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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2021.

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

For the transition period from ________ to ________.

Commission File Number 001-37468

AppFolio, Inc.

(Exact name of registrant as specified in its charter)

Delaware

26-0359894

(State of incorporation or organization)

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

50 Castilian Drive

93117

Santa Barbara,

California

(Address of principal executive offices)

(Zip Code)

(805) 364-6093

(Registrant’s telephone number, including area code)

N/A

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

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


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

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

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

As of August 2, 2021, the number of shares of the registrant’s Class A common stock outstanding was 18,991,205 and the number of shares of the registrant’s Class B common stock outstanding was 15,620,784.

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TABLE OF CONTENTS


Section						Page No.
Cautionary Note Regarding Forward-Looking Statements						1
Part I. Financial Information						2
Item 1. Condensed Consolidated Financial Statements (Unaudited)						2
Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020						3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020						4
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2021 and 2020						5
Condensed Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended June 30, 2021 and 2020						6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020						8
Notes to Condensed Consolidated Unaudited Financial Statements						10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						22
Item 3. Qualitative and Quantitative Disclosure about Market Risk						33
Item 4. Controls and Procedures						33
Part II. Other Information						35
Item 1. Legal Proceedings						35
Item 1A. Risk Factors						35
Item 6. Exhibits						49
Signatures

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2021 (this "Quarterly Report"), includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that are not statements of historical facts and can be identified by words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts," “projects,” “seeks,” “should,” “will,” “would” or similar expressions and the negatives of those expressions. Forward-looking statements also include the assumptions underlying or relating to such statements. In particular, forward-looking statements contained in this Quarterly Report relate to, among other things:

▪our future or assumed financial condition, results of operations and liquidity;

▪business forecasts and plans;

▪trends affecting our business and industry, and the economy as a whole;

▪capital needs and financing plans;

▪capital resource allocation plans;

▪share repurchase plans;

▪research and product development plans;

▪future products and Value+ services;

▪growth in the size of our business and number of customers;

▪strategic plans and objectives;

▪the impact of acquisitions, investments and divestitures;

▪performance-based compensation, whether cash- or equity-based;

▪changes in the competitive environment;

▪commitments and contingencies, including with respect to the outcome of legal proceedings or regulatory matters;

▪the application of accounting guidance, including the impact from adoption of recent accounting pronouncements; and

▪the impacts of, and our response to, the novel coronavirus ("COVID-19") pandemic.

The foregoing list may not include all of the forward-looking statements made in this Quarterly Report.

Our forward-looking statements are based on our management’s current beliefs, assumptions and expectations about future events and trends, which affect or may affect our business, strategy, operations, financial performance or liquidity. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to numerous known and unknown risks and uncertainties and are made in light of information currently available to us. Our actual financial condition and results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including those discussed in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (our "Annual Report"), as well as in the other reports we file with the Securities and Exchange Commission (the "SEC"). You should read this Quarterly Report, and the other documents we file with the SEC, with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements.

Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time to time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual future results to be materially different from those expressed or implied by any forward-looking statements.

Forward-looking statements speak only as of the date they were made, and, except to the extent required by law or the rules of the NASDAQ Global Market, we undertake no obligation to update or review any forward-looking statement because of new information, future events or other factors.

We qualify all of our forward-looking statements by these cautionary statements.

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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APPFOLIO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except par values)


	June 30, 2021		December 31, 2020
Assets
Current assets
Cash and cash equivalents	$	48,610	$	140,263
Investment securities—current	102,978		28,256
Accounts receivable, net	14,973		10,057
Prepaid expenses and other current assets	23,306		20,777
Total current assets	189,867		199,353
Investment securities—noncurrent	11,541		6,770
Property and equipment, net	27,324		26,439
Operating lease right-of-use assets	40,983		30,561
Capitalized software development costs, net	39,225		35,459
Goodwill	56,147		56,147
Intangible assets, net	14,017		16,357
Deferred income taxes—noncurrent	12,774		12,181
Other long-term assets	7,194		6,213
Total assets	$	399,072	$	389,480
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	2,411	$	1,040
Accrued employee expenses—current	27,504		18,888
Accrued expenses	11,403		14,069
Deferred revenue	3,205		2,262
Income tax payable	66		9,095
Other current liabilities	4,196		4,451

Total current liabilities	48,785		49,805

Accrued employee expenses—noncurrent	968		—
Operating lease liabilities	53,936		40,146


Deferred income taxes—noncurrent	8,116		13,609
Total liabilities	111,805		103,560
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.0001 par value, 25,000 shares authorized and no shares issued and outstanding as of June 30, 2021 and December 31, 2020	—		—
Class A common stock, $0.0001 par value, 250,000 shares authorized as of June 30, 2021 and December 31, 2020; 19,408 and 19,148 shares issued as of June 30, 2021 and December 31, 2020, respectively; 18,989 and 18,729 shares outstanding as of June 30, 2021 and December 31, 2020, respectively	2		2
Class B common stock, $0.0001 par value, 50,000 shares authorized as of June 30, 2021 and December 31, 2020; 15,621 and 15,659 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively	2		2
Additional paid-in capital	160,160		161,247
Accumulated other comprehensive (loss) income	(10)		56
Treasury stock, at cost, 419 shares of Class A common stock as of June 30, 2021 and December 31, 2020	(25,756)		(25,756)
Retained earnings	152,869		150,369
Total stockholders’ equity	287,267		285,920
Total liabilities and stockholders’ equity	$	399,072	$	389,480

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

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APPFOLIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Revenue	$	89,040	$	81,043	$	167,961	$	153,538
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)	32,819		27,411		66,117		56,372
Sales and marketing	17,714		13,717		33,893		28,223
Research and product development	15,506		12,128		29,889		23,340
General and administrative	14,206		14,785		27,567		23,357
Depreciation and amortization	7,649		6,657		15,018		13,071
Total costs and operating expenses	87,894		74,698		172,484		144,363
Income (loss) from operations	1,146		6,345		(4,523)		9,175
Other income (loss), net	496		(10)		1,058		12
Interest income (expense), net	55		(562)		108		(1,056)
Income (loss) before benefit from income taxes	1,697		5,773		(3,357)		8,131
Benefit from income taxes	(324)		(13,484)		(5,857)		(13,109)
Net income	$	2,021	$	19,257	$	2,500	$	21,240

Net income per common share:
Basic	$	0.06	$	0.56	$	0.07	$	0.62
Diluted	$	0.06	$	0.54	$	0.07	$	0.60
Weighted average common shares outstanding:
Basic	34,548		34,254		34,479		34,214
Diluted	35,674		35,614		35,697		35,647

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

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APPFOLIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Net income	$	2,021	$	19,257	$	2,500	$	21,240
Other comprehensive income:
Changes in unrealized (losses) gains on investment securities	(48)		(34)		(66)		98
Comprehensive income	$	1,973	$	19,223	$	2,434	$	21,338

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

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APPFOLIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)

(in thousands)


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

Other comprehensive loss	—	—		—	—		—		(18)		—		—		(18)
Net income	—	—		—	—		—		—		—		479		479
Balance at March 31, 2021	18,902	$	2	15,551	$	2	$	160,650	$	38	$	(25,756)	$	150,848	$	285,784
Exercise of stock options	13	—		84	—		545		—		—		—		545
Stock-based compensation	—	—		—	—		3,873		—		—		—		3,873
Vesting of restricted stock units, net of shares withheld for taxes	56	—		—	—		(4,908)		—		—		—		(4,908)
Conversion of Class B stock to Class A stock	14	—		(14)	—		—		—		—		—		—
Issuance of restricted stock awards	4	—		—	—		—		—		—		—		—
Other comprehensive loss	—	—		—	—		—		(48)		—		—		(48)
Net income	—	—		—	—		—		—		—		2,021		2,021
Balance at June 30, 2021	18,989	$	2	15,621	$	2	$	160,160	$	(10)	$	(25,756)	$	152,869	$	287,267

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APPFOLIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)

(in thousands)


									Accumulated				(Accumulated
							Additional		Other				Deficit)/
	Common Stock			Common Stock			Paid-in		Comprehensive		Treasury		Retained
	Class A			Class B			Capital		Income		Stock		Earnings		Total
	Shares	Amount		Shares	Amount
Balance at December 31, 2019	16,552	$	2	17,594	$	2	$	161,509	$	33	$	(21,562)	$	(8,034)	$	131,950
Exercise of stock options	17	—		—	—		97		—		—		—		97
Stock-based compensation	—	—		—	—		1,365		—		—		—		1,365
Vesting of restricted stock units, net of shares withheld for taxes	91	—		—	—		(6,458)		—		—		—		(6,458)
Conversion of Class B stock to Class A stock	58	—		(58)	—		—		—		—		—		—

Other comprehensive income	—	—		—	—		—		132		—		—		132
Repurchase of common stock	(48)	—		—	—		—		—		(4,194)		—		(4,194)
Net income	—	—		—	—		—		—		—		1,983		1,983
Balance as of March 31, 2020	16,670	$	2	17,536	$	2	$	156,513	$	165	$	(25,756)	$	(6,051)	$	124,875
Exercise of stock options	32	—		—	—		232		—		—		—		232
Stock-based compensation	—	—		—	—		3,406		—		—		—		3,406
Vesting of restricted stock units, net of shares withheld for taxes	50	—		—	—		(3,232)		—		—		—		(3,232)
Conversion of Class B stock to Class A stock	197	—		(197)	—		—		—		—		—		—
Issuance of restricted stock awards	3	—		—	—		—		—		—		—		—
Other comprehensive loss	—	—		—	—		—		(34)		—		—		(34)
Net income	—	—		—	—		—		—		—		19,257		19,257
Balance as of June 30, 2020	16,952	$	2	17,339	$	2	$	156,919	$	131	$	(25,756)	$	13,206	$	144,504

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

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

	Six Months Ended June 30,
	2021		2020
Cash from operating activities
Net income	$	2,500	$	21,240
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	15,018		13,071
Amortization of operating lease right-of-use assets	1,399		2,071
Deferred income taxes	(6,086)		(13,137)
Stock-based compensation	5,990		3,712
Other	(579)		(30)

Changes in operating assets and liabilities:
Accounts receivable	(4,007)		(5,136)
Prepaid expenses and other current assets	(2,171)		(292)
Other assets	(982)		(107)
Accounts payable	1,301		193
Accrued employee expenses—current	7,638		717
Accrued expenses	(3,047)		4,534
Deferred revenue	33		532
Income tax payable	(9,029)		—
Other current liabilities	30		100
Accrued employee expenses—noncurrent	968		—
Operating lease liabilities	1,685		(92)
Net cash provided by operating activities	10,661		27,376
Cash from investing activities
Purchases of available-for-sale investments	(148,293)		(13,389)
Proceeds from sales of available-for-sale investments	42,198		13,942
Proceeds from maturities of available-for-sale investments	26,750		7,750
Purchases of property, equipment and intangible assets	(2,804)		(14,306)
Capitalization of software development costs	(11,911)		(12,709)



Net cash used in investing activities	(94,060)		(18,712)
Cash from financing activities
Proceeds from stock option exercises	646		329


Tax withholding for net share settlement	(8,900)		(9,690)

Payment of contingent consideration	—		(5,977)
Proceeds from issuance of debt	—		50,190
Principal payments on debt	—		(1,818)

Purchase of treasury stock	—		(4,194)
Net cash (used in) provided by financing activities	(8,254)		28,840
Net (decrease) increase in cash, cash equivalents and restricted cash	(91,653)		37,504
Cash, cash equivalents and restricted cash
Beginning of period	140,699		16,247
End of period	$	49,046	$	53,751







Noncash investing and financing activities
Purchases of property and equipment included in accounts payable and accrued expenses	$	822	$	2,678
Capitalization of software development costs included in accrued expenses and accrued employee expenses	1,361		1,281
Stock-based compensation capitalized for software development	1,178		1,059

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


	June 30,
	2021		2020
Cash and cash equivalents	$	48,610	$	53,315
Restricted cash included in other assets	436		436
Total cash, cash equivalents and restricted cash	$	49,046	$	53,751

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

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APPFOLIO, INC.

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

1. Nature of Business

AppFolio, Inc. (the "Company," "we," "us" or "our") provides innovative software, services and data analytics to the real estate industry. Our cloud-based solutions are used primarily by property managers, but also by numerous other constituencies in the property management business ecosystem. These other constituencies include property owners, rental prospects, tenants and service providers, whom we refer to collectively as "users". Although specific functionality varies by product, our core solutions are designed to enable our customers to digitally transform their businesses, address critical business operations and enable exceptional customer service. In addition to our core solutions, we offer an array of optional, but often business-critical, Value+ services that are designed to enhance, automate and streamline processes and workflows that are essential to our customers' businesses. Our Value+ services are generally available on an as-needed basis and enable our customers to adapt our offerings to their specific operational requirements.

Our solutions and services are designed to be a system of record to automate essential business processes, a system of engagement to enhance business interactions between our customers and users and a system of intelligence to leverage data to predict and optimize business workflows in order to enable exceptional customer experiences and increase efficiency across our customers' businesses. Our mobile-optimized software solutions are designed for use across multiple devices and operating systems. Our software solutions are offered as a service, are hosted using a modern cloud-based architecture, and in part, use artificial intelligence technologies. This architecture leads to rich data sets that have a consistent schema across our customer and user base and enables us to deploy data-powered products and services for our customers and users.

During the six months ended June 30, 2020, we also provided software solutions and services to the legal industry via MyCase, a software solution primarily designed for small and mid-sized law firms. As previously disclosed, we completed our divestiture of MyCase, Inc. on September 30, 2020. For additional details, see Note 3, Divestitures.

2. Summary of Significant Accounting Policies

Basis of Presentation and Significant Accounting Policies

The accompanying unaudited Condensed Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these Condensed Consolidated Financial Statements should be read in conjunction with our audited consolidated financial statements and the related notes included in our Annual Report, which was filed with the SEC on March 1, 2021. The year-end condensed balance sheet was derived from our audited consolidated financial statements. Our unaudited interim Condensed Consolidated Financial Statements include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of our Condensed Consolidated Financial Statements. The operating results for the six months ended June 30, 2021 are not necessarily indicative of the results expected for the full year ending December 31, 2021.

Reclassifications

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

Changes in Accounting Policies

Except as described below under Recently Adopted Accounting Pronouncements, there have been no significant changes in our accounting policies from those disclosed in our annual consolidated financial statements and the related notes included in our Annual Report.

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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 assets and liabilities assumed in business combinations, fair value of financial instruments, capitalized software 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 valuation and assumptions underlying stock-based compensation and other equity instruments.

In light of the unknown duration and severity of COVID-19, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of June 30, 2021 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for credit losses, the carrying value of goodwill and other long-lived assets, performance-based compensation and income taxes.

As of the date of our Condensed Consolidated Financial Statements, we are not aware of any specific event or circumstance that would require us to update our estimates or judgments or to revise the carrying value of our assets or liabilities. However, these estimates and judgments may change as new events occur and additional information is obtained, which may result in changes being recognized in our consolidated financial statements in future periods. While we considered the effects of COVID-19 in our estimates and assumptions, due to the level of uncertainty regarding the economic and operational impacts of COVID-19 on our business, there may be other judgments and assumptions that we have not considered. Such judgments and assumptions could result in a meaningful impact on our financial statements in future periods. Actual results could differ from those estimates and any such differences may have a material impact on our Condensed Consolidated Financial Statements.

Net Income per Common Share

Net 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 income per common share (in thousands):


	Three Months Ended June 30,		Six Months Ended June 30,
	2021	2020	2021	2020
Weighted average common shares outstanding	34,553	34,259	34,484	34,219
Less: Weighted average unvested restricted shares subject to repurchase	5	5	5	5
Weighted average common shares outstanding; basic	34,548	34,254	34,479	34,214






Plus: Weighted average options, restricted stock units and restricted shares used to compute diluted net income per common share	1,126	1,360	1,218	1,433
Weighted average common shares outstanding; diluted	35,674	35,614	35,697	35,647

For the three and six months ended June 30, 2021 and 2020, an aggregate of 120,000 and 146,000 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 the satisfaction of predefined performance measures and their performance measures have not been met.

Restricted stock units ("RSUs") with an anti-dilutive effect were excluded from the calculation of weighted average number of shares used to compute diluted net income per common share and they were not material for the three and six months ended June 30, 2021 and 2020.

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Recent Accounting Pronouncements Adopted in 2020

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which amends the current accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions and reasonable and supportable forecasts. This guidance amends the accounting for credit losses for available-for-sale investment securities and purchased financial assets with credit deterioration. We adopted ASU 2016-13 on January 1, 2020. The adoption of this guidance did not have a material impact on our financial condition, results of operations, cash flows or disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"), a series of amendments which align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. We adopted ASU 2018-15 on January 1, 2020. The adoption of this guidance did not have a material impact on our financial condition, results of operations, cash flows or disclosures.

Recent Accounting Pronouncements Adopted in 2021

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). This amendment was issued to simplify the accounting for income taxes by removing certain exceptions for recognizing deferred taxes, performing intraperiod allocation, and calculating income taxes in interim periods. Further, ASU 2019-12 adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax basis goodwill and allocating taxes to members of a consolidated group. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. We adopted ASU 2019-12 on January 1, 2021. The adoption of this guidance did not have a material impact on our financial condition, results of operations, cash flows or disclosures.

3. Divestitures

Divestiture of MyCase

On September 30, 2020, we completed our divestiture of 100% of our issued and outstanding equity interests 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 is refundable to the Company to the extent that MyCase employees are terminated prior to the retention period, which is 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 (loss), net in our Condensed Consolidated Statements of Operations during the three months ended September 30, 2020. Income received during the three and six months ended June 30, 2021 in relation to the transition services provided by us to MyCase was $0.3 million and $0.7 million, and is included within Other income (loss), net in our Condensed Consolidated Statements of Operations.

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4. Investment Securities and Fair Value Measurements

Investment Securities

Investment securities classified as available-for-sale consisted of the following as of June 30, 2021 and December 31, 2020 (in thousands):


	June 30, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Corporate bonds	$	49,442	$	4	$	(7)	$	49,439
Agency securities	11,842		13		(7)		11,848

Treasury securities	53,225		18		(11)		53,232
Total available-for-sale investment securities	$	114,509	$	35	$	(25)	$	114,519


	December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Agency securities	$	17,104	$	29	$	(1)	$	17,132


Treasury securities	17,847		47		—		17,894
Total available-for-sale investment securities	$	34,951	$	76	$	(1)	$	35,026

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 June 30, 2021 or December 31, 2020.

As of June 30, 2021 and December 31, 2020, the contractual maturities of our investments did not exceed 36 months. The fair values of available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands):


	June 30, 2021				December 31, 2020
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	102,950	$	102,978	$	28,197	$	28,256
Due after one year through three years	11,559		11,541		6,754		6,770
Total available-for-sale investment securities	$	114,509	$	114,519	$	34,951	$	35,026

During the six months ended June 30, 2021 and 2020, we had sales and maturities (which include calls) of investment securities, as follows (in thousands):


	Six Months Ended June 30, 2021
	Gross Realized Gains		Gross Realized Losses		Gross Proceeds from Sales		Gross Proceeds from Maturities

Agency securities	$	—	$	—	$	—	$	5,250

Treasury securities	6		—		42,198		21,500
Total	$	6	$	—	$	42,198	$	26,750

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	Six Months Ended June 30, 2020
	Gross Realized Gains		Gross Realized Losses		Gross Proceeds from Sales		Gross Proceeds from Maturities
Corporate bonds	$	5	$	—	$	4,006	$	4,000
Agency securities	24		—		7,878		1,250

Treasury securities	4		—		2,058		2,500
Total	$	33	$	—	$	13,942	$	7,750

Interest income, net of the amortization and accretion of the premium and discount, was $0.1 million for the three months ended June 30, 2021 and 2020, and $0.1 million for the six months ended June 30, 2021 and $0.2 million for the six months ended June 30, 2020.

Fair Value Measurements

Recurring Fair Value Measurements

Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following tables summarize our financial assets measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020 by level within the fair value hierarchy (in thousands):


	June 30, 2021
	Level 1		Level 2		Level 3		Total Fair Value
Cash equivalents:
Money market funds	$	5,030	$	—	$	—	$	5,030
Treasury securities	9,500		—		—		9,500
Commercial paper	—		3,000		—		3,000
Available-for-sale investment securities:
Corporate bonds	—		49,439		—		49,439
Agency securities	—		11,848		—		11,848

Treasury securities	53,232		—		—		53,232
Total	$	67,762	$	64,287	$	—	$	132,049


	December 31, 2020
	Level 1		Level 2		Level 3		Total Fair Value
Cash equivalents:
Money market funds	$	4,749	$	—	$	—	$	4,749
Treasury securities	97,433		—		—		97,433
Available-for-sale investment securities:

Agency securities	—		17,132		—		17,132

Treasury securities	17,894		—		—		17,894
Total	$	120,076	$	17,132	$	—	$	137,208

The carrying amounts of restricted cash, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short maturity of these items.

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There were no changes to our valuation techniques used to measure financial asset and financial liability fair values on a recurring basis during the six months ended June 30, 2021. The valuation techniques for the financial assets in the tables above are as follows:

Cash Equivalents

As of June 30, 2021 and December 31, 2020, cash equivalents include cash invested in money market funds, commercial paper, 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.

Non-Recurring Fair Value Measurements

Certain assets, including goodwill, intangible assets and our note receivable with SecureDocs, Inc., are also subject to measurement at fair value on a non-recurring basis using Level 3 measurement, but only when they are deemed to be impaired. For the six months ended June 30, 2021 and 2020, no impairments were identified on those assets required to be measured at fair value on a non-recurring basis.

5. Capitalized Software Development Costs, net

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


	June 30, 2021		December 31, 2020
Capitalized software development costs, gross	$	111,042	$	96,974
Less: Accumulated amortization	(71,817)		(61,515)
Capitalized software development costs, net	$	39,225	$	35,459

Capitalized software development costs were $7.0 million and $7.1 million for the three months ended June 30, 2021 and 2020, respectively, and $14.1 million and $13.8 million for the six months ended June 30, 2021 and 2020, respectively. Amortization expense with respect to capitalized software development costs totaled $5.3 million and $4.5 million for the three months ended June 30, 2021 and 2020, respectively, and $10.3 million and $8.7 million for the six months ended June 30, 2021 and 2020, respectively.

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


Years Ending December 31,
2021	$	10,545
2022	17,432
2023	9,357
2024	1,891
Total amortization expense	$	39,225

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6. Intangible Assets, net

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

June 30, 2021

Gross Carrying
Value

Accumulated
Amortization

Net Carrying
Value

Weighted Average Useful Life in Years

Customer relationships

2,840