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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, 2023.

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

For the transition period from ________ to ________.

Commission File Number 001-37468

AppFolio, Inc.

(Exact name of registrant as specified in its charter)

Delaware

26-0359894

(State of incorporation or organization)

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

70 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 July 20, 2023, the number of shares of the registrant’s Class A common stock outstanding was 20,925,280 and the number of shares of the registrant’s Class B common stock outstanding was 14,719,225.

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TABLE OF CONTENTS


						Page No.
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 , 2023 and December 31, 2022						3
Condensed Consolidated Statements of Operations for the Three a nd Si x Months Ended June 30 , 2023 and 2022						4
Condensed Consolidated Statements of Comprehensive Loss for the Three an d Six Months Ended June 30 , 2023 and 2022						5
Condensed Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended June 30 , 2023 and 2022						6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30 , 2023 and 2022						8
Notes to Condensed Consolidated Unaudited Financial Statements						9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						18
Item 3. Qualitative and Quantitative Disclosure about Market Risk						25
Item 4. Controls and Procedures						25
Part II. Other Information						26
Item 1. Legal Proceedings						26
Item 1A. Risk Factors						26
Item 5. Other Information						26
Item 6. Exhibits						27
Signatures

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023 (this "Quarterly Report"), contains forward-looking statements within the meaning of federal securities laws, which statements involve substantial risks and uncertainties. The forward-looking statements made in this Quarterly Report are based primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects and relate only to events as of the date on which the statements are made. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “might,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report and "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (our "Annual Report"), as well as in the other reports we file with the Securities and Exchange Commission (the "SEC"). You should read this Quarterly Report, and the other documents we file with the SEC, with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. As such, you should not rely upon forward-looking statements as predictions of future events. Examples of forward-looking statements include, among others, statements made regarding changes in the competitive environment, responding to customer needs, research and product development plans, future products and services, growth in the size of our business and number of customers, strategic plans and objectives, business forecasts and plans, our future or assumed financial condition, results of operations and liquidity, trends affecting our business and industry, capital needs and financing plans, capital resource allocation plans, share repurchase plans, and commitments and contingencies, including with respect to the outcome of legal proceedings or regulatory matters. Any forward-looking statement made by us in this Quarterly Report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law.

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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)


	June 30, 2023		December 31, 2022
Assets
Current assets
Cash and cash equivalents	$	24,698	$	70,769
Investment securities—current	139,273		89,297
Accounts receivable, net	20,033		16,503
Prepaid expenses and other current assets	25,478		24,899
Total current assets	209,482		201,468
Investment securities—noncurrent	—		25,161
Property and equipment, net	26,635		26,110
Operating lease right-of-use assets	20,308		23,485
Capitalized software development costs, net	26,857		35,315
Goodwill	56,060		56,060
Intangible assets, net	3,593		4,833

Other long-term assets	8,424		8,785
Total assets	$	351,359	$	381,217
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	1,532	$	2,473
Accrued employee expenses	31,447		34,376
Accrued expenses	18,560		15,601

Income tax payable	13,485		—
Other current liabilities	9,687		8,893

Total current liabilities	74,711		61,343


Operating lease liabilities	39,554		50,237



Other liabilities	11,141		4,091
Total liabilities	125,406		115,671
Commitments and contingencies (Note 8)
Stockholders’ equity:

Class A common stock	2		2
Class B common stock	2		2
Additional paid-in capital	223,025		209,704
Accumulated other comprehensive loss	(587)		(1,684)
Treasury stock	(25,756)		(25,756)
Retained earnings	29,267		83,278
Total stockholders’ equity	225,953		265,546
Total liabilities and stockholders’ equity	$	351,359	$	381,217

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,
	2023		2022		2023		2022
Revenue	$	147,075	$	117,450	$	283,175	$	222,746
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)(1)	57,854		47,430		114,062		90,777
Sales and marketing(1)	27,002		26,995		56,400		51,914
Research and product development(1)	37,263		26,687		74,925		51,007
General and administrative(1)	18,819		37,947		50,510		56,911
Depreciation and amortization	6,816		8,321		14,487		16,736
Total costs and operating expenses	147,754		147,380		310,384		267,345
Loss from operations	(679)		(29,930)		(27,209)		(44,599)
Other (loss) income, net	(54)		45		(34)		35
Interest income, net	1,478		151		2,839		258
Income (loss) before provision for income taxes	745		(29,734)		(24,404)		(44,306)
Provision for (benefit from) income taxes	19,646		236		29,607		(49)
Net loss	$	(18,901)	$	(29,970)	$	(54,011)	$	(44,257)


Net loss per common share, basic and diluted	$	(0.53)	$	(0.86)	$	(1.52)	$	(1.27)


Weighted average common shares outstanding, basic and diluted	35,565		34,927		35,505		34,881

(1) Includes stock-based compensation expense as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Stock-based compensation expense included in costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)	$	988	$	726	$	1,756	$	1,084
Sales and marketing	444		2,013		2,861		3,473
Research and product development	4,348		4,024		9,787		6,830
General and administrative	4,992		3,198		10,271		5,992
Total stock-based compensation expense	$	10,772	$	9,961	$	24,675	$	17,379

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 LOSS

(UNAUDITED)

(in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net loss	$	(18,901)	$	(29,970)	$	(54,011)	$	(44,257)
Other comprehensive income (loss):
Changes in unrealized gains (losses) on investment securities	334		(400)		1,097		(1,745)
Comprehensive loss	$	(18,567)	$	(30,370)	$	(52,914)	$	(46,002)

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		Loss		Stock		Earnings		Total
	Shares	Amount		Shares	Amount
Balance at December 31, 2022	20,569	$	2	14,746	$	2	$	209,704	$	(1,684)	$	(25,756)	$	83,278	$	265,546
Exercise of stock options	64	—		—	—		834		—		—		—		834
Stock based compensation	—	—		—	—		14,075		—		—		—		14,075
Vesting of restricted stock units, net of shares withheld for taxes	79	—		—	—		(5,539)		—		—		—		(5,539)
Conversion of Class B common stock to Class A common stock	27	—		(27)	—		—		—		—		—		—
Issuance of restricted stock awards	2	—		—	—		—		—		—		—		—
Other comprehensive income	—	—		—	—		—		763		—		—		763

Net loss	—	—		—	—		—		—		—		(35,110)		(35,110)
Balance at March 31, 2023	20,741	$	2	14,719	$	2	$	219,074	$	(921)	$	(25,756)	$	48,168	$	240,569
Exercise of stock options	95	—		—	—		668		—		—		—		668
Stock based compensation	—	—		—	—		11,000		—		—		—		11,000
Vesting of restricted stock units, net of shares withheld for taxes	82	—		—	—		(7,717)		—		—		—		(7,717)

Issuance of restricted stock awards	4	—		—	—		—		—		—		—		—
Other comprehensive income	—	—		—	—		—		334		—		—		334
Net loss	—	—		—	—		—		—		—		(18,901)		(18,901)
Balance at June 30, 2023	20,922	$	2	14,719	$	2	$	223,025	$	(587)	$	(25,756)	$	29,267	$	225,953

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									Accumulated
							Additional		Other
	Common Stock			Common Stock			Paid-in		Comprehensive		Treasury		Retained
	Class A			Class B			Capital		Loss		Stock		Earnings		Total
	Shares	Amount		Shares	Amount
Balance at December 31, 2021	19,417	$	2	15,408	$	2	$	171,930	$	(194)	$	(25,756)	$	151,397	$	297,381
Exercise of stock options	17	—		—	—		100		—		—		—		100
Stock-based compensation	—	—		—	—		7,967		—		—		—		7,967
Vesting of restricted stock units, net of shares withheld for taxes	17	—		—	—		(1,073)		—		—		—		(1,073)
Conversion of Class B common stock to Class A common stock	572	—		(572)	—		—		—		—		—		—

Other comprehensive loss	—	—		—	—		—		(1,345)		—		—		(1,345)
Net loss	—	—		—	—		—		—		—		(14,287)		(14,287)
Balance at March 31, 2022	20,023	$	2	14,836	$	2	$	178,924	$	(1,539)	$	(25,756)	$	137,110	$	288,743
Exercise of stock options	41	—		27	—		503		—		—		—		503
Stock-based compensation	—	—		—	—		10,639		—		—		—		10,639
Vesting of restricted stock units, net of shares withheld for taxes	66	—		—	—		(4,524)		—		—		—		(4,524)
Conversion of Class B stock to Class A stock	37	—		(37)	—		—		—		—		—		—
Issuance of restricted stock awards	6	—		—	—		—		—		—		—		—
Other comprehensive loss	—	—		—	—		—		(400)		—		—		(400)
Net income	—	—		—	—		—		—		—		(29,970)		(29,970)
Balance at June 30, 2022	20,173	$	2	14,826	$	2	$	185,542	$	(1,939)	$	(25,756)	$	107,140	$	264,991

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,
	2023		2022
Cash from operating activities
Net loss	$	(54,011)	$	(44,257)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	13,135		15,637
Amortization of operating lease right-of-use assets	1,109		1,809
Impairment, net	—		19,792
Gain on lease modification	(4,281)		—
Deferred income taxes	9		(1,550)
Stock-based compensation, including as amortized	26,027		18,478

Other	(717)		6

Changes in operating assets and liabilities:
Accounts receivable	(3,530)		(2,924)
Prepaid expenses and other current assets	(2,429)		(2,652)
Other assets	363		(1,308)
Accounts payable	(989)		17
Accrued employee expenses	(2,719)		(3,217)
Accrued expenses	2,170		3,182

Taxes payable	25,152		52


Operating lease liabilities	(4,638)		(1,311)
Other liabilities	(2,308)		1,527
Net cash (used in) provided by operating activities	(7,657)		3,281
Cash from investing activities
Purchases of available-for-sale investments	(73,597)		(44,900)
Proceeds from sales of available-for-sale investments	1,013		—
Proceeds from maturities of available-for-sale investments	49,617		43,498
Purchases of property and equipment	(2,171)		(5,099)
Capitalization of software development costs	(2,151)		(7,193)
Proceeds from sale of equity-method investment	629		—


Net cash used in investing activities	(26,660)		(13,694)
Cash from financing activities
Proceeds from stock option exercises	1,502		603


Tax withholding for net share settlement	(13,256)		(5,597)






Net cash used in financing activities	(11,754)		(4,994)
Net decrease in cash, cash equivalents and restricted cash	(46,071)		(15,407)
Cash, cash equivalents and restricted cash
Beginning of period	71,019		58,283
End of period	$	24,948	$	42,876

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,
	2023		2022
Cash and cash equivalents	$	24,698	$	42,626
Restricted cash included in other assets	250		250
Total cash, cash equivalents and restricted cash	$	24,948	$	42,876

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. ("we," "us" or "our") is a leading provider of cloud business management solutions for the real estate industry. Our solutions are designed to enable our customers to digitally transform their businesses, 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.

2. Summary of Significant Accounting Policies

Basis of Presentation and Significant Accounting Policies

The accompanying unaudited Condensed Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these Condensed Consolidated Financial Statements should be read in conjunction with our audited consolidated financial statements and the related notes included in our Annual Report, which was filed with the SEC on February 9, 2023. The year-end condensed balance sheet was derived from our audited consolidated financial statements. Our unaudited interim Condensed Consolidated Financial Statements include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of our Condensed Consolidated Financial Statements. The operating results for the six months ended June 30, 2023 are not necessarily indicative of the results expected for the full year ending December 31, 2023.

Reclassification

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

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue, expenses, other income, and provision for income taxes during the reporting period. Assets and liabilities which are subject to judgment and use of estimates include the fair value of financial instruments, capitalized software development costs, period of benefit associated with deferred costs, incremental borrowing rate used to measure operating lease liabilities, the recoverability of goodwill and long-lived assets, income taxes, useful lives associated with property and equipment and intangible assets, contingencies, assumptions underlying performance-based compensation (whether cash or stock-based), and assumptions underlying stock-based compensation. Actual results could differ from those estimates and any such differences may have a material impact on our Condensed Consolidated Financial Statements.

Net Loss per Common Share

Net loss 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 per common share (in thousands):


	Three Months Ended June 30,		Six Months Ended June 30,
	2023	2022	2023	2022
Weighted average common shares outstanding	35,573	34,931	35,512	34,885
Less: Weighted average unvested restricted shares subject to repurchase	8	4	7	4
Weighted average common shares outstanding; basic and diluted	35,565	34,927	35,505	34,881

Because we reported a net loss for all periods presented, all potentially dilutive common shares are anti-dilutive for these periods and have been excluded from the calculation of net loss per share.

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Recent Accounting Pronouncements 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 adopted ASU 2021-08 on January 1, 2023. Adoption did not have an impact on our condensed consolidated financial statements.

3. Investment Securities and Fair Value Measurements

Investment Securities

Investment securities classified as available-for-sale consisted of the following as of June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Corporate bonds	$	5,484	$	—	$	(32)	$	5,452
Agency securities	11,261		—		(233)		11,028

Treasury securities	123,582		8		(797)		122,793
Total available-for-sale investment securities	$	140,327	$	8	$	(1,062)	$	139,273


	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Corporate bonds	$	17,497	$	2	$	(112)	$	17,387
Agency securities	17,507		—		(484)		17,023

Treasury securities	81,605		—		(1,557)		80,048
Total available-for-sale investment securities	$	116,609	$	2	$	(2,153)	$	114,458

As of June 30, 2023, the decline in fair value below amortized cost basis was not considered other than temporary as it is more likely than not we will hold the securities until maturity or recovery of the cost basis. No allowance for credit losses for available-for-sale investment securities was recorded as of June 30, 2023 or December 31, 2022.

The fair values of available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands):


	June 30, 2023				December 31, 2022
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	140,327	$	139,273	$	90,822	$	89,297
Due after one year through three years	—		—		25,787		25,161
Total available-for-sale investment securities	$	140,327	$	139,273	$	116,609	$	114,458

During the six months ended June 30, 2023 and 2022, we had sales and maturities of investment securities, as follows (in thousands):

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	Six Months Ended June 30, 2023
	Gross Realized Gains		Gross Realized Losses		Gross Proceeds from Sales		Gross Proceeds from Maturities
Corporate bonds	$	3	$	—	$	1,013	$	11,012
Agency securities	—		—		—		6,250

Treasury securities	—		—		—		32,355
Total	$	3	$	—	$	1,013	$	49,617


	Six Months Ended June 30, 2022
	Gross Realized Gains		Gross Realized Losses		Gross Proceeds from Sales		Gross Proceeds from Maturities
Corporate bonds	$	—	$	—	$	—	$	23,998


Treasury securities	—		—		—		19,500
Total	$	—	$	—	$	—	$	43,498

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 June 30, 2023 and December 31, 2022 by level within the fair value hierarchy (in thousands):


	June 30, 2023
	Level 1		Level 2		Total Fair Value
Cash equivalents:
Money market funds	$	5,226	$	—	$	5,226
Treasury securities	797		—		797

Available-for-sale investment securities:
Corporate bonds	—		5,452		5,452
Agency securities	—		11,028		11,028

Treasury securities	122,793		—		122,793
Total	$	128,816	$	16,480	$	145,296


	December 31, 2022
	Level 1		Level 2		Total Fair Value
Cash equivalents:
Money market funds	$	41,973	$	—	$	41,973
Treasury securities	1,287		—		1,287
Available-for-sale investment securities:
Corporate bonds	—		17,387		17,387
Agency securities	—		17,023		17,023

Treasury securities	80,048		—		80,048
Total	$	123,308	$	34,410	$	157,718

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

Fair value for our Level 1 investment securities is based on market prices for identical assets. Our Level 2 securities were priced by a pricing vendor. The pricing vendor utilizes the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, other observable inputs like market transactions involving comparable securities are used.

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4. Capitalized Software Development Costs, net

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


	June 30, 2023		December 31, 2022
Capitalized software development costs, gross	$	128,142	$	129,749
Less: Accumulated amortization	(101,285)		(94,434)
Capitalized software development costs, net	$	26,857	$	35,315

Capitalized software development costs were $1.3 million and $4.2 million for the three months ended June 30, 2023 and 2022, respectively, and $2.3 million and $8.3 million for the six months ended June 30, 2023 and 2022, respectively. Amortization expense with respect to capitalized software development costs totaled $4.9 million and $6.0 million for the three months ended June 30, 2023 and 2022, respectively, and $10.8 million and $12.0 million for the six months ended June 30, 2023 and 2022, respectively. During the three and six months ended June 30, 2023, we disposed of $1.3 million and $3.5 million, respectively, of fully amortized capitalized software development costs.

Future amortization expense with respect to capitalized software development costs as of June 30, 2023 is estimated as follows (in thousands):


Years Ending December 31,
2023	$	8,580
2024	12,042
2025	5,012
2026	1,223
Total amortization expense	$	26,857

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5. Intangible Assets, net

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


	June 30, 2023
	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted Average Useful Life in Years
Customer relationships	$	1,670	$	(1,559)	$	111	5.0
Database	4,710		(2,120)		2,590		10.0
Technology	6,539		(6,539)		—		4.0
Trademarks and trade names	1,520		(1,367)		153		5.0
Partner relationships	680		(680)		—		3.0
Non-compete agreements	7,340		(6,606)		734		5.0
Domain names	90		(85)		5		5.0
Patents	252		(252)		—		5.0

Total intangible assets, net	$	22,801	$	(19,208)	$	3,593	5.8


	December 31, 2022
	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted Average Useful Life in Years
Customer relationships	$	1,670	$	(1,448)	$	222	5.0
Database	4,710		(1,884)		2,826		10.0
Technology	6,539		(6,539)		—		4.0
Trademarks and trade names	1,520		(1,211)		309		5.0
Partner relationships	680		(680)		—		3.0
Non-compete agreements	7,340		(5,872)		1,468		5.0
Domain names	90		(82)		8		5.0
Patents	252		(252)		—		5.0

Total intangible assets, net	$	22,801	$	(17,968)	$	4,833	4.7

Amortization expense with respect to intangible assets totaled $0.6 million and $1.2 million for the three months ended June 30, 2023 and 2022, respectively, and $1.2 million and $2.3 million for the six months ended June 30, 2023 and 2022, respectively. Future amortization expense with respect to intangible assets as of June 30, 2023 is estimated as follows (in thousands):


Years Ending December 31,
2023	$	1,236
2024	473
2025	471
2026	471
2027	471
Thereafter	471
Total amortization expense	$	3,593

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6. Accrued Employee Expenses

Accrued employee expenses consisted of the following (in thousands):


	June 30, 2023		December 31, 2022
Accrued vacation	$	13,523	$	12,067
Accrued bonuses	10,028		13,806
Accrued severance	515		496
Accrued payroll and other	7,381		8,007


Total accrued employee expenses	$	31,447	$	34,376

In the first quarter of 2023, we accrued $14.9 million of severance related to separation costs associated with our former Chief Executive Officer's Transition and Separation Agreement, dated March 1, 2023 ("Separation Agreement"). The $14.9 million was fully paid in the second quarter of 2023.

7. Leases

Operating leases for our corporate offices have remaining lease terms ranging from one to ten years, some of which include options to extend the leases for up to ten years. These options to extend have not been recognized as part of our operating lease right-of-use assets and lease liabilities as it is not reasonably certain that we will exercise these options. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. Certain leases contain provisions for property-related costs that are variable in nature for which we are responsible, including common area maintenance, which are expensed as incurred.

The components of lease expense recognized in the Condensed Consolidated Statements of Operations were as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Operating lease cost	$	1,131	$	1,468	$	2,276	$	2,915
Variable lease cost	448		252		1,021		375
Total lease cost	$	1,579	$	1,720	$	3,297	$	3,290

Lease-related assets and liabilities were as follows (in thousands):


	June 30, 2023		December 31, 2022
Assets

Operating lease right-of-use assets	$	20,308	$	23,485

Liabilities
Other current liabilities	$	3,052	$	3,357
Operating lease liabilities	39,554		50,237
Total lease liabilities	$	42,606	$	53,594

During the second quarter of 2022, we decided to exit and make available for sublease certain leased office spaces. As a result, we recorded an impairment of $19.4 million consisting of $15.7 million related to ROU assets and $3.7 million related to property and equipment associated with our leased office spaces. These charges were recorded within General and administrative expenses in our Condensed Consolidated Statements of Operations.

In January 2023, we entered into an amendment to the lease agreement for our San Diego facility (the "San Diego Lease"). We remeasured the lease liability and recorded a reduction to the lease liability and right-of-use asset using the discount rate at the modification date, which resulted in a gain of $2.4 million in the Condensed Consolidated Statements of Operations.

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In June 2023, we entered into a second amendment to reduce the rentable square footage and our future rental payment obligations under the San Diego Lease pursuant to which we made a one-time payment of $2.9 million. We again remeasured the lease liability and recorded a reduction to the lease liability using the discount rate at the modification date. As a result, we recorded a gain of $1.9 million in the Condensed Consolidated Statements of Operations.

In July 2023, we entered into an agreement to sublet one of our office spaces in Santa Barbara through December 31, 2031.

Future minimum lease payments under non-cancellable leases as of June 30, 2023 were as follows (in thousands):


Years ending December 31,
2023(1)	$	(793)
2024(1)	5,063
2025	6,168
2026	6,345
2027	6,528
Thereafter	31,090
Total future minimum lease payments	54,401
Less: imputed interest	(11,795)
Total	$	42,606

(1) Future minimum lease payments for the years ending December 31, 2023 and 2024 are presented net of tenant improvement allowances of $3.7 million and $0.7 million respectively.

8. Commitments and Contingencies

Legal Liability to Landlord Insurance

We have a wholly owned subsidiary, Terra Mar Insurance Company, Inc., which was established in connection with reinsuring liability to landlord insurance policies offered to our customers by our third-party service provider. Each policy has a limit of $100 thousand per incident. We assume a 100% quota share of the liability to landlord insurance policies placed with our customers by our third-party service provider. We accrue for reported claims, and include an estimate of losses incurred but not reported by our property manager customers, in cost of revenue because we bear the risk related to all such claims. Our estimated liability for reported claims and incurred but not reported claims as of June 30, 2023 and December 31, 2022 was $3.2 million and $2.7 million, respectively, and is included in Other current liabilities on our Condensed Consolidated Balance Sheets.

Included in Prepaid expenses and other current assets as of June 30, 2023 and December 31, 2022 are $2.8 million and $4.5 million, respectively, of deposits held with a third party related to requirements to maintain collateral for this insurance service.

Legal Proceedings

From time to time we may become involved in various legal proceedings, investigative inquiries, and other disputes arising from or related to matters incident to the ordinary course of our business activities. We are not currently a party to any matters, nor are we aware of any pending or threatened matters, that we believe would have a material adverse effect on our business, operating results, cash flows or financial condition should such proceedings be resolved unfavorably.

Indemnification

In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, business partners, investors, directors, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of any applicable agreements, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from our services or our acts or omissions. These indemnification provisions may survive termination of the underlying agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions may not be subject to maximum loss clauses and is indeterminable. We have not incurred any costs as a result of such indemnification obligations and have not recorded any liabilities related to such obligations in the Condensed Consolidated Financial Statements.

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9. Stock-Based Compensation

Stock Options

A summary of activity in connection with our stock options for the six months ended June 30, 2023, is as follows (number of shares in thousands):


	Number of Shares	Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life in Years
Options outstanding as of December 31, 2022	516	$	12.90	2.7
Options granted	120	129.74
Options exercised	(159)	9.44

Options outstanding as of June 30, 2023	477	$	43.44	3.4

During the six months ended June 30, 2023, we granted our Chief Executive Officer 120,000 stock options of our Class A common stock. These stock options vest based on service conditions with one-third vesting at the end of each of the years ending December 31, 2025, 2026 and 2027. No stock options were granted during the six months ended June 30, 2022.

Our stock-based compensation expense for stock options was $0.4 million and $0.6 million for the three and six months ended June 30, 2023, respectively. There was no stock-based compensation expense for stock options in the same periods in the prior year.

The fair value of stock options granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following table summarizes information relating to our stock options granted during six months ended June 30, 2023:




Weighted average grant-date fair value per share	$	67.23
Weighted average Black-Scholes model assumptions:
Risk-free interest rate	4.06		%
Expected term (in years)	6.92
Expected volatility	44		%
Expected dividend yield	—

As of June 30, 2023, the total estimated remaining stock-based compensation expense for the aforementioned stock options was $7.5 million, which is expected to be recognized over a weighted average period of 4.5 years.

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Restricted Stock Units

A summary of activity in connection with our RSUs for the six months ended June 30, 2023, is as follows (number of shares in thousands):


	Number of Shares	Weighted Average Grant Date Fair Value per Share
Unvested as of December 31, 2022	1,162	$	116.88
Granted	630	122.37
Vested	(261)	116.18
Forfeited	(196)	115.28
Unvested as of June 30, 2023	1,335	$	119.84

Unvested RSUs as of June 30, 2023 were composed of 1.1 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 June 30, 2023, 0.1 million are subject to vesting based on the achievement of pre-established performance metrics for the year ending December 31, 2023 and will vest over a three year period, assuming continued employment through each vesting date. The actual number of shares to be issued at the end of the performance period will range from 0% to 142% of the target number of shares depending on achievement relative to the performance metric over the applicable period. The remaining 0.1 million PSUs unvested as of June 30, 2023 are subject to vesting based on the achievement of pre-established performance metrics for three year measurement periods ending December 31, 2023, assuming continued employment throughout the performance period. The actual number of shares to be issued at the end of the performance period will range from 0% to 100% of the initial target awards. Achievement of the performance metric between 100% and 150% of the performance target will result in a performance-based cash bonus payment between 0% and 65% of the initial target awards.

We recognized stock-based compensation expense for the RSUs and PSUs of $10.4 million and $10.5 million for the three months ended June 30, 2023 and 2022, respectively, and $24.1 million and $18.3 million for the six months ended June 30, 2023 and 2022, respectively. Excluded from stock-based compensation expense is capitalized software development costs of $0.2 million and $0.7 million for the three months ended June 30, 2023 and 2022, respectively, and $0.4 million and $1.2 million for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023, the total estimated remaining stock-based compensation expense for the aforementioned RSUs and PSUs was $126.2 million, which is expected to be recognized over a weighted average period of 2.7 years.

Restricted Stock Awards

A summary of activity in connection with our restricted stock awards ("RSAs") for the six months ended June 30, 2023 is as follows (number of shares in thousands):


	Number of Shares	Weighted Average Grant Date Fair Value per Share
Unvested as of December 31, 2022	6	$	96.33
Granted	6	151.83
Vested	(6)	96.33

Unvested as of June 30, 2023	6	$	151.83

We have the right to repurchase any unvested RSAs subject to certain conditions. RSAs vest over a one-year period. Our stock-based compensation expense for RSAs was not material for the periods presented.

As of June 30, 2023, the total estimated remaining stock-based compensation expense for unvested RSAs with a repurchase right was $0.9 million, which is expected to be recognized over a weighted average period of 0.9 years.

10. Income Taxes

We calculate our provision for (benefit from) income taxes on a quarterly basis by applying an estimated annual effective tax rate to income/loss from operations and by calculating the tax effect of discrete items recognized during the quarter.

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For the three and six months ended June 30, 2023, we recorded income tax expense of $19.6 million and $29.6 million representing an effective tax rate of 2,637% and (121)%. The effective tax rate as compared to the U.S. federal statutory rate of 21% differs primarily due to the change in valuation allowance against deferred tax assets, non-deductible officers' compensation and state income taxes, partially offset by tax benefits from research and development tax credits.

We assess our ability to realize our deferred tax assets on a quarterly basis and we establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. We weigh all available positive and negative evidence, including our earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies.

There were no material changes to our unrecognized tax benefits during the six months ended June 30, 2023.

11. Revenue and Other Information

The following table presents our revenue categories for the three and six months ended June 30, 2023 and 2022 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Core solutions	$	38,515	$	32,414	$	75,684	$	63,223
Value Added Services	106,085		81,450		202,920		152,950
Other	2,475		3,586		4,571		6,573
Total revenue	$	147,075	$	117,450	$	283,175	$	222,746

Our revenue is generated primarily from customers in the United States. All of our property and equipment is located in the United States.

Deferred Revenue

Deferred revenue as of June 30, 2023 and December 31, 2022 was $1.1 million and $0.9 million, respectively, and is included in Other current liabilities on our Condensed Consolidated Balance Sheets. During the six months ended June 30, 2023 and 2022, we recognized $0.7 million and $2.1 million of revenue, respectively, which were included in the deferred revenue balances as of December 31, 2022 and 2021, respectively.

Remaining Performance Obligations

As of June 30, 2023, the total non-cancelable remaining performance obligations ("RPO") under our contracts with customers was $24 million, and we expect to recognize revenue on approximately 50% of these RPO over the following 12 months, with the balance to be recognized thereafter.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our Condensed Consolidated Financial Statements and the related notes included elsewhere in this Quarterly Report and in our Annual Report. This discussion and analysis contains forward-looking statements that are based on our current expectations and reflect our plans, estimates and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the section entitled “Risk Factors” in our Annual Report, as well as our other public filings with the SEC. Please also refer to the section of this Quarterly Report entitled "Forward-Looking Statements" for additional information.

Overview

We are a leading provider of cloud business management solutions for the real estate industry. Our solutions are designed to enable our property manager customers to digitally transform their businesses, 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 risk mitigation services. AppFolio’s intuitive

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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.

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 7.7 million and 6.8 million property management units under management as of June 30, 2023 and 2022, respectively.

Key Components of Results of Operations

Revenue

Our core solutions and certain of our Value Added Services are offered on a subscription basis. Our core solutions subscription fees vary by property type and are designed to scale with the size of our customers’ businesses. We recognize revenue for subscription-based services on a straight-line basis over the contract term beginning on the date that our service is made available. We generally invoice monthly or, to a lesser extent, annually in advance of the subscription period.

We also offer certain Value Added Services, which are not covered by our subscription fees, on a per-use basis. Usage-based fees are charged either as a percentage of the transaction amount (e.g., for certain of our 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 assistance onboarding onto our core solutions and for certain other non-recurring services. We generally invoice for these other services in advance of the services being completed and recognize revenue 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 June 30, 2023 and 2022, we had 19,145 and 17,878 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

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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, gains on lease modifications, and allocated shared and other costs.

Depreciation and Amortization. Depreciation and amortization expense includes depreciation of property and equipment, amortization of capitalized software development costs, and amortization of intangible assets. We depreciate or amortize property and equipment, software development costs, and intangible assets over their expected useful lives on a straight-line basis, which approximates the pattern in which the economic benefits of the assets are consumed.

Other Income (Loss), Net. Other income (loss), net includes gains and losses associated with the sale of businesses and property and equipment.

Interest Income, Net. Interest income, net includes interest earned on investment securities, amortization and accretion of the premium and discounts paid from the purchase of investment securities, and interest earned on cash deposited in our bank accounts.

Provision for (Benefit from) Income Taxes. Provision for income taxes consists of federal and state income taxes in the United States.

Results of Operations

Revenue


	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
	2023		2022		Amount		%		2023		2022		Amount		%
	(dollars in thousands)
Core solutions	$	38,515	$	32,414	$	6,101	19	%	$	75,684	$	63,223	$	12,461	20	%