What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-02-09 compared with 2022-02-28 · 175 added, 182 removed, 659 unchanged (35% of the section changed)

4 unchanged sentences

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income

Consolidated Statements of Comprehensive (Loss) Income

Consolidated Statements of Stockholders' Equity

5 unchanged sentences

We have audited the accompanying consolidated balance sheets of AppFolio, Inc.

and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”).

and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive (loss) income, of stockholder’s equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

24 unchanged sentences

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Uncertain Tax Positions

As described in Notes 2 and 13 to the consolidated financial statements, the Company has recorded reserves for unrecognized tax benefits from uncertain tax positions of $7.8 million as of December 31, 2021.

Judgment is required to measure the amount of tax benefits that can be recognized associated with uncertain tax positions.

Management recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

The tax benefits recognized from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized.

The principal considerations for our determination that performing procedures relating to uncertain tax positions is a critical audit matter are (i) the significant judgment by management when determining uncertain tax positions and measuring the amount of reserve required to be recognized, (ii) the significant auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s identification of uncertain tax positions and measurement of the amount of tax benefits recognized associated with uncertain tax positions, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Impairment of Long-Lived Assets

As described in Note 9 to the consolidated financial statements, the Company decided to exit and make available for sublease certain leased office spaces.

Management reassessed the Company’s asset groupings and evaluated the recoverability of the Company’s right-of-use and other lease-related assets and determined that the carrying value of the respective asset groups was not fully recoverable.

Management utilized discounted cash flow models to estimate the fair value of the asset groups taking into consideration the time period it will take to obtain a sublessee, the applicable discount rates and the anticipated sublease income and calculated the corresponding impairment loss.

The Company recorded a net impairment of $22.0 million related to right-of-use assets and property and equipment associated with the leased office space.

The principal considerations for our determination that performing procedures relating to the impairment of long-lived assets is a critical audit matter are (i) the significant judgment by management in developing the fair value estimate of the asset groups;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the time period it will take to obtain a sublessee and the anticipated sublease income;

and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the identification and recognition of the reserves for uncertain tax positions.

These procedures also included, among others (i) evaluating management’s process for identifying uncertain tax positions and measuring the amount of the reserve required, (ii) testing the completeness of management’s assessment of the identification of uncertain tax positions, and (iii) testing the reasonableness of management’s assessment of the technical merits of the tax positions and estimates of the amount of tax benefit expected to be realized.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s uncertain tax positions related to the application of relevant tax laws.

These procedures included testing the effectiveness of controls relating to the impairment of long-lived assets, including controls over the valuation of the asset groups.

These procedures also included, among others (i) evaluating the reassessment of asset groupings and the recoverability of the right-of-use and other lease-related assets;

(ii) testing management’s process for developing the fair value estimate of the asset groups;

(iii) evaluating the appropriateness of the discounted cash flow models;

(iv) testing the completeness and accuracy of underlying data used in the discounted cash flow models;

and (v) evaluating the reasonableness of the significant assumptions used by management related to the time period it will take to obtain a sublessee and the anticipated sublease income.

Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the discounted cash flow models and evaluating the reasonableness of the significant assumptions related to the time period it will take to obtain a sublessee and the anticipated sublease income.

/s/ PricewaterhouseCoopers LLP

17 unchanged sentences

Intangible assets, net 4,833 11,711

Deferred income taxes—noncurrent — 12,181

Other long-term assets 8,785 7,087

3 unchanged sentences

Accounts payable $ 2,473 $ 1,704

Accrued employee expenses—current 30,065 18,888

Accrued employee expenses 34,376 30,065

Accrued expenses 15,601 13,284

Deferred revenue 2,512 2,262

Income tax payable 136 9,095

Other current liabilities 8,893 7,589

Total current liabilities 61,343 52,642

Accrued employee expenses—noncurrent 583 —

Operating lease liabilities 50,237 55,733

Deferred income taxes—noncurrent 1,678 13,609

Other liabilities 4,091 2,261

Total liabilities 115,671 110,636

8 unchanged sentences

Additional paid-in capital 209,704 171,930

Accumulated other comprehensive (loss) income ( 194 ) 56

Accumulated other comprehensive loss ( 1,684 ) ( 194 )

Treasury stock, at cost, 419 shares of Class A common stock as of December 31, 2022 and December 31, 2021

12 unchanged sentences

Cost of revenue (exclusive of depreciation and amortization) (1)

191,826 143,944 119,029

Sales and marketing (1)

107,398 73,200 58,445

Research and product development (1)

111,118 65,980 48,529

General and administrative (1)

100,792 57,279 47,480

Depreciation and amortization 33,119 30,845 26,790

3 unchanged sentences

Interest income (expense), net 1,184 501 ( 1,849 )

Income before provision for (benefit from) income taxes 1,734 196,831 4,823

Provision for (benefit from) income taxes 706 38,428 ( 31,459 )

Net income $ 1,028 $ 158,403 $ 36,282

Net income per common share:

(Loss) income before provision for income taxes ( 66,717 ) 1,734 196,831

Provision for income taxes 1,402 706 38,428

Net (loss) income $ ( 68,119 ) $ 1,028 $ 158,403

Net (loss) income per common share:

Basic $ ( 1.95 ) $ 0.03 $ 4.62

3 unchanged sentences

Diluted 35,010 35,701 35,713

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

Year Ended December 31,

2022 2021 2020

Stock-based compensation expense included in costs and operating expenses:

Cost of revenue (exclusive of depreciation and amortization) $ 2,640 $ 2,024 $ 1,506

Sales and marketing 8,681 2,329 1,415

Research and product development 16,030 5,457 1,818

General and administrative 13,584 5,531 4,286

Total stock-based compensation expense $ 40,935 $ 15,341 $ 9,025

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

APPFOLIO, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

1 unchanged sentence

2022 2021 2020

Net income $ 1,028 $ 158,403 $ 36,282

Net (loss) income $ ( 68,119 ) $ 1,028 $ 158,403

Other comprehensive (loss) income:

Changes in unrealized (losses) gains on investment securities ( 1,490 ) ( 250 ) 23

Comprehensive income $ 778 $ 158,426 $ 36,493

Comprehensive (loss) income $ ( 69,609 ) $ 778 $ 158,426

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

11 unchanged sentences

Vesting of restricted stock units, net of shares withheld for taxes 166 — — — ( 12,196 ) — — — ( 12,196 )

Vesting of early exercised shares — — — — 6 — — — 6

Conversion of Class B stock to Class A stock 515 — ( 515 ) — — — — — —

Conversion of Class B common stock to Class A common stock 1,948 — ( 1,948 ) — — — — — —

Issuance of restricted stock awards 5 — — — — — — — —

6 unchanged sentences

Vesting of restricted stock units, net of shares withheld for taxes 111 — — — ( 9,962 ) — — — ( 9,962 )

Vesting of early exercised shares — — — — — — — — —

Conversion of Class B stock to Class A stock 1,948 — ( 1,948 ) — — — — — —

Conversion of Class B common stock to Class A common stock 335 — ( 335 ) — — — — — —

Issuance of restricted stock awards 4 — — — — — — — —

Other comprehensive income — — — — — 23 — — 23

Repurchase of common stock ( 48 ) — — — — — ( 4,194 ) — ( 4,194 )

Other comprehensive loss — — — — — ( 250 ) — — ( 250 )

Net income — — — — — — — 1,028 1,028

3 unchanged sentences

Vesting of restricted stock units, net of shares withheld for taxes 154 — — — ( 10,637 ) — — — ( 10,637 )

Conversion of Class B stock to Class A stock 335 — ( 335 ) — — — — — —

Conversion of Class B common stock to Class A common stock 689 — ( 689 ) — — — — — —

Issuance of restricted stock awards 6 — — — — — — — —

Other comprehensive loss — — — — — ( 1,490 ) — — ( 1,490 )

Net income — — — — — — — 1,028 1,028

Net loss — — — — — — — ( 68,119 ) ( 68,119 )

Balance at December 31, 2022 20,569 $ 2 14,746 $ 2 $ 209,704 $ ( 1,684 ) $ ( 25,756 ) $ 83,278 $ 265,546

6 unchanged sentences

Cash from operating activities

Net income $ 1,028 $ 158,403 $ 36,282

Adjustments to reconcile net income to net cash provided by operating activities:

Net (loss) income $ ( 68,119 ) $ 1,028 $ 158,403

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation and amortization 30,820 29,032 25,507

Amortization of operating lease right-of-use assets 3,187 3,199 3,701

Impairment, net 22,022 — —

Deferred income taxes ( 993 ) 250 29,002

8 unchanged sentences

Accounts payable 1,176 497 ( 903 )

Accrued employee expenses—current 11,264 2,799 4,542

Accrued employee expenses 4,281 11,264 2,799

Accrued expenses 3,452 ( 1,773 ) 6,878

Deferred revenue ( 186 ) 530 1,193

Income tax payable ( 8,959 ) 9,095 292

Accrued employee expenses—noncurrent 583 — —

Operating lease liabilities ( 2,524 ) 1,268 ( 564 )

5 unchanged sentences

Proceeds from maturities of available-for-sale investments 87,883 107,354 27,330

Purchases of property, equipment and intangible assets ( 8,103 ) ( 19,038 ) ( 8,084 )

Purchases of property and equipment ( 6,540 ) ( 8,103 ) ( 19,038 )

Capitalization of software development costs ( 14,688 ) ( 24,615 ) ( 26,042 )

Cash paid in business acquisition, net of cash acquired — — ( 54,004 )

Proceeds from sale of business, net of cash divested 5,124 402 191,427

Proceeds from sale of equity-method investment and recovery of note receivable 12,520 — —

Proceeds from sale of equity-method investment 40 12,520 —

Net cash (used in) provided by investing activities ( 6,466 ) ( 110,459 ) 146,511

5 unchanged sentences

Principal payments on debt — — ( 99,565 )

Payment of debt issuance costs — — ( 420 )

Purchase of treasury stock — — ( 4,194 )

Net cash used in financing activities ( 6,163 ) ( 7,348 ) ( 70,358 )

Net (decrease) increase in cash and cash equivalents ( 82,416 ) 124,452 ( 58,259 )

Net increase (decrease) in cash and cash equivalents 12,736 ( 82,416 ) 124,452

Cash, cash equivalents and restricted cash

11 unchanged sentences

Right-of-use assets obtained in exchange for operating lease liabilities — 11,945 6,644

Noncash investing and financing activities

Purchases of property and equipment included in accounts payable and accrued expenses $ 1,526 $ 370 $ 3,447

Capitalization of software development costs included in accrued expenses and accrued employee expenses 296 383 1,187

Stock-based compensation capitalized for software development 877 804 1,844

Purchase consideration for acquisitions included in other current liabilities — — 5,977

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

8 unchanged sentences

AppFolio, Inc.

(the "Company," "we," "us" or "our") is a leading provider of cloud business management solutions for the real estate industry.

Our solutions enable our customers to digitally transform their businesses, automate and streamline critical business operations and deliver a better customer experience.

We were founded in 2006 with the vision to revolutionize vertical industry businesses by providing great software and services.

Our mission is even more relevant today, digital transformation is effectively a requirement for business success in the modern world, and the way we work and live today requires powerful software solutions to enable a more seamless experience.

During the years ended December 31, 2020 and 2019, we also provided cloud-based solutions and services to the legal industry via MyCase, a solution primarily designed for small and mid-sized law firms.

As previously disclosed, we completed our divestiture of MyCase, Inc.

("we," "us" or "our") is a leading provider of cloud business management solutions for the real estate industry.

Our solutions are designed to enable our property manager customers to digitally transform their businesses, address critical business operations and deliver a better customer experience.

Digital transformation is effectively a requirement for business success in the modern world, and the way we work and live requires powerful software solutions.

During the year ended December 31, 2020, we also provided cloud-based solutions and services to the legal industry via MyCase, a solution primarily designed for small and mid-sized law firms.

As previously disclosed, we completed the sale of MyCase, Inc.

on September 30, 2020.

For additional details, see Note 3, Divestitures .

For additional details, see Note 3, Sales of Subsidiary Businesses .

Summary of Significant Accounting Policies

2 unchanged sentences

Reclassification

We reclassified certain amounts in our 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.

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

Principles of Consolidation

2 unchanged sentences

All intercompany balances and transactions have been eliminated in consolidation.

Our investment in SecureDocs, Inc.

(“SecureDocs”) is accounted for under the equity method of accounting as we have the ability to exert significant influence, but do not control and are not the primary beneficiary of the entity.

Our investment in SecureDocs is not material and any income (loss) activity is not material individually or in the aggregate to our Consolidated Financial Statements for any period presented.

We accounted for our investment in SecureDocs, Inc.

(“SecureDocs”) under the equity method of accounting as we had the ability to exert significant influence, but did not control and were not the primary beneficiary of the entity.

Our investment in SecureDocs was not material and any income (loss) activity was not material individually or in the aggregate to our Consolidated Financial Statements for any period presented.

In December 2021, we sold our interest in SecureDocs.

Refer to Note 4, Investments for additional information.

Refer to Note 4, Investment Securities and Fair Value Measurements for additional information.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue, expenses, other income, and provision for income taxes during the reporting period.

Assets and liabilities which are subject to judgment and use of estimates include the fair value of financial instruments, capitalized software development costs, period of benefit associated with deferred costs, incremental borrowing rate used to measure operating lease liabilities, the recoverability of goodwill and long-lived assets, income taxes, useful lives associated with property and equipment and intangible assets, contingencies, assumptions underlying performance-based compensation (whether cash or stock-based), and valuation and assumptions underlying stock-based compensation and other equity instruments.

Actual results could differ from those estimates and any such differences may have a material impact on our Consolidated Financial Statements.

3 unchanged sentences

Concentrations of Credit Risk

Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents, restricted cash, accounts receivable, investment securities and notes receivable.

Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents, restricted cash, accounts receivable, and investment securities.

We maintain cash balances at financial institutions in excess of amounts insured by United States government agencies or payable by the United States government directly.

place our cash with high credit, quality financial institutions.

We place our cash with high credit, quality financial institutions.

We invest in investment securities with a minimum rating of A by Standard & Poor's or A-1 by Moody's and regularly monitor our investment security portfolio for changes in credit ratings.

35 unchanged sentences

We determine if an arrangement is a lease at inception.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments, over the lease term at commencement date.

As none of our leases provide an implicit rate, we use our incremental borrowing rate based on the information available at

commencement date in determining the present value of future payments.

Operating lease right-of-use ("ROU") assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments, over the lease term at commencement date.

As none of our leases provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.

The operating lease ROU assets also include any lease payments made to the lessor before or at the lease commencement date and excludes lease incentives received and initial direct costs incurred.

15 unchanged sentences

We test for goodwill impairment annually during the fourth quarter of the calendar year.

Based on the assessment performed at November 1, 2021, we determined it was unlikely that our reporting unit fair value was less than its carrying value and no quantitative impairment test assessment was required.

Based on the assessment performed at November 1, 2022, we determined it was not more likely than not that our reporting unit fair value was less than its carrying value and no quantitative impairment test assessment was required.

No impairment losses were recorded for goodwill during the years ended December 31, 2022, 2021 and 2020.

6 unchanged sentences

The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group.

We recorded net lease-related impairment charges of $ 22.0 million for the year ended December 31, 2022.

Refer to Note 9, Leases for additional information.

There were no impairment charges related to the identified long-lived assets for the years ended December 31, 2021 and 2020.

4 unchanged sentences

Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.

We do not disclose the value of unsatisfied performance obligations for contracts with an original expected term of one year or less.

We recognize revenue in proportion to the amount we have the right to invoice for certain core solutions and Value Added Services revenue, as that amount corresponds directly with our performance completed to date.

2 unchanged sentences

We charge our customers on a subscription basis for our core solutions.

Our subscription fees are designed to scale to the size of our customers' businesses.

Subscription fees for our core solutions are charged on a per-unit per-month basis for our property management software solution and on a per-user per-month basis for our legal software solution.

Our customers do not have rights to the underlying software code of our solutions, and, accordingly, we recognize subscription revenue over time on a straight-line basis over the contract term beginning on the date that our service is made available to the customer.

The term of our core solutions subscription agreements typically ranges from one month to one year .

We typically invoice our customers for subscription services in monthly or annual installments, in advance of the subscription period.

The terms of our subscription agreements are monthly, annual, and multiyear and we typically invoice our customers for subscription services in monthly or annual installments, in advance of the subscription period.

Value Added Services

We charge our customers on a subscription or usage basis for our Value Added Services.

Subscription-based fees are charged on a per-unit basis.

We typically invoice our customers for subscription-based services in monthly installments, in advance of the subscription period.

We recognize revenue for subscription-based services over time on a straight-line basis over the contract term beginning on the date that our service is made available to the customer.

We primarily charge our customers on a usage basis for our Value Added Services.

Usage-based fees are charged either as a percentage of the transaction amount (e.g., for certain of our electronic payment services) or on a flat fee per transaction basis with no minimum usage commitments (e.g., for our tenant screening and risk mitigation services).

2 unchanged sentences

We generally invoice our customers for usage-based services on a monthly basis for services rendered in the preceding month.

In addition, some subscription or usage-based Value Added Services, such as fees for electronic payment services, are paid by either our customers or clients of our customers at the time the services are rendered.

We also have certain Value Added Services which are charged on a subscription basis.

We typically invoice our customers for subscription-based services in monthly installments, in advance of the subscription period.

We recognize revenue for subscription-based services over time on a straight-line basis over the contract term beginning on the date that our service is made available to the customer.

Some subscription or usage-based Value Added Services, such as fees for electronic payment services, are paid by either our customers or clients of our customers at the time the services are rendered.

We work with third-party partners to provide certain of our Value Added Services.

4 unchanged sentences

This includes legacy customers of businesses we have acquired where the customers haven't migrated to our core solutions.

The fees for implementation and data migration services are billed upon signing our core subscription contract and are not recognized until the core solution is accessible and fully functional for our customer's use.

The fees for implementation and data migration services are billed upon signing our core subscription contract and are recognized as revenue in the period the service is rendered.

Other services are billed when the services rendered are completed and delivered to the customer or billed in advance and deferred over the subscription period.

1 unchanged sentence

We record deferred revenue when cash payments are received in advance of our performance.

Deferred revenue as of December 31, 2022 and 2021 was $ 0.9 million and $ 2.5 million, respectively.

During the twelve months ended December 31, 2022 and 2021, we recognized revenue of $ 2.4 million and $ 2.2 million, respectively, that were included in the deferred revenue balances at December 31, 2021 and 2020, respectively.

Remaining Performance Obligations

Transaction price allocated to remaining performance obligations (“RPO”) represents contracted revenue that has not been recognized, which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenue in future periods.

RPO does not include revenue related to performance obligations that are part of a contract whose original expected duration is one year or less or related to usage-based Value Added Services that are billed in arrears.

As of December 31, 2022, the total non-cancelable RPO under our contracts with customers was $ 15 million, and we expect to recognize revenue on approximately 47 % of these RPO over the following 12 months, with the balance to be recognized thereafter.

Deferred Costs

3 unchanged sentences

We determined the period of benefit by taking into consideration our customer contract term, the useful life of our internal-use software, average customer life, and other factors.

Amortization expense for the deferred costs is allocated based on the employee's department and included within sales and marketing expense in the accompanying Consolidated Statements of Operations.

Amortization expense for the deferred costs is included within sales and marketing expense in the accompanying Consolidated Statements of Operations.

Deferred costs were $ 15.8 million and $ 12.4 million at December 31, 2022 and 2021, respectively, of which $ 8.1 million and $ 6.4 million, respectively, are included in Prepaid expenses and other current assets and $ 7.7 million and $ 6.0 million, respectively, are included in Other assets in the accompanying Consolidated Balance Sheets.

1 unchanged sentence

For the years ended December 31, 2022 and 2021, no impairments were identified in relation to the costs capitalized for the periods presented.

Cost of Revenue

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 electronic payments services, the cost of credit reporting services for our tenant screening services, and various costs associated with our risk mitigation 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.

2 unchanged sentences

Sales and Marketing

Sales and marketing expense consists of personnel-related costs (including salaries, sales commissions, performance-based compensation, benefits, and stock-based compensation) for our employees focused on sales and marketing, costs associated with sales and marketing activities, and allocated shared and other costs.

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.

Sales commissions and other incremental costs to acquire customers and grow adoption and utilization of our Value Added Services by our new and existing customers are deferred and then amortized on a straight-line basis over a period of benefit, which we have determined to be three years.

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.

1 unchanged sentence

Research and Product Development

Research and product development expense consists of personnel-related costs (including salaries, performance-based compensation, benefits, and stock-based compensation) for our employees focused on research and product development, fees for third-party development resources, and allocated shared and other costs.

Our research and product development efforts are focused on enhancing functionality and the ease of use of our existing software solutions by adding new core functionality, Value Added Services and other improvements, as well as developing new products and services for new and existing markets.

Research and product development expense consists of personnel-related costs for our employees focused on research and product development (including salaries, performance-based compensation, benefits, and stock-based compensation), fees for third-party development resources, and allocated shared and other costs.

Our research and product development efforts are focused on expanding functionality and the ease of use of our existing software solutions by adding new core functionality, Value Added Services and other improvements, as well as developing new products and services.

We capitalize our software development costs which meet the criteria for capitalization.

1 unchanged sentence

General and Administrative

General and administrative expense consists of personnel-related costs (including salaries, a majority of total performance-based compensation, benefits, and stock-based compensation) for employees in our executive, finance, information technology, human resources, legal, compliance, corporate development and administrative organizations.

In addition, general and administrative expense includes fees for third-party professional services (including audit, legal, compliance, tax, and consulting services), transaction costs related to business combinations and divestitures, regulatory fines and penalties, other corporate expenses, and allocated shared costs.

General and administrative expense consists of personnel-related costs for employees in our executive, finance, information technology, human resources, legal, compliance, corporate development and administrative organizations (including salaries, performance-based compensation, benefits, and stock-based compensation).

In addition, general and administrative expense includes fees for third-party professional services (including audit, legal, compliance, and tax services), transaction costs related to sales of subsidiary businesses, regulatory f, other corporate expenses, impairment of long-lived assets, and allocated shared costs.

Depreciation and Amortization

3 unchanged sentences

We recognize stock-based compensation expense for restricted stock awards ("RSAs") and restricted stock units ("RSUs") with only service conditions on a straight-line basis over the requisite service period.

For RSUs with both service and performance conditions (performance-based RSUs or performance share units ("PSUs")), compensation cost is recorded on a graded-vesting method, if it is probable that the performance condition will be achieved.

For RSUs with both service and performance conditions (performance share units ("PSUs")), compensation cost is recorded on a graded-vesting method, if it is probable that the performance condition will be achieved.

Adjustments to compensation expense are made each period based on changes in our estimate of the number of PSUs that are probable of vesting.

PSUs will vest upon achievement of the relevant performance metric once such calculation is reviewed and approved by our Board of Directors.

PSUs will vest on the vesting date and upon achievement of the relevant performance metric once such calculation is finalized in accordance with our internal policies.

We estimate a forfeiture rate to calculate our stock-based compensation expense for our stock-based awards.

We recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.

Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be

recovered or settled.

Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the Consolidated Statements of Operations in the period that includes the enactment date.

A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.

In evaluating the need for a valuation allowance, management considers the weighting of all available positive and negative evidence, which includes, among other things, the nature, frequency and severity of current and cumulative taxable income or losses, future projections of profitability, and the duration of statutory carryforward periods.

Net Income per Common Share

Basic net income per share includes no dilution and is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period.

In evaluating the need for a valuation allowance, we consider the weighting of all available positive and negative evidence, which includes, among other things, the nature, frequency and severity of current and cumulative taxable income or losses, future projections of profitability, and the duration of statutory carryforward periods.

Net (Loss) Income per Common Share

Basic net (loss) income per share includes no dilution and is computed by dividing net (loss) income for the period by the weighted average number of common shares outstanding during the period.

Diluted net income per share is computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period.

1 unchanged sentence

The calculation of diluted net income per share excludes all anti-dilutive common shares.

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):

Net (loss) income per common share was the same for shares of our Class A and Class B common stock because they are entitled to the same liquidation and dividend rights and are therefore combined in the table below.

The following table presents a reconciliation of the weighted average number of shares of our Class A and Class B common stock used to compute net (loss) income per common share (in thousands):

Year Ended December 31,

9 unchanged sentences

diluted 35,010 35,701 35,713

For the years ended December 31, 2021, 2020 and 2019, an aggregate of 181,000 , 79,000 and 187,000 shares, respectively, underlying performance-based stock options and PSUs were not included in the computations of diluted and anti-dilutive shares as they are considered contingently issuable upon satisfaction of pre-defined performance measures and their respective performance measures have not been met.

RSUs with an anti-dilutive effect were excluded from the calculation of weighted average number of shares used to compute diluted net income per common share and they were not material for the years ended December 31, 2021, 2020 and 2019.

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.

For the years ended December 31, 2021 and 2020, an aggregate of 181,000 and 79,000 shares, respectively, underlying performance-based restricted stock units ("PSUs") were not included in the computations of diluted and anti-dilutive shares as they are considered contingently issuable upon satisfaction of pre-defined performance measures and their respective performance measures had not been met.

Restricted stock units ("RSUs") with an anti-dilutive effect were excluded from the calculation of weighted average number of shares used to compute diluted net income per common share and they were not material for the years ended December 31, 2021 and 2020.

Because we reported a net loss for the years ended December 31, 2022, all potentially dilutive common shares are anti-dilutive for these periods and have been excluded from the calculation of net loss per share.

Recent Accounting Pronouncements Not Yet Adopted

In October 2021, the FASB issued ASU 2021-08, " Business Combinations (Topic 805):

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 and interim reporting periods within those fiscal years beginning after December 15, 2022.

We will adopt ASU 2021-08 on January 1, 2023 on a prospective basis to business combinations that occur on or after the adoption date.

The Company is currently evaluating the effect, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows and disclosures.

Divestiture of MyCase

On September 30, 2020, we completed our divestiture of 100% of our issued and outstanding equity interests of MyCase, Inc.

ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted.

We expect to adopt ASU 2021-08 on January 1, 2023.

Sales of Subsidiary Businesses

Sale of WegoWise

In August 2022, we completed the sale of AppFolio Utility Management, Inc., dba WegoWise ("WegoWise"), a former wholly owned subsidiary of the Company that provided cloud-based utility analytics reporting software solutions to our customers.

We sold WegoWise for $ 5.2 million (the “WegoWise Transaction”) and recognized a pre-tax gain on the sale of $ 4.2 million.

Net assets divested are primarily comprised of intangible assets of $ 2.5 million and deferred revenue of $ 1.7 million.

The gain on the sale is included within Other income, net in our Consolidated Statements of Operations.

Sale of MyCase

On September 30, 2020, we completed the sale of MyCase, Inc.

("MyCase"), a former wholly owned subsidiary that provided legal practice and case management software solutions to our legal customers, for $ 193.0 million, consisting of $ 192.2 million of cash proceeds, plus a $ 2.2 million employee retention bonus pool funded by us, less cash divested of $ 0.8 million and a preliminary working capital adjustment of $ 0.6 million (the "MyCase Transaction").

4 unchanged sentences

Income received during the twelve months ended December 31, 2021 and 2020 in relation to the transition services provided by us to MyCase was $ 2.4 million, and $ 1.1 million respectively, and is included within Other income, net in our Consolidated Statements of Operations.

Investments and Fair Value Measurements

Investment Securities and Fair Value Measurements

Investment Securities

8 unchanged sentences

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value

Corporate bonds $ 29,080 $ — $ ( 11 ) $ 29,069

Agency securities 19,753 — ( 27 ) 19,726

1 unchanged sentence

Total available-for-sale investment securities $ 125,941 $ 2 $ ( 267 ) $ 125,676

At December 31, 2021 and 2020, the contractual maturities of our investments did not exceed 36 months.

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

As of December 31, 2022, the decline in fair value below amortized cost basis was not considered other than temporary as it is more likely than not we will hold the securities until maturity or recovery of the cost basis.

No allowance for credit losses for available-for-sale investment securities was recorded as of December 31, 2022 or 2021.

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

December 31, 2022 December 31, 2021

20 unchanged sentences

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 present our financial assets and liabilities measured at fair value on a recurring basis at December 31, 2021 and 2020, by level within the fair value hierarchy (in thousands):

The following tables present our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021 by level within the fair value hierarchy (in thousands):

December 31, 2022

Level 1 Level 2 Level 3 Total Fair

Level 1 Level 2 Total Fair

Cash equivalents:

Money market funds $ 41,973 $ — $ 41,973

Treasury securities 1,287 — 1,287

Available-for-sale investment securities:

4 unchanged sentences

December 31, 2021

Level 1 Level 2 Level 3 Total Fair

Level 1 Level 2 Total Fair

Cash equivalents:

Money market funds $ 6,105 $ — $ 6,105

Treasury securities 97,433 — — 97,433

Available-for-sale investment securities:

Corporate bonds — 29,069 29,069

Agency securities — 19,726 19,726

1 unchanged sentence

Total $ 82,986 $ 48,795 $ 131,781

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

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

There were no changes to our valuation techniques used to measure asset and liability fair values on a recurring basis during the year ended December 31, 2022.

18 unchanged sentences

Depreciation expense for property and equipment totaled $ 5.1 million, $ 4.7 million, and $ 4.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.

During the year ended December 31, 2022, we recorded an impairment of $ 4.4 million related to property and equipment associated with our leased office spaces.

For additional information, see Note 9, Leases .

Capitalized Software Development Costs, net

5 unchanged sentences

Amortization expense with respect to software development costs totaled $ 23.6 million, $ 21.5 million and $ 17.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.

During the year ended December 31, 2021, we disposed of $ 8.8 million of fully amortized capitalized software development costs.

Future amortization expense with respect to capitalized software development costs at December 31, 2021 is estimated as follows (in thousands):

During the years ended December 31, 2022 and 2021, we disposed of $ 3.3 million and $ 8.8 million, respectively, of fully amortized capitalized software development costs.

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

Years Ending December 31,

1 unchanged sentence

Total amortization expense $ 35,315

Intangible Assets, net

Intangible Assets, net and Goodwill

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

31 unchanged sentences

Total intangible assets, net $ 28,021 $ ( 16,310 ) $ 11,711 6.3

During the year ended December 31, 2022, we divested intangible assets of $ 2.5 million as part of the WegoWise Transaction.

For additional information see Note 3, Sales of Subsidiary Businesses .

Amortization expense with respect to intangible assets totaled $ 4.4 million, $ 4.6 million and $ 4.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.

2 unchanged sentences

Thereafter 471

Total amortization expense $ 11,711

Total $ 4,833

Our goodwill balance is solely attributed to acquisitions.

The change in the carrying amount of goodwill during the year ended December 31, 2022 is as follows (in thousands):

Goodwill at December 31, 2021 $ 56,147

Goodwill attributed to WegoWise Transaction ( 87 )

Goodwill at December 31, 2022 $ 56,060

Accrued Employee Expenses

2 unchanged sentences

Accrued bonuses 13,806 13,101

Accrued commissions 2,048 1,995

Accrued payroll 3,068 1,921

Accrued payroll taxes and other 1,173 1,057

Total accrued employee expenses—current $ 30,065 $ 18,888

Accrued employee expenses—noncurrent $ 583 $ —

Operating leases for our corporate offices have remaining lease terms ranging from one to eleven years , some of which include options to extend the leases for up to ten years .

Accrued payroll and other 8,503 6,289

Total accrued employee expenses $ 34,376 $ 30,065

Operating leases for our corporate offices have remaining lease terms ranging from five months to ten years , some of which include options to extend the leases for up to ten years .

These options to extend have not been recognized as part of our operating lease right-of-use assets and lease liabilities as it is not reasonably certain that we will exercise these options.

Our lease agreements do not contain any residual value guarantees or material restrictive covenants.

Certain leases contain provisions for property-related costs that are variable in nature for which the Company is responsible, including common area maintenance, which are expensed as incurred.

Certain leases contain provisions for property-related costs that are variable in nature for which we are responsible, including common area maintenance, which are expensed as incurred.

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

17 unchanged sentences

imputed interest ( 11,525 )

(1) Future minimum lease payments for the years ending December 31, 2022, 2023 and 2024 are presented net of tenant improvement allowances of $ 6.0 million, $ 0.8 million, and $ 0.2 million, respectively.

(2) Total future minimum lease payments include the current portion of lease liabilities recorded in Prepaid expenses and other current assets of $ 4.9 million on our Consolidated Balance Sheets, which relates to certain of our leases for which the lease incentives to be received exceed the minimum lease payments to be paid over the next twelve months.

Total $ 53,594

(1) Future minimum lease payments for the year ending December 31, 2023 are presented net of tenant improvement allowances of $ 3.5 million.

During the current year, we decided to exit and make available for sublease certain leased office spaces.

As a result, we reassessed our asset groupings and evaluated the recoverability of our right-of-use and other lease related assets, and determined that the carrying value of the respective asset groups was not fully recoverable.

We utilized discounted cash flow models to estimate the fair value of the asset groups taking into consideration the time period it will take to obtain a sublessee, the applicable discount rates and the anticipated sublease income and calculated the corresponding impairment loss.

We used prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets, as well as our historical experience in real estate transactions.

When available, we use valuation inputs from independent valuation experts, such as real estate appraisers and brokers, to corroborate our estimates of fair value.

We recorded a net impairment of $ 22.0 million consisting of $ 17.6 million related to ROU assets and $ 4.4 million related to property and equipment associated with our leased office spaces.

These amounts were recorded within General and administrative in our Consolidated Statements of Operations.

Commitments and Contingencies

1 unchanged sentence

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 liability for reported claims and incurred but not reported claims as of December 31, 2021 and 2020 was $ 1.7 million and $ 1.5 million, respectively, and is included in Other current liabilities on our Consolidated Balance Sheets.

Our estimated liability for reported claims and incurred but not reported claims as of December 31, 2022 and 2021 was $ 2.7 million and $ 1.7 million, respectively, and is included in Other current liabilities on our Consolidated Balance Sheets.

Included in Prepaid expenses and other current assets as of December 31, 2022 and 2021 are $ 4.5 million and $ 3.0 million, respectively, of deposits held with a third party related to requirements to maintain collateral for this risk mitigation service.

1 unchanged sentence

From time to time we may become involved in various legal proceedings, investigative inquiries, and other disputes arising from or related to matters incident to the ordinary course of our business activities.

We are not currently a party to any legal proceedings, nor are we aware of any pending or threatened legal proceedings, that would have a material adverse effect on our business, operating results, cash flows or financial condition should such proceedings be resolved unfavorably.

We are not currently a party to any legal proceedings, nor are we aware of any pending or threatened legal proceedings, that we believe would have a material adverse effect on our business, operating results, cash flows or financial condition should such proceedings be resolved unfavorably.

Indemnification

In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, investors, directors and officers with respect to certain matters, including, but not limited to, losses arising out of our breach of any applicable agreements, services to be provided by us, or intellectual property infringement claims made by third parties.

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.

14 unchanged sentences

In addition, our amended and restated certificate of incorporation requires the approval of the holders of at least a majority of the outstanding shares of our Class B common stock, voting as a separate class to approve a change-in-control transaction.

Upon the closing of our initial public offering ("IPO"), all shares of our convertible preferred stock and common stock held prior to the offering were converted into shares of Class B common stock.

Currently, each share of our Class B common stock is convertible at any time at the option of the holder into one share of our Class A common stock.

Each share of our Class B common stock is convertible at any time at the option of the holder into one share of our Class A common stock.

In addition, each share of our Class B common stock will convert into one share of our Class A common stock upon any transfer, whether or not for value, except for certain transfers described in our amended and restated certificate of incorporation, including, without limitation, (i) a transfer by a partnership or limited liability company that was a registered holder of our Class B common stock at the “effective time,” as defined in our amended and restated certificate of incorporation, to a partner or member thereof at the effective time or (ii) a transfer to a “qualified recipient,” as defined in our amended and restated certificate of incorporation.

9 unchanged sentences

Under the Share Repurchase Program, share repurchases may be made from time to time, as directed by a committee consisting of three directors, in open market purchases or in privately negotiated transactions at a repurchase price that the members of the committee unanimously believe is below intrinsic value conservatively determined.

The Share Repurchase Program does not obligate us to repurchase any

specific dollar amount or number of shares, there is no expiration date for the Share Repurchase Program, which may be modified, suspended or terminated at any time and for any reason.

The Share Repurchase Program does not obligate us to repurchase any specific dollar amount or number of shares, there is no expiration date for the Share Repurchase Program, which may be modified, suspended or terminated at any time and for any reason.

During the year ended December 31, 2020, we repurchased a total of 48,002 shares of our Class A common stock through open market repurchases, and recorded a $ 4.2 million reduction to stockholders' equity, which includes broker commissions.

1 unchanged sentence

Stock-Based Compensation

2015 Stock Incentive Plan

In conjunction with our IPO in 2015, our Board of Directors and stockholders adopted the 2015 Stock Incentive Plan (the "2015 Plan").

Upon adoption of the 2015 Plan, 2,000,000 shares of our Class A common stock were reserved and available for grant and issuance.

We currently have two stock incentive plans, our 2007 Stock Incentive Plan (the "2007 Plan") and the 2015 Stock Incentive Plan (the "2015 Plan").

The 2007 Plan expired on February 14, 2017, however it will continue to govern outstanding awards granted under the 2007 Plan.

Under the 2015 Plan, 2,000,000 shares of our Class A common stock were reserved and available for grant and issuance.

On January 1 of each subsequent calendar year, the number of shares available for grant and issuance under the 2015 Plan increase by the lesser of (i) the number of shares of our Class A common stock subject to awards granted under the 2015 Plan during the preceding calendar year and (ii) such lesser number of shares of our Class A common stock determined by our Board of Directors.

4 unchanged sentences

RSUs, PSUs, and RSAs have been issued during 2022 pursuant to the 2015 Plan.

Stock options may vest based on the passage of time or the achievement of performance conditions at the discretion of our compensation committee.

Our compensation committee may provide for stock options to be exercised only as they vest or to be immediately exercisable with any shares issued on exercise being subject to our right of repurchase that lapses as the shares vest.

The maximum term of stock options granted under the 2015 Plan is 10 years.

RSUs and PSUs represent the right on the part of the holder to receive shares of our Class A common stock at a specified date in the future or the achievement of performance conditions at the discretion of our compensation committee, subject to forfeiture of that right due to termination of employment.

If an RSU or PSU has not been forfeited, then, on the specified date, we will deliver to the holder of the RSU or PSU shares of our Class A common stock.

2007 Stock Incentive Plan

On February 14, 2007, our Board of Directors adopted the 2007 Stock Incentive Plan (the “2007 Plan”).

Following our IPO, our Board of Directors determined not to make any further awards under the 2007 Plan.

The 2007 Plan expired on February 14, 2017.

The 2007 Plan will continue to govern outstanding awards granted under the 2007 Plan.

Stock Options

2 unchanged sentences

Options outstanding as of December 31, 2021 846 $ 13.15 3.0

Options granted — —

Options exercised ( 330 ) 13.56

Options cancelled/forfeited — —

Options outstanding as of December 31, 2022 516 $ 12.90 2.7

2 unchanged sentences

Options exercisable 516 $ 12.90 2.7

Our stock-based compensation expense for stock options were not material for all periods presented.

Our stock-based compensation expense for stock options were not material for the periods presented.

No stock options were granted during the years ended December 31, 2022, 2021 or 2020.

10 unchanged sentences

Unvested as of December 31, 2022 1,162 $ 116.88

Unvested RSUs as of December 31, 2021 were comprised of 0.6 million RSUs with only service conditions and 0.2 million PSUs with both service conditions and performance conditions.

Unvested RSUs as of December 31, 2022 were composed of 1.0 million RSUs with only service conditions and 0.2 million PSUs with both service conditions and performance conditions.

RSUs granted with only service conditions generally vest over a four-year period.

15 unchanged sentences

Vested ( 4 ) 144.33

Forfeited — —

Unvested as of December 31, 2022 6 $ 96.33

1 unchanged sentence

Restricted stock awards vest over a one-year period.

We recognized stock-based compensation expense for restricted stock awards of $ 0.7 million and for each of the years ended December 31, 2021, and 2020 and $ 0.3 million for the ended December 31, 2019.

During 2021, the grant date fair value of the shares vested was $ 0.7 million.

Our stock-based compensation expense for RSAs was not material for the periods presented.

As of December 31, 2022, the total estimated remaining stock-based compensation expense for unvested restricted stock awards with a repurchase right was $ 0.3 million, which is expected to be recognized over a weighted average period of 0.5 years.

The effective tax rate as compared to the U.S.

federal statutory rate of 21 % differs primarily due to the significance of the benefits associated with stock-based compensation expense, research and development tax credits, and the change in the valuation allowance against deferred taxes.

Set forth below is a reconciliation of the components that caused our provision for (benefit from) income taxes to differ from amounts computed by applying the United States federal statutory rate :

federal statutory rate of 21 % differs primarily due to change in valuation allowance against deferred taxes and non-deductible expenses, partially offset by state income taxes and tax benefits associated with stock-based compensation expense and research and development tax credits.

Set forth below is a reconciliation of the components that caused our provision for income taxes to differ from amounts computed by applying the United States federal statutory rate:

Year Ended December 31,

3 unchanged sentences

Stock-based compensation expense 7 ( 426 ) ( 3 )

Non-deductible officers' compensation ( 6 ) 47 —

Meals and entertainment — 3 —

2 unchanged sentences

Research and development tax credits 5 ( 205 ) ( 2 )

Provision for (benefit from) income taxes 41 % 20 % ( 652 ) %

The provision for (benefit from) income tax consists of the following (in thousands):

Provision for income taxes ( 2 ) % 41 % 20 %

The provision for income tax consists of the following (in thousands):

Year Ended December 31,

6 unchanged sentences

Total deferred ( 597 ) 340 29,002

Total income tax provision (benefit) $ 706 $ 38,428 $ ( 31,459 )

Total income tax provision $ 1,402 $ 706 $ 38,428

The components of deferred tax assets (liabilities) were as follows (in thousands):

2 unchanged sentences

Research and development tax credits 18,558 15,966

Capitalized research and software costs 14,706 —

Stock-based compensation 5,105 3,965

5 unchanged sentences

Deferred tax liabilities:

Property, equipment and software ( 14,996 ) ( 13,412 )

Capitalized research and software costs — ( 9,972 )

Property and equipment ( 4,914 ) ( 5,024 )

Intangible assets ( 940 ) ( 1,558 )

Capitalized commissions ( 4,217 ) ( 3,296 )

State taxes — ( 2,350 )

Lease asset ( 6,249 ) ( 11,056 )

2 unchanged sentences

Total net deferred tax liabilities $ ( 685 ) $ ( 1,678 )

At December 31, 2021, we had federal and state net operating loss carryforwards of $ 23.8 million and $ 69.6 million, respectively.

The federal net operating loss carryovers do not expire and the state net operating losses will begin to expire in 2028.

At December 31, 2022, we had state net operating loss carryforwards $ 66.0 million.

The state net operating losses will begin to expire in 2028.

At December 31, 2022, we also had federal and state research and development credit carryforwards of $ 8.7 million and $ 19.3 million, respectively.

The federal credit carryforwards will begin to expire in 2040, while the state credit carryforwards apply indefinitely.

The Internal Revenue Code of 1986, as amended (“IRC”), imposes substantial restrictions on the utilization of tax attributes in the event of an “ownership change” of a corporation.

Accordingly, a company’s ability to use pre-change tax attributes may be limited as prescribed under IRC Section 382.

Events which may cause limitations in the amount of the tax attributes that we utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a rolling three-year period.

We have undertaken an IRC Section 382 analysis and have determined that there are no limitations on the tax attributes at December 31, 2021.

As of December 31, 2021, we have approximately $ 1.7 million of net deferred tax liabilities.

During the fourth quarter of 2021, to assess the need for a valuation allowance against deferred tax assets, we evaluated all available positive and negative evidence.

Due to the amount of negative evidence, particularly the expected increase in forecasted expenses, at this time, we consider it more likely than not that we may not have sufficient taxable income in the future that will allow us to realize all of our deferred tax assets.

As a result,we determined a valuation allowance was necessary against all of the net deferred income tax assets, which primarily consist of state R&D tax credit carryforwards, effective December 31, 2021.

Utilization of our net operating loss and credit carryforwards may be subject to annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions.

We have undertaken an analysis and have determined that there are no limitations on the tax attributes at December 31, 2022.

The change in the valuation allowance are as follows (in thousands):

2 unchanged sentences

Valuation allowance, at beginning of year $ 17,217 $ — $ —

Increase (decrease) in valuation allowance 17,217 — ( 23,002 )

Increase in valuation allowance 26,559 17,217 —

Valuation allowance, at end of year $ 43,776 $ 17,217 $ —

10 unchanged sentences

Due to the net operating loss carryforwards, our federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions for all years since inception.

We are under audit only by the State of New York.

Revenue and Other Information

14 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data