in the absence of a particular problem or threat, could reduce market
acceptance of our products and solutions and cause us to lose customers. The legal and regulatory environment around data security and governance is
evolving, and both regulators and consumers are increasingly taking action on data-related matters, which may contribute to increased reputational,
economic and other harm in the event of a data security incident.
Privacy and data security laws and regulations could impose additional costs and reduce demand for our solutions.
We store and transmit personal information relating to our employees, customers, prospective customers, and other individuals, and our customers
use our technology platform to store and transmit a significant amount of personal information relating to their customers, vendors, employees and other
industry participants. Federal, state and foreign government bodies and agencies have adopted, and are increasingly adopting, laws and regulations
regarding the collection, use, processing, storage and disclosure of personal or identifying information obtained from customers and other individuals. For
example, in the United States new comprehensive privacy laws have or will be enacted in 2023 in Colorado, Utah, Connecticut and Virginia, and updates to
existing laws and regulations in California also became effective on January 1, 2023. These obligations have and will likely continue to increase the cost
and complexity of delivering our services.
10
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. As new laws, regulations and industry standards take effect, and as we offer new services in new markets, market
segments and, potentially, new industries, we will need to understand and comply with various new requirements, which may impede our plans for growth
or result in significant additional costs. These laws, regulations and industry standards have had, and will likely continue to 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 Added Services. Failure to comply with these laws, regulations and industry standards could result in negative publicity, subject us to fines or
penalties, expose us to litigation, or result in demands that we modify or cease existing business practices. 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, which could reduce overall demand for our solutions. Any of these outcomes could adversely affect our
business and operating results.
Risks Related to Our Industry
All of our revenues are presently generated by sales to customers in the real estate industry, and factors that adversely affect that industry, or our
customers within it, could also adversely affect us.
We expect that our real estate industry customers will continue to account for a significant portion or all of our revenue for the foreseeable future.
Demand for our solutions and services could be affected by factors that are unique to and adversely affect the real estate industry and our customers within
it. If the industry itself declines, our customers may decide not to renew their subscriptions or they may cease using our Value Added Services to reduce
costs to remain competitive. For example, higher interest rates may make it difficult or impossible for our customers to obtain financing or may increase
their cost of capital, which could negatively impact the demand for our solutions and services, increase customer churn, and impact our operating results.
Further, we could lose real estate customers as a result of acquisitions or consolidations, bankruptcies or other financial difficulties facing our real estate
customers, new or enhanced legal or regulatory regimes that negatively impact the real estate industry, and conditions or trends specific to the real estate
industry such as the economic factors that impact the rental market.
Our estimates of market opportunity are subject to significant uncertainty.
We determine the level of our investment in various aspects of the business, in part, based on our market opportunity estimates. Market
opportunity estimates are subject to significant uncertainty and are based on assumptions, including our internal analysis and industry experience.
Assessing markets for cloud-based business management solutions in the real estate industry is particularly difficult due to a number of factors, including
limited available information and rapid evolution of the industry and markets therein. If we do not accurately estimate our opportunities, we may fail to
realize a return on our investment in various aspects of our business, which could lead to a failure to gain market share and negatively impact our long-term
growth prospects.
Risks Related to Our Products and Solutions
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 and our operating results.
Our business depends, in part, on our ability to satisfy our customers by providing onboarding services and ongoing customer service. Once our
solutions are deployed, our customers depend on our customer service organization to resolve technical issues relating to their use of our solutions.
Increased demand for our support services may increase our costs without corresponding revenue, which could adversely affect our operating results.
Further, our sales process is highly dependent on the ease of use of our solutions, our reputation and positive recommendations from our existing
customers. Any failure to maintain high-quality and responsive customer service, or a market perception that we do not maintain high-quality and
responsive customer service, could harm our reputation, cause us to lose customers and adversely impact our ability to sell our solutions to prospective
customers.
11
Errors, defects or other disruptions in our products could harm our reputation, cause us to lose customers, and result in significant expenditures to
correct the problem.
Our customers use our products to manage critical aspects of their businesses, and any errors, defects or other disruptions in the performance of
our products, or the products of our third party partners upon which certain of our products are dependent, may result in loss of or damage to our
customers’ data and disruption to our customers’ businesses, which could harm our reputation. Such product problems could be caused by a variety of
factors, including infrastructure changes, power or network outages, fire, flood or other natural disasters, human or software errors, viruses, security
breaches, fraud or other malicious activity, spikes in customer usage or distributed denial of service attacks. In addition, we provide continuous updates to
our products and these updates may contain undetected errors when first introduced. In the past, we have discovered errors, failures, vulnerabilities and
bugs in our updates after they have been released, and similar problems may arise in the future. Real or perceived errors, failures, vulnerabilities or bugs in
our products could result in negative publicity, reputational harm, loss of customers, delay in market acceptance of our products and solutions, loss of
competitive position, withholding or delay of payment to us, claims by customers for losses sustained by them and potential litigation or regulatory action.
In any such event, we may be required to expend additional resources to help correct the problem or 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. In addition,
we may not carry insurance sufficient to offset any losses that may result from claims arising from errors, defects or other disruptions in our products.
We face risks in our electronic payment services business that could adversely affect our business and/or results of operation.
Our electronic payment services business facilitates the processing of inbound and outbound payments for our customers. These payments are
settled through our sponsoring clearing bank, card payment processors and other third-party electronic payment services providers that we contract with
from time to time. Our electronic payment services subject us to a number of risks, including liability for customer costs related to disputed transactions.
Additionally, with respect to the processing of electronic payment transactions by our third-party electronic payment services providers, we are exposed to
financial risks that could affect our operating results. Electronic payment transactions between our customers and another individual may be returned for
various reasons such as insufficient funds or stop payment orders. If we or any of our electronic payment services providers are unable to collect such
amounts from the customer’s account, we bear the ultimate risk of loss for the transaction amount.
Our electronic payment services business also exposes us to risk in connection with theft, fraud and other malicious activity on the part of our
employees, our partners’ employees, or third parties who improperly gain access to our systems or our customers’ systems. In the event of such activity, we
may incur liability to compensate our customers, our customers' stakeholders, or payment partners for losses incurred. While we take reasonable measures
to secure our systems and payments infrastructure, it is not possible to entirely eliminate the risk of intentional wrongdoing. In the past, third party bad
actors have gained improper access to our systems and our customers’ systems and we experienced financial loss as a result. If third party bad actors again
gain access to our systems or our customers’ systems, or our employees or partners’ employees misuse our payment systems for malicious purposes, we
could experience significant financial loss that may affect our operating results.
Changes to payment card networks or bank fees, rules, or practices could harm our business.
We do not directly access the payment card networks, such as Visa and MasterCard, that enable our acceptance of credit cards and debit cards,
including some types of prepaid cards. Accordingly, we must rely on banks or other payment processors to process transactions and must pay fees for the
services. From time to time, payment card networks have increased, and may increase in the future, the interchange fees and assessments that they charge
for each transaction which accesses their networks. Our payment card processors may have the right to pass any increases in interchange fees and
assessments on to us as well as increase their own fees for processing. Any changes in interchange fees and assessments could increase our operating costs
and reduce our operating income. In addition, federal regulators have required Visa and MasterCard to reduce interchange fees, or have opened
investigations as to whether Visa’s or MasterCard’s interchange fees and practices violate antitrust law. Any material change in credit or debit card
interchange rates, including as a result of changes in interchange fee limitations, could have an adverse effect on our business.
We are required by our processors to comply with payment card network operating rules, including special operating rules for payment service
providers to merchants, and we have agreed to reimburse our processors for any fines they are assessed by payment card networks as a result of any rule
violations by us or our merchants. The payment card networks set and interpret the card operating rules. From time to time, the networks have alleged that
various aspects of our business model violate these operating rules. If such allegations are not resolved favorably, they may result in material fines and
penalties or require changes in our business practices that may be costly. In addition, the payment card networks could adopt new operating rules or
interpret or re-interpret existing rules that we or our processors might find difficult or even impossible to follow, or costly to implement. As a result, we
could lose our ability to give consumers the option of using payment cards to fund their payments. If we are unable to accept payment cards or are
meaningfully limited in our ability to do so, our business would be adversely affected.
12
We face risks in our tenant screening services business that could adversely affect our business and/or operating results.
Our tenant screening services business is subject to a number of complex laws that are subject to varying interpretations, including the Fair Credit
Reporting Act (the "FCRA"), the Fair Housing Act, and related regulations. The FCRA continues to be the subject of multiple class-based litigation
proceedings, as well as numerous regulatory inquiries and enforcement actions. In addition, entities such as the Federal Trade Commission and the
Consumer Financial Protection Bureau have the authority to promulgate rules and regulations that may impact our customers and our business and have
made various public statements that tenant screening is an area of focus for such agencies. Although we attempt to structure our tenant screening services to
comply with relevant laws and regulations, we have previously been accused of not complying with such laws and regulations and may be found to be in
violation of them. In addition we have been and expect in the future to be subject to routine regulatory inquiries, enforcement actions, class-based litigation
and/or indemnity demands.
As previously disclosed, in January 2021, we entered into a settlement agreement with the Federal Trade Commission (the "FTC") to resolve
allegations that we failed to comply with certain sections of the FCRA. In connection with the settlement, we paid a fine and agreed to ongoing compliance
and reporting obligations. Our failure to comply with these obligations could result in material additional penalties or other actions by the FTC or other
agencies, including enjoining our ability to provide screening services.
Due to the large number of tenant screening transactions in which we participate, our potential liability in any enforcement action or a class action
lawsuit could have a material impact on our business, especially given that certain applicable laws and regulations provide for fines or penalties on a per
occurrence basis. The existence of any such enforcement action or class action lawsuit, whether meritorious or not, may adversely affect our ability to
attract customers, result in the loss of existing customers, harm our reputation and cause us to incur defense costs or other expenses.
If our property management customers stop requiring insurance coverage for their units, if insurance premiums decline or if insureds experience
greater than expected losses, our operating results could be harmed.
We generate a portion of our revenue by offering insurance-related services through wholly owned subsidiaries. If demand for rental housing
declines, or if our property management customers believe that it may decline, these customers may stop requiring insurance coverage for their units to
reduce the overall cost of renting and make their rental offerings more competitive. If our property management customers stop tracking and requiring
insurance coverage for their units or elect to use other methods of tracking and acquiring insurance coverage, demand for our insurance-related products
may drop and our revenues from our insurance related products could be adversely affected.
In the event we are found to be in violation of the legal requirements applicable to our products and services, our business and operating results may be
adversely affected.
Many of our products and services are highly regulated or intended to be used in connection with other highly regulated activities. Some of the
laws and regulations to which our products and services are subject include, without limitation:
•
•
•
•
•
•
•
the Fair Housing Act;
the FCRA;
Title VII of the Civil Rights Act;
the Telephone Consumer Protection Act;
the Americans with Disabilities Act;
the Electronic Signatures in Global and National Commerce Act; and
the Federal Trade Commission Act;
State law equivalents of the foregoing, plus various state regulations related to insurance licensing and solicitation, utility billing practices and
privacy also apply to certain of our products and services. In addition, the evolution and expansion of our products and services may subject us to
additional risks and regulatory requirements. For example, as our electronic payments services business evolves, we may become directly subject to
limitations, laws and regulations governing money transmission and anti-money laundering.
In addition, we periodically undergo examinations, audits and investigations related to our services, including those related to the affairs of
insurance companies and agencies and electronic payment services providers. Such examining, auditing, and investigating authorities are generally vested
with relatively broad discretion to grant, renew and revoke licenses and approvals, to implement and interpret rules and regulations, levy fines and
penalties, and bring enforcement actions. While we have implemented various programs, processes and controls focused on compliance with applicable
laws and regulations throughout our business, 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. 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 business and operating results.
13
If we fail to maintain relationships with third-party partners that enable certain functionality within our solutions, our business and operating results
may be harmed.
Certain functionality of our services is provided, supported or enhanced by third parties, including without limitation functions related to customer
relationship management, utility billing management, cloud computing, texting, emailing, electronic payments, tenant screening, and insurance related
offerings. If our third-party partners cease providing their products, if such third parties are acquired by competitors or if we are otherwise unable to
integrate with such third-party products, our solutions and demand for our solutions could be adversely impacted and our business and operating results
would be harmed. In addition, 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. Acquisitions of our partners by our
competitors or others 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 customer base and revenue could be impaired, which could negatively impact
our operating results.
If we are unable to ensure that our solutions interoperate and keep pace with other technology, our solutions may become less competitive and our
operating results may be harmed.
We depend on the interoperability of our platform with web browsers, and in the case of our mobile applications - operating systems, that we do
not control. Any changes in such web browsers or systems that degrade the functionality of our solutions or give preferential treatment to competitive
services could adversely affect the adoption and usage of our solutions. In addition, to deliver high quality solutions, we will need to continuously enhance
and modify our functionality to keep pace with technical, contractual, and other changes in Internet-related hardware, mobile operating systems such as iOS
and Android, browsers, 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 or 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
solutions, our solutions may become less competitive, and our operating results could be adversely affected.
Risks Related to Intellectual Property Matters
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. In addition, we utilize third party platforms to host our code for
version control and collaboration and rely on the security features made available by such platforms to prevent unauthorized access to our code. Our
success and ability to compete depend, in part, on our ability to continue to protect our intellectual property, including our code, proprietary technology and
brands. If we are unable to protect our proprietary rights adequately or the security controls made available by our code hosting partners are compromised
and our code is improperly accessed, which has previously occurred and could occur again in the future, our competitors could use the intellectual property
we have developed to enhance their own products and services, which could harm our business. In addition, third parties may independently develop
technologies or products that compete with ours, and we may be unable to prevent such competition. 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 management, and could result in the impairment or loss of portions of our intellectual property or require us to pay costly
royalties. 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.
14
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.
Our success depends, in part, on us refraining from 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 solutions, including without limitation
technology we develop and build internally and/or acquire. From time to time, our competitors or other third parties may claim that we are infringing upon
their intellectual property rights. Any claims or litigation, regardless of merit, could cause us to incur significant expenses, distract management, 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 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 solutions contain both open source and third-party software, which may pose risks to our proprietary source code and/or introduce security
vulnerabilities, and could have a material adverse impact on our business and operating results.
We use open source software in our 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 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 functionality 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. We also use third-party commercial software in our 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 or open source software
providers will continue to maintain and update 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 material
adverse impact on our business and operating results.
Risks Related to Our Financial Results
We expect to make substantial investments across our organization to grow our business, which may impact profitability.
To implement our business and growth strategy, we have made and will continue to make substantial investments across our organization and, as a
result, our expenses may increase significantly impacting profitability. For example, 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 solutions and develop new products; our
sales and marketing organization, including expansion of our direct sales organization and marketing programs, to increase the size of our customer base
and increase adoption and utilization of new and existing Value Added Services by our new and existing customers; and maintaining and expanding our
technology infrastructure and operational support to promote the security and availability of our products and solutions. 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.
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. We may experience significant fluctuations in our operating results from period to period, including significant losses.
This may make it difficult for us to effectively allocate our resources to achieve our strategic goals. Furthermore, if our quarterly results fall below the
expectations of investors or any securities analysts who follow our stock, or below any financial guidance we may provide, the price of our common stock
could decline substantially.
15
There are risks associated with potential future indebtedness that may adversely affect our financial condition and future financing agreements may
contain restrictive operating and financial covenants.
We may incur indebtedness in the future and/or enter into new financing arrangements. Our ability to meet expenses, to remain in compliance with
the covenants under any future debt instruments, and to pay fees, interest and principal on our indebtedness will depend on, among other things, our
operating performance and market conditions. Accordingly, our cash flow may not be sufficient to allow us to pay principal and interest on future
indebtedness and meet our other business and customer obligations.
In addition, increases in interest rates have increased the cost of borrowing and volatility in financial markets could impact our access to, or further
increase the cost of, any new financing arrangements we may enter into. Past disruptions in the credit and equity markets made it more difficult for many
businesses to obtain financing on acceptable terms. These conditions tended to increase the cost of borrowing in the past and if they recur, our borrowing
costs could increase and it may be more difficult to obtain financing for our operations or investments. We may not be able to obtain financing on terms
acceptable to us, if at all.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), if a corporation undergoes an “ownership
change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to
offset its post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5%
shareholders” that exceeds 50% 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. There is also a risk that due to legislative changes, such as suspensions on the use of net operating loss
carryforwards, or other unforeseen reasons, our existing net operating loss carryforwards could expire or otherwise be unavailable to offset future income
tax liabilities.
Risks Related to Our 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 our stockholders to lose all or part of their investments. There are a wide variety of factors, many of which are outside our
control, that could cause fluctuations in the market price of our Class A common stock, including without limitation:
•
•
•
•
•
•
•
•
changes in the estimates of our operating results;
changes in recommendations by securities analysts;
announcements of new products, services or technologies;
fluctuations in our valuation or the valuation of similarly situated companies;
changes to our management team;
trading activity by insiders or the market’s perception that insiders intend to sell their shares;
the trading volume of our Class A common stock, including sales upon exercise of outstanding options or vesting of equity awards; and
the overall performance of the equity markets.
Such factors 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.
16
The dual class structure of our common stock concentrates voting control with a limited number of stockholders, including our executive officers,
directors and principal stockholders, effectively limiting 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, 2022, the holders
of the outstanding shares of our Class B common stock, including our executive officers, directors, and principal stockholders, collectively held
approximately 88% 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 control the election of a majority of our directors and thereby have the power to control our affairs and policies, including the
appointment of management and strategic decisions, as well as matters that are submitted to a vote by our holders of our common stock. The interests of
our principal stockholders may be inconsistent with or adverse to those of holders of our Class A common stock. 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. In addition, 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.
S&P Dow Jones, a provider of widely followed stock indices, has announced that companies with multiple classes of stock will not be eligible for
inclusion in certain of their indices. As a result, our Class A common stock will not be eligible for those stock indices. Many investment funds are
precluded from investing in companies that are not included in major indices, and these funds would be unable to purchase our Class A common stock.
Exclusion from these and other 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. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class
structures. As a result, shareholder advisory firms may publish negative commentary about our corporate governance practices or otherwise seek to cause
us to change our capital structure. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital
structure could also adversely affect the value of our Class A common stock.
We do not expect to declare any dividends in the foreseeable future and may repurchase stock in accordance with our Share Repurchase Program.
We have never declared, and we do not anticipate declaring or paying, any cash dividends to holders of our Class A common stock in the
foreseeable future. In addition, the terms of our future borrowing arrangements we may enter into from time to time may 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.
Price appreciation, which may never occur, may be further impacted by repurchases of our shares in accordance with our Share Repurchase
Program. Repurchases of our shares could increase the volatility of the trading price of our shares, which could have a material adverse impact on the
trading price of our shares. Similarly, the future announcement of the termination or suspension of the Share Repurchase Program, or our decision not to
utilize the full authorized repurchase amount under the Share Repurchase Program, could result in a decrease in the trading price of our shares. In addition,
the Share Repurchase Program could have the impact of diminishing our cash reserves, which may impact our ability to finance our growth, complete
acquisitions and execute our strategic plan. For additional information regarding our Share Repurchase Program, refer to Note 11, Stockholders' Equity.
Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of
Delaware law, could impair a takeover attempt.
Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could have the effect of
rendering more difficult hostile takeovers, change-in-control transactions or changes in our Board of Directors or management. Among other things, these
provisions authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock, provide for the adoption
of a staggered three-class Board of Directors, prohibit our stockholders from filling vacancies on our Board of Directors or calling special stockholder
meetings, 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, 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 price that some investors are willing to pay for our Class A common stock.
17
We could be subject to securities class action litigation.
In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a
company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which
could adversely affect our business, operating results, or financial condition. Additionally, the dramatic increase in the cost of directors’ and officers’
liability insurance may make it more expensive for us to obtain directors’ and officers’ liability insurance in the future and may require us to opt for lower
overall policy limits and coverage or to forgo insurance that we may otherwise rely on to cover significant defense costs, settlements, and damages awarded
to plaintiffs, or incur substantially higher costs to maintain the same or similar coverage. These factors could make it more difficult for us to attract and
retain qualified executive officers and members of our board of directors.
Risks Related to Macroeconomic Conditions
Global and regional economic conditions could harm our business.
Adverse global and regional economic conditions such as turmoil affecting the banking system or financial markets, including, but not limited to,
recessionary or inflationary pressures, tightening in the credit markets, extreme volatility or distress in the financial markets, supply chain issues, reduced
consumer confidence or economic activity, government fiscal and tax policies, the ongoing impact of COVID-19, geopolitical events, and other negative
financial news or macroeconomic developments could have a material adverse impact on the demand for our products and services or cause us to
experience increased costs that could negatively affect our operating results.
Government regulations and laws are continuously evolving and unfavorable changes could adversely affect our operating results, subject us to
litigation or governmental investigation, or otherwise harm our business.
In addition to regulations and laws directly applicable to our products and services, we are subject to general business regulations and laws.
Unfavorable regulations, laws, and administrative or judicial decisions interpreting or applying laws and regulations applicable to our business could
subject us to litigation or governmental investigation and increase our cost of doing business, any of which may adversely affect our operating results. For
example, the Inflation Reduction Act of 2022 contains several revisions to the Internal Revenue Code, including a 15% corporate minimum income tax on
adjusted financial statement income for companies with profits greater than $1.0 billion and a nondeductible 1% excise tax on corporate stock repurchases
in tax years beginning after December 31, 2022. While the foregoing tax law changes have no immediate effect on our business, such changes or similar
changes may adversely affect our operating results in the future. In addition, 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 such 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.
Health epidemics, including the COVID-19 pandemic, could have a material adverse impact on our operations, employees culture, customers, and
business partners.
The COVID-19 pandemic continues to have, and a future public health crisis could have, repercussions across local, regional, and global
economies and financial markets. Travel restrictions, quarantines, and similar government orders to control the spread of COVID-19 or a future virus may
result in business closures, work stoppages, slowdowns, and cancellation or postponement of events that, among other effects, could negatively impact our
operations, as well as the operations of our customers, and business partners. The demand for our products and services, as well as our operating results,
could be adversely impacted due to customers delaying decisions to adopt our products and services or terminating their use of our products and services,
as they seek to reduce or delay spending to mitigate the impact of the COVID-19 pandemic or a future public health crisis on their businesses.
18
Natural disasters or other catastrophic events may cause damage or disruption to our operations, commerce and the global economy, and have a
negative effect on our business and operations.
Our business operations are subject to interruption by natural disasters, flooding, fire, power shortages, pandemics, terrorism, political unrest,
telecommunications failure, vandalism, cyber-attacks, geopolitical instability, war, the effects of climate change (such as drought, wildfires, hurricanes,
increased storm severity and sea level rise) and other events beyond our control. Although we maintain crisis management and disaster response plans, such
events could make it difficult or impossible for us to deliver our services to our customers, could decrease demand for our services, and could cause us to
incur substantial expense. Our insurance may not be sufficient to cover losses or additional expenses that we may sustain. The majority of our research and
development activities, offices, information technology systems, and other critical business operations are located near major seismic faults in California.
Customer data could be lost, significant recovery time could be required to resume operations and our financial condition and operating results could be
adversely affected in the event of a major natural disaster or catastrophic event. In addition, the impacts of climate change on the global economy and our
industry are rapidly evolving. We may be subject to increased regulations, reporting requirements, standards or expectations regarding the environmental
impacts of our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Santa Barbara, California, where we lease approximately 86,000 square feet of space. We also lease office
space in several other U.S. cities. We do not own any real estate.
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.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in various investigative inquiries, legal proceedings and other disputes arising from or related to matters
incident to the ordinary course of our business activities, including actions with respect to intellectual property, employment, labor, regulatory and
contractual matters. Although the results of such investigative inquiries, legal proceedings and other disputes cannot be predicted with certainty, we believe
that we are not currently a party to any matters which, if determined adversely to us, would, individually or taken together, have a material adverse effect
on our business, operating results, financial condition or cash flows. However, regardless of the merit of any matters raised or the ultimate outcome,
investigative inquiries, legal proceedings and other disputes may generally have an adverse impact on us as a result of defense and settlement costs,
diversion of management resources, and other factors.
For additional information regarding legal proceedings, refer to Note 10, Commitments and Contingencies of our Consolidated Financial
Statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market for our Common Stock
Our Class A common stock is listed on the NASDAQ Global Market under the symbol "APPF".
Our Class B common stock is not listed or traded on any stock exchange.
19
Holders of Record
At February 2, 2023, there were 35 holders of record of our Class A common stock and 72 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 do not anticipate declaring or paying any cash dividends to holders of
our capital stock in the foreseeable future and intend to retain all future earnings for use in the growth of our business.
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 in our Class A common stock at the close of market on December 31, 2017, and in 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 and Purchases of Equity Securities
None.
20
ITEM 6. [RESERVED]
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. 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". See the section of this Annual Report entitled
“Forward-Looking Statements” for additional information.
The following discussion and analysis of our financial condition and results of operations discusses 2022 and 2021 items and year-over-year
comparisons between 2022 and 2021. For discussion of 2020 items and year-over-year comparisons between 2021 and 2020, refer to Part II. Item 7.
“Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended
December 31, 2021.
Overview
We are a leading provider of cloud business management solutions for the real estate industry. Our solutions are designed to enable our property
manager customers to digitally transform their businesses, address critical business operations and deliver a better customer experience. Our products assist
our customers with an interconnected and growing network of stakeholders in their business ecosystems, including property owners, real estate investment
managers, rental prospects, residents, and service providers, and provide key functionality related to critical transactions across the real estate lifecycle,
including screening potential tenants, sending and receiving payments and even providing insurance-related risk mitigation services. AppFolio’s intuitive
interface, coupled with streamlined and automated workflows, make it easier for our customers to eliminate redundant and manual processes so they can
deliver a great experience for their network of stakeholders while improving financial and operational performance.
We rely heavily on our talented team of employees to execute our growth plans and achieve our long-term strategic objectives. We believe our
people are at the heart of our success and our customers' success, and we have worked hard not only to attract and retain talented individuals, but also to
provide a challenging and rewarding work environment to motivate and develop our valuable human capital. As we navigate the challenges of increased
competition for talent, we continue to evolve our compensation and employee reward practices.
Key Business Metric
Property management units under management. We believe that our ability to increase our number of property management units under
management is an indicator of our market penetration, growth, and potential future business opportunities. We define property management units under
management as active or committed units under management at the period end date. We had 7.3 million and 6.3 million property management units under
management as of December 31, 2022 and 2021, respectively.
Seasonality
We have historically experienced seasonality in our Value Added Services revenue, primarily in our tenant screening services, due to seasonally
higher leasing activities in the second quarter which increases tenant screening transactions in that period. We generally experience decreased tenant
screening revenue in the fourth quarter, when seasonally lower leasing activities occur. Corresponding to the higher tenant applications in the second
quarter, our property manager customers typically experience an increase in new tenants in the third quarter, resulting in a higher demand for our insurance-
related risk mitigation services in that period. As a result of the seasonality of the rental lifecycle and the growth of our business, we have typically
experienced a sequential increase in revenue in the first, second and third quarters and a sequential decline in revenue in the fourth quarter of each of our
most recent fiscal years. These seasonal factors could be heightened or lessened due to the impact of a change in macroeconomic factors that could impact
tenant behavior or a change in the adoption rate of our other less seasonally impacted Value Added Services. Although these seasonal factors are common
in the real estate industry, historical patterns should not be considered a reliable indicator of our future sales activity or performance.
21
Key Components of Results of Operations
Revenue
Our core solutions and certain of our Value Added Services are offered on a subscription basis. Our core solutions subscription fees vary by
property type and are designed to scale with the size of our customers’ businesses. We recognize revenue for subscription-based services on a straight-line
basis over the contract term beginning on the date that our service is made available. We generally invoice monthly or, to a lesser extent, annually in
advance of the subscription period.
We also offer certain Value Added Services, which are not covered by our subscription fees, on a per-use basis. Usage-based fees are charged
either as a percentage of the transaction amount (e.g., for certain of our payment services) or on a flat fee per transaction basis with no minimum usage
commitments (e.g., for our tenant screening and risk mitigation services). We recognize revenue for usage-based services in the period the service is
rendered. Our payments services fees are recorded gross of the interchange and payment processing related fees. We generally invoice our usage-based
services on a monthly basis or collect the fee at the time of service. A significant majority of our Value Added Services revenue comes from the use of our
payment services, tenant screening services, and risk mitigation services.
We charge our customers for onboarding assistance to our core solutions and certain other non-recurring services. We generally invoice for these
other services in advance of the services being completed and recognize revenue in the period the service is rendered. We generate revenue from the legacy
customers of previously acquired businesses by providing services outside of our property management core solution platform. Revenue derived from these
services is recorded in Other revenue. As of December 31, 2022 and 2021, we had 18,441 and 17,215 property management customers, respectively.
Costs and Operating Expenses
Cost of Revenue (Exclusive of Depreciation and Amortization). Many of our Value Added Services are facilitated by third-party service providers.
Cost of revenue paid to these third-party service providers includes the cost of electronic interchange and payment processing-related services to support
our payments services, the cost of credit reporting services for our tenant screening services, and various costs associated with our risk mitigation service
providers. These third-party costs vary both in amount and as a percent of revenue for each Value Added Service offering. Cost of revenue also consists of
personnel-related costs for our employees focused on customer service and the support of our operations (including salaries, performance-based
compensation, benefits, and stock-based compensation), platform infrastructure costs (such as data center operations and hosting-related costs), and
allocated shared and other costs. Cost of revenue excludes depreciation of property and equipment, amortization of capitalized software development costs
and amortization of intangible assets.
Sales and Marketing. Sales and marketing expense consists of personnel-related costs for our employees focused on sales and marketing
(including salaries, sales commissions, performance-based compensation, benefits, and stock-based compensation), costs associated with sales and
marketing activities, and allocated shared and other costs. Marketing activities include advertising, online lead generation, lead nurturing, customer and
industry events, and the creation of industry-related content and collateral. We focus our sales and marketing efforts on generating awareness of our
software solutions, creating sales leads, establishing and promoting our brands, and cultivating an educated community of successful and vocal customers.
Research and Product Development. Research and product development expense consists of personnel-related costs for our employees focused on
research and product development (including salaries, performance-based compensation, benefits, and stock-based compensation), fees for third-party
development resources, and allocated shared and other costs. Our research and product development efforts are focused on expanding functionality and the
ease of use of our existing software solutions by adding new core functionality, Value Added Services and other improvements, as well as developing new
products and services. We capitalize our software development costs that meet the criteria for capitalization. Amortization of capitalized software
development costs is included in depreciation and amortization expense.
General and Administrative. General and administrative expense consists of personnel-related costs for employees in our executive, finance,
information technology, human resources, legal, compliance, corporate development and administrative organizations (including salaries, performance-
based cash compensation, benefits, and stock-based compensation). In addition, general and administrative expense includes fees for third-party
professional services (including audit, legal, compliance, and tax services), transaction costs related to sales of subsidiary businesses, regulatory fees, other
corporate expenses, impairment of long-lived assets, and allocated shared and other costs.
Depreciation and Amortization. Depreciation and amortization expense includes depreciation of property and equipment, amortization of
capitalized software development costs, and amortization of intangible assets. We depreciate or amortize property and equipment, software development
costs, and intangible assets over their expected useful lives on a straight-line basis, which approximates the pattern in which the economic benefits of the
assets are consumed.
22
Other Income, Net. Other income, net includes gain on sale of our equity-method investments, gains and losses associated with the sale of
businesses and property and equipment, and income from certain post-closing transition services provided by us to MyCase, Inc. during fiscal year 2021.
Interest Income (Expense), Net. Interest income includes interest earned on investment securities, amortization and accretion of the premium and
discounts paid from the purchase of investment securities, and interest earned on cash deposited in our bank accounts. Interest expense includes interest
paid on any outstanding borrowings during the year ended December 31, 2020.
Provision for Income Taxes. Provision for income taxes consists of federal and state income taxes in the United States.
Results of Operations
Revenue
Core solutions
Value Added Services
Other
Total revenue
Year Ended December 31,
Change
2022
2021
Amount
%
(dollars in thousands)
$
$
132,541 $
327,636
11,706
471,883 $
105,148 $
241,289
12,933
359,370 $
27,393
86,347
(1,227)
112,513
26 %
36
(9)
31 %
The increase in revenue for the year ended December 31, 2022, compared to the prior year, was primarily attributable to growth in our base of
property management customers driving an increase in the number of property management units under management, and growth in users of our
subscription and usage-based services. During the year ended December 31, 2022, we experienced growth of 15% in the number of property management
units under management resulting from 7% growth in the number of property management customers, compared to the prior year.
Our payment services experienced increased adoption during the comparative periods as residents, property managers, and owners transacted
more business online. Our tenant screening and risk mitigation services usage also increased during the comparative periods in line with the increase in
units under management. A significant majority of our Value Added Services revenue comes from the use of our payment services, tenant screening
services, and the risk mitigation services we make available to customers.
Cost of Revenue (Exclusive of Depreciation and Amortization)
Cost of revenue (exclusive of depreciation and amortization)
Percentage of revenue
Stock-based compensation, included above
Percentage of revenue
Year Ended December 31,
Change
2022
2021
Amount
%
(dollars in thousands)
$
$
191,826
40.7 %
2,640
0.6 %
$
$
143,944
40.1 %
2,024
0.6 %
$
$
47,882
616
33 %
30 %
Cost of revenue (exclusive of depreciation and amortization) for the year ended December 31, 2022, increased primarily due to increases in
expenditures to third-party service providers related to the delivery of our Value Added Services of $34.1 million compared to the prior year. This increase
was directly associated with the increased adoption and utilization of our Value Added Services. Personnel-related costs, including performance-based
compensation, necessary to support growth and key investments, increased $12.5 million for the year ended December 31, 2022, compared to the prior
year. Allocated shared and other costs increased by $1.2 million for the year ended December 31, 2022, compared to the prior year, primarily related to
platform infrastructure, software and other costs incurred in support of our overall growth.
23
As a percentage of revenue, cost of revenue (exclusive of depreciation and amortization) fluctuates primarily based on the mix of Value Added
Services revenue in the period, given the varying percentage of revenue we pay to third-party service providers. We expect cost of revenue (exclusive of
depreciation and amortization) for the year ending December 31, 2023 to decrease as a percentage of revenue compared to the year ended December 31,
2022, as we expect to leverage headcount efficiencies to offset an increase in expenditures to third-party service providers related to the delivery of our
Value Added Services.
Sales and Marketing
Sales and marketing
Percentage of revenue
Stock-based compensation, included above
Percentage of revenue
Year Ended December 31,
Change
2022
2021
Amount
%
$
$
107,398
22.8 %
8,681
1.8 %
$
$
(dollars in thousands)
73,200
$
34,198
20.4 %
2,329
0.6 %
$
6,352
47 %
273 %
Sales and marketing expense for the year ended December 31, 2022 increased primarily due to increases in personnel-related costs, including
performance-based compensation, necessary to support growth in the business of $23.9 million compared to the prior year. Advertising and promotion
costs increased by $2.1 million primarily due to increased advertising and promotion spending to support the growth and key investments in the business.
Allocated shared and other costs increased by $8.2 million year ended December 31, 2022 compared to the prior year, primarily related to software and
other costs incurred in support of our overall growth.
We expect sales and marketing expense for the year ending December 31, 2023 to decrease as a percentage of revenue compared to the year ended
December 31, 2022, as we continue to leverage headcount efficiencies.
Research and Product Development
Year Ended December 31,
Change
2022
2021
Amount
%
Research and product development
Percentage of revenue
Stock-based compensation, included above
Percentage of revenue
$
$
111,118
23.5 %
16,030
3.4 %
$
$
(dollars in thousands)
65,980
$
45,138
18.4 %
5,457
1.5 %
$
10,573
68 %
194 %
Research and product development expense for the year ended December 31, 2022 increased primarily due to an increase in personnel-related
costs including performance-based compensation, net of capitalized software development costs, of $42.8 million, compared to the prior year. Allocated
shared and other costs increased by $2.3 million year ended December 31, 2022 compared to the prior year, primarily related to software and other costs
incurred in support of our overall growth.
We expect research and product development expenses for the year ending December 31, 2023 to increase as a percentage of revenue compared to
the year ended December 31, 2022, as we continue to invest in our research and product development organization to support our strategy to expand the use
cases of our product capabilities to the larger customer segment.
24
General and Administrative
General and administrative
Percentage of revenue
Stock-based compensation, included above
Percentage of revenue
Year Ended December 31,
Change
2022
2021
Amount
%
$
$
100,792
21.4 %
13,584
2.9 %
$
$
(dollars in thousands)
57,279
$
43,513
15.9 %
5,531
1.5 %
$
8,053
76 %
146 %
General and administrative expense for the year ended December 31, 2022 increased primarily due to a net ROU and other lease-related asset
impairment of $22.0 million. Personnel-related costs, including performance-based compensation, increased $15.7 million for the year ended December 31,
2022, compared to the prior year. Allocated shared and other costs increased $3.9 million for the year ended December 31, 2022, compared to the prior
year, for professional fees, education and training, insurance, software and other costs to support our growth. Additionally, offsetting general and
administrative expense for the year ended December 31, 2021 was a $1.9 million insurance recovery related to our previously disclosed settlement with the
Federal Trade Commission (the "FTC").
Excluding the impairment charge, we expect general and administrative expenses for the year ending December 31, 2023 to remain flat as a
percentage of revenue compared to the year ended December 31, 2022.
Depreciation and Amortization
Depreciation and amortization
Percentage of revenue
Year Ended December 31,
Change
2022
2021
Amount
$
33,119
$
(dollars in thousands)
30,845
$
2,274
7.0 %
8.6 %
%
7%
Depreciation and amortization expense for the year ended December 31, 2022 increased, compared to the prior year, primarily due to increased
amortization expense associated with accumulated capitalized software development balances.
We expect depreciation and amortization expenses for the year ending December 31, 2023 to decrease as a percentage of revenue compared to the
year ended December 31, 2022 due to a decrease in amortization of accumulated capitalized software development balances.
Other Income, net
Other income, net
Percentage of revenue
Year Ended December 31,
Change
2022
2021
Amount
%
$
4,469
$
(dollars in thousands)
13,111
$
(8,642)
(66)%
0.9 %
3.6 %
Other income, net for the year ended December 31, 2022 decreased, compared to the prior year, primarily due to a gain of $12.8 million related to
the sale of our investment in SecureDocs during the year ended December 31, 2021. The decrease was offset by a gain of $4.2 million associated with the
WegoWise Transaction during the year ended December 31, 2022. For additional information regarding the WegoWise Transaction, refer to Note 3, Sale of
Subsidiary Businesses.
Provision for Income Taxes
Provision for income taxes
Percentage of revenue
Year Ended December 31,
Change
2022
2021
Amount
%
(dollars in thousands)
$
1,402
$
0.3 %
$
706
0.2 %
696
99%
25
The effective tax rate as compared to the U.S. federal statutory rate of 21% differs primarily due to change in valuation allowance against deferred
taxes and non-deductible expenses, partially offset by state income taxes and tax benefits associated with stock-based compensation expense and research
and development tax credits.
Liquidity and Capital Resources
Our principal sources of liquidity continue to be cash, cash equivalents, and investment securities, as well as cash flows generated from our
operations. At December 31, 2022, our cash and cash equivalents and investment securities had an aggregate balance of $185.2 million. We have financed
our operations primarily through cash generated from operations. We believe that our existing cash and cash equivalents, investment securities, and cash
generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.
Capital Requirements
Our future capital requirements will depend on many factors, including continued market acceptance of our software solutions, changes in the
number of our customers, adoption and utilization of our Value Added Services by new and existing customers, the timing and extent of the introduction of
new core functionality, products and Value Added Services, and the timing and extent of our investments across our organization. Non-cancelable purchase
commitments for business operations total $23.4 million as of December 31, 2022, due primarily over the next three years. Operating lease obligations
totaling $65.1 million associated with leased facilities and have varying maturities with $30.1 million due over the next five years. Furthermore, our Board
of Directors has authorized our management to repurchase up to $100.0 million of shares of our Class A common stock from time to time. To date, we have
repurchased $4.2 million of our Class A common stock under the Share Repurchase Program. For additional information regarding our Share Repurchase
Program, refer to Note 11, Stockholders' Equity.
Cash Flows
The following table presents our cash flows for the periods indicated (in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash Provided by Operating Activities
Year Ended December 31,
2022
25,365 $
(6,466)
(6,163)
12,736 $
2021
35,391
(110,459)
(7,348)
(82,416)
$
$
Our primary source of operating cash inflows is cash collected from our customers in connection with their use of our core solutions and Value
Added Services. Our primary uses of cash from operating activities are for personnel-related expenditures and third-party costs incurred to support the
delivery of our software solutions.
Net cash provided by operating activities was $25.4 million for the year ended December 31, 2022 compared to net cash provided by operating
activities of $35.4 million for the year ended December 31, 2021. The net decrease in cash provided by operating activities was primarily due to an increase
in employee related costs and the settlement of accounts payable offset by an increase in cash collections from customers due to higher revenue growth and
a decrease in income taxes paid related to the sale of MyCase, Inc. during the year ended December 31, 2021.
Cash Used in Investing Activities
Cash used in investing activities is generally composed of purchases of investment securities, maturities and sales of investment securities,
purchases of property and equipment, and additions to capitalized software development.
Net cash used in investing activities for the year ended December 31, 2022 was $6.5 million compared to $110.5 million for the year ended
December 31, 2021. The net decrease in cash used in investing activities was primarily due to decreases in purchases of available-for-sale investment
securities and capitalization of software development costs, offset by a decrease in proceeds from sales of available-for-sale investment securities and
decrease in proceeds from sales of business and equity method investments.
26
Cash Used in Financing Activities
Cash used in financing activities is generally composed of net share settlements for employee tax withholdings associated with the vesting of
equity awards offset by proceeds from the exercise of stock options.
Net cash used in financing activities for the year ended December 31, 2022 was $6.2 million compared to $7.3 million for the year ended
December 31, 2021. The decrease in cash used in financing activities was primarily due to an increase in proceeds from stock option exercises.
Off-Balance Sheet Arrangements
At December 31, 2022, we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our Consolidated 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 Consolidated Financial Statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
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
Many of our contracts with customers contain multiple performance obligations. Determining whether products and services are considered
distinct performance obligations that should be accounted for separately versus together may require judgment. We account for individual performance
obligations separately if they are distinct. The performance obligations for these contracts include access and use of our core solutions, implementation
services, and customer support. Access and use of our core solutions and implementation services are considered distinct.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. Judgment is required to determine the
standalone selling price for each distinct performance obligation. We typically have more than one standalone selling price for individual products and
services due to the stratification of those products and services by customers and circumstances. In these instances, we determine the standalone selling
price based on our overall pricing objectives, taking into consideration customer demographics and other factors. Fees are fixed based on rates specified in
the subscription agreements, which do not provide for any refunds or adjustments.
Capitalized Software Development Costs
We believe there are two key estimates within the capitalized software balance, which are the determination of the useful life of the software and
the determination of the amounts to be capitalized.
We determined that a three year life is appropriate for our internal-use software based on our best estimate of the useful life of the internally
developed software after considering factors such as continuous developments in the technology, obsolescence and anticipated life of the service offering
before significant upgrades. Based on our prior experience, internally generated software will generally remain in use for a minimum of three years before
being significantly replaced or modified to keep up with evolving customer and company needs. While we do not anticipate any significant changes to this
three year estimate, a change in this estimate could produce a material impact on our financial statements.
We determine the amount of internal software costs to be capitalized based on the amount of time spent by our software engineers on projects.
Costs associated with building or significantly enhancing our software solutions and new internally built software solutions are capitalized, while costs
associated with planning new developments and maintaining our software solutions are expensed as incurred. There is judgment involved in estimating the
stage of development as well as estimating time allocated to a particular project. A significant change in the time spent on each project could have a
material impact on the amount capitalized and related amortization expense in subsequent periods.
27
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 or that the useful lives of those assets are no longer appropriate. 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.
Any impairments to operating lease right of use ("ROU") assets, leasehold improvements, or other assets as a result of a sublease, abandonment,
or other similar factor are assessed for impairment when a decision to do so is made and recorded as an operating expense. Similar to other long-lived
assets, management tests ROU assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these
assets. For ROU and other lease-related assets, such circumstances would include subleases that do not fully recover the costs of the associated leases or a
decision to abandon the use of all or part of a leased asset. We recorded a net impairment of $22.0 million consisting of $17.6 million related to ROU assets
and $4.4 million related to property and equipment associated with our leased office spaces as described further in Note 9, Leases. Significant judgment
and estimates are required in assessing impairment of long-lived assets, including identifying whether events or changes in circumstances require an
impairment assessment, estimating future cash flows, uncertainty associated with the time period it will take to obtain a sublessee, the anticipated sublease
income and determining appropriate discount rates. Our estimates of fair value are based on assumptions believed to be reasonable, but which are
inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Income Taxes
We recognize deferred tax liabilities and assets 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. In evaluating the need for a valuation allowance, we consider the
weighting of all available positive and negative evidence, which includes, among other things, the nature, frequency and severity of current and cumulative
taxable income or losses, future projections of profitability, and the duration of statutory carryforward periods.
Judgment is required to measure the amount of tax benefits that can be recognized associated with uncertain tax positions. 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. 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
Investment Securities
At December 31, 2022, we had $114.5 million of investment securities consisting of United States government agency securities, corporate bonds,
and treasury securities. The primary objective of investing in securities is to support our liquidity and capital needs. We did not purchase these investments
for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.
Our investment securities are exposed to market risk due to interest rate fluctuations. While fluctuations in interest rates do not impact our interest
income from our investment securities as all of these securities have fixed interest rates, changes in interest rates may impact the fair value of the
investment securities. Since our investment securities are held as available for sale, all changes in fair value impact our other comprehensive (loss) income
unless an investment security is considered impaired in which case changes in fair value are reported in other expense. As of December 31, 2022, a
hypothetical 100 basis point decrease in interest rates would have resulted in an increase in the fair value of our investment securities of approximately $0.7
million, and a hypothetical 100 basis point increase in interest rates would have resulted in a decrease in the fair value of our investment securities of
approximately $0.7 million. This estimate is based on a sensitivity model which measured an instant change in interest rates by 100 basis points as of
December 31, 2022.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID 238)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
30
32
33
34
35
36
38
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of AppFolio, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of AppFolio, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021,
and the related consolidated statements of operations, of comprehensive (loss) income, of stockholder’s equity and of cash flows for each of the three years
in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have
audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2022 and 2021 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's
internal control over financial reporting 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 in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements 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. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process 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. A company’s internal control
over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
30
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated
financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment of Long-Lived Assets
As described in Note 9 to the consolidated financial statements, the Company decided to exit and make available for sublease certain leased office spaces.
Management reassessed the Company’s asset groupings and evaluated the recoverability of the Company’s right-of-use and other lease-related assets and
determined that the carrying value of the respective asset groups was not fully recoverable. Management utilized discounted cash flow models to estimate
the fair value of the asset groups taking into consideration the time period it will take to obtain a sublessee, the applicable discount rates and the anticipated
sublease income and calculated the corresponding impairment loss. The Company recorded a net impairment of $22.0 million related to right-of-use assets
and property and equipment associated with the leased office space.
The principal considerations for our determination that performing procedures relating to the impairment of long-lived assets is a critical audit matter are (i)
the significant judgment by management in developing the fair value estimate of the asset groups; (ii) a high degree of auditor judgment, subjectivity, and
effort in performing procedures and evaluating management’s significant assumptions related to the time period it will take to obtain a sublessee and the
anticipated sublease income; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the effectiveness of controls relating to the impairment of long-lived assets, including controls over
the valuation of the asset groups. These procedures also included, among others (i) evaluating the reassessment of asset groupings and the recoverability of
the right-of-use and other lease-related assets; (ii) testing management’s process for developing the fair value estimate of the asset groups; (iii) evaluating
the appropriateness of the discounted cash flow models; (iv) testing the completeness and accuracy of underlying data used in the discounted cash flow
models; and (v) evaluating the reasonableness of the significant assumptions used by management related to the time period it will take to obtain a
sublessee and the anticipated sublease income. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of
the discounted cash flow models and evaluating the reasonableness of the significant assumptions related to the time period it will take to obtain a
sublessee and the anticipated sublease income.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 9, 2023
We have served as the Company’s auditor since 2012.
31
APPFOLIO, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
December 31,
2022
2021
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
Operating lease right-of-use assets
Capitalized software development costs, net
Goodwill
Intangible assets, net
Other long-term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
Accrued employee expenses
Accrued expenses
Other current liabilities
Total current liabilities
Operating lease liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.0001 par value, 25,000 shares authorized and no shares issued and outstanding as of December 31,
2022 and December 31, 2021
Class A common stock, $0.0001 par value, 250,000 shares authorized as of December 31, 2022 and December 31,
2021; 20,988 and 19,836 shares issued as of December 31, 2022 and December 31, 2021, respectively; 20,569 and
19,417 shares outstanding as of December 31, 2022 and December 31, 2021, respectively
Class B common stock, $0.0001 par value, 50,000 shares authorized as of December 31, 2022 and December 31, 2021;
14,746 and 15,408 shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Treasury stock, at cost, 419 shares of Class A common stock as of December 31, 2022 and December 31, 2021
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
70,769
89,297
16,503
24,899
201,468
25,161
26,110
23,485
35,315
56,060
4,833
8,785
381,217
2,473
34,376
15,601
8,893
61,343
50,237
4,091
115,671
—
2
2
209,704
(1,684)
(25,756)
83,278
265,546
381,217
$
$
$
$
57,847
64,600
12,595
23,553
158,595
61,076
30,479
41,710
41,212
56,147
11,711
7,087
408,017
1,704
30,065
13,284
7,589
52,642
55,733
2,261
110,636
—
2
2
171,930
(194)
(25,756)
151,397
297,381
408,017
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
32
APPFOLIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Revenue
Costs and operating expenses:
(1)
Cost of revenue (exclusive of depreciation and amortization)
Sales and marketing
Research and product development
General and administrative
Depreciation and amortization
(1)
(1)
(1)
Total costs and operating expenses
(Loss) income from operations
Other income, net
Interest income (expense), net
(Loss) income before provision for income taxes
Provision for income taxes
Net (loss) income
Net (loss) income per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
(1)
Includes stock-based compensation expense as follows:
Stock-based compensation expense included in 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
Year Ended December 31,
2022
2021
2020
$
471,883 $
359,370 $
310,056
191,826
107,398
111,118
100,792
33,119
544,253
(72,370)
4,469
1,184
(66,717)
1,402
(68,119) $
(1.95) $
(1.95) $
35,010
35,010
143,944
73,200
65,980
57,279
30,845
371,248
(11,878)
13,111
501
1,734
706
1,028 $
0.03 $
0.03 $
34,578
35,701
119,029
58,445
48,529
47,480
26,790
300,273
9,783
188,897
(1,849)
196,831
38,428
158,403
4.62
4.44
34,264
35,713
Year Ended December 31,
2022
2021
2020
2,640 $
8,681
16,030
13,584
40,935 $
2,024 $
2,329
5,457
5,531
15,341 $
1,506
1,415
1,818
4,286
9,025
$
$
$
$
$
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
33
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
APPFOLIO, INC.
(in thousands)
Net (loss) income
Other comprehensive (loss) income:
Changes in unrealized (losses) gains on investment securities
Comprehensive (loss) income
Year Ended December 31,
2022
2021
2020
(68,119) $
1,028 $
158,403
(1,490)
(69,609) $
(250)
778 $
23
158,426
$
$
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
34
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
APPFOLIO, INC.
(in thousands)
Common Stock
Class A
Common Stock
Class B
Shares
Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
(Loss) Income
Retained
Earnings/
(Accumulated
Deficit)
Treasury
Stock
Total
17,594 $
13
—
2 $
—
—
161,509 $
822
11,112
33 $
—
—
(21,562) $
—
—
(8,034) $
—
—
131,950
822
11,112
Balance at December 31, 2019
Exercise of stock options
Stock-based compensation
Vesting of restricted stock units, net of
shares withheld for taxes
Conversion of Class B common stock to
Class A common stock
Issuance of restricted stock awards
Other comprehensive income
Repurchase of common stock
Net income
Balance at December 31, 2020
Exercise of stock options
Stock-based compensation
Vesting of restricted stock units, net of
shares withheld for taxes
Conversion of Class B common stock to
Class A common stock
Issuance of restricted stock awards
Other comprehensive loss
Net income
Balance at December 31, 2021
Exercise of stock options
Stock-based compensation
Vesting of restricted stock units, net of
shares withheld for taxes
Conversion of Class B common stock to
Class A common stock
Issuance of restricted stock awards
Other comprehensive loss
Net loss
16,552 $
106
—
166
1,948
5
—
(48)
—
18,729
238
—
111
335
4
—
—
19,417
303
—
154
689
6
—
—
Balance at December 31, 2022
20,569 $
2
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
2
—
(1,948)
—
—
—
—
15,659
84
—
—
(335)
—
—
—
15,408
27
—
—
(689)
—
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
(12,196)
—
—
—
—
—
161,247
2,614
18,031
(9,962)
—
—
—
—
171,930
4,474
43,937
(10,637)
—
—
—
—
—
—
—
23
—
—
56
—
—
—
—
—
(250)
—
(194)
—
—
—
—
—
(1,490)
—
—
—
—
—
(4,194)
—
(25,756)
—
—
—
—
—
—
—
(25,756)
—
—
—
—
—
—
—
—
(12,196)
—
—
—
—
158,403
150,369
—
—
—
—
—
—
1,028
151,397
—
—
—
—
23
(4,194)
158,403
285,920
2,614
18,031
(9,962)
—
—
(250)
1,028
297,381
4,474
43,937
—
(10,637)
—
—
—
(68,119)
—
—
(1,490)
(68,119)
265,546
14,746 $
2 $
209,704 $
(1,684) $
(25,756) $
83,278 $
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
35
APPFOLIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash from operating activities
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization
Amortization of operating lease right-of-use assets
Impairment, net
Deferred income taxes
Stock-based compensation, including as amortized
Gain on sale of business
Gain on sale of equity-method investment and recovery of note receivable
Other
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued employee expenses
Accrued expenses
Operating lease liabilities
Other liabilities
Net cash provided by operating activities
Cash from investing activities
Purchases of available-for-sale investments
Proceeds from sales of available-for-sale investments
Proceeds from maturities of available-for-sale investments
Purchases of property and equipment
Capitalization of software development costs
Proceeds from sale of business, net of cash divested
Proceeds from sale of equity-method investment
Net cash (used in) provided by investing activities
Cash from financing activities
Proceeds from stock option exercises
Tax withholding for net share settlement
Payment of contingent consideration
Proceeds from issuance of debt
Principal payments on debt
36
Year Ended December 31,
2022
2021
2020
$
(68,119) $
1,028 $
158,403
30,820
3,187
22,022
(993)
43,234
(4,156)
(40)
175
(4,198)
(5,398)
(1,883)
1,176
4,281
3,452
(2,524)
4,329
25,365
(79,279)
994
87,883
(6,540)
(14,688)
5,124
40
(6,466)
4,474
(10,637)
—
—
—
29,032
3,199
—
250
17,154
(380)
(12,767)
249
(2,103)
(2,168)
(1,259)
497
11,264
(1,773)
1,268
(8,100)
35,391
(241,215)
43,198
107,354
(8,103)
(24,615)
402
12,520
(110,459)
2,614
(9,962)
—
—
—
25,507
3,701
—
29,002
10,308
(187,658)
—
125
(2,782)
(5,894)
(519)
(903)
2,799
6,878
(564)
9,896
48,299
(43,877)
16,711
27,330
(19,038)
(26,042)
191,427
—
146,511
822
(12,196)
(5,977)
50,752
(99,565)
Purchase of treasury stock
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash, cash equivalents and restricted cash
Beginning of period
End of period
—
(6,163)
12,736
—
(7,348)
(82,416)
$
58,283
71,019 $
140,699
58,283 $
(4,194)
(70,358)
124,452
16,247
140,699
APPFOLIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Supplemental disclosure of cash flow information
Cash paid for interest
Cash paid for income taxes
Cash paid for amounts included in the measurement of lease liabilities included in operating cash flows
Right-of-use assets obtained in exchange for operating lease liabilities
$
— $
— $
3,338
3,933
—
9,324
1,618
11,945
1,815
85
2,198
6,644
Year Ended December 31,
2022
2021
2020
The following table presents a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets to the total of
the same such amounts shown above (in thousands):
Cash and cash equivalents
Restricted cash included in other assets
Total cash, cash equivalents and restricted cash
2022
70,769 $
250
71,019 $
$
$
December 31,
2021
57,847 $
436
58,283 $
2020
140,263
436
140,699
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
37
NOTES TO CONSOLIDATED AUDITED FINANCIAL STATEMENTS
APPFOLIO, INC.
1. Nature of Business
AppFolio, Inc. ("we," "us" or "our") is a leading provider of cloud business management solutions for the real estate industry. Our solutions are
designed to enable our property manager customers to digitally transform their businesses, address critical business operations and deliver a better customer
experience. Digital transformation is effectively a requirement for business success in the modern world, and the way we work and live requires powerful
software solutions.
During the year ended December 31, 2020, we also provided cloud-based solutions and services to the legal industry via MyCase, a solution
primarily designed for small and mid-sized law firms. As previously disclosed, we completed the sale of MyCase, Inc. on September 30, 2020. For
additional details, see Note 3, Sales of Subsidiary Businesses.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”).
Reclassification
We reclassified certain amounts in our Consolidated Balance Sheets and Consolidated Statements of Cash Flows within the cash flows from
operating activities section in the prior year to conform to the current year's presentation.
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.
We accounted for our investment in SecureDocs, Inc. (“SecureDocs”) under the equity method of accounting as we had the ability to exert
significant influence, but did not control and were not the primary beneficiary of the entity. Our investment in SecureDocs was not material and any income
(loss) activity was not material individually or in the aggregate to our Consolidated Financial Statements for any period presented. In December 2021, we
sold our interest in SecureDocs. Refer to Note 4, Investment Securities and Fair Value Measurements for additional information.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of
revenue, expenses, other income, and provision for income taxes during the reporting period. Assets and liabilities which are subject to judgment and use of
estimates include the fair value of financial instruments, capitalized software development costs, period of benefit associated with deferred costs,
incremental borrowing rate used to measure operating lease liabilities, the recoverability of goodwill and long-lived assets, income taxes, useful lives
associated with property and equipment and intangible assets, contingencies, assumptions underlying performance-based compensation (whether cash or
stock-based), and assumptions underlying stock-based compensation. Actual results could differ from those estimates and any such differences may have a
material impact on our Consolidated Financial Statements.
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 Added Services, and other service offerings, principally to make decisions about how to allocate resources and to
measure our performance. Accordingly, we have 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, cash equivalents, restricted cash, accounts receivable, and
investment securities. 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 or A-1 by Moody's and regularly monitor our investment security portfolio for changes in credit ratings.
38
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 at December 31, 2022 and 2021 or revenue for the years ended December 31, 2022, 2021 and
2020.
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. We use 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.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, in the marketplace.
Level 3 - Unobservable inputs that are supported by little or no market activity.
Cash, 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.
Investment Securities
Our investment securities currently consist of corporate bonds, United States government agency securities and treasury securities. We classify
investment securities as available-for-sale at the time of purchase and reevaluate such classification at each balance sheet date. All investments are recorded
at estimated fair value and investments with original maturities of less than one year at the time of purchase are classified as short-term. Unrealized gains
and losses for available-for-sale investment securities are included in accumulated other comprehensive income, a component of stockholders' equity.
For available-for-sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or whether it is more likely than not
that we will be required to sell the security before recovery of its amortized cost basis. If either of these criteria is met, the security’s amortized cost basis is
written down to fair value through income. For securities in an unrealized loss position that do not meet these criteria, we evaluate whether the decline in
fair value has resulted from credit loss or other factors. If this assessment indicates a credit loss exists, the credit-related portion of the loss is recorded as an
allowance for losses on the security. No allowance for credit losses for available-for-sale investment securities was recorded as of December 31, 2022 and
2021.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount, net of an allowance for credit losses. The allowance for credit losses 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 uncollectible are charged against the allowance for credit losses when identified. We do not have any off-balance
sheet credit exposure related to our customers. At December 31, 2022 and 2021, our allowance for credit losses was not material.
Property and Equipment
Property and equipment is stated at cost net of accumulated depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of assets as follows:
Asset Type
Computer equipment
Furniture and fixtures
Office equipment
Leasehold improvements
Depreciation Period
3 years
7 years
3 to 5 years
Shorter of remaining life of lease or asset life
39
Leases
We determine if an arrangement is a lease at inception. Operating lease right-of-use ("ROU") assets and operating lease liabilities are recognized
based on the present value of the future minimum lease payments, over the lease term at commencement date. As none of our leases provide an implicit
rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.
The operating lease ROU assets also include any lease payments made to the lessor before or at the lease commencement date and excludes lease incentives
received and initial direct costs incurred. Our lease terms may include options to extend the lease when it is reasonably certain that we will exercise that
option.
Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have lease arrangements with lease and
non-lease components, which are generally accounted for as a single lease component. Leases with an initial term of twelve months or less are not recorded
on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Capitalized Software Development Costs
Software development costs consist of certain payroll and stock compensation costs incurred to develop functionality of our internal-use software
solutions. We capitalize certain software development costs for new offerings as well as significant upgrades and enhancements to our existing software
solutions. 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, license, or lease our software to third parties.
Goodwill and Intangible Assets
Goodwill is tested for impairment at least annually at the reporting unit level or at other times if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its carrying amount. A qualitative assessment is performed to determine whether
it is more likely than not that the fair value of its reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative
assessment results in a more-likely-than-not determination or if a qualitative assessment is not performed. The quantitative assessment considers whether
the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recorded to the extent that the reporting unit’s carrying
value exceeds its fair value.
We test for goodwill impairment annually during the fourth quarter of the calendar year. Based on the assessment performed at November 1, 2022,
we determined it was not more likely than not that our reporting unit fair value was less than its carrying value and no quantitative impairment test
assessment was required. No impairment losses were recorded for goodwill during the years ended December 31, 2022, 2021 and 2020.
Intangible assets primarily consist of acquired database and technology, non-compete agreements, customer and partner relationships, trademarks
and trade names, 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
on a straight-line basis, which approximates the pattern in which the economic benefits of the assets 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 or that the useful lives of those assets are no longer appropriate. 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. We recorded net lease-
related impairment charges of $22.0 million for the year ended December 31, 2022. Refer to Note 9, Leases for additional information. There were no
impairment charges related to the identified long-lived assets for the years ended December 31, 2021 and 2020.
40
Revenue Recognition
We generate revenue from our customers primarily for subscriptions to access our core solutions and Value Added Services. Revenue is
recognized upon transfer of control of promised services in an amount that reflects the consideration we expect to receive in exchange for those services.
We enter into contracts that can include various combinations of services, which are generally capable of being distinct, distinct within the context of the
contract, and accounted for as separate performance obligations. Revenue is recognized net of any taxes collected from customers, which are subsequently
remitted to governmental authorities. We recognize revenue in proportion to the amount we have the right to invoice for certain core solutions and Value
Added Services revenue, as that amount corresponds directly with our performance completed to date. Refer to Note 14, Revenue and Other Information
for the disaggregated breakdown of revenue between Core solutions, Value Added Services and Other revenue.
Core Solutions
We charge our customers on a subscription basis for our core solutions. Our customers do not have rights to the underlying software code of our
solutions, and, accordingly, we recognize subscription revenue over time on a straight-line basis over the contract term beginning on the date that our
service is made available to the customer. The terms of our subscription agreements are monthly, annual, and multiyear and we typically invoice our
customers for subscription services in monthly or annual installments, in advance of the subscription period.
Value Added Services
We primarily charge our customers on a usage basis for our Value Added Services. Usage-based fees are charged either as a percentage of the
transaction amount (e.g., for certain of our electronic payment services) or on a flat fee per transaction basis with no minimum usage commitments (e.g.,
for our tenant screening and risk mitigation services). We recognize revenue for usage-based services in the period the service is rendered. Our electronic
payments services fees are recorded gross of the interchange and payment processing related fees. We generally invoice our customers for usage-based
services on a monthly basis for services rendered in the preceding month. We also have certain Value Added Services which are charged on a subscription
basis. We typically invoice our customers for subscription-based services in monthly installments, in advance of the subscription period. We recognize
revenue for subscription-based services over time on a straight-line basis over the contract term beginning on the date that our service is made available to
the customer. Some subscription or usage-based Value Added Services, such as fees for electronic payment services, are paid by either our customers or
clients of our customers at the time the services are rendered.
We work with third-party partners to provide certain of our Value Added Services. For these Value Added Services, we evaluate whether we are
the principal, and report revenue on a gross basis, or the agent, and report revenue on a net basis. In this assessment we consider if we obtain control of the
specified services before they are transferred to the customer, as well as other indicators such as whether we are the party primarily responsible for
fulfillment, and whether we have discretion in establishing price.
Other Revenue
Other revenue include fees from one-time services related to the implementation of our software solutions and other recurring or one-time fees
related to our customers who are not otherwise using our core solutions. This includes legacy customers of businesses we have acquired where the
customers haven't migrated to our core solutions. The fees for implementation and data migration services are billed upon signing our core subscription
contract and are recognized as revenue in the period the service is rendered. Other services are billed when the services rendered are completed and
delivered to the customer or billed in advance and deferred over the subscription period.
Deferred Revenue
We record deferred revenue when cash payments are received in advance of our performance. Deferred revenue as of December 31, 2022 and
2021 was $0.9 million and $2.5 million, respectively. During the twelve months ended December 31, 2022 and 2021, we recognized revenue of $2.4
million and $2.2 million, respectively, that were included in the deferred revenue balances at December 31, 2021 and 2020, respectively.
Remaining Performance Obligations
Transaction price allocated to remaining performance obligations (“RPO”) represents contracted revenue that has not been recognized, which
includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenue in future periods. RPO does not include revenue
related to performance obligations that are part of a contract whose original expected duration is one year or less or related to usage-based Value Added
Services that are billed in arrears.
41
As of December 31, 2022, the total non-cancelable RPO under our contracts with customers was $15 million, and we expect to recognize revenue
on approximately 47% of these RPO over the following 12 months, with the balance to be recognized thereafter.
Deferred Costs
Deferred costs, which primarily consist of sales commissions, are considered incremental and recoverable costs of obtaining a contract with a
customer. These costs are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be three years. We
typically do not pay commissions for contract renewals. We determined the period of benefit by taking into consideration our customer contract term, the
useful life of our internal-use software, average customer life, and other factors. Amortization expense for the deferred costs is included within sales and
marketing expense in the accompanying Consolidated Statements of Operations.
Deferred costs were $15.8 million and $12.4 million at December 31, 2022 and 2021, respectively, of which $8.1 million and $6.4 million,
respectively, are included in Prepaid expenses and other current assets and $7.7 million and $6.0 million, respectively, are included in Other assets in the
accompanying Consolidated Balance Sheets. Amortization expense for deferred costs was $8.1 million, $6.8 million, and $5.8 million for the years ended
December 31, 2022, 2021, and 2020, respectively. For the years ended December 31, 2022 and 2021, no impairments were identified in relation to the costs
capitalized for the periods presented.
Cost of Revenue (Exclusive of Depreciation and Amortization)
Many of our Value Added Services are facilitated by third-party service providers. Cost of revenue paid to these third-party service providers
includes the cost of electronic interchange and payment processing-related services to support our payments services, the cost of credit reporting services
for our tenant screening services, and various costs associated with our risk mitigation service providers. These third-party costs vary both in amount and as
a percent of revenue for each Value Added Service offering. Cost of revenue also consists of personnel-related costs for our employees focused on
customer service and the support of our operations (including salaries, performance-based compensation, benefits, and stock-based compensation),
platform infrastructure costs (such as data center operations and hosting-related costs), and allocated shared and other costs. Cost of revenue excludes
depreciation of property and equipment, amortization of capitalized software development costs and amortization of intangible assets.
Sales and Marketing
Sales and marketing expense consists of personnel-related costs for our employees focused on sales and marketing (including salaries, sales
commissions, performance-based compensation, benefits, and stock-based compensation), costs associated with sales and marketing activities, and
allocated shared and other costs. Marketing activities include advertising, online lead generation, lead nurturing, customer and industry events, and the
creation of industry-related content and collateral. 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
$9.2 million, $9.4 million and $7.0 million for each of the years ended December 31, 2022, 2021 and 2020, respectively, and are expensed as incurred.
Research and Product Development
Research and product development expense consists of personnel-related costs for our employees focused on research and product development
(including salaries, performance-based compensation, benefits, and stock-based compensation), fees for third-party development resources, and allocated
shared and other costs. Our research and product development efforts are focused on expanding functionality and the ease of use of our existing software
solutions by adding new core functionality, Value Added Services and other improvements, as well as developing new products and services. We capitalize
our software development costs which meet 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 for employees in our executive, finance, information technology, human
resources, legal, compliance, corporate development and administrative organizations (including salaries, performance-based compensation, benefits, and
stock-based compensation). In addition, general and administrative expense includes fees for third-party professional services (including audit, legal,
compliance, and tax services), transaction costs related to sales of subsidiary businesses, regulatory f, other corporate expenses, impairment of long-lived
assets, and allocated shared costs.
42
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 recognize stock-based compensation expense for restricted stock awards ("RSAs") and restricted stock units ("RSUs") with only service
conditions on a straight-line basis over the requisite service period. For RSUs with both service and performance conditions (performance share units
("PSUs")), compensation cost is recorded on a graded-vesting method, if it is probable that the performance condition will be achieved. Adjustments to
compensation expense are made each period based on changes in our estimate of the number of PSUs that are probable of vesting. PSUs will vest on the
vesting date and upon achievement of the relevant performance metric once such calculation is finalized in accordance with our internal policies. We
estimate a forfeiture rate to calculate our stock-based compensation expense for our stock-based awards.
Income Taxes
We recognize deferred tax liabilities and assets 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. In evaluating the need for a valuation allowance, we consider the
weighting of all available positive and negative evidence, which includes, among other things, the nature, frequency and severity of current and cumulative
taxable income or losses, future projections of profitability, and the duration of statutory carryforward periods.
Net (Loss) Income per Common Share
Basic net (loss) income per share includes no dilution and is computed by dividing net (loss) income for the period by the weighted average
number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted
average number of shares of common stock and potentially dilutive common stock outstanding during the period. The dilutive effect of outstanding options
and equity incentive awards is reflected in diluted net income per share by application of the treasury stock method. The calculation of diluted net income
per share excludes all anti-dilutive common shares.
Net (loss) income per common share was the same for shares of our Class A and Class B common stock because they are entitled to the same
liquidation and dividend rights and are therefore combined in the table below. The following table presents a reconciliation of the weighted average number
of shares of our Class A and Class B common stock used to compute net (loss) income per common 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, restricted stock units and restricted shares used to compute diluted net
income per common share
Weighted average common shares outstanding; diluted
Year Ended December 31,
2022
2021
2020
35,015
5
35,010
34,583
5
34,578
34,269
5
34,264
35,010
34,578
34,264
—
35,010
1,123
35,701
1,449
35,713
For the years ended December 31, 2021 and 2020, an aggregate of 181,000 and 79,000 shares, respectively, underlying performance-based
restricted stock units ("PSUs") were not included in the computations of diluted and anti-dilutive shares as they are considered contingently issuable upon
satisfaction of pre-defined performance measures and their respective performance measures had not been met. Restricted stock units ("RSUs") with an
anti-dilutive effect were excluded from the calculation of weighted average number of shares used to compute diluted net income per common share and
they were not material for the years ended December 31, 2021 and 2020. Because we reported a net loss for the years ended December 31, 2022, all
potentially dilutive common shares are anti-dilutive for these periods and have been excluded from the calculation of net loss per share.
43
Recent Accounting Pronouncements Not Yet Adopted
In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-08, "Business
Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires contract assets and
contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606,
"Revenue from Contracts with Customers," as if the acquirer had originated the contracts. ASU 2021-08 is effective for fiscal years beginning after
December 15, 2022, with early adoption permitted. We expect to adopt ASU 2021-08 on January 1, 2023.
3. Sales of Subsidiary Businesses
Sale of WegoWise
In August 2022, we completed the sale of AppFolio Utility Management, Inc., dba WegoWise ("WegoWise"), a former wholly owned subsidiary
of the Company that provided cloud-based utility analytics reporting software solutions to our customers. We sold WegoWise for $5.2 million (the
“WegoWise Transaction”) and recognized a pre-tax gain on the sale of $4.2 million. Net assets divested are primarily comprised of intangible assets of $2.5
million and deferred revenue of $1.7 million. The gain on the sale is included within Other income, net in our Consolidated Statements of Operations.
Sale of MyCase
On September 30, 2020, we completed the sale of MyCase, Inc. ("MyCase"), a former wholly owned subsidiary that provided legal practice and
case management software solutions to our legal customers, for $193.0 million, consisting of $192.2 million of cash proceeds, plus a $2.2 million employee
retention bonus pool funded by us, less cash divested of $0.8 million and a preliminary working capital adjustment of $0.6 million (the "MyCase
Transaction"). The retention bonus pool was refundable to the Company to the extent that MyCase employees were terminated prior to the retention period,
which was one year from the closing date of the MyCase Transaction.
We recognized a pre-tax gain on the sale of $188.0 million on the MyCase Transaction, consisting of cash proceeds of $192.2 million, less net
assets divested of $4.6 million, plus an adjustment in the employee retention bonus pool of $0.4 million. Net assets divested is primarily comprised of
capitalized software of $3.9 million, deferred revenue of $2.8 million and goodwill allocated to MyCase of $2.3 million. The gain on the sale was recorded
within Other income, net. Income received during the twelve months ended December 31, 2021 and 2020 in relation to the transition services provided by
us to MyCase was $2.4 million, and $1.1 million respectively, and is included within Other income, net in our Consolidated Statements of Operations.
44
4. Investment Securities and Fair Value Measurements
Investment Securities
Investment securities classified as available-for-sale consisted of the following at December 31, 2022 and 2021 (in thousands):
Corporate bonds
Agency securities
Treasury securities
Total available-for-sale investment securities
Corporate bonds
Agency securities
Treasury securities
Total available-for-sale investment securities
Amortized Cost
Gross Unrealized Gains
Gross Unrealized
Losses
December 31, 2022
17,497 $
17,507
81,605
116,609 $
2 $
—
—
2 $
(112) $
(484)
(1,557)
(2,153) $
Estimated Fair Value
17,387
17,023
80,048
114,458
Amortized Cost
Gross Unrealized Gains
Gross Unrealized
Losses
December 31, 2021
29,080 $
19,753
77,108
125,941 $
— $
—
2
2 $
(11) $
(27)
(229)
(267) $
Estimated Fair Value
29,069
19,726
76,881
125,676
$
$
$
$
As of December 31, 2022, the decline in fair value below amortized cost basis was not considered other than temporary as it is more likely than
not we will hold the securities until maturity or recovery of the cost basis. No allowance for credit losses for available-for-sale investment securities was
recorded as of December 31, 2022 or 2021.
The fair values of available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands):
Due in one year or less
Due after one year through three years
Total available-for-sale investment securities
December 31, 2022
December 31, 2021
Amortized Cost
Estimated Fair Value
Amortized Cost
$
$
90,822 $
25,787
116,609 $
89,297 $
25,161
114,458 $
64,627 $
61,314
125,941 $
Estimated Fair Value
64,600
61,076
125,676
During the years ended December 31, 2022 and 2021, we had sales and maturities (which include calls) of investment securities, as follows (in
thousands):
Corporate bonds
Agency securities
Treasury securities
Year Ended December 31, 2022
Gross Realized Losses
Gross Proceeds from
Sales
Gross Proceeds from
Maturities
(3) $
—
—
(3) $
994 $
—
—
994 $
28,998
2,250
56,635
87,883
Gross Realized Gains
$
— $
—
—
— $
$
45
Corporate bonds
Agency securities
Treasury securities
SecureDocs
Gross Realized Gains
$
— $
—
6
6 $
$
Year Ended December 31, 2021
Gross Realized Losses
Gross Proceeds from
Sales
Gross Proceeds from
Maturities
— $
—
—
— $
— $
—
43,198
43,198 $
39,075
11,575
56,704
107,354
In December 2021, we sold all of our interest in SecureDocs. A gain of $12.8 million was recognized within Other income, net in our
Consolidated Statements of Operations, a portion of which relates to the recovery of a $2.0 million note receivable which had been previously reserved.
Fair Value Measurements
Recurring Fair Value Measurements
The following tables present our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021 by
level within the fair value hierarchy (in thousands):
Cash equivalents:
Money market funds
Treasury securities
Available-for-sale investment securities:
Corporate bonds
Agency securities
Treasury securities
Total
Cash equivalents:
Money market funds
Available-for-sale investment securities:
Corporate bonds
Agency securities
Treasury securities
Total
December 31, 2022
Level 1
Level 2
Total Fair
Value
41,973 $
1,287
—
—
80,048
123,308 $
— $
—
17,387
17,023
—
34,410 $
41,973
1,287
17,387
17,023
80,048
157,718
December 31, 2021
Level 1
Level 2
Total Fair
Value
6,105 $
— $
6,105
—
—
76,881
82,986 $
29,069
19,726
—
48,795 $
29,069
19,726
76,881
131,781
$
$
$
$
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their
fair value because of the short maturity of these items.
There were no changes to our valuation techniques used to measure asset and liability fair values on a recurring basis during the year ended
December 31, 2022. The valuation techniques for the financial assets in the tables above are as follows:
46
Cash Equivalents
At December 31, 2022 and 2021, cash equivalents include cash invested in money market funds and treasury securities with a maturity of three
months or less. Fair value is based on market prices for identical assets.
Available-for-Sale Investment Securities
Fair value for our Level 1 investment securities is based on market prices for identical assets. Our Level 2 securities were priced by a pricing
vendor. The pricing vendor utilizes the most recent observable market information in pricing these securities or, if specific prices are not available for these
securities, other observable inputs like market transactions involving comparable securities are used.
47
5. Property and Equipment, net
Property and equipment, net consists of the following (in thousands):
Computer equipment
Furniture and fixtures
Office equipment
Leasehold improvements
Construction in process
Gross property and equipment
Less: Accumulated depreciation
Total property and equipment, net
December 31,
2022
2021
$
$
5,529 $
5,747
3,800
23,625
544
39,245
(13,135)
26,110 $
4,884
5,167
3,285
22,679
5,227
41,242
(10,763)
30,479
Depreciation expense for property and equipment totaled $5.1 million, $4.7 million, and $4.0 million for the years ended December 31, 2022,
2021 and 2020, respectively. During the year ended December 31, 2022, we recorded an impairment of $4.4 million related to property and equipment
associated with our leased office spaces. For additional information, see Note 9, Leases.
6. Capitalized Software Development Costs, net
Capitalized software development costs, net were as follows (in thousands):
Capitalized software development costs, gross
Less: Accumulated amortization
Capitalized software development costs, net
December 31,
2022
2021
$
$
129,749 $
(94,434)
35,315 $
115,377
(74,165)
41,212
Capitalized software development costs were $17.7 million, $27.2 million and $27.3 million for the years ended December 31, 2022, 2021 and
2020, respectively. Amortization expense with respect to software development costs totaled $23.6 million, $21.5 million and $17.9 million for the years
ended December 31, 2022, 2021 and 2020, respectively. During the years ended December 31, 2022 and 2021, we disposed of $3.3 million and
$8.8 million, respectively, of fully amortized capitalized software development costs.
Future amortization expense with respect to capitalized software development costs is estimated as follows (in thousands):
Years Ending December 31,
2023
2024
2025
2026
Total amortization expense
$
$
19,237
11,407
4,377
294
35,315
48
7. Intangible Assets, net and Goodwill
Intangible assets, net consisted of the following (in thousands, except years):
Customer relationships
Database
Technology
Trademarks and trade names
Partner relationships
Non-compete agreements
Domain names
Patents
Total intangible assets, net
Customer relationships
Database
Technology
Trademarks and trade names
Partner relationships
Non-compete agreements
Domain names
Patents
Total intangible assets, net
Gross Carrying
Value
Accumulated
Amortization
Net Carrying
Value
Weighted
Average Useful
Life in Years
December 31, 2022
1,670 $
4,710
6,539
1,520
680
7,340
90
252
22,801 $
(1,448) $
(1,884)
(6,539)
(1,211)
(680)
(5,872)
(82)
(252)
(17,968) $
December 31, 2021
222
2,826
—
309
—
1,468
8
—
4,833
Gross Carrying
Value
Accumulated
Amortization
Net Carrying
Value
Weighted
Average Useful
Life in Years
2,840 $
8,330
6,539
1,890
680
7,400
90
252
28,021 $
(2,006) $
(2,620)
(5,107)
(1,128)
(680)
(4,444)
(75)
(250)
(16,310) $
834
5,710
1,432
762
—
2,956
15
2
11,711
5.0
10.0
4.0
5.0
3.0
5.0
5.0
5.0
4.7
5.0
10.0
4.0
5.0
3.0
5.0
5.0
5.0
6.3
$
$
$
$
During the year ended December 31, 2022, we divested intangible assets of $2.5 million as part of the WegoWise Transaction. For additional
information see Note 3, Sales of Subsidiary Businesses. Amortization expense with respect to intangible assets totaled $4.4 million, $4.6 million and $4.9
million for the years ended December 31, 2022, 2021 and 2020, respectively. Future amortization expense with respect to intangible assets is estimated as
follows (in thousands):
Years Ending December 31,
2023
2024
2025
2026
2027
Thereafter
Total
$
$
2,476
473
471
471
471
471
4,833
Our goodwill balance is solely attributed to acquisitions. The change in the carrying amount of goodwill during the year ended December 31, 2022
is as follows (in thousands):
Goodwill at December 31, 2021
Goodwill attributed to WegoWise Transaction
Goodwill at December 31, 2022
$
$
56,147
(87)
56,060
49
8. Accrued Employee Expenses
Accrued employee expenses consisted of the following (in thousands):
Accrued vacation
Accrued bonuses
Accrued payroll and other
Total accrued employee expenses
9. Leases
December 31,
2022
2021
$
$
12,067 $
13,806
8,503
34,376 $
10,675
13,101
6,289
30,065
Operating leases for our corporate offices have remaining lease terms ranging from five months to ten years, some of which include options to
extend the leases for up to ten years. These options to extend have not been recognized as part of our operating lease right-of-use assets and lease liabilities
as it is not reasonably certain that we will exercise these options. Our lease agreements do not contain any residual value guarantees or material restrictive
covenants. Certain leases contain provisions for property-related costs that are variable in nature for which we are responsible, including common area
maintenance, which are expensed as incurred.
The components of lease expense recognized in the Consolidated Statements of Operations were as follows (in thousands):
Operating lease cost
Variable lease cost
Total lease cost
Lease-related assets and liabilities were as follows (in thousands, except years and %):
Assets
Prepaid expenses and other current assets
Operating lease right-of-use assets
Liabilities
Other current liabilities
Operating lease liabilities
Total lease liabilities
Weighted-average remaining lease term (years)
Weighted-average discount rate
50
Year Ended December 31,
2022
2021
2020
$
$
5,403 $
1,058
6,461 $
5,203 $
1,463
6,666 $
5,272
1,443
6,715
December 31,
2022
2021
$
$
$
—
23,485
3,357
50,237
53,594
$
$
$
4,854
41,710
1,874
55,733
57,607
9.4
3.9 %
10.3
4.0 %
Future minimum lease payments under non-cancellable leases as of December 31, 2022 were as follows (in thousands):
(1)
Years ending December 31,
2023
2024
2025
2026
2027
Thereafter
Total future minimum lease payments
Less: imputed interest
Total
$
$
2,615
6,351
6,837
7,035
7,239
35,042
65,119
(11,525)
53,594
(1)
Future minimum lease payments for the year ending December 31, 2023 are presented net of tenant improvement allowances of $3.5 million.
During the current year, we decided to exit and make available for sublease certain leased office spaces. As a result, we reassessed our asset
groupings and evaluated the recoverability of our right-of-use and other lease related assets, and determined that the carrying value of the respective asset
groups was not fully recoverable. We utilized discounted cash flow models to estimate the fair value of the asset groups taking into consideration the time
period it will take to obtain a sublessee, the applicable discount rates and the anticipated sublease income and calculated the corresponding impairment loss.
We used prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets, as well as our
historical experience in real estate transactions. When available, we use valuation inputs from independent valuation experts, such as real estate appraisers
and brokers, to corroborate our estimates of fair value. We recorded a net impairment of $22.0 million consisting of $17.6 million related to ROU assets
and $4.4 million related to property and equipment associated with our leased office spaces. These amounts were recorded within General and
administrative in our Consolidated Statements of Operations.
10. Commitments and Contingencies
Liability to Landlord Insurance
We have a wholly owned subsidiary, Terra Mar Insurance Company, Inc., which was established in connection with reinsuring liability to landlord
insurance policies offered to our customers by our third-party service provider. We assume a 100% quota share of the liability to landlord insurance policies
placed with our customers by our third-party service provider. We accrue for reported claims, and include an estimate of losses incurred but not reported by
our property manager customers, in cost of revenue because we bear the risk related to all such claims. Our estimated liability for reported claims and
incurred but not reported claims as of December 31, 2022 and 2021 was $2.7 million and $1.7 million, respectively, and is included in Other current
liabilities on our Consolidated Balance Sheets.
Included in Prepaid expenses and other current assets as of December 31, 2022 and 2021 are $4.5 million and $3.0 million, respectively, of
deposits held with a third party related to requirements to maintain collateral for this risk mitigation service.
Legal Proceedings
From time to time we may become involved in various legal proceedings, investigative inquiries, and other disputes arising from or related to
matters incident to the ordinary course of our business activities. We are not currently a party to any legal proceedings, nor are we aware of any pending or
threatened legal proceedings, that we believe would have a material adverse effect on our business, operating results, cash flows or financial condition
should such proceedings be resolved unfavorably.
51
Indemnification
In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, business partners, investors,
directors, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of any applicable
agreements, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from our services or our acts or
omissions. These indemnification provisions may survive termination of the underlying agreement and the maximum potential amount of future payments
we could be required to make under these indemnification provisions may not be subject to maximum loss clauses and is indeterminable. We have not
incurred any costs as a result of such indemnification obligations and have not recorded any liabilities related to such obligations in the Consolidated
Financial Statements.
11. Stockholders' Equity
Amended and Restated Certificate of Incorporation
Upon the effectiveness of our Amended and Restated Certificate of Incorporation 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.
Class A Common Stock and Class B Common Stock
Except for voting rights, or as otherwise required by applicable law, the shares of our Class A common stock and Class B common stock have the
same powers, preferences and rights and rank equally, share ratably and are identical in all respects as to all matters. The rights and preferences are as
follows:
Dividend Rights. Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of outstanding shares
of our Class A common stock and Class B common stock are entitled to receive dividends out of funds legally available at the times and in the amounts
that our Board of Directors may determine.
Voting Rights. The holders of our Class A common stock are entitled to one vote per share, and holders of our Class B common stock are entitled
to 10 votes per share. The holders of our Class A common stock and Class B common stock will vote together as a single class on all matters submitted to a
vote of our stockholders, unless otherwise required by Delaware law or our amended and restated certificate of incorporation. Delaware law could require
either holders of our Class A common stock or holders of our Class B common stock to vote separately. In addition, our amended and restated certificate of
incorporation requires the approval of the holders of at least a majority of the outstanding shares of our Class B common stock, voting as a separate class to
approve a change-in-control transaction.
Conversion. Each share of our Class B common stock is convertible at any time at the option of the holder into one share of our Class A common
stock. In addition, each share of our Class B common stock will convert into one share of our Class A common stock upon any transfer, whether or not for
value, except for certain transfers described in our amended and restated certificate of incorporation, including, without limitation, (i) a transfer by a
partnership or limited liability company that was a registered holder of our Class B common stock at the “effective time,” as defined in our amended and
restated certificate of incorporation, to a partner or member thereof at the effective time or (ii) a transfer to a “qualified recipient,” as defined in our
amended and restated certificate of incorporation.
All the outstanding shares of our Class B common stock will convert automatically into shares of our Class A common stock upon the date when
the number of outstanding shares of our Class B common stock represents less than 10% of all outstanding 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.
52
Preferred Stock
Our Board of Directors is 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.
Share Repurchase Program
On February 20, 2019, our Board of Directors authorized a $100.0 million share repurchase program (the "Share Repurchase Program") relating to
our outstanding shares of Class A common stock. Under the Share Repurchase Program, share repurchases may be made from time to time, as directed by a
committee consisting of three directors, in open market purchases or in privately negotiated transactions at a repurchase price that the members of the
committee unanimously believe is below intrinsic value conservatively determined. The Share Repurchase Program does not obligate us to repurchase any
specific dollar amount or number of shares, there is no expiration date for the Share Repurchase Program, which may be modified, suspended or terminated
at any time and for any reason.
During the year ended December 31, 2020, we repurchased a total of 48,002 shares of our Class A common stock through open market
repurchases, and recorded a $4.2 million reduction to stockholders' equity, which includes broker commissions. We have not made any other repurchases
under the Share Repurchase Program.
12. Stock-Based Compensation
We currently have two stock incentive plans, our 2007 Stock Incentive Plan (the "2007 Plan") and the 2015 Stock Incentive Plan (the "2015
Plan"). The 2007 Plan expired on February 14, 2017, however it will continue to govern outstanding awards granted under the 2007 Plan.
Under 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. At December 31, 2022, we have reserved an aggregate of 4,450,726 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, and RSAs have been issued during 2022 pursuant to the
2015 Plan.
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.
53
Stock Options
A summary of activity in connection with our stock options for the year ended December 31, 2022 is as follows (number of shares in thousands):
Options outstanding as of December 31, 2021
Options exercised
Options outstanding as of December 31, 2022
At December 31, 2022:
Options vested and expected to vest
Options exercisable
Number of Shares
Weighted Average
Exercise Price per Share
13.15
13.56
Weighted Average
Remaining
Contractual Life in Years
3.0
846 $
(330)
516 $
516 $
516 $
12.90
12.90
12.90
2.7
2.7
2.7
Our stock-based compensation expense for stock options were not material for the periods presented.
No stock options were granted during the years ended December 31, 2022, 2021 or 2020.
The total intrinsic value of options exercised in 2022, 2021 and 2020 was $31.1 million, $39.1 million, and $17.9 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 at December 31, 2022, the total intrinsic value of all outstanding options, exercisable options, and options vested and
expected to vest was $47.7 million.
Restricted Stock Units
A summary of activity in connection with our RSUs for the year ended December 31, 2022 is as follows (number of shares in thousands):
Unvested as of December 31, 2021
Granted
Vested
Forfeited
Unvested as of December 31, 2022
Number of Shares
Weighted Average
Grant Date
Fair Value per Share
837 $
726
(252)
(149)
1,162 $
118.27
110.61
111.03
104.09
116.88
Unvested RSUs as of December 31, 2022 were composed of 1.0 million RSUs with only service conditions and 0.2 million PSUs with both
service conditions and performance conditions. RSUs granted with only service conditions generally vest over a four-year period. The number of PSUs
granted, as included in the above table, assumes achievement of the performance metric at 100% of the performance target. Of the unvested PSUs as of
December 31, 2022, 0.1 million are subject to vesting based on the achievement of pre-established performance metrics for the year ending December 31,
2022 and will vest over a three year period, assuming continued employment throughout the performance period. The actual number of shares to be issued
at the end of the performance period will range from 0% to 150% of the target number of shares depending on achievement relative to the performance
metric over the applicable period. The remaining 0.1 million PSUs unvested as of December 31, 2022 are subject to vesting based on the achievement of
pre-established performance metrics for the years ending December 31, 2022 and 2023, assuming continued employment throughout the performance
period. The actual number of shares to be issued at the end of the performance period will range from 0% to 100% of the initial target awards. Achievement
of the performance metric between 100% and 150% of the performance target will result in a performance-based cash bonus payment between 0% and
65% of the initial target awards.
54
We recognized stock-based compensation expense for the RSUs and PSUs of $43.3 million, $17.3 million and $10.4 million for the years ended
December 31, 2022, 2021 and 2020, respectively. Excluded from stock-based compensation expense is capitalized software development costs of
$3.0 million, $2.7 million, and $2.1 million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, the total
estimated remaining stock-based compensation expense for the aforementioned RSUs and PSUs was $100.1 million, which is expected to be recognized
over a weighted average period of 2.6 years. The total fair value of RSUs and PSUs vested during the years ended December 31, 2022, 2021 and 2020 was
approximately $27.5 million, $26.6 million and $32.0 million, respectively.
Restricted Stock Awards
A summary of activity in connection with our RSAs for the year ended December 31, 2022 is as follows (number of shares in thousands):
Unvested as of December 31, 2021
Granted
Vested
Unvested as of December 31, 2022
Number of Shares
Weighted- Average
Grant Date
Fair Value per Share
4 $
6
(4)
6 $
144.33
96.33
144.33
96.33
We have the right to repurchase any unvested RSAs subject to certain conditions. Restricted stock awards vest over a one-year period. Our stock-
based compensation expense for RSAs was not material for the periods presented.
As of December 31, 2022, the total estimated remaining stock-based compensation expense for unvested restricted stock awards with a repurchase
right was $0.3 million, which is expected to be recognized over a weighted average period of 0.5 years.
13. Income Taxes
The effective tax rate as compared to the U.S. federal statutory rate of 21% differs primarily due to change in valuation allowance against deferred
taxes and non-deductible expenses, partially offset by state income taxes and tax benefits associated with stock-based compensation expense and research
and development tax credits.
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:
U.S. federal statutory income tax rate
State and local income taxes, net of federal benefit
Stock-based compensation expense
Non-deductible officers' compensation
Meals and entertainment
Change in valuation allowance
Other permanent differences
Research and development tax credits
Provision for income taxes
55
Year Ended December 31,
2022
2021
2020
21 %
9
7
(6)
—
(37)
(1)
5
(2)%
21 %
(214)
(426)
47
3
795
20
(205)
41 %
21 %
3
(3)
—
—
—
1
(2)
20 %
The provision for income tax consists of the following (in thousands):
Current
Federal
State and local
Total current
Deferred
Federal
State and local
Total deferred
Total income tax provision
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
Capitalized research and software costs
Stock-based compensation
Lease liability
Other
Total deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Capitalized research and software costs
Property and equipment
Intangible assets
Capitalized commissions
Lease asset
Other
Total deferred tax liabilities
Total net deferred tax liabilities
Year Ended December 31,
2022
2021
2020
$
$
1,313 $
686
1,999
(854)
257
(597)
1,402 $
20 $
346
366
(10,966)
11,306
340
706 $
3,982
5,444
9,426
27,982
1,020
29,002
38,428
December 31,
2022
2021
$
5,802 $
18,558
14,706
5,105
14,260
3,614
62,045
(43,776)
18,269
—
(4,914)
(940)
(4,217)
(6,249)
(2,634)
(18,954)
$
(685) $
10,849
15,966
—
3,965
13,983
2,853
47,616
(17,217)
30,399
(9,972)
(5,024)
(1,558)
(3,296)
(11,056)
(1,171)
(32,077)
(1,678)
At December 31, 2022, we had state net operating loss carryforwards $66.0 million. The state net operating losses will begin to expire in 2028. At
December 31, 2022, we also had federal and state research and development credit carryforwards of $8.7 million and $19.3 million, respectively. The
federal credit carryforwards will begin to expire in 2040, while the state credit carryforwards apply indefinitely. Utilization of our net operating loss and
credit carryforwards may be subject to annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state
provisions. We have undertaken an analysis and have determined that there are no limitations on the tax attributes at December 31, 2022.
56
The change in the valuation allowance are as follows (in thousands):
Valuation allowance, at beginning of year
Increase in valuation allowance
Valuation allowance, at end of year
Year Ended December 31,
2022
2021
2020
$
$
17,217 $
26,559
43,776 $
— $
17,217
17,217 $
—
—
—
The following is a reconciliation of the total amounts of reserves for unrecognized tax benefits from uncertain tax positions (in thousands):
Unrecognized tax benefit beginning of year
Increases-tax positions in current year
Unrecognized tax benefit end of year
Year Ended December 31,
2022
2021
2020
$
$
7,816 $
1,639
9,455 $
6,141 $
1,675
7,816 $
4,421
1,720
6,141
The unrecognized tax benefits are recorded as a reduction to the deferred tax assets and liabilities.
At December 31, 2022 and 2021, 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, our federal and state returns are
open to examination by the Internal Revenue Service and state jurisdictions for all years since inception.
14. Revenue and Other Information
The following table presents our revenue categories (in thousands):
Core solutions
Value Added Services
Other
Total revenue
Year Ended December 31,
2022
2021
2020
$
$
132,541 $
327,636
11,706
471,883 $
105,148 $
241,289
12,933
359,370 $
100,938
195,146
13,972
310,056
Our revenue is generated primarily from United States customers. All of our property and equipment is located in the United States.
15. Retirement Plans
We have a 401(k) retirement and savings plan made available to all employees. We may, at our discretion, make matching contributions to the
401(k) plan. Cash contributions to the plan were $5.9 million, $4.0 million, and $3.2 million for the years ended December 31, 2022, 2021 and 2020,
respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
57
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 at December 31, 2022, the last day of the period covered by this Annual Report. 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
periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to its 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, at December 31, 2022, our disclosure controls and
procedures were effective at the reasonable assurance level.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate 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 a process designed under the supervision and with the participation of
our management, including our principal executive officer and principal financial officer, 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.
As of December 31, 2022, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth in
the Internal Control – Integrated Framework (2013) as issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
Based on our evaluation under the COSO criteria, our management concluded that our internal control over financial reporting was effective at the
reasonable assurance level as of December 31, 2022.
The effectiveness of our internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their audit report which expresses an unqualified opinion on the effectiveness of our internal control over financial
reporting at December 31, 2022.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13(a)-15(d)
and 15d-15(d) under the Exchange Act that occurred during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On February 8, 2023, the Company entered into an employment agreement (the “Employment Agreement”) with William Shane Trigg, the
Company’s President and General Manager, Real Estate. Pursuant to the Employment Agreement, Mr. Trigg is entitled to receive (a) an annual base salary
paid in accordance with the Company's regular payroll practices, (b) an annual cash bonus award, with a target set annually by the Board of Directors, (c) a
performance-based restricted stock unit award, which award will vest if applicable performance conditions are achieved over a performance period of up to
three years, and (d) a time-based restricted stock unit award, which award will vest consistent with the Company’s standard time-vesting schedule. In the
event the Company terminates Mr. Trigg’s employment without “cause” or he resigns for “good reason,” he will be entitled to (i) twelve months of base
salary continuation, (ii) a prorated cash bonus award for the year of termination, (iii) payment of COBRA premiums for twelve months, and (iv) payment
of any earned but unpaid cash bonus awards.
The foregoing description of the Employment Agreement does not purport to be complete and is qualified in its entirety by reference to the full
text of the Employment Agreement, a copy of which is filed as an exhibit to this Annual Report.
ITEM 9C. DISCLOSURES REGARDING FOREIGN JURISDICTION THAT PREVENT INSPECTIONS
Not applicable.
PART III
58
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be included in our definitive Proxy Statement or an amendment to this Annual Report, which will be
filed with the SEC not later than 120 days after the end of our fiscal year ended December 31, 2022, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in our definitive Proxy Statement or an amendment to this Annual Report, which will be
filed with the SEC not later than 120 days after the end of our fiscal year ended December 31, 2022, 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 our definitive Proxy Statement or an amendment to this Annual Report, which will be
filed with the SEC not later than 120 days after the end of our fiscal year ended December 31, 2022, 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 our definitive Proxy Statement or an amendment to this Annual Report, which will be
filed with the SEC not later than 120 days after the end of our fiscal year ended December 31, 2022, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be included in our definitive Proxy Statement or an amendment to this Annual Report, which will be
filed with the SEC not later than 120 days after the end of our fiscal year ended December 31, 2022, and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
The following documents are filed as part of this Annual Report:
1.
Consolidated Financial Statements
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 or furnished with, or incorporated by reference into, this
Annual Report, in each case as indicated therein.
59
EXHIBIT INDEX
Incorporated by Reference
Exhibit Description
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.
Description of Capital Stock of the registrant.
Industrial Lease, by and between the registrant and 50
Castilian Drive, LLC, effective December 6, 2019 (50
Castilian Drive, Goleta, CA 93117).
Industrial Lease, by and between the registrant and 50
Castilian Drive, LLC, effective December 6, 2019 (70
Castilian Drive, Goleta, CA 93117).
Industrial Lease, by and between the registrant and 50
Castilian Drive, LLC, effective December 6, 2019 (90
Castilian Drive, Goleta, CA 93117).
First Amendment to Industrial Lease, by and between
the registrant and 50 Castilian Drive, LLC, effective
February 10, 2022 (50 Castilian Drive, Goleta, CA
93117).
First Amendment to Industrial Lease, by and between
the registrant and 50 Castilian Drive, LLC, effective
February 10, 2022 (70 Castilian Drive, Goleta, CA
93117).
First Amendment to Industrial Lease, by and between
the registrant and 50 Castilian Drive, LLC, effective
February 10, 2022 (90 Castilian Drive, Goleta, CA
93117).
Umbrella Termination Agreement, by and between the
registrant and Castilian 90, LLC, Castilian 70, LLC and
Castilian 50, LLC, effective February 10, 2022.
Employment agreement between the Company and
Jason Randall.
2007 Stock Incentive Plan, as amended, and related
form agreements.
2015 Stock Incentive Plan and related form agreements.
2015 Employee Stock Purchase Plan.
Long-Term Cash Incentive Plan.
Form of Long-Term Cash Incentive Award Offer.
Form of Indemnification Agreement by and between
the registrant and certain of its senior employees and
directors.
Employment agreement between the Company and Fay
Sien Goon.
Form
10-Q
File No.
001-37468
Exhibit
3.1
Filing Date
8/6/2015
10-Q
001-37468
S-1/A
S-1/A
10-K
8-K
333-204262
333-204262
001-37468
001-37468
3.1
4.1
4.2
4.3
10.1
8/3/2020
6/4/2015
6/4/2015
3/2/2020
12/11/2019
8-K
001-37468
10.2
12/11/2019
8-K
001-37468
10.3
12/11/2019
10-K
001-37468
10.4
2/28/2022
10-K
001-37468
10.5
2/28/2022
10-K
001-37468
10.6
2/28/2022
10-K
001-37468
10.7
2/28/2022
10-Q
001-37468
S-1/A
333-204262
S-1/A
S-1/A
10-K
10-K
333-204262
333-204262
001-37468
001-37468
10.1
10.3
10.4
10.5
10.9
10.1
7/28/2022
6/4/2015
6/4/2015
6/4/2015
2/26/2018
2/26/2018
10-Q
001-37468
10.1
11/8/2021
Exhibit
Number
3.1
3.1
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8#
10.9#
10.10#
10.11#
10.12#
10.13#
10.14
10.15#
Filed
Herewith
X
Exhibit
Number
10.16#
10.17#
10.18#
10.19#
10.20#
10.21#
21.1
23.1
24.1
31.1
31.2
32.1*
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Exhibit Description
Form of Restricted Stock Unit Award Agreement (New
Hire) under 2015 Stock Incentive Plan.
Form of Restricted Stock Unit Award Agreement
(Refresh) under 2015 Stock Incentive Plan.
Form of Restricted Stock Unit Award Agreement (PSU)
under 2015 Stock Incentive Plan.
Nonemployee Director Deferred Compensation Plan.
Related form of Deferral Election under Nonemployee
Director Deferred Compensation Plan.
Employment agreement between the Company and
William Shane Trigg.
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.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase
Document.
XBRL Taxonomy Extension Definition Linkbase
Document.
XBRL Taxonomy Extension Label Linkbase
Document.
XBRL Taxonomy Extension Presentation Linkbase
Document.
Cover Page Interactive Data File (formatted as Inline
XBRL and contained in Exhibit 101)
Incorporated by Reference
File No.
001-37468
001-37468
001-37468
001-37468
001-37468
Exhibit
10.16
Filing Date
2/28/2022
10.17
10.18
10.19
10.20
2/28/2022
2/28/2022
2/28/2022
2/28/2022
Form
10-K
10-K
10-K
10-K
10-K
Filed
Herewith
X
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 9, 2023
Date:
February 9, 2023
AppFolio, Inc.
By: /s/ Jason Randall
Jason Randall
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Fay Sien Goon
Fay Sien Goon
Chief Financial Officer
(Principal Financial and Accounting Officer)
SIGNATURE
/s/ Jason Randall
Jason Randall
/s/ Fay Sien Goon
Fay Sien Goon
/s/ Andreas von Blottnitz
Andreas von Blottnitz
/s/ Timothy Bliss
Timothy Bliss
/s/ Agnes Bundy Scanlan
Agnes Bundy Scanlan
/s/ Janet Kerr
Janet Kerr
/s/ Klaus Schauser
Klaus Schauser
/s/ Winifred Webb
Winifred Webb
/s/ Alexander Wolf
Alexander Wolf
TITLE
DATE
President, Chief Executive Officer and Director
(Principal Executive Officer)
February 9, 2023
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 9, 2023
Chairman of the Board
February 9, 2023
Director
Director
Director
Director
Director
Director
February 9, 2023
February 9, 2023
February 9, 2023
February 9, 2023
February 9, 2023
February 9, 2023
Each of the individuals identified below is a party to an indemnification agreement with AppFolio, Inc. in the form attached
herewith as Exhibit 10.14.
LIST OF INDEMNITEES
EXHIBIT 10.14
Name
Jon Walker
Timothy Bliss
Andreas von Blottnitz
Klaus Schauser
Janet Kerr
Jason Randall
Winifred Webb
Agnes Bundy Scanlan
William Shane Trigg
Fay Sien Goon
Alex Wolf
Nailya Dovletova
Brian Hershokowitz
Amy Meyer
Luca Caporicci
Evan Pickering
Matthew Mazza
Ronnie Lin
Jay Choi
-1-
Date Signed
December 12, 2022
December 4, 2022
November 17, 2022
November 18, 2022
December 7, 2022
November 18, 2022
November 17, 2022
November 30, 2022
November 19, 2022
November 16, 2022
December 5, 2022
November 18, 2022
November 19, 2022
November 23, 2022
November 16, 2022
November 16, 2022
November 16, 2022
December 12, 2022
November 21, 2022
This Indemnification Agreement (this “Agreement”), dated ________, 2022, is by and between AppFolio, Inc., a Delaware
corporation (the “Company”), and _________________________________ (“Indemnitee”). This Agreement supersedes and
replaces any and all previous Agreements between the Company and Indemnitee covering the subject matter of this Agreement.
INDEMNIFICATION AGREEMENT
A. Indemnitee is a director or an officer of the Company.
RECITALS
B. The board of directors of the Company (the “Board”) has determined that enhancing the ability of the Company to retain and
attract as directors and officers the most capable persons is in the best interests of the Company and that the Company therefore should
seek to assure such persons that indemnification is available.
C. In recognition of the need to provide Indemnitee with substantial protection against personal liability, in order to procure
Indemnitee’s service or continued service as a director or officer of the Company and to enhance Indemnitee’s ability to serve the
Company in an effective manner, and in order to provide such protection pursuant to express contract rights (intended to be enforceable
irrespective of, among other things, any amendment to the Company’s certificate of incorporation or bylaws (collectively, the
“Constituent Documents”), any change in the composition of the Board or any change in control or business combination transaction
relating to the Company), the Company wishes to provide in this Agreement for the indemnification of, and the advancement of
Expenses (as defined in Section 2 below) to, Indemnitee as set forth in this Agreement and, to the extent insurance is maintained, for
the continued coverage of Indemnitee under the Company’s directors’ and officers’ liability insurance policies.
NOW, THEREFORE, in consideration of the foregoing and the Indemnitee’s agreement to serve or continue to provide services to
the Company, the parties hereby agree as follows:
1.
Services to the Company. Indemnitee agrees to serve or continue to serve as a director or officer of the Company for so
long as Indemnitee is duly elected or appointed, until Indemnitee tenders Indemnitee’s resignation or until Indemnitee is terminated by
the Company, as applicable. This Agreement shall not be deemed an employment agreement between the Company (or any of its
subsidiaries or another Enterprise) and Indemnitee. Indemnitee specifically acknowledges that Indemnitee’s service to the Company or
any of its subsidiaries or another Enterprise (as defined in Section 2 below) is at will and the Indemnitee may be discharged at any time
for any reason, with or without cause, except as may be otherwise provided in any written employment agreement between Indemnitee
and the Company (or any of its subsidiaries or another Enterprise), other applicable formal severance policies duly adopted by the
Board or, with respect to service as a director or officer of the Company, by the Company’s Constituent Documents or Delaware law.
This Agreement shall continue in force after Indemnitee has ceased to serve as a director or officer of the Company or, at the request of
the Company, of any of its subsidiaries or Enterprise (as defined in Section 2 below).
2.
Definitions. For purposes of this Agreement, the following terms shall have the following meanings:
(a)
(b)
Act.
“Agreement” shall have the meaning ascribed to it in the prefatory language above.
“Beneficial Owner” has the meaning given to the term “beneficial owner” in Rule 13d-3 under the Exchange
-2-
(c)
(d)
(e)
“Board” shall have the meaning ascribed to it in the Recitals above.
“Business Combination” means a reorganization, a merger or a consolidation.
“Change in Control” means the occurrence after the date of this Agreement of any of the following events:
Acquisition of Stock by Third Party. Any Person (as defined below) becomes hereafter the Beneficial
Owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the Company’s Voting
Securities, unless the change in the relative Beneficial Ownership of the Company’s securities by any Person results solely from a
reduction in the aggregate number of outstanding Voting Securities;
(i)
(ii)
Corporate Transactions. The consummation of a Business Combination, unless immediately
following such Business Combination, (1) the Beneficial Owners of the Voting Securities of the Company immediately prior to
such transaction beneficially own, directly or indirectly, more than fifty percent (50%) of the combined voting power of the
outstanding Voting Securities of the entity resulting from such transaction, (2) no Person (excluding any corporation resulting
from such Business Combination) is the Beneficial Owner, directly or indirectly, of twenty percent (20%) or more of the
combined voting power of the then outstanding securities entitled to vote generally in the election of directors of such corporation
except to the extent that such ownership existed prior to the Business Combination and (3) at least a majority of the Board of
Directors of the corporation resulting from such Business Combination were Continuing Directors (as defined below), at the time
of the execution of the initial agreement or of the action of the Board, providing for such Business Combination;
majority of the members of the Board; or
(iii) Change in Board of Directors. The Continuing Directors cease for any reason to constitute at least a
(iv) Liquidation. The stockholders of the Company approve a plan of complete liquidation or dissolution of
the Company or an agreement or series of agreements for the sale or disposition by the Company of all or substantially all of the
Company’s assets (or, if such approval is not required, the decision by the Board to proceed with such a liquidation, sale, or disposition
in one transaction or a series of related transactions).
(f)
“Claim” means:
any threatened, pending or completed action, suit, claim, counterclaim, crossclaim, demand, proceeding, arbitration, mediation,
alternative dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed
proceeding, whether brought in the right of the Corporation or otherwise and whether civil, criminal, administrative, arbitrative,
investigative (formal or informal), legislative, regulatory or other, including any appeal therefrom, and whether made pursuant to
federal, state or other law. Any situation that the Indemnitee determines in good faith might lead to the institution of a Claim shall be
considered a Claim under this Agreement.
(g)
(h)
“Company” shall have the meaning ascribed to it in the prefatory language above.
“Constituent Documents” shall have the meaning ascribed to it in the Recitals above.
-3-
(i)
“Continuing Directors” means, during a period of two consecutive years, not including any period prior to the
execution of this Agreement, the individuals collectively who at the beginning of such period constituted the Board (including for this
purpose any new directors whose election by the Board or nomination for election by the Company’s stockholders was approved by a
vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved).
(j)
(k)
“Delaware Court” means the Court of Chancery of the State of Delaware.
“Disinterested Director” means a director of the Company who is not and was not a party to the Claim in
respect of which indemnification is sought by Indemnitee.
(l)
(m)
(n)
“Enterprise” means, any corporation, limited liability company, partnership, joint venture, trust or other entity.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Expense Advance” means any payment of Expenses advanced to Indemnitee by the Company pursuant to
Section 4 or Section 5 hereof.
(o)
“Expenses” means any and all reasonable attorneys’ fees and retainers, experts’ and other professionals’ fees,
witness fees, court costs, transcript costs, travel expenses, duplicating, printing and binding costs, telephone charges, postage, delivery
service fees and all other costs and expenses of the types customarily incurred in connection with, or as a result of, investigating,
prosecuting, defending, being a witness or deponent in or otherwise participating in (including on appeal), or preparing to prosecute or
defend, be a witness or deponent or otherwise participate in, any Claim. Expenses also shall include (i) Expenses incurred in
connection with any appeal resulting from any Claim, including without limitation the premium, security for, and other costs relating to
any cost bond, supersedes bond, or other appeal bond or its equivalent, (ii) Expenses incurred in connection with recovery under any
directors’ and officers’ liability insurance policies maintained by the Company, regardless of whether Indemnitee is ultimately
determined to be entitled to such indemnification, advancement or Expenses or insurance recovery, as the case may be and (iii) for
purposes of Section 5 only, Expenses incurred by Indemnitee in connection with the interpretation, enforcement or defense of
Indemnitee’s rights under this Agreement, by litigation or otherwise. Expenses, however, shall not include amounts paid in settlement
by Indemnitee or the amount of judgments or fines against Indemnitee.
(p)
“Indemnifiable Event” means any event or occurrence, whether occurring before, on or after the date of this
Agreement, related to the fact that Indemnitee is or was a director, officer, employee or agent of the Company or any subsidiary of the
Company, or is or was serving at the request of the Company as a director, officer, employee, member, manager, trustee or agent of
another Enterprise or by reason of an action or inaction by Indemnitee in any such capacity (whether or not serving in such capacity at
the time any Loss (as defined below) is incurred for which indemnification can be provided under this Agreement).
(q)
“Indemnitee” shall have the meaning ascribed to it in the prefatory language above.
(r)
“Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of
corporate law and neither presently performs, nor in the past five (5) years has performed, services for either: (i) the Company or
Indemnitee (other than in connection with matters concerning other indemnitees under similar agreements) or (ii) any other party to the
Claim giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not
include any person who, under the applicable standards of
-4-
professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to
determine Indemnitee’s rights under this Agreement.
(s)
“Losses” means any and all Expenses, damages, losses, liabilities, judgments, fines, penalties (whether civil,
criminal or other), ERISA excise taxes, amounts paid or payable in settlement, including any interest, assessments, any federal, state,
local or foreign taxes imposed as a result of the actual or deemed receipt of any payments under this Agreement and all other charges
paid or payable in connection with investigating, prosecuting, defending, being a witness or deponent in or otherwise participating in
(including on appeal), or preparing to prosecute, defend, be a witness or deponent or otherwise participate in, any Claim.
(t)
(u)
“Notification Date” shall have the meaning ascribed to it in Section 10(c) below.
“Other Indemnity Provisions” shall have the meaning ascribed to it in Section 14 below.
“Person” means any individual, corporation, firm, partnership, joint venture, limited liability company, estate,
trust, business association, organization, governmental entity or other entity and includes the meaning set forth in Sections 13(d) and
14(d) of the Exchange Act.
(v)
(w)
(x)
“Standard of Conduct Determination” shall have the meaning ascribed to it in Section 10(b) below.
“Voting Securities” means any securities of the Company that vote generally in the election of directors.
3.
Indemnification. Subject to the terms of this Agreement, the Company shall indemnify Indemnitee, to the fullest extent
permitted by law, against any and all Losses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in
connection with a Claim if Indemnitee was or is or becomes a party to or participant in, or is threatened to be made a party to or
participant in, any Claim by reason of or arising in part out of an Indemnifiable Event, including, without limitation, Claims brought by
or in the right of the Company, Claims brought by third parties, and Claims in which the Indemnitee is solely a witness or deponent.
The parties hereto intend that this Agreement shall provide to the fullest extent permitted by law for indemnification in excess of
that expressly permitted by statute, including, without limitation, any indemnification provided by the Constituent Documents,
vote of the Company’s stockholders or disinterested directors or applicable law.
4.
Advancement of Expenses. Indemnitee shall have the right to advancement of expenses, to the fullest extent permitted
by law, by the Company, prior to the final disposition of any Claim by final adjudication to which there are no further rights of appeal,
of any and all Expenses actually and reasonably paid or incurred by Indemnitee in connection with any Claim arising out of an
Indemnifiable Event. Indemnitee’s right to such advancement is not subject to the satisfaction of any standard of conduct. Without
limiting the generality or effect of the foregoing, within twenty (20) calendar days after any receipt by the Company of a statement or
statements requesting such advances from Indemnitee, the Company shall, in accordance with such request, (a) pay such Expenses on
behalf of Indemnitee, (b) advance to Indemnitee funds in an amount sufficient to pay such Expenses, or (c) reimburse Indemnitee for
such Expenses. In connection with any request for Expense Advances, Indemnitee shall not be required to provide any documentation
or information to the extent that the provision thereof would undermine or otherwise jeopardize attorney-client privilege. Execution
and delivery to the Company of this Agreement by Indemnitee constitutes an undertaking by the Indemnitee, pursuant to which
Indemnitee hereby agrees, to repay any amounts paid, advanced or reimbursed by the Company pursuant to this Section 4 in respect of
Expenses relating to, arising out of or resulting from any Claim in respect of which it shall be determined,
-5-
pursuant to Section 10, following the final disposition of such Claim, that Indemnitee is not entitled to indemnification hereunder. No
other form of undertaking shall be required other than the execution of this Agreement. Indemnitee’s obligation to reimburse the
Company for Expense Advances shall be unsecured and no interest shall be charged thereon.
5.
Indemnification for Expenses in Enforcing Rights. To the fullest extent allowable under applicable law, the Company
shall also indemnify against, and, if requested by Indemnitee, shall advance to Indemnitee (within ten days after receipt by the
Company of a written request therefor) subject to and in accordance with Section 4, any Expenses actually and reasonably paid or
incurred by Indemnitee in connection with any action or proceeding by Indemnitee for (a) indemnification or reimbursement or
advance payment of Expenses by the Company under any provision of this Agreement, or under any other agreement or provision of
the Constituent Documents now or hereafter in effect relating to Claims relating to Indemnifiable Events, and/or (b) recovery under
any directors’ and officers’ liability insurance policies maintained by the Company. However, in the event that Indemnitee is ultimately
determined not to be entitled to such indemnification or insurance recovery, as the case may be, then all amounts advanced under this
Section 5 shall be repaid.
6.
Partial Indemnity. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company
for a portion of any Losses in respect of a Claim related to an Indemnifiable Event but not for the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
7.
Contribution in the Event of Joint Liability. To the fullest extent permissible under applicable law, if the indemnification
and hold harmless rights provided for in this Agreement are unavailable to Indemnitee in whole or in part for any reason whatsoever,
the Company, in lieu of indemnifying and holding harmless Indemnitee, shall contribute to the amount incurred by Indemnitee the
entire amount incurred by Indemnitee, whether for judgments, liabilities, fines, penalties, amounts paid or to be paid in settlement
and/or for Expenses, in connection with any Claim relating to an Indemnifiable Event, in such proportion as is deemed fair and
reasonable in light of all of the circumstances of such Indemnifiable Event in order to reflect (i) the relative benefits received by the
Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such proceeding; and/or (ii) the relative fault
of the Company (and its directors, officers, employees, trustees, fiduciaries and agents) and Indemnitee in connection with such
event(s) and/or transaction(s).
8.
Notification and Defense of Claims.
(a)
Notification of Claims. Indemnitee shall notify the Company in writing of any Claim which could relate to an
Indemnifiable Event or for which Indemnitee could seek Expense Advances as soon as practicable following receipt by Indemnitee of
written notice thereof. The written notification to the Company shall include a brief description (based upon information then available
to Indemnitee) of the nature of, and the facts underlying, such Claim. The failure by Indemnitee to timely notify the Company
hereunder shall not relieve the Company from any liability hereunder other than to the extent the Company’s ability to participate in
the defense of such claim was materially and adversely prejudiced by such failure.
(b)
Defense of Claims. The Company shall be entitled to participate in the defense of any Claim relating to an
Indemnifiable Event at its own expense and, except as otherwise provided below, to the extent the Company so wishes, it may assume
the defense thereof with counsel reasonably satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election to
assume the defense of any such Claim, the Company shall not be liable to Indemnitee under this Agreement or otherwise for any
Expenses subsequently directly incurred by Indemnitee in connection with Indemnitee’s defense of such Claim other than reasonable
costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ its own legal counsel in such
-6-
Claim, but all Expenses related to such counsel incurred after notice from the Company of its assumption of the defense shall be at
Indemnitee’s own expense; provided, however, that if (i) Indemnitee’s employment of its own legal counsel has been authorized by the
Company, (ii) Indemnitee’s counsel has reasonably determined that there may be a conflict of interest between Indemnitee and the
Company in the defense of such Claim, (iii) after a Change in Control, Indemnitee’s employment of its own counsel has been approved
by the Independent Counsel or (iv) the Company shall not in fact have employed counsel to assume the defense of such Claim, then
Indemnitee shall be entitled to retain its own separate counsel (but not more than one law firm plus, if applicable, local counsel in
respect of any such Claim) and all Expenses related to such separate counsel shall be borne by the Company.
9.
Procedure Upon Application for Indemnification. In order to obtain indemnification pursuant to this Agreement,
Indemnitee shall submit to the Company a written request therefor, including in such request such documentation and information as is
reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to
indemnification following the final disposition of the Claim. Indemnification shall be made insofar as the Company determines
Indemnitee is entitled to indemnification in accordance with Section 10 below.
-7-
10. Determination of Right to Indemnification.
(a) Mandatory Indemnification; Indemnification as a Witness.
(i) Mandatory Indemnification. Notwithstanding any other provisions of this Agreement, to the extent that
Indemnitee shall have been successful on the merits or otherwise in defense of any Claim relating to an Indemnifiable Event or in
defense of any issue or matter therein, in whole or in part, including without limitation the termination of any Claim by dismissal with
or without prejudice, Indemnitee shall be indemnified against all Losses relating to such successfully resolved Claim or such
successfully resolved issue or matter therein, as applicable, to the fullest extent allowable by law.
(ii)
Indemnification as a Witness. Notwithstanding any other provisions of this Agreement, to the extent that
Indemnitee’s involvement in a Claim relating to an Indemnifiable Event is to prepare to serve and serve as a witness, is or was made
(or asked to respond to discovery requests) or is otherwise asked to participate in a Claim, in each case, to which Indemnitee is not a
party, the Indemnitee shall be indemnified against all Losses actually and reasonably incurred in connection therewith to the fullest
extent allowable by law.
(b)
Standard of Conduct. To the extent that the provisions of Section 10(a) are inapplicable to a Claim related to an
Indemnifiable Event that shall have been finally disposed of, any determination of whether Indemnitee has satisfied any applicable
standard of conduct under Delaware law that is a legally required condition to indemnification of Indemnitee hereunder against Losses
relating to such Claim and any determination that Expense Advances must be repaid to the Company (a “Standard of Conduct
Determination”) shall be made as follows:
(i)
if no Change in Control has occurred, (A) by a majority vote of the Disinterested Directors, even if less
than a quorum of the Board, (B) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors,
even though less than a quorum (C) if there are no such Disinterested Directors or if such Disinterested Directors so direct, by
Independent Counsel in a written opinion addressed to the Board, a copy of which shall be delivered to Indemnitee or (D) if so directed
by the Board, by the stockholders of the Company; and
if a Change in Control shall have occurred, (A) if the Indemnitee so requests in writing, by a majority
vote of the Disinterested Directors, even if less than a quorum of the Board or (B) otherwise, by Independent Counsel in a written
opinion addressed to the Board, a copy of which shall be delivered to Indemnitee.
(ii)
The Company shall indemnify and hold harmless Indemnitee against and, if requested by Indemnitee in writing,
shall reimburse Indemnitee for, or advance to Indemnitee, within twenty (20) calendar days of such request, any and all Expenses
actually and reasonably incurred by Indemnitee in cooperating with the Person or Persons making such Standard of Conduct
Determination (irrespective of the determination as to Indemnitee’s entitlement to indemnification).
The Company promptly will advise Indemnitee in writing with respect to any determination that
Indemnitee is or is not entitled to indemnification, including a description of any reason or basis for which indemnification has
been denied.
(c) Making the Standard of Conduct Determination. The Company shall use its reasonable best efforts to cause any
Standard of Conduct Determination required under Section 10(b) to be made as promptly as practicable. Subject to the last sentence of
this Section 10(c), if the Person or Persons designated to make the Standard of Conduct Determination under Section 10(b) shall not
have made a determination within thirty (30) calendar days after the later of (A) receipt by the Company of a written request from
Indemnitee for indemnification pursuant to Section 9 (the date of such receipt being the “Notification Date”) and (B) the selection of
an Independent Counsel, if such
-8-
determination is to be made by Independent Counsel, then Indemnitee shall be deemed to have satisfied the applicable standard of
conduct, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s
statement not materially misleading, in connection with the request for indemnification, or (ii) a final judicial determination that any or
all such indemnification is expressly prohibited under applicable law; provided, however, that such thirty (30) calendar day period may
be extended for a reasonable time, not to exceed an additional fifteen (15) calendar days, if the Person or Persons making such
determination in good faith requires such additional time to obtain or evaluate information relating thereto and provided, further, that
the foregoing provisions of this Section 10(c) shall not apply (i) if the determination of entitlement to indemnification is to be
made by the stockholders pursuant to Section 10(b)(i) of this Agreement and if (i) within fifteen (15) days after receipt by the
Company of the request for such determination the Board has resolved to submit such determination to the stockholders for their
consideration at an annual meeting thereof to be held within seventy-five (75) days after such receipt and such determination is
made thereat, or (ii) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of
making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such
determination is made thereat. Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement of
Indemnitee to indemnification under this Agreement shall be required to be made prior to the final disposition of any Claim.
(d)
Payment of Indemnification. If, in regard to any Losses:
(i)
(ii)
Indemnitee hereunder; or
Indemnitee shall be entitled to indemnification pursuant to Section 10(a);
no Standard of Conduct Determination is legally required as a condition to indemnification of
the Standard of Conduct Determination,
(iii)
Indemnitee has been determined or deemed pursuant to Section 10(b) or Section 10(c) to have satisfied
then the Company shall pay to Indemnitee, within twenty (20) calendar days after the later of (A) the
Notification Date or (B) the earliest date on which the applicable criterion specified in clause (i), (ii) or (iii) is satisfied, an amount
equal to the Losses to which such Indemnitee is entitled.
(e)
Selection of Independent Counsel for Standard of Conduct Determination. If a Standard of Conduct
Determination is to be made by Independent Counsel pursuant to Section 10(b)(i), the Independent Counsel shall be selected by the
Board of Directors, and the Company shall give written notice to Indemnitee advising Indemnitee of the identity of the Independent
Counsel so selected. If a Standard of Conduct Determination is to be made by the Independent Counsel pursuant to Section 10(b)(ii),
the Independent Counsel shall be selected by Indemnitee, and Indemnitee shall give written notice to the Company advising it of the
identity of the Independent Counsel so selected. In either case, Indemnitee or the Company, as applicable, may, within ten (10)
calendar days after receiving written notice of selection from the other, deliver to the other a written objection to such selection;
provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not satisfy
the criteria set forth in the definition of “Independent Counsel” in Section 2, and the objection shall set forth with particularity the
factual basis of such assertion. Absent a proper and timely objection, the individual or firm so selected shall act as Independent
Counsel. If such written objection is properly and timely made and substantiated, (i) the Independent Counsel so selected may not
serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without
merit; and (ii) the non-objecting party may, at its option, select an alternative Independent Counsel and give written notice to the other
party advising such other party of the identity of the alternative Independent Counsel so selected, in which case the provisions of the
two immediately preceding sentences, the
-9-
introductory clause of this sentence and numbered clause (i) of this sentence shall apply to such subsequent selection and notice. If
applicable, the provisions of clause (ii) of the immediately preceding sentence shall apply to successive alternative selections. If no
Independent Counsel that is permitted under the foregoing provisions of this Section 10(e) to make the Standard of Conduct
Determination shall have been selected within twenty (20) calendar days after the Company gives its initial notice pursuant to the first
sentence of this Section 10(e) or Indemnitee gives its initial notice pursuant to the second sentence of this Section 10(e), as the case
may be, either the Company or Indemnitee may petition the Delaware Court to resolve any objection which shall have been made by
the Company or Indemnitee to the other’s selection of Independent Counsel and/or to appoint as Independent Counsel an individual or
firm to be selected by the Court or such other person as the Court shall designate, and the individual or firm with respect to whom all
objections are so resolved or the individual or firm so appointed will act as Independent Counsel. In all events, the Company shall pay
all of the reasonable fees and expenses of the Independent Counsel incurred in connection with the Independent Counsel’s
determination pursuant to Section 10(b) and shall fully indemnify and hold harmless such Independent Counsel against any and all
expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.
(f)
Presumptions and Defenses.
(i)
Indemnitee’s Entitlement to Indemnification. In making any Standard of Conduct Determination, the
Person or Persons making such determination shall presume, to the fullest extent permitted by law, that Indemnitee has satisfied the
applicable standard of conduct and is entitled to indemnification under this Agreement if Indemnitee has submitted a request for
indemnification in accordance with Section 9 of this Agreement, and the Company shall, to the fullest extent permitted by law, have
the burden of proof to overcome that presumption and establish that Indemnitee is not so entitled. Any Standard of Conduct
Determination that is adverse to Indemnitee may be challenged by the Indemnitee in the Delaware Court. No determination by the
Company (including by its directors or any Independent Counsel) that Indemnitee has not satisfied any applicable standard of conduct
or failure by the Company to reach such a determination may be used as a defense to any legal proceedings brought by Indemnitee to
secure indemnification or reimbursement or advance payment of Expenses by the Company hereunder or create a presumption that
Indemnitee has not met any applicable standard of conduct.
(ii) Reliance as a Safe Harbor. For purposes of this Agreement, and without creating any presumption as to
a lack of good faith if the following circumstances do not exist, Indemnitee shall be deemed to have acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best interests of the Company if Indemnitee’s actions or omissions
to act are taken in good faith reliance upon the records of the Company, including its financial statements, or upon information,
opinions, reports or statements furnished to Indemnitee by the officers or employees of the Company or any of its subsidiaries in the
course of their duties, or by committees of the Board or by any other Person (including legal counsel, accountants and financial
advisors) as to matters Indemnitee reasonably believes are within such other Person’s professional or expert competence and who has
been selected with reasonable care by or on behalf of the Company. In addition, the knowledge and/or actions, or failures to act, of any
director, officer, agent or employee of the Company shall not be imputed to Indemnitee for purposes of determining the right to
indemnity hereunder. The provisions of this Section 10(f)(ii) shall not be deemed to be exclusive or to limit in any way the other
circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in this
Agreement.
(iii) No Other Presumptions. For purposes of this Agreement, the termination of any Claim by judgment,
order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere or its equivalent, will not
(except as otherwise provided in this Agreement) of itself create a presumption that Indemnitee did not meet any applicable standard of
conduct, or that indemnification hereunder is otherwise not permitted.
-10-
(iv) Defense to Indemnification and Burden of Proof. It shall be a defense to any action brought by
Indemnitee against the Company to enforce this Agreement (other than an action brought to enforce a claim for Losses incurred in
defending against a Claim related to an Indemnifiable Event in advance of its final disposition) that it is not permissible under
applicable law for the Company to indemnify Indemnitee for the amount claimed. In connection with any such action or any related
Standard of Conduct Determination, the burden of proving such a defense or that the Indemnitee did not satisfy the applicable standard
of conduct shall be on the Company.
11.
obligated to:
Exclusions from Indemnification. Notwithstanding anything in this Agreement to the contrary, the Company shall not be
(a)
indemnify or advance funds to Indemnitee for Expenses or Losses with respect to Claims initiated by
Indemnitee, including any Claims against the Company or its directors, officers, employees or other indemnitees, except:
(i)
(ii)
(iii)
proceedings referenced in Section 5 above;
if the Board has authorized the Claim prior to its initiation;
if the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the
Company under applicable law; or
(iv)
by Indemnitee in any Claim.
if such payment arises in connection with any mandatory counterclaim or cross claim brought or raised
(b)
Indemnify and advance funds Indemnitee if a final decision by a court of competent jurisdiction determines that
such indemnification is prohibited by applicable law.
Indemnify or advance funds Indemnitee for an accounting of profits arising from the purchase or sale by
Indemnitee of securities of the Company in violation of Section 16(b) of the Exchange Act, or any similar successor statute, state law
or other law.
(c)
(d)
indemnify or advance funds to Indemnitee for Indemnitee’s reimbursement to the Company of any bonus or
other incentive-based or equity-based compensation previously received by Indemnitee or payment of any profits realized by
Indemnitee from the sale of securities of the Company, as required in each case under the Exchange Act (including any such
reimbursements under Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) in connection with an accounting
restatement of the Company or the payment to the Company of profits arising from the purchase or sale by Indemnitee of securities in
violation of Section 306 of the Sarbanes-Oxley Act).
(e) indemnify or advance funds to Indemnitee for any reimbursement of the Company by Indemnitee of any
compensation pursuant to any compensation recoupment or clawback policy adopted by the Board or the compensation
committee of the Board, including but not limited to any such policy adopted to comply with stock exchange listing requirements
implementing Section 10D of the Exchange Act.
(f) indemnify or advance funds for which payment has actually been made to or on behalf of Indemnitee under
any insurance policy or other indemnity provision, except with respect to any excess beyond the amount paid under any insurance
policy or other indemnity provision.
12.
Settlement of Claims. The Company shall not be liable to Indemnitee under this Agreement for any amounts paid in
settlement of any threatened or pending Claim related to an Indemnifiable Event effected without the Company’s prior written consent,
which shall not be
-11-
unreasonably withheld. The Company shall not settle any Claim related to an Indemnifiable Event in any manner that would impose
any Losses on the Indemnitee without the Indemnitee’s prior written consent. The Company shall not, without the prior written consent
of Indemnitee, effect any settlement of any Claim relating to an Indemnifiable Event which the Indemnitee is or could have been a
party unless such settlement solely involves the payment of money and includes a complete and unconditional release of the
Indemnitee from all liability on all claims that are the subject matter of such Claim.
13.
Duration. All agreements and obligations of the Company contained herein shall continue during the period that
Indemnitee is a director, officer, employee or agent of the Company or any subsidiary of the Company (or is serving at the request of
the Company as a director, officer, employee, member, trustee or agent of another Enterprise) and shall continue thereafter (i) so long
as Indemnitee may be subject to any possible Claim relating to an Indemnifiable Event (including any rights of appeal thereto) and (ii)
throughout the pendency of any proceeding (including any rights of appeal thereto) commenced by Indemnitee to enforce or interpret
his or her rights under this Agreement, even if, in either case, he or she may have ceased to serve in such capacity at the time of any
such Claim or proceeding.
14. Non-Exclusivity. The rights of Indemnitee hereunder (i) shall not be deemed exclusive of any other rights to which
Indemnitee may at any time be entitled under applicable law, the Constituent Documents, any agreement, a vote of stockholders
or a resolution of directors, or otherwise and (ii) shall be interpreted independently of, and without reference to, any other such
rights to which Indemnitee may at any time be entitled. No amendment, alteration or repeal of this Agreement or of any provision
hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by Indemnitee
that is an Indemnifiable Event prior to such amendment, alteration or repeal. To the extent that a change in Delaware law,
whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded
currently under the Constituent Documents and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by
this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive
of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right
or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.
15.
Liability Insurance. For the duration of Indemnitee’s service as a director or officer of the Company, and thereafter for
so long as Indemnitee shall be subject to any pending Claim relating to an Indemnifiable Event, the Company shall use commercially
reasonable efforts (taking into account the scope and amount of coverage available relative to the cost thereof) to continue to maintain
in effect policies of directors’ and officers’ liability insurance providing coverage that is at least substantially comparable in scope and
amount to that provided by the Company’s policies of directors’ and officers’ liability insurance in effect on the date of this Agreement.
The insurance provided pursuant to this Section 15 shall be primary insurance to the Indemnitee for any Indemnifiable Event and/or
Expense to which such insurance applies. In all policies of directors’ and officers’ liability insurance maintained by the Company,
Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are provided to the
most favorably insured of the Company’s directors, if Indemnitee is a director, or of the Company’s officers, if Indemnitee is an officer
(and not a director) by such policy. Upon request, the Company will provide to Indemnitee copies of all directors’ and officers’ liability
insurance applications, binders, policies, declarations, endorsements and other related materials.
16.
No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment to
Indemnitee in respect of any Losses to the extent Indemnitee has otherwise received payment under any insurance policy, the
Constituent Documents, Other Indemnity
-12-
Provisions or otherwise of the amounts otherwise (including from another Enterprise) indemnifiable by the Company hereunder;
provided that the foregoing shall not affect the rights of Indemnitee or the Fund Indemnitors (as defined below) as set forth in Section
17.
17.
Primacy of Indemnification. The Company hereby acknowledges that Indemnitee has or may have in the future certain
rights to indemnification, advancement of expenses and/or insurance provided by Investment Group of Santa Barbara and certain of its
affiliates (collectively, the “Fund Indemnitors”). The Company hereby agrees (i) that it is the indemnitor of first resort (i.e., its
obligations to Indemnitee are primary and any obligation of the Fund Indemnitors to advance expenses or to provide indemnification
for the same expenses or liabilities incurred by Indemnitee are secondary), (ii) that it shall be required to advance the full amount of
expenses incurred by Indemnitee and (iii) that it shall be liable for the full amount of all Losses to the extent legally permitted and as
required by the terms of this Agreement, the Constituent Documents and/or Other Indemnity Provisions, without regard to any rights
Indemnitee may have against the Fund Indemnitors. The Company irrevocably waives, relinquishes and releases the Fund Indemnitors
from any and all claims against the Fund Indemnitors for contribution, subrogation or any other recovery of any kind in respect thereof.
The Company further agrees that no advancement or payment by the Fund Indemnitors on behalf of Indemnitee with respect to any
claim for which Indemnitee has sought indemnification from the Company shall affect the foregoing, and the Fund Indemnitors shall
have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of the rights of recovery of
Indemnitee against the Company. The Company and Indemnitee agree that the Fund Indemnitors are express third party beneficiaries
of the terms of this Section 17.
18.
Subrogation. In the event of payment to Indemnitee under this Agreement, the Company shall be subrogated to the
extent of such payment to all of the rights of recovery of Indemnitee (other than against the Fund Indemnitors). Indemnitee shall
execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such
documents necessary to enable the Company effectively to bring suit to enforce such rights.
19. Amendments; Waivers. No supplement, modification or amendment of this Agreement shall be binding unless executed
in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be binding unless in the form of a
writing signed by the party against whom enforcement of the waiver is sought, and no such waiver shall operate as a waiver of any
other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. Except as specifically provided
herein, no failure to exercise or any delay in exercising any right or remedy hereunder shall constitute a waiver thereof.
20.
Enforcement and Binding Effect.
(a)
The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations
imposed on it hereby in order to induce Indemnitee to serve or continue to service as a director or officer of the Company, and the
Company acknowledges that Indemnitee is relying upon this Agreement in serving or continuing to serve as a director or officer of the
Company.
(b) Without limiting any of the rights of Indemnitee under any Other Indemnity Provisions as they may be amended
from time to time, this Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the
subject matter hereof; provided, however, that this Agreement is a supplement to and in furtherance of the Constituent Documents,
any directors’ and officers’ insurance maintained by the Company and applicable law, and shall not be deemed a substitute
therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.
-13-
(c)
This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and
their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company), assigns, spouses, heirs and personal and legal representatives. The
Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all,
substantially all or a substantial part of the business and/or assets of the Company, by written agreement in form and substances
satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform if no such succession had taken place.
21.
Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof
(including any portion thereof) are held by a court of competent jurisdiction to be invalid, illegal, void or otherwise unenforceable, and
the remaining provisions shall remain enforceable to the fullest extent permitted by law. Upon such determination that any term or
other provision is invalid, illegal or unenforceable, the parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions
contemplated hereby be consummated as originally contemplated to the greatest extent possible.
22. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to
have been duly given if delivered by hand, against receipt, or mailed, by postage prepaid, certified or registered mail:
(a)
(b)
if to Indemnitee, to the address set forth on the signature page hereto.
if to the Company, to:
AppFolio, Inc.
Attn: Chief Legal Officer
70 Castilian Drive
Santa Barbara, California 93117
Notice of change of address shall be effective only when given in accordance with this Section. All notices complying with this
Section shall be deemed to have been received on the date of hand delivery or on the third business day after mailing.
23. Governing Law and Forum. This Agreement shall be governed by and construed and enforced in accordance with the
laws of the State of Delaware applicable to contracts made and to be performed in such state without giving effect to its principles of
conflicts of laws. The Company and Indemnitee hereby irrevocably and unconditionally: (a) agree that any action or proceeding arising
out of or in connection with this Agreement shall be brought only in the Delaware Court and not in any other state or federal court in
the United States or any other country, (b) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any
action or proceeding arising out of or in connection with this Agreement and (c) waive, and agree not to plead or make, any claim that
the Delaware Court lacks venue or that any such action or proceeding brought in the Delaware Court has been brought in an improper
or inconvenient forum.
24. Headings. The headings of the sections and paragraphs of this Agreement are inserted for convenience only and shall
not be deemed to constitute part of this Agreement or to affect the construction or interpretation thereof.
25.
Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be
deemed to be an original, but all of which together shall constitute one and the same Agreement.
-14-
[Remainder of Page Intentionally Left Blank; Signature Page Follows]
-15-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
COMPANY:
APPFOLIO, INC.
By:
Name:
Its:
INDEMNITEE:
(Print Name)
Address: 70 Castilian Drive
Santa Barbara, CA 93117
[Signature Page to Indemnification Agreement]
This EMPLOYMENT AGREEMENT (this “Agreement”) is entered into as of February 8, 2023 (the “Effective Date”),
between AppFolio, Inc., a Delaware corporation (the “Company”), and William Shane Trigg (the “Executive”).
EMPLOYMENT AGREEMENT
W I T N E S S E T H
WHEREAS, the Company employs the Executive as the President and General Manager, Real Estate of the Company; and
WHEREAS, the Company and the Executive desire to enter into this Agreement as to the terms of the Executive’s
employment with the Company.
NOW, THEREFORE, the parties to this Agreement agree as follows:
1.
Employment Term. The Company agrees to employ the Executive pursuant to the terms of this Agreement, and
the Executive agrees to be so employed, commencing as of the Effective Date. The Executive’s employment may be terminated
in accordance with Sections 7 and 8 of this Agreement. The period of time between the Effective Date and the termination of the
Executive’s employment is the “Employment Term.”
2.
Position and Duties.
(a)
During the Employment Term, the Executive will serve as the President and General Manager, Real Estate of the
Company, reporting to the Company’s Chief Executive Officer. In this capacity, the Executive will have the duties, authorities
and responsibilities as are consistent with the Executive’s position.
(b)
During the Employment Term, the Executive shall devote all of the Executive’s business time, energy, business
judgment, knowledge and skill and the Executive’s best efforts to the performance of the Executive’s duties with the Company.
Notwithstanding the foregoing, the Executive may, subject to the Company’s policies, practices and procedures: (i) serve on the
boards of directors of non-profit organizations and, in a manner consistent with the Company’s applicable policies and
procedures and practices, other for-profit companies, (ii) participate in charitable, civic, educational, professional, community or
industry affairs, and (iii) manage the Executive’s passive personal investments; provided that in each case of clauses (i)-(iii), so
long as such activities in the aggregate do not interfere or conflict with the Executive’s duties under this Agreement or create a
potential business or fiduciary conflict.
3.
Base Salary. During the Employment Term, the Company will pay the Executive a base salary (the “Base Salary”)
in accordance with the Company’s regular payroll practices. The Base Salary is subject to annual review by the Company’s Board
of Directors (the “Board”).
4.
Corporate Bonus Program. For each fiscal year of the Company completed during the Employment Term, the
Executive will be eligible to earn an annual bonus under the Company’s Corporate Bonus Program (each annual bonus, an
“Annual Bonus”). The Annual Bonus is subject to the Board’s approval and the Executive’s execution of any applicable
participation agreement under the Corporate Bonus Program. In each case, the Annual Bonus will be subject to the terms and
conditions of this Section 4 and the applicable plan documents.
5.
Equity Awards. The Executive will be eligible to receive the following incentive equity awards:
(a)
Performance-Based Award. The Executive will be granted an award of RSUs that is tied to certain performance
metrics over a performance period of up to three years (the “Performance-Based LTI Award”). Such Performance-Based LTI
Award is subject to the Board’s approval and the Executive’s acceptance of related equity award grant agreements with the
Company containing standard terms and conditions; and
(b)
Time-Based Award. The Executive will be granted an award of time-vesting RSUs (the “Time-Based LTI
Award”). The Time-Based LTI Award will vest subject to a vesting schedule and the Executive’s continuous employment through
the applicable vesting date. The Time-Based LTI Award is subject to the Board’s approval and the Executive’s acceptance of
related equity award grant agreements with the Company containing standard terms and conditions.
6.
Employee Benefits.
(a)
Benefit Plans; Vacation. During the Employment Term, the Executive will be eligible to participate in any
employee benefit plan adopted by the Company for the benefit of its executive employees, subject to satisfying the applicable
eligibility requirements, except to the extent such plans are duplicative of the benefits otherwise provided under this Agreement.
The Executive shall be entitled to the same vacation policy for executive employees of the Company as in effect from time to
time. Notwithstanding the foregoing, the Company may modify or terminate any employee benefit plan at any time.
(b)
Business Expenses. The Company will reimburse the Executive for all reasonable and necessary out-of-pocket
business incurred by the Executive in connection with the performance of the Executive’s duties under this Agreement, including
reasonable travel costs and expenses incurred in connection with the Executive’s commute to the Company’s headquarters, in
accordance with the Company’s expense reimbursement policy.
7.
to occur:
Termination. The Executive’s employment and the Employment Term shall terminate on the first of the following
(a)
Disability. Immediately upon written notice by the Company to the Executive of termination due to Disability
(capitalized terms in this Section 7 that have not been previously defined in this Agreement are defined in Section 11, below).
(b)
(c)
Death. Automatically upon the date of death of the Executive.
Cause. Immediately upon written notice by the Company to the Executive of a termination for Cause.
(d) Without Cause. Immediately upon written notice by the Company to the Executive of an involuntary termination
without Cause (other than for death or Disability).
(e)
Good Reason. Upon written notice by the Executive to the Company of a termination for Good Reason.
(f)
Without Good Reason. Upon thirty (30) days’ prior written notice by the Executive to the Company of the
Executive’s voluntary termination of employment without Good Reason (which the Company may, in its sole discretion, make
effective earlier than any notice date).
2
8.
Consequences Of Termination.
(a)
Death; Disability. In the event that the Executive’s employment and/or the Employment Term ends on account of
the Executive’s death or Disability, the Company shall pay to the Executive or the Executive’s estate, as the case may be, the
Accrued Benefits (as defined in Section 11, below), and the Executive’s outstanding equity awards as of such termination date
shall vest in accordance with the Equity Award Treatment (as defined in Section 11, below). Notwithstanding the foregoing, all
rights and obligations to the Accrued Benefits shall be subject to state and federal laws governing disabilities and leaves of
absence as well as the Company’s applicable policies.
(b)
Termination For Cause Or Voluntary Termination By Executive. If the Executive’s employment is terminated:
(x) by the Company for Cause, or (y) by the Executive other than by reason of death, Disability or resignation for Good Reason,
then the Company shall pay to the Executive the Accrued Benefits.
(c)
Termination Without Cause or Resignation for Good Reason. If the Executive’s employment by the Company
is terminated by the Company other than for Cause (excluding due to Executive’s death or Disability) or the Executive resigns for
Good Reason, the Company shall pay or provide the Executive with the following:
(i)
the Accrued Benefits;
(ii)
subject to the Executive’s continued compliance with Sections 9 and 10 of this Agreement, (1) an amount
equal to the Executive’s monthly Base Salary (but not as an employee), paid in accordance with the Company’s normal payroll
practices for a period of twelve (12) months following such termination; (2) a prorated portion of the Annual Bonus for the fiscal
year in which such termination occurs, with such prorated portion determined based on the number of days the Executive was
employed by the Company during such year, and achievement of the applicable performance goals determined by the Board at
the time of such termination based on forecasted results (but no greater than target-level performance), payable on the first
regularly scheduled pay period following the sixtieth (60th) day following such termination; and (3) payment of COBRA
premiums (through premium reimbursement or direct payment to the insurer) for twelve (12) months following termination.
Notwithstanding the foregoing, any such payment scheduled to occur pursuant to this Section 8(c)(ii) during the first sixty
(60) days following the termination will not be paid until the first regularly scheduled pay period following the sixtieth (60th) day
following such termination and will include payment of any amount that was otherwise scheduled to be paid prior thereto.
(d)
Corporate Transaction. In addition to the payments described in Sections 8(c)(i) and (ii), and subject to the
Executive’s continued compliance with Sections 9 and 10 of this Agreement, if the Executive’s employment by the Company (or
its successor) is terminated by the Company (or its successor) other than for Cause or the Executive resigns for Good Reason on
or within twelve (12) months following the consummation of a Corporate Transaction (as defined in Section 11 below), all
outstanding equity awards held by the Executive as of the applicable termination date shall accelerate and become fully-vested
effective as of immediately prior to such termination. In addition, if the outstanding equity awards held by the Executive as of
immediately prior to the consummation of a Corporate Transaction are not assumed or substituted for value upon such Corporate
Transaction, such equity awards shall accelerate and become fully-vested effective as of immediately prior to such Corporate
Transaction.
(e)
Resignation From All Other Positions. Upon any termination of the Employment Term, the Executive will
promptly resign, and will be deemed to have automatically resigned, from all positions, if any, that the Executive holds as a
member of the
3
Board (including any committees), officer, director, manager or fiduciary of the Company or any of its affiliates or subsidiaries.
The Executive will take all actions reasonably requested by the Company to give effect to this Section 8(e).
(f)
Exclusive Remedy. The amounts payable to the Executive following termination of employment and the
Employment Term pursuant to Sections 7 and 8 of this Agreement shall be in full and complete satisfaction of the Executive’s
rights under this Agreement and any other claims that the Executive may have in respect of the Executive’s employment with the
Company or any of its affiliates. The Executive acknowledges that such amounts are fair and reasonable and are the Executive’s
sole and exclusive remedy, in lieu of all other remedies at law or in equity, with respect to the termination of the Executive’s
employment or any breach of this Agreement.
9.
Release; Continued Compliance. Any and all amounts payable and benefits or additional rights provided upon
termination of employment pursuant to this Agreement beyond the Accrued Benefits pursuant to Section 8(c) (the “Severance
Benefits”) shall be payable if and only if the Executive delivers to the Company, and does not revoke, a general release of claims
in favor of the Company in substantially the form attached hereto as Exhibit A. Such release will be executed and delivered (and
no longer subject to revocation, if applicable) within sixty (60) days following termination. During such time that the Executive
is receiving the Severance Benefits, if (a) the Company discovers grounds constituting Cause existed before Executive’s
termination or (b) the Executive breaches any of the restrictive covenants set forth in the Employee Proprietary Information and
Invention Assignment Agreement attached to this Agreement as Exhibit B, the Executive’s right to receive the Severance
Benefits will immediately cease and be forfeited and any previously paid Severance Benefits shall be repaid by the Executive to
the Company.
10.
Restrictive Covenants. The Executive acknowledges and agrees to be bound by the restrictive covenants set forth
in the Employee Proprietary Information and Invention Assignment Agreement attached to this Agreement as Exhibit B.
11.
Certain Defined Terms. As used in this Agreement, the following terms have the meanings set forth below:
(a)
“Accrued Benefits” means: (i) any accrued but unpaid Base Salary through the date of termination; (ii)
reimbursement for any unreimbursed business expenses incurred through the date of termination; and (iii) all other accrued but
unpaid payments, benefits or fringe benefits to which the Executive shall be entitled under the terms of any applicable
compensation or benefit arrangement. Notwithstanding anything to the contrary, amounts due under prongs (i)-(iii) will be paid
within sixty (60) days following termination of employment, or such earlier date as may be required by applicable law.
(b)
“Cause” means the Executive’s: (i) theft, dishonesty, misconduct, falsification of any employment or Company
records, (ii) any act or omission that has a material detrimental effect on the Company’s reputation or business; (iii) conviction
(including any plea of guilty or no contest) for any felony, or for any criminal act that materially impairs the Executive’s ability to
perform the Executives duties to the Company; (iv) material breach of any agreement between the Executive and the Company;
or (v) material violation of any Company policy; or (vi) the Executive’s willful failure to perform, or willful misconduct or gross
negligence in the performance of, the Executive’s duties to the Company or the Executive’s failure to follow the lawful directives
of the Board or any executive to which the Executive reports (other than as a result of death or Disability); provided that, in the
case of clauses (iv), (v) and (vi), Executive shall have an opportunity to cure, if susceptible to cure, for a period of thirty (30)
days following written notice by the Company.
4
(c)
“Corporate Transaction” has the meaning set forth in the Company’s 2015 Stock Incentive Plan, as may be
amended from time to time.
(d)
“Disability” or “Disabled” means the Executive becomes “disabled” or suffers from a “disability” as defined in
Section 409A, or in any successor regulation, as determined by the Board in good faith.
(e)
“Equity Award Treatment” means (i) with respect to each outstanding equity award held by the Executive as of the
applicable termination date that vests solely based on the Executive’s continued employment with the Company (whether strictly
time-based awards or earned but not yet vested performance-based awards), the portion of such award that would have vested had
the Executive remained employed with the Company for an additional twelve (12) months will accelerate and become vested
effective as of immediately prior to such termination; and (ii) with respect to each outstanding equity award held by the
Executive as of the applicable termination date that has not yet vested but is forecasted to vest (in whole or in part) based on
achievement of applicable performance goals (each a “Performance-Vesting Award”), a prorated portion of such Performance-
Vesting Award will accelerate and become vested effective as of immediately prior to such termination, with such prorated
portion determined based on the number of days the Executive was employed by the Company during the applicable performance
period for the Performance-Vesting Award, and achievement of the applicable performance goals determined by the Board at the
time of such termination based on forecasted results (but no greater than target-level performance).
(f)
“Good Reason” means, without the Executive’s prior written consent: (i) a material reduction in the Executive’s
base salary (other than a reduction pertaining to all similarly situated employees of the Company); (ii) a material diminution of
the Executive’s duties inconsistent with the Executive’s position; (iii) a material breach by the Company or its affiliate of the
Agreement or any other material written agreement with the Company; (iv) a material modification by the Company of the
Executive’s flexible hybrid work arrangement involving both off-site services and in-person services at the Company’s
headquarters; or (v) any change in Executive’s reporting structure such that Executive no longer reports to the Chief Executive
Officer; provided that, “Good Reason” shall only exist if the Executive tenders written objection to the Company within thirty
(30) days of the initial occurrence of such Good Reason setting forth in reasonable detail the circumstances alleged to give rise to
Good Reason, the Company fails to remedy the condition within thirty (30) days after receiving such written objection notice,
and the Executive gives notice of resignation from employment within thirty (30) days after the end of such cure period.
(g)
“RSUs” means restricted stock units covering a number of shares of Class A common stock of the Company that
may be settled in cash and/or by issuance of shares of Class A common stock of the Company.
(h)
“Section 409A” means Section 409A of the Internal Revenue Code and the regulations and guidance promulgated
under the Internal Revenue Code.
12.
No Assignments. This Agreement is personal to each of the parties. Except as provided below, no party may
assign or delegate any rights or obligations under this Agreement without first obtaining the written consent of the other party.
The Company may assign this Agreement to any successor to all or substantially all of its business or assets.
13.
Notice. All communications provided for in this Agreement shall be in writing and shall be deemed to have been
duly given (a) on the date of delivery, if delivered by hand, (b) on the date of transmission, if delivered by electronic mail, or (c)
on the first business day following the date of deposit, if delivered by guaranteed overnight delivery service:
5
If to the Executive:
At the address (or to the email address) shown in the books and
records of the Company.
If to the Company:
70 Castilian Drive
Santa Barbara, CA 93117
Attention: Chief Legal Officer
or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
14.
Interpretation. The section headings used in this Agreement are included solely for convenience and shall not
affect, or be used in connection with, the interpretation of this Agreement. In the event of any inconsistency between the terms of
this Agreement and any form, award, plan or policy of the Company, the terms of this Agreement shall govern and control.
15.
Severability. The provisions of this Agreement shall be deemed severable. The invalidity or unenforceability of
any provision of this Agreement in any jurisdiction shall not affect the validity, legality or enforceability of the remainder of this
Agreement in such jurisdiction or the validity, legality or enforceability of any provision of this Agreement in any other
jurisdiction, it being intended that all rights and obligations of the parties shall be enforceable to the fullest extent permitted by
applicable law.
16.
Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and the same instrument.
17.
Arbitration. Any dispute or controversy arising under or in connection with this Agreement or the Executive’s
employment with the Company shall be settled exclusively by arbitration, conducted before a single arbitrator in Santa Barbara,
California in accordance with the JAMS Employment Rules and Procedures then in effect (available at www.jamsdr.com). The
decision of the arbitrator will be final and binding upon the parties. Judgment may be entered on the arbitrator’s award in any
court having jurisdiction. In connection with any such arbitration and regardless of outcome, (a) each party shall pay all of its
own costs and expenses, including, without limitation, its own legal fees and expenses, and (b) the arbitration costs shall be borne
by the Company.
18.
Governing Law. This Agreement, the rights and obligations of the parties, and all claims or disputes relating
thereto, shall be governed by and construed in accordance with the laws of the State of California (without regard to its choice of
law provisions).
19. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed by the Executive and such officer or director as may be designated by
the Board. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. This Agreement, together with all exhibits attached to this Agreement,
sets forth the entire agreement of the parties in respect of the subject matter contained in this Agreement and supersedes any and
all prior agreements or understandings between the Executive and the Company with respect to
6
the subject matter of this Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set forth in this Agreement. In the event of any
inconsistency between the terms of this Agreement and any equity award, the terms of this Agreement shall govern and control.
20.
Representations. The Executive represents and warrants to the Company that: (a) the Executive has the legal right
to enter into this Agreement and to perform all of the obligations on the Executive’s part to be performed under this Agreement;
and (b) the Executive is not a party to any agreement or understanding, written or oral, and is not subject to any restriction,
which, in either case, could prevent or impair the Executive from entering into this Agreement or performing the Executive’s
duties and obligations under this Agreement.
21.
Tax Matters.
(a) Withholding. The Company may withhold from any and all amounts payable under this Agreement or otherwise
such federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.
(b)
Section 409A Compliance.
(i)
The intent of the parties is that payments and benefits under this Agreement comply with, or are exempt
from, Section 409A. Accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance
therewith or exempt therefrom. In no event whatsoever shall the Company be liable for any additional tax, interest or penalty that
may be imposed on the Executive by Section 409A or damages for failing to comply with Section 409A.
(i)
A termination of employment shall not be deemed to have occurred for purposes of any provision of this
Agreement providing for the payment of any amounts or benefits upon or following a termination of employment unless such
termination is also a “separation from service” within the meaning of Section 409A. For purposes of any such provision of this
Agreement, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.”
Notwithstanding anything to the contrary in this Agreement, if the Executive is deemed on the date of termination to be a
“specified employee” within the meaning of that term under Section 409A, then with regard to any payment or the provision of
any benefit that is considered deferred compensation under Section 409A payable on account of a “separation from service,” such
payment or benefit shall not be made or provided until the date which is the earlier of (A) the expiration of the six (6)-month
period measured from the date of such “separation from service” of the Executive, and (B) the date of the Executive’s death, to
the extent required under Section 409A. Upon the expiration of the foregoing delay period, all payments and benefits delayed
pursuant to this Section 22(b)(ii) (whether they would have otherwise been payable in a single sum or in installments in the
absence of such delay) shall be paid or reimbursed to the Executive in a lump sum, and any remaining payments and benefits due
under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.
(ii)
To the extent that reimbursements or other in-kind benefits under this Agreement constitute “nonqualified
deferred compensation” for purposes of Section 409A, (A) all expenses or other reimbursements under this Agreement shall be
made on or prior to the last day of the taxable year following the taxable year in which such expenses were incurred by the
Executive, (B) any right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit,
and (C) no such reimbursement, expenses eligible for reimbursement, or in-kind benefits provided in any taxable year shall in
any way affect the
7
expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year.
(iii)
For purposes of Section 409A, the Executive’s right to receive any installment payments pursuant to this
Agreement shall be treated as a right to receive a series of separate and distinct payments. Whenever a payment under this
Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period
shall be within the sole discretion of the Company.
(iv)
Notwithstanding any other provision of this Agreement to the contrary, in no event shall any payment
under this Agreement that constitutes “nonqualified deferred compensation” for purposes of Section 409A be subject to offset by
any other amount unless otherwise permitted by Section 409A.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
8
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
APPFOLIO, INC.
By:
Name:
Title:
/s/ Jason Randall
Jason Randall
President and Chief Executive Officer
EXECUTIVE
By:
/s/ William Shane Trigg
Name: William Shane Trigg
Title:
General Manger, Real Estate
[Signature Page to Employment Agreement]
Exhibit A
GENERAL RELEASE
I, Shane Trigg, in consideration of and subject to the performance by AppFolio, Inc. (together with its subsidiaries, the
“Company”) of its obligations under that Employment Agreement, dated as of February 8, 2023 (the “Agreement”), do hereby
release and forever discharge as of the date hereof the Company and its respective affiliates and all present, former and future
managers, directors, officers, employees, successors and assigns of the Company and its affiliates and direct or indirect owners
(collectively, the “Released Parties”) to the extent provided below (this “General Release”). The Released Parties are intended to
be third-party beneficiaries of this General Release, and this General Release may be enforced by each of them in accordance
with the terms hereof in respect of the rights granted to such Released Parties hereunder. Terms used herein but not otherwise
defined shall have the meanings given to them in the Agreement.
1.
2.
My employment or service with the Company and its affiliates terminated as of ________________, and I hereby resign
from any position as an officer, member of the board of managers or directors (as applicable) or fiduciary of the Company
or its affiliates (or reaffirm any such resignation that may have already occurred). I understand that the Severance Benefits
represent, in part, consideration for signing this General Release and are not salary, wages or benefits to which I was
already entitled. I understand and agree that I will not receive the Severance Benefits unless I execute this General
Release and do not revoke this General Release within the time period permitted hereafter. I understand and agree that
such payments and benefits are subject to the restrictive covenants set forth in Exhibit B attached to the Agreement, which
(as noted below) expressly survive my termination of employment and the execution of this General Release. Such
payments and benefits will not be considered compensation for purposes of any employee benefit plan, program, policy or
arrangement maintained or hereafter established by the Company or its affiliates.
Except as provided in paragraphs 5 and 6 below and except for the provisions of the Agreement which expressly survive
the termination of my employment with the Company, I knowingly and voluntarily (for myself, my heirs, executors,
administrators and assigns) release and forever discharge the Company and the other Released Parties from any and all
claims, suits, controversies, actions, causes of action, cross-claims, counterclaims, demands, debts, compensatory
damages, liquidated damages, punitive or exemplary damages, other damages, claims for costs and attorneys’ fees, or
liabilities of any nature whatsoever in law and in equity, both past and present (through the date that this General Release
becomes effective and enforceable) and whether known or unknown, suspected, or claimed against the Company or any
of the Released Parties which I, my spouse, or any of my heirs, executors, administrators or assigns, may have, which
arise out of or are connected with my employment with, or my separation or termination from, the Company (including,
but not limited to, any allegation, claim or violation, arising under: Title VII of the Civil Rights Act of 1964, as amended;
the Civil Rights Act of 1991; the Age Discrimination in Employment Act of 1967, as amended (including the Older
Workers Benefit Protection Act); the Equal Pay Act of 1963, as amended; the Americans with Disabilities Act of 1990;
the Family and Medical Leave Act of 1993; the Worker Adjustment Retraining and Notification Act; the Employee
Retirement Income Security Act of 1974; any applicable Executive Order Programs; the Fair Labor Standards Act; or
their state or local counterparts; or under any other federal, state or local civil or human rights law, or under any other
local, state, or federal law, regulation or ordinance; or under any public policy, contract or tort, or under common
Exhibit A - 1
3.
4.
5.
6.
7.
law; or arising under any policies, practices or procedures of the Company; or any claim for wrongful discharge, breach of
contract, infliction of emotional distress, defamation; or any claim for costs, fees, or other expenses, including attorneys’
fees incurred in these matters) (all of the foregoing collectively referred to herein as the “Claims”).
The released claims described in paragraph 2 hereof include all such claims, whether known or unknown by me.
Therefore, I waive the effect of California Civil Code Section 1542 and any other analogous provision of applicable law
of any jurisdiction. Section 1542 states:
“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS THAT THE CREDITOR OR RELEASING
PARTY DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING
THE RELEASE AND THAT, IF KNOWN BY HIM OR HER, WOULD HAVE MATERIALLY AFFECTED HIS OR
HER SETTLEMENT WITH THE DEBTOR OR RELEASED PARTY.”
I represent that I have made no assignment or transfer of any right, claim, demand, cause of action, or other matter
covered by paragraph 2 above.
I agree that this General Release does not waive or release any rights or claims that I may have under the Age
Discrimination in Employment Act of 1967 which arise after the date I execute this General Release. I acknowledge and
agree that my separation from employment with the Company in compliance with the terms of the Agreement shall not
serve as the basis for any claim or action (including, without limitation, any claim under the Age Discrimination in
Employment Act of 1967).
I agree that I hereby waive all rights to sue or obtain equitable, remedial or punitive relief from any or all Released Parties
of any kind whatsoever in respect of any Claim, including, without limitation, reinstatement, back pay, front pay, and any
form of injunctive relief. Notwithstanding the above, I further acknowledge that I am not waiving and am not being
required to waive any right that cannot be waived under law, including the right to file an administrative charge or
participate in an administrative investigation or proceeding; provided, however, that I disclaim and waive any right to
share or participate in any monetary award resulting from the prosecution of such charge or investigation or proceeding.
Additionally, I am not waiving (i) any right to the Accrued Benefits or any severance benefits to which I am entitled under
the Agreement, (ii) any claim relating to directors’ and officers’ liability insurance coverage or any right of
indemnification under the Company’s organizational documents or otherwise, or (iii) my rights as an equity or security
holder in the Company or its affiliates.
In signing this General Release, I acknowledge and intend that it shall be effective as a bar to each and every one of the
Claims hereinabove mentioned or implied. I expressly consent that this General Release shall be given full force and
effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected
Claims (notwithstanding any state or local statute that expressly limits the effectiveness of a general release of unknown,
unsuspected and unanticipated Claims), if any, as well as those relating to any other Claims hereinabove mentioned or
implied. I acknowledge and agree that this waiver is an essential and material term of this General Release and that
without such waiver the Company would not have agreed to the terms of the Agreement. I further agree that in the event I
should bring a Claim seeking damages against the Company, or in the event I should seek to recover against the Company
in any Claim brought by a governmental agency on my behalf, this General Release shall serve as a complete defense to
such Claims to the maximum extent permitted by law. I further
Exhibit A - 2
agree that I am not aware of any pending claim of the type described in paragraph 2 above as of the execution of this
General Release.
I agree that neither this General Release, nor the furnishing of the consideration for this General Release, shall be deemed
or construed at any time to be an admission by the Company, any Released Party or myself of any improper or unlawful
conduct.
I agree that if I violate this General Release by suing the Company or the other Released Parties, I will pay all costs and
expenses of defending against the suit incurred by the Released Parties, including reasonable attorneys’ fees.
Any nondisclosure provision in this General Release does not prohibit or restrict me (or my attorney) from responding to
any inquiry about this General Release or its underlying facts and circumstances by the Securities and Exchange
Commission (SEC), the Financial Industry Regulatory Authority (FINRA), any other self regulatory organization or any
governmental entity.
I hereby acknowledge that Exhibit B of the Agreement shall survive as applicable therein my execution of this General
Release.
I represent that I am not aware of any claim by me other than the claims that are released by this General Release. I
acknowledge that I may hereafter discover claims or facts in addition to or different than those which I now know or
believe to exist with respect to the subject matter of the release set forth in paragraph 2 above and which, if known or
suspected at the time of entering into this General Release, may have materially affected this General Release and my
decision to enter into it.
Notwithstanding anything in this General Release to the contrary, this General Release shall not relinquish, diminish, or in
any way affect any rights or claims arising out of any breach by the Company or by any Released Party of the Agreement
after the date hereof.
8.
9.
10.
11.
12.
13.
14. Whenever possible, each provision of this General Release shall be interpreted in, such manner as to be effective and
valid under applicable law, but if any provision of this General Release is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not
affect any other provision or any other jurisdiction, but this General Release shall be reformed, construed and enforced in
such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.
BY SIGNING THIS GENERAL RELEASE, I REPRESENT AND AGREE THAT:
1.
2.
I HAVE READ IT CAREFULLY;
I UNDERSTAND ALL OF ITS TERMS AND KNOW THAT I AM GIVING UP IMPORTANT RIGHTS,
INCLUDING BUT NOT LIMITED TO, RIGHTS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT
ACT OF 1967, AS AMENDED, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, AS AMENDED; THE
EQUAL PAY ACT OF 1963, THE AMERICANS WITH DISABILITIES ACT OF 1990; AND THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED;
3.
I VOLUNTARILY CONSENT TO EVERYTHING IN IT;
Exhibit A - 3
4.
5.
6.
7.
8.
I HAVE BEEN ADVISED TO CONSULT WITH AN ATTORNEY BEFORE EXECUTING IT AND I HAVE
DONE SO OR, AFTER CAREFUL READING AND CONSIDERATION, I HAVE CHOSEN NOT TO DO SO
OF MY OWN VOLITION;
I HAVE HAD AT LEAST 21 DAYS FROM THE DATE OF MY RECEIPT OF THIS RELEASE TO CONSIDER
IT, AND THE CHANGES MADE SINCE MY RECEIPT OF THIS RELEASE ARE NOT MATERIAL OR
WERE MADE AT MY REQUEST AND WILL NOT RESTART THE REQUIRED 21-DAY PERIOD;-
I UNDERSTAND THAT I HAVE SEVEN (7) DAYS AFTER THE EXECUTION OF THIS RELEASE TO
REVOKE IT AND THAT THIS RELEASE SHALL NOT BECOME EFFECTIVE OR ENFORCEABLE UNTIL
THE REVOCATION PERIOD HAS EXPIRED;
I HAVE SIGNED THIS GENERAL RELEASE KNOWINGLY AND VOLUNTARILY AND WITH THE
ADVICE OF ANY COUNSEL RETAINED TO ADVISE ME WITH RESPECT TO IT; AND
I AGREE THAT THE PROVISIONS OF THIS GENERAL RELEASE MAY NOT BE AMENDED, WAIVED,
CHANGED OR MODIFIED EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY AN AUTHORIZED
REPRESENTATIVE OF THE COMPANY AND BY ME.
SIGNED:__________________________ DATED:_________________
Exhibit A - 4
Employee Proprietary Information and Invention Assignment Agreement
Exhibit B
(attached)
Exhibit B - 1
List of Subsidiaries of the Registrant
Subsidiary
AppFolio Investment Management, Inc.
Dynasty Marketplace, Inc.
AppFolio Insurance Services, Inc.
RentLinx LLC
Terra Mar Insurance Company, Inc.
Exhibit 21.1
Jurisdiction
California
Delaware
California
Michigan
Hawaii
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-263096, No. 333-236818, No.
333-229970, No. 333-223231, No. 333-216274, No. 333-209792, and No. 333-206179) of AppFolio, Inc. of our report dated February 9, 2023
relating to the financial statements and the effectiveness of internal control over financial reporting which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 9, 2023
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 Rules13a-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; and
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 9, 2023
/s/ Jason Randall
Jason Randall
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Fay Sien Goon, 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 Rules13a-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; and
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 9, 2023
/s/ Fay Sien Goon
Fay Sien Goon
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, 2022, 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 9, 2023
By:
/s/ Jason Randall
Jason Randall
President and Chief Executive Officer
I, Fay Sien Goon, 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 9, 2023
By:
/s/ Fay Sien Goon
Fay Sien Goon
Chief Financial Officer