APPFOLIO INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 30 Consolidated Balance Sheets 32 Consolidated Statements of Operations 33 Consolidated Statements of Comprehensive (Loss) Income 34 Consolidated Statements of Stockholders' Equity 35 Consolidated Statements of Cash Flows 36 Notes to Consolidated Financial Statements 38 29 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of AppFolio, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of AppFolio, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive (loss) income, of stockholder’s equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 30 Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Impairment of Long-Lived Assets As described in Note 9 to the consolidated financial statements, the Company decided to exit and make available for sublease certain leased office spaces. Management reassessed the Company’s asset groupings and evaluated the recoverability of the Company’s right-of-use and other lease-related assets and determined that the carrying value of the respective asset groups was not fully recoverable. Management utilized discounted cash flow models to estimate the fair value of the asset groups taking into consideration the time period it will take to obtain a sublessee, the applicable discount rates and the anticipated sublease income and calculated the corresponding impairment loss. The Company recorded a net impairment of $22.0 million related to right-of-use assets and property and equipment associated with the leased office space. The principal considerations for our determination that performing procedures relating to the impairment of long-lived assets is a critical audit matter are (i) the significant judgment by management in developing the fair value estimate of the asset groups; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the time period it will take to obtain a sublessee and the anticipated sublease income; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the impairment of long-lived assets, including controls over the valuation of the asset groups. These procedures also included, among others (i) evaluating the reassessment of asset groupings and the recoverability of the right-of-use and other lease-related assets; (ii) testing management’s process for developing the fair value estimate of the asset groups; (iii) evaluating the appropriateness of the discounted cash flow models; (iv) testing the completeness and accuracy of underlying data used in the discounted cash flow models; and (v) evaluating the reasonableness of the significant assumptions used by management related to the time period it will take to obtain a sublessee and the anticipated sublease income. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the discounted cash flow models and evaluating the reasonableness of the significant assumptions related to the time period it will take to obtain a sublessee and the anticipated sublease income. /s/ PricewaterhouseCoopers LLP Los Angeles, California February 9, 2023 We have served as the Company’s auditor since 2012. 31 APPFOLIO, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par values) December 31, 2022 2021 Assets Current assets Cash and cash equivalents $ 70,769 $ 57,847 Investment securities—current 89,297 64,600 Accounts receivable, net 16,503 12,595 Prepaid expenses and other current assets 24,899 23,553 Total current assets 201,468 158,595 Investment securities—noncurrent 25,161 61,076 Property and equipment, net 26,110 30,479 Operating lease right-of-use assets 23,485 41,710 Capitalized software development costs, net 35,315 41,212 Goodwill 56,060 56,147 Intangible assets, net 4,833 11,711 Other long-term assets 8,785 7,087 Total assets $ 381,217 $ 408,017 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 2,473 $ 1,704 Accrued employee expenses 34,376 30,065 Accrued expenses 15,601 13,284 Other current liabilities 8,893 7,589 Total current liabilities 61,343 52,642 Operating lease liabilities 50,237 55,733 Other liabilities 4,091 2,261 Total liabilities 115,671 110,636 Commitments and contingencies (Note 10) Stockholders’ equity: Preferred stock, $ 0.0001 par value, 25,000 shares authorized and no shares issued and outstanding as of December 31, 2022 and December 31, 2021 — — Class A common stock, $ 0.0001 par value, 250,000 shares authorized as of December 31, 2022 and December 31, 2021; 20,988 and 19,836 shares issued as of December 31, 2022 and December 31, 2021, respectively; 20,569 and 19,417 shares outstanding as of December 31, 2022 and December 31, 2021, respectively 2 2 Class B common stock, $ 0.0001 par value, 50,000 shares authorized as of December 31, 2022 and December 31, 2021; 14,746 and 15,408 shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively 2 2 Additional paid-in capital 209,704 171,930 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 ( 25,756 ) ( 25,756 ) Retained earnings 83,278 151,397 Total stockholders’ equity 265,546 297,381 Total liabilities and stockholders’ equity $ 381,217 $ 408,017 The accompanying notes to the Consolidated Financial Statements are an integral part of these statements. 32 APPFOLIO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Year Ended December 31, 2022 2021 2020 Revenue $ 471,883 $ 359,370 $ 310,056 Costs and operating expenses: 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 Total costs and operating expenses 544,253 371,248 300,273 (Loss) income from operations ( 72,370 ) ( 11,878 ) 9,783 Other income, net 4,469 13,111 188,897 Interest income (expense), net 1,184 501 ( 1,849 ) (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 Diluted $ ( 1.95 ) $ 0.03 $ 4.44 Weighted average common shares outstanding: Basic 35,010 34,578 34,264 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. 33 APPFOLIO, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (in thousands) Year Ended December 31, 2022 2021 2020 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 (loss) income $ ( 69,609 ) $ 778 $ 158,426 The accompanying notes to the Consolidated Financial Statements are an integral part of these statements. 34 APPFOLIO, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) Accumulated Retained Additional Other Earnings/ Common Stock Common Stock Paid-in Comprehensive Treasury (Accumulated Class A Class B Capital (Loss) Income Stock Deficit) Total Shares Amount Shares Amount Balance at December 31, 2019 16,552 $ 2 17,594 $ 2 $ 161,509 $ 33 $ ( 21,562 ) $ ( 8,034 ) $ 131,950 Exercise of stock options 106 — 13 — 822 — — — 822 Stock-based compensation — — — — 11,112 — — — 11,112 Vesting of restricted stock units, net of shares withheld for taxes 166 — — — ( 12,196 ) — — — ( 12,196 ) Conversion of Class B common stock to Class A common stock 1,948 — ( 1,948 ) — — — — — — Issuance of restricted stock awards 5 — — — — — — — — Other comprehensive income — — — — — 23 — — 23 Repurchase of common stock ( 48 ) — — — — — ( 4,194 ) — ( 4,194 ) Net income — — — — — — — 158,403 158,403 Balance at December 31, 2020 18,729 2 15,659 2 161,247 56 ( 25,756 ) 150,369 285,920 Exercise of stock options 238 — 84 — 2,614 — — — 2,614 Stock-based compensation — — — — 18,031 — — — 18,031 Vesting of restricted stock units, net of shares withheld for taxes 111 — — — ( 9,962 ) — — — ( 9,962 ) Conversion of Class B common stock to Class A common stock 335 — ( 335 ) — — — — — — Issuance of restricted stock awards 4 — — — — — — — — Other comprehensive loss — — — — — ( 250 ) — — ( 250 ) Net income — — — — — — — 1,028 1,028 Balance at December 31, 2021 19,417 2 15,408 2 171,930 ( 194 ) ( 25,756 ) 151,397 297,381 Exercise of stock options 303 — 27 — 4,474 — — — 4,474 Stock-based compensation — — — — 43,937 — — — 43,937 Vesting of restricted stock units, net of shares withheld for taxes 154 — — — ( 10,637 ) — — — ( 10,637 ) 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 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 The accompanying notes to the Consolidated Financial Statements are an integral part of these statements. 35 APPFOLIO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2022 2021 2020 Cash from 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 Stock-based compensation, including as amortized 43,234 17,154 10,308 Gain on sale of business ( 4,156 ) ( 380 ) ( 187,658 ) Gain on sale of equity-method investment and recovery of note receivable ( 40 ) ( 12,767 ) — Other 175 249 125 Changes in operating assets and liabilities: Accounts receivable ( 4,198 ) ( 2,103 ) ( 2,782 ) Prepaid expenses and other current assets ( 5,398 ) ( 2,168 ) ( 5,894 ) Other assets ( 1,883 ) ( 1,259 ) ( 519 ) Accounts payable 1,176 497 ( 903 ) Accrued employee expenses 4,281 11,264 2,799 Accrued expenses 3,452 ( 1,773 ) 6,878 Operating lease liabilities ( 2,524 ) 1,268 ( 564 ) Other liabilities 4,329 ( 8,100 ) 9,896 Net cash provided by operating activities 25,365 35,391 48,299 Cash from investing activities Purchases of available-for-sale investments ( 79,279 ) ( 241,215 ) ( 43,877 ) Proceeds from sales of available-for-sale investments 994 43,198 16,711 Proceeds from maturities of available-for-sale investments 87,883 107,354 27,330 Purchases of property and equipment ( 6,540 ) ( 8,103 ) ( 19,038 ) Capitalization of software development costs ( 14,688 ) ( 24,615 ) ( 26,042 ) Proceeds from sale of business, net of cash divested 5,124 402 191,427 Proceeds from sale of equity-method investment 40 12,520 — Net cash (used in) provided by investing activities ( 6,466 ) ( 110,459 ) 146,511 Cash from financing activities Proceeds from stock option exercises 4,474 2,614 822 Tax withholding for net share settlement ( 10,637 ) ( 9,962 ) ( 12,196 ) Payment of contingent consideration — — ( 5,977 ) Proceeds from issuance of debt — — 50,752 Principal payments on debt — — ( 99,565 ) 36 Purchase of treasury stock — — ( 4,194 ) Net cash used in financing activities ( 6,163 ) ( 7,348 ) ( 70,358 ) Net increase (decrease) in cash and cash equivalents 12,736 ( 82,416 ) 124,452 Cash, cash equivalents and restricted cash Beginning of period 58,283 140,699 16,247 End of period $ 71,019 $ 58,283 $ 140,699 APPFOLIO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2022 2021 2020 Supplemental disclosure of cash flow information Cash paid for interest $ — $ — $ 1,815 Cash paid for income taxes 3,338 9,324 85 Cash paid for amounts included in the measurement of lease liabilities included in operating cash flows 3,933 1,618 2,198 Right-of-use assets obtained in exchange for operating lease liabilities — 11,945 6,644 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): December 31, 2022 2021 2020 Cash and cash equivalents $ 70,769 $ 57,847 $ 140,263 Restricted cash included in other assets 250 436 436 Total cash, cash equivalents and restricted cash $ 71,019 $ 58,283 $ 140,699 The accompanying notes to the Consolidated Financial Statements are an integral part of these statements. 37 APPFOLIO, INC. NOTES TO CONSOLIDATED AUDITED 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 property manager customers to digitally transform their businesses, address critical business operations and deliver a better customer experience. Digital transformation is effectively a requirement for business success in the modern world, and the way we work and live requires powerful software solutions. During the year ended December 31, 2020, we also provided cloud-based solutions and services to the legal industry via MyCase, a solution primarily designed for small and mid-sized law firms. As previously disclosed, we completed the sale of MyCase, Inc. on September 30, 2020. For additional details, see Note 3, Sales of Subsidiary Businesses . 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Reclassification We reclassified certain amounts in our Consolidated Balance Sheets and Consolidated Statements of Cash Flows within the cash flows from operating activities section in the prior year to conform to the current year's presentation. Principles of Consolidation The accompanying Consolidated Financial Statements include the operations of AppFolio, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. We accounted for our investment in SecureDocs, Inc. (“SecureDocs”) under the equity method of accounting as we had the ability to exert significant influence, but did not control and were not the primary beneficiary of the entity. Our investment in SecureDocs was not material and any income (loss) activity was not material individually or in the aggregate to our Consolidated Financial Statements for any period presented. In December 2021, we sold our interest in SecureDocs. Refer to Note 4, Investment Securities and Fair Value Measurements for additional information. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue, expenses, other income, and provision for income taxes during the reporting period. Assets and liabilities which are subject to judgment and use of estimates include the fair value of financial instruments, capitalized software development costs, period of benefit associated with deferred costs, incremental borrowing rate used to measure operating lease liabilities, the recoverability of goodwill and long-lived assets, income taxes, useful lives associated with property and equipment and intangible assets, contingencies, assumptions underlying performance-based compensation (whether cash or stock-based), and assumptions underlying stock-based compensation. Actual results could differ from those estimates and any such differences may have a material impact on our Consolidated Financial Statements. Segment Information Our chief operating decision maker reviews financial information presented on an aggregated and consolidated basis, together with revenue information for our core solutions, Value Added Services, and other service offerings, principally to make decisions about how to allocate resources and to measure our performance. Accordingly, we have determined that we have one reportable and operating segment. Concentrations of Credit Risk Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents, restricted cash, accounts receivable, and investment securities. We maintain cash balances at financial institutions in excess of amounts insured by United States government agencies or payable by the United States government directly. We place our cash with high credit, quality financial institutions. We invest in investment securities with a minimum rating of A by Standard & Poor's or A-1 by Moody's and regularly monitor our investment security portfolio for changes in credit ratings. 38 Concentrations of credit risk with respect to accounts receivable and revenue are limited due to a large, diverse customer base. No individual customer represented 10% or more of accounts receivable at December 31, 2022 and 2021 or revenue for the years ended December 31, 2022, 2021 and 2020. Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following: Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, in the marketplace. Level 3 - Unobservable inputs that are supported by little or no market activity. Cash, Cash Equivalents and Restricted Cash We consider all highly liquid investments, readily convertible to cash, and which have a remaining maturity date of three months or less at the date of purchase, to be cash equivalents. Cash and cash equivalents are recorded at fair value and consist primarily of bank deposits and money market funds. Investment Securities Our investment securities currently consist of corporate bonds, United States government agency securities and treasury securities. We classify investment securities as available-for-sale at the time of purchase and reevaluate such classification at each balance sheet date. All investments are recorded at estimated fair value and investments with original maturities of less than one year at the time of purchase are classified as short-term. Unrealized gains and losses for available-for-sale investment securities are included in accumulated other comprehensive income, a component of stockholders' equity. For available-for-sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of these criteria is met, the security’s amortized cost basis is written down to fair value through income. For securities in an unrealized loss position that do not meet these criteria, we evaluate whether the decline in fair value has resulted from credit loss or other factors. If this assessment indicates a credit loss exists, the credit-related portion of the loss is recorded as an allowance for losses on the security. No allowance for credit losses for available-for-sale investment securities was recorded as of December 31, 2022 and 2021. Accounts Receivable Accounts receivable are recorded at the invoiced amount, net of an allowance for credit losses. The allowance for credit losses is based on historical loss experience, the number of days that receivables are past due, and an evaluation of the potential risk of loss associated with delinquent accounts. Accounts receivable considered uncollectible are charged against the allowance for credit losses when identified. We do not have any off-balance sheet credit exposure related to our customers. At December 31, 2022 and 2021, our allowance for credit losses was not material. Property and Equipment Property and equipment is stated at cost net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of assets as follows: Asset Type Depreciation Period Computer equipment 3 years Furniture and fixtures 7 years Office equipment 3 to 5 years Leasehold improvements Shorter of remaining life of lease or asset life 39 Leases We determine if an arrangement is a lease at inception. Operating lease right-of-use ("ROU") assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments, over the lease term at commencement date. As none of our leases provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU assets also include any lease payments made to the lessor before or at the lease commencement date and excludes lease incentives received and initial direct costs incurred. Our lease terms may include options to extend the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have lease arrangements with lease and non-lease components, which are generally accounted for as a single lease component. Leases with an initial term of twelve months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Capitalized Software Development Costs Software development costs consist of certain payroll and stock compensation costs incurred to develop functionality of our internal-use software solutions. We capitalize certain software development costs for new offerings as well as significant upgrades and enhancements to our existing software solutions. Capitalized software development costs are amortized using the straight-line method over an estimated useful life of three years . We do not transfer ownership of our software, license, or lease our software to third parties. Goodwill and Intangible Assets Goodwill is tested for impairment at least annually at the reporting unit level or at other times if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A qualitative assessment is performed to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessment results in a more-likely-than-not determination or if a qualitative assessment is not performed. The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recorded to the extent that the reporting unit’s carrying value exceeds its fair value. We test for goodwill impairment annually during the fourth quarter of the calendar year. Based on the assessment performed at November 1, 2022, we determined it was not more likely than not that our reporting unit fair value was less than its carrying value and no quantitative impairment test assessment was required. No impairment losses were recorded for goodwill during the years ended December 31, 2022, 2021 and 2020. Intangible assets primarily consist of acquired database and technology, non-compete agreements, customer and partner relationships, trademarks and trade names, domain names and patents, which are recorded at cost, less accumulated amortization. We determine the appropriate useful life of our intangible assets by performing an analysis of expected cash flows of the acquired assets. Intangible assets are amortized over their estimated useful lives on a straight-line basis, which approximates the pattern in which the economic benefits of the assets are consumed. Impairment of Long-Lived Assets We assess the recoverability of our long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable or that the useful lives of those assets are no longer appropriate. An impairment charge would be recognized when the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. We recorded net lease-related impairment charges of $ 22.0 million for the year ended December 31, 2022. Refer to Note 9, Leases for additional information. There were no impairment charges related to the identified long-lived assets for the years ended December 31, 2021 and 2020. 40 Revenue Recognition We generate revenue from our customers primarily for subscriptions to access our core solutions and Value Added Services. Revenue is recognized upon transfer of control of promised services in an amount that reflects the consideration we expect to receive in exchange for those services. We enter into contracts that can include various combinations of services, which are generally capable of being distinct, distinct within the context of the contract, and accounted for as separate performance obligations. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We recognize revenue in proportion to the amount we have the right to invoice for certain core solutions and Value Added Services revenue, as that amount corresponds directly with our performance completed to date. Refer to Note 14, Revenue and Other Information for the disaggregated breakdown of revenue between Core solutions, Value Added Services and Other revenue. Core Solutions We charge our customers on a subscription basis for our core solutions. Our customers do not have rights to the underlying software code of our solutions, and, accordingly, we recognize subscription revenue over time on a straight-line basis over the contract term beginning on the date that our service is made available to the customer. The terms of our subscription agreements are monthly, annual, and multiyear and we typically invoice our customers for subscription services in monthly or annual installments, in advance of the subscription period. Value Added Services We primarily charge our customers on a usage basis for our Value Added Services. Usage-based fees are charged either as a percentage of the transaction amount (e.g., for certain of our electronic payment services) or on a flat fee per transaction basis with no minimum usage commitments (e.g., for our tenant screening and risk mitigation services). We recognize revenue for usage-based services in the period the service is rendered. Our electronic payments services fees are recorded gross of the interchange and payment processing related fees. We generally invoice our customers for usage-based services on a monthly basis for services rendered in the preceding month. We also have certain Value Added Services which are charged on a subscription basis. We typically invoice our customers for subscription-based services in monthly installments, in advance of the subscription period. We recognize revenue for subscription-based services over time on a straight-line basis over the contract term beginning on the date that our service is made available to the customer. Some subscription or usage-based Value Added Services, such as fees for electronic payment services, are paid by either our customers or clients of our customers at the time the services are rendered. We work with third-party partners to provide certain of our Value Added Services. For these Value Added Services, we evaluate whether we are the principal, and report revenue on a gross basis, or the agent, and report revenue on a net basis. In this assessment we consider if we obtain control of the specified services before they are transferred to the customer, as well as other indicators such as whether we are the party primarily responsible for fulfillment, and whether we have discretion in establishing price. Other Revenue Other revenue include fees from one-time services related to the implementation of our software solutions and other recurring or one-time fees related to our customers who are not otherwise using our core solutions. This includes legacy customers of businesses we have acquired where the customers haven't migrated to our core solutions. The fees for implementation and data migration services are billed upon signing our core subscription contract and are recognized as revenue in the period the service is rendered. Other services are billed when the services rendered are completed and delivered to the customer or billed in advance and deferred over the subscription period. Deferred Revenue We record deferred revenue when cash payments are received in advance of our performance. Deferred revenue as of December 31, 2022 and 2021 was $ 0.9 million and $ 2.5 million, respectively. During the twelve months ended December 31, 2022 and 2021, we recognized revenue of $ 2.4 million and $ 2.2 million, respectively, that were included in the deferred revenue balances at December 31, 2021 and 2020, respectively. Remaining Performance Obligations Transaction price allocated to remaining performance obligations (“RPO”) represents contracted revenue that has not been recognized, which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenue in future periods. RPO does not include revenue related to performance obligations that are part of a contract whose original expected duration is one year or less or related to usage-based Value Added Services that are billed in arrears. 41 As of December 31, 2022, the total non-cancelable RPO under our contracts with customers was $ 15 million, and we expect to recognize revenue on approximately 47 % of these RPO over the following 12 months, with the balance to be recognized thereafter. Deferred Costs Deferred costs, which primarily consist of sales commissions, are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be three years . We typically do not pay commissions for contract renewals. We determined the period of benefit by taking into consideration our customer contract term, the useful life of our internal-use software, average customer life, and other factors. Amortization expense for the deferred costs is included within sales and marketing expense in the accompanying Consolidated Statements of Operations. Deferred costs were $ 15.8 million and $ 12.4 million at December 31, 2022 and 2021, respectively, of which $ 8.1 million and $ 6.4 million, respectively, are included in Prepaid expenses and other current assets and $ 7.7 million and $ 6.0 million, respectively, are included in Other assets in the accompanying Consolidated Balance Sheets. Amortization expense for deferred costs was $ 8.1 million, $ 6.8 million, and $ 5.8 million for the years ended December 31, 2022, 2021, and 2020, respectively. For the years ended December 31, 2022 and 2021, no impairments were identified in relation to the costs capitalized for the periods presented. Cost of Revenue (Exclusive of Depreciation and Amortization) Many of our Value Added Services are facilitated by third-party service providers. Cost of revenue paid to these third-party service providers includes the cost of electronic interchange and payment processing-related services to support our payments services, the cost of credit reporting services for our tenant screening services, and various costs associated with our risk mitigation service providers. These third-party costs vary both in amount and as a percent of revenue for each Value Added Service offering. Cost of revenue also consists of personnel-related costs for our employees focused on customer service and the support of our operations (including salaries, performance-based compensation, benefits, and stock-based compensation), platform infrastructure costs (such as data center operations and hosting-related costs), and allocated shared and other costs. Cost of revenue excludes depreciation of property and equipment, amortization of capitalized software development costs and amortization of intangible assets. Sales and Marketing Sales and marketing expense consists of personnel-related costs for our employees focused on sales and marketing (including salaries, sales commissions, performance-based compensation, benefits, and stock-based compensation), costs associated with sales and marketing activities, and allocated shared and other costs. Marketing activities include advertising, online lead generation, lead nurturing, customer and industry events, and the creation of industry-related content and collateral. We focus our sales and marketing efforts on generating awareness of our software solutions, creating sales leads, establishing and promoting our brands, and cultivating an educated community of successful and vocal customers. Advertising expenses were $ 9.2 million, $ 9.4 million and $ 7.0 million for each of the years ended December 31, 2022, 2021 and 2020, respectively, and are expensed as incurred. Research and Product Development Research and product development expense consists of personnel-related costs for our employees focused on research and product development (including salaries, performance-based compensation, benefits, and stock-based compensation), fees for third-party development resources, and allocated shared and other costs. Our research and product development efforts are focused on expanding functionality and the ease of use of our existing software solutions by adding new core functionality, Value Added Services and other improvements, as well as developing new products and services. We capitalize our software development costs which meet the criteria for capitalization. Amortization of capitalized software development costs is included in depreciation and amortization expense. General and Administrative General and administrative expense consists of personnel-related costs for employees in our executive, finance, information technology, human resources, legal, compliance, corporate development and administrative organizations (including salaries, performance-based compensation, benefits, and stock-based compensation). In addition, general and administrative expense includes fees for third-party professional services (including audit, legal, compliance, and tax services), transaction costs related to sales of subsidiary businesses, regulatory f, other corporate expenses, impairment of long-lived assets, and allocated shared costs. 42 Depreciation and Amortization Depreciation and amortization expense includes depreciation of property and equipment, amortization of capitalized software development costs, and amortization of intangible assets. We depreciate or amortize property and equipment, software development costs, and intangible assets over their expected useful lives on a straight-line basis, which approximates the pattern in which the economic benefits of the assets are consumed. Stock-Based Compensation We recognize stock-based compensation expense for restricted stock awards ("RSAs") and restricted stock units ("RSUs") with only service conditions on a straight-line basis over the requisite service period. For RSUs with both service and performance conditions (performance share units ("PSUs")), compensation cost is recorded on a graded-vesting method, if it is probable that the performance condition will be achieved. Adjustments to compensation expense are made each period based on changes in our estimate of the number of PSUs that are probable of vesting. PSUs will vest on the vesting date and upon achievement of the relevant performance metric once such calculation is finalized in accordance with our internal policies. We estimate a forfeiture rate to calculate our stock-based compensation expense for our stock-based awards. Income Taxes We recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the Consolidated Statements of Operations in the period that includes the enactment date. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we consider the weighting of all available positive and negative evidence, which includes, among other things, the nature, frequency and severity of current and cumulative taxable income or losses, future projections of profitability, and the duration of statutory carryforward periods. Net (Loss) Income per Common Share Basic net (loss) income per share includes no dilution and is computed by dividing net (loss) income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. The dilutive effect of outstanding options and equity incentive awards is reflected in diluted net income per share by application of the treasury stock method. The calculation of diluted net income per share excludes all anti-dilutive common shares. Net (loss) income per common share was the same for shares of our Class A and Class B common stock because they are entitled to the same liquidation and dividend rights and are therefore combined in the table below. The following table presents a reconciliation of the weighted average number of shares of our Class A and Class B common stock used to compute net (loss) income per common share (in thousands): Year Ended December 31, 2022 2021 2020 Weighted average common shares outstanding 35,015 34,583 34,269 Less: Weighted average unvested restricted shares subject to repurchase 5 5 5 Weighted average common shares outstanding; basic 35,010 34,578 34,264 Weighted average common shares outstanding; basic 35,010 34,578 34,264 Plus: Weighted average options, restricted stock units and restricted shares used to compute diluted net income per common share — 1,123 1,449 Weighted average common shares outstanding; diluted 35,010 35,701 35,713 For the years ended December 31, 2021 and 2020, an aggregate of 181,000 and 79,000 shares, respectively, underlying performance-based restricted stock units ("PSUs") were not included in the computations of diluted and anti-dilutive shares as they are considered contingently issuable upon satisfaction of pre-defined performance measures and their respective performance measures had not been met. Restricted stock units ("RSUs") with an anti-dilutive effect were excluded from the calculation of weighted average number of shares used to compute diluted net income per common share and they were not material for the years ended December 31, 2021 and 2020. Because we reported a net loss for the years ended December 31, 2022, all potentially dilutive common shares are anti-dilutive for these periods and have been excluded from the calculation of net loss per share. 43 Recent Accounting Pronouncements Not Yet Adopted In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-08, " Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ," which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, " Revenue from Contracts with Customers ," as if the acquirer had originated the contracts. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We expect to adopt ASU 2021-08 on January 1, 2023. 3. Sales of Subsidiary Businesses Sale of WegoWise In August 2022, we completed the sale of AppFolio Utility Management, Inc., dba WegoWise ("WegoWise"), a former wholly owned subsidiary of the Company that provided cloud-based utility analytics reporting software solutions to our customers. We sold WegoWise for $ 5.2 million (the “WegoWise Transaction”) and recognized a pre-tax gain on the sale of $ 4.2 million. Net assets divested are primarily comprised of intangible assets of $ 2.5 million and deferred revenue of $ 1.7 million. The gain on the sale is included within Other income, net in our Consolidated Statements of Operations. Sale of MyCase On September 30, 2020, we completed the sale of MyCase, Inc. ("MyCase"), a former wholly owned subsidiary that provided legal practice and case management software solutions to our legal customers, for $ 193.0 million, consisting of $ 192.2 million of cash proceeds, plus a $ 2.2 million employee retention bonus pool funded by us, less cash divested of $ 0.8 million and a preliminary working capital adjustment of $ 0.6 million (the "MyCase Transaction"). The retention bonus pool was refundable to the Company to the extent that MyCase employees were terminated prior to the retention period, which was one year from the closing date of the MyCase Transaction. We recognized a pre-tax gain on the sale of $ 188.0 million on the MyCase Transaction, consisting of cash proceeds of $ 192.2 million, less net assets divested of $ 4.6 million, plus an adjustment in the employee retention bonus pool of $ 0.4 million. Net assets divested is primarily comprised of capitalized software of $ 3.9 million, deferred revenue of $ 2.8 million and goodwill allocated to MyCase of $ 2.3 million. The gain on the sale was recorded within Other income, net . Income received during the twelve months ended December 31, 2021 and 2020 in relation to the transition services provided by us to MyCase was $ 2.4 million, and $ 1.1 million respectively, and is included within Other income, net in our Consolidated Statements of Operations. 44 4. Investment Securities and Fair Value Measurements Investment Securities Investment securities classified as available-for-sale consisted of the following at December 31, 2022 and 2021 (in thousands): 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 December 31, 2021 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 Treasury securities 77,108 2 ( 229 ) 76,881 Total available-for-sale investment securities $ 125,941 $ 2 $ ( 267 ) $ 125,676 As of December 31, 2022, the decline in fair value below amortized cost basis was not considered other than temporary as it is more likely than not we will hold the securities until maturity or recovery of the cost basis. No allowance for credit losses for available-for-sale investment securities was recorded as of December 31, 2022 or 2021. The fair values of available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands): December 31, 2022 December 31, 2021 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Due in one year or less $ 90,822 $ 89,297 $ 64,627 $ 64,600 Due after one year through three years 25,787 25,161 61,314 61,076 Total available-for-sale investment securities $ 116,609 $ 114,458 $ 125,941 $ 125,676 During the years ended December 31, 2022 and 2021, we had sales and maturities (which include calls) of investment securities, as follows (in thousands): Year Ended December 31, 2022 Gross Realized Gains Gross Realized Losses Gross Proceeds from Sales Gross Proceeds from Maturities Corporate bonds $ — $ ( 3 ) $ 994 $ 28,998 Agency securities — — — 2,250 Treasury securities — — — 56,635 $ — $ ( 3 ) $ 994 $ 87,883 45 Year Ended December 31, 2021 Gross Realized Gains Gross Realized Losses Gross Proceeds from Sales Gross Proceeds from Maturities Corporate bonds $ — $ — $ — $ 39,075 Agency securities — — — 11,575 Treasury securities 6 — 43,198 56,704 $ 6 $ — $ 43,198 $ 107,354 SecureDocs In December 2021, we sold all of our interest in SecureDocs. A gain of $ 12.8 million was recognized within Other income, net in our Consolidated Statements of Operations, a portion of which relates to the recovery of a $ 2.0 million note receivable which had been previously reserved. Fair Value Measurements Recurring Fair Value Measurements The following tables present our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021 by level within the fair value hierarchy (in thousands): 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 December 31, 2021 Level 1 Level 2 Total Fair Value Cash equivalents: Money market funds $ 6,105 $ — $ 6,105 Available-for-sale investment securities: Corporate bonds — 29,069 29,069 Agency securities — 19,726 19,726 Treasury securities 76,881 — 76,881 Total $ 82,986 $ 48,795 $ 131,781 The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short maturity of these items. There were no changes to our valuation techniques used to measure asset and liability fair values on a recurring basis during the year ended December 31, 2022. The valuation techniques for the financial assets in the tables above are as follows: 46 Cash Equivalents At December 31, 2022 and 2021, cash equivalents include cash invested in money market funds and treasury securities with a maturity of three months or less. Fair value is based on market prices for identical assets. Available-for-Sale Investment Securities Fair value for our Level 1 investment securities is based on market prices for identical assets. Our Level 2 securities were priced by a pricing vendor. The pricing vendor utilizes the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, other observable inputs like market transactions involving comparable securities are used. 47 5. Property and Equipment, net Property and equipment, net consists of the following (in thousands): December 31, 2022 2021 Computer equipment $ 5,529 $ 4,884 Furniture and fixtures 5,747 5,167 Office equipment 3,800 3,285 Leasehold improvements 23,625 22,679 Construction in process 544 5,227 Gross property and equipment 39,245 41,242 Less: Accumulated depreciation ( 13,135 ) ( 10,763 ) Total property and equipment, net $ 26,110 $ 30,479 Depreciation expense for property and equipment totaled $ 5.1 million, $ 4.7 million, and $ 4.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. During the year ended December 31, 2022, we recorded an impairment of $ 4.4 million related to property and equipment associated with our leased office spaces. For additional information, see Note 9, Leases . 6. Capitalized Software Development Costs, net Capitalized software development costs, net were as follows (in thousands): December 31, 2022 2021 Capitalized software development costs, gross $ 129,749 $ 115,377 Less: Accumulated amortization ( 94,434 ) ( 74,165 ) Capitalized software development costs, net $ 35,315 $ 41,212 Capitalized software development costs were $ 17.7 million, $ 27.2 million and $ 27.3 million for the years ended December 31, 2022, 2021 and 2020, respectively. Amortization expense with respect to software development costs totaled $ 23.6 million, $ 21.5 million and $ 17.9 million for the years ended December 31, 2022, 2021 and 2020, respectively. During the years ended December 31, 2022 and 2021, we disposed of $ 3.3 million and $ 8.8 million, respectively, of fully amortized capitalized software development costs. Future amortization expense with respect to capitalized software development costs is estimated as follows (in thousands): Years Ending December 31, 2023 $ 19,237 2024 11,407 2025 4,377 2026 294 Total amortization expense $ 35,315 48 7. Intangible Assets, net and Goodwill Intangible assets, net consisted of the following (in thousands, except years): 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 December 31, 2021 Gross Carrying Value Accumulated Amortization Net Carrying Value Weighted Average Useful Life in Years Customer relationships $ 2,840 $ ( 2,006 ) $ 834 5.0 Database 8,330 ( 2,620 ) 5,710 10.0 Technology 6,539 ( 5,107 ) 1,432 4.0 Trademarks and trade names 1,890 ( 1,128 ) 762 5.0 Partner relationships 680 ( 680 ) — 3.0 Non-compete agreements 7,400 ( 4,444 ) 2,956 5.0 Domain names 90 ( 75 ) 15 5.0 Patents 252 ( 250 ) 2 5.0 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. Future amortization expense with respect to intangible assets is estimated as follows (in thousands): Years Ending December 31, 2023 $ 2,476 2024 473 2025 471 2026 471 2027 471 Thereafter 471 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 49 8. Accrued Employee Expenses Accrued employee expenses consisted of the following (in thousands): December 31, 2022 2021 Accrued vacation $ 12,067 $ 10,675 Accrued bonuses 13,806 13,101 Accrued payroll and other 8,503 6,289 Total accrued employee expenses $ 34,376 $ 30,065 9. Leases Operating leases for our corporate offices have remaining lease terms ranging from five months to ten years , some of which include options to extend the leases for up to ten years . These options to extend have not been recognized as part of our operating lease right-of-use assets and lease liabilities as it is not reasonably certain that we will exercise these options. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. Certain leases contain provisions for property-related costs that are variable in nature for which we are responsible, including common area maintenance, which are expensed as incurred. The components of lease expense recognized in the Consolidated Statements of Operations were as follows (in thousands): Year Ended December 31, 2022 2021 2020 Operating lease cost $ 5,403 $ 5,203 $ 5,272 Variable lease cost 1,058 1,463 1,443 Total lease cost $ 6,461 $ 6,666 $ 6,715 Lease-related assets and liabilities were as follows (in thousands, except years and %): December 31, 2022 2021 Assets Prepaid expenses and other current assets $ — $ 4,854 Operating lease right-of-use assets 23,485 41,710 Liabilities Other current liabilities $ 3,357 $ 1,874 Operating lease liabilities 50,237 55,733 Total lease liabilities $ 53,594 $ 57,607 Weighted-average remaining lease term (years) 9.4 10.3 Weighted-average discount rate 3.9 % 4.0 % 50 Future minimum lease payments under non-cancellable leases as of December 31, 2022 were as follows (in thousands): Years ending December 31, 2023 (1) $ 2,615 2024 6,351 2025 6,837 2026 7,035 2027 7,239 Thereafter 35,042 Total future minimum lease payments 65,119 Less: imputed interest ( 11,525 ) 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. 10. Commitments and Contingencies Liability to Landlord Insurance We have a wholly owned subsidiary, Terra Mar Insurance Company, Inc., which was established in connection with reinsuring liability to landlord insurance policies offered to our customers by our third-party service provider. We assume a 100 % quota share of the liability to landlord insurance policies placed with our customers by our third-party service provider. We accrue for reported claims, and include an estimate of losses incurred but not reported by our property manager customers, in cost of revenue because we bear the risk related to all such claims. Our estimated liability for reported claims and incurred but not reported claims as of December 31, 2022 and 2021 was $ 2.7 million and $ 1.7 million, respectively, and is included in Other current liabilities on our Consolidated Balance Sheets. Included in Prepaid expenses and other current assets as of December 31, 2022 and 2021 are $ 4.5 million and $ 3.0 million, respectively, of deposits held with a third party related to requirements to maintain collateral for this risk mitigation service. Legal Proceedings From time to time we may become involved in various legal proceedings, investigative inquiries, and other disputes arising from or related to matters incident to the ordinary course of our business activities. We are not currently a party to any legal proceedings, nor are we aware of any pending or threatened legal proceedings, that we believe would have a material adverse effect on our business, operating results, cash flows or financial condition should such proceedings be resolved unfavorably. 51 Indemnification In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, business partners, investors, directors, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of any applicable agreements, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from our services or our acts or omissions. These indemnification provisions may survive termination of the underlying agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions may not be subject to maximum loss clauses and is indeterminable. We have not incurred any costs as a result of such indemnification obligations and have not recorded any liabilities related to such obligations in the Consolidated Financial Statements. 11. Stockholders' Equity Amended and Restated Certificate of Incorporation Upon the effectiveness of our Amended and Restated Certificate of Incorporation on June 25, 2015, the number of shares of capital stock that is authorized to be issued was increased to 325,000,000 shares, of which 250,000,000 shares are Class A common stock, 50,000,000 shares are Class B common stock and 25,000,000 are undesignated preferred stock. The Class A common stock, Class B common stock and preferred stock have a par value of $ 0.0001 per share. Class A Common Stock and Class B Common Stock Except for voting rights, or as otherwise required by applicable law, the shares of our Class A common stock and Class B common stock have the same powers, preferences and rights and rank equally, share ratably and are identical in all respects as to all matters. The rights and preferences are as follows: Dividend Rights . Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of outstanding shares of our Class A common stock and Class B common stock are entitled to receive dividends out of funds legally available at the times and in the amounts that our Board of Directors may determine. Voting Rights . The holders of our Class A common stock are entitled to one vote per share, and holders of our Class B common stock are entitled to 10 votes per share. The holders of our Class A common stock and Class B common stock will vote together as a single class on all matters submitted to a vote of our stockholders, unless otherwise required by Delaware law or our amended and restated certificate of incorporation. Delaware law could require either holders of our Class A common stock or holders of our Class B common stock to vote separately. In addition, our amended and restated certificate of incorporation requires the approval of the holders of at least a majority of the outstanding shares of our Class B common stock, voting as a separate class to approve a change-in-control transaction. Conversion . Each share of our Class B common stock is convertible at any time at the option of the holder into one share of our Class A common stock. In addition, each share of our Class B common stock will convert into one share of our Class A common stock upon any transfer, whether or not for value, except for certain transfers described in our amended and restated certificate of incorporation, including, without limitation, (i) a transfer by a partnership or limited liability company that was a registered holder of our Class B common stock at the “effective time,” as defined in our amended and restated certificate of incorporation, to a partner or member thereof at the effective time or (ii) a transfer to a “qualified recipient,” as defined in our amended and restated certificate of incorporation. All the outstanding shares of our Class B common stock will convert automatically into shares of our Class A common stock upon the date when the number of outstanding shares of our Class B common stock represents less than 10 % of all outstanding shares of our Class A common stock and Class B common stock. Once converted into our Class A common stock, our Class B common stock may not be reissued. Right to Receive Liquidation Distributions . Upon our dissolution, liquidation or winding-up, the assets legally available for distribution to our stockholders are distributable ratably among the holders of our Class A common stock and Class B common stock, subject to prior satisfaction of all outstanding debt and liabilities and the preferential rights and payment of liquidation preferences, if any, on any outstanding shares of preferred stock. 52 Preferred Stock Our Board of Directors is authorized, subject to limitations prescribed by Delaware law, to issue up to 25,000,000 shares of our preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, and to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions, in each case without further action by our stockholders. The number of authorized shares of any series of preferred stock may be increased or decreased, but not below the number of shares of that series then outstanding, by the affirmative vote of the holders of a majority of the voting power of our outstanding capital stock entitled to vote thereon, or such other vote as may be required by the certificate of designation establishing the series. Share Repurchase Program On February 20, 2019, our Board of Directors authorized a $ 100.0 million share repurchase program (the "Share Repurchase Program") relating to our outstanding shares of Class A common stock. Under the Share Repurchase Program, share repurchases may be made from time to time, as directed by a committee consisting of three directors, in open market purchases or in privately negotiated transactions at a repurchase price that the members of the committee unanimously believe is below intrinsic value conservatively determined. The Share Repurchase Program does not obligate us to repurchase any specific dollar amount or number of shares, there is no expiration date for the Share Repurchase Program, which may be modified, suspended or terminated at any time and for any reason. During the year ended December 31, 2020, we repurchased a total of 48,002 shares of our Class A common stock through open market repurchases, and recorded a $ 4.2 million reduction to stockholders' equity, which includes broker commissions. We have not made any other repurchases under the Share Repurchase Program. 12. Stock-Based Compensation We currently have two stock incentive plans, our 2007 Stock Incentive Plan (the "2007 Plan") and the 2015 Stock Incentive Plan (the "2015 Plan"). The 2007 Plan expired on February 14, 2017, however it will continue to govern outstanding awards granted under the 2007 Plan. Under the 2015 Plan, 2,000,000 shares of our Class A common stock were reserved and available for grant and issuance. On January 1 of each subsequent calendar year, the number of shares available for grant and issuance under the 2015 Plan increase by the lesser of (i) the number of shares of our Class A common stock subject to awards granted under the 2015 Plan during the preceding calendar year and (ii) such lesser number of shares of our Class A common stock determined by our Board of Directors. At December 31, 2022, we have reserved an aggregate of 4,450,726 shares of our Class A common stock for grant and issuance under the 2015 Plan. The number of shares of our Class A common stock is also subject to adjustment in the event of a recapitalization, stock split, reclassification, stock dividend or other change in our capitalization. The 2015 Plan authorizes the award of stock options, stock appreciation rights, RSAs, RSUs, performance awards and stock bonuses. The 2015 Plan provides for the grant of awards to our employees, directors, consultants and independent contractors, subject to certain exceptions. RSUs, PSUs, and RSAs have been issued during 2022 pursuant to the 2015 Plan. RSUs and PSUs represent the right on the part of the holder to receive shares of our Class A common stock at a specified date in the future or the achievement of performance conditions at the discretion of our compensation committee, subject to forfeiture of that right due to termination of employment. If an RSU or PSU has not been forfeited, then, on the specified date, we will deliver to the holder of the RSU or PSU shares of our Class A common stock. 53 Stock Options A summary of activity in connection with our stock options for the year ended December 31, 2022 is as follows (number of shares in thousands): Number of Shares Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Life in Years Options outstanding as of December 31, 2021 846 $ 13.15 3.0 Options exercised ( 330 ) 13.56 Options outstanding as of December 31, 2022 516 $ 12.90 2.7 At December 31, 2022: Options vested and expected to vest 516 $ 12.90 2.7 Options exercisable 516 $ 12.90 2.7 Our stock-based compensation expense for stock options were not material for the periods presented. No stock options were granted during the years ended December 31, 2022, 2021 or 2020. The total intrinsic value of options exercised in 2022, 2021 and 2020 was $ 31.1 million, $ 39.1 million, and $ 17.9 million, respectively. This intrinsic value represents the difference between the fair value of our common stock on the date of exercise and the exercise price of each option. Based on the fair value of our common stock at December 31, 2022, the total intrinsic value of all outstanding options, exercisable options, and options vested and expected to vest was $ 47.7 million. Restricted Stock Units A summary of activity in connection with our RSUs for the year ended December 31, 2022 is as follows (number of shares in thousands): Number of Shares Weighted Average Grant Date Fair Value per Share Unvested as of December 31, 2021 837 $ 118.27 Granted 726 110.61 Vested ( 252 ) 111.03 Forfeited ( 149 ) 104.09 Unvested as of December 31, 2022 1,162 $ 116.88 Unvested RSUs as of December 31, 2022 were composed of 1.0 million RSUs with only service conditions and 0.2 million PSUs with both service conditions and performance conditions. RSUs granted with only service conditions generally vest over a four-year period. The number of PSUs granted, as included in the above table, assumes achievement of the performance metric at 100 % of the performance target. Of the unvested PSUs as of December 31, 2022, 0.1 million are subject to vesting based on the achievement of pre-established performance metrics for the year ending December 31, 2022 and will vest over a three year period, assuming continued employment throughout the performance period. The actual number of shares to be issued at the end of the performance period will range from 0 % to 150 % of the target number of shares depending on achievement relative to the performance metric over the applicable period. The remaining 0.1 million PSUs unvested as of December 31, 2022 are subject to vesting based on the achievement of pre-established performance metrics for the years ending December 31, 2022 and 2023, assuming continued employment throughout the performance period. The actual number of shares to be issued at the end of the performance period will range from 0 % to 100 % of the initial target awards. Achievement of the performance metric between 100 % and 150 % of the performance target will result in a performance-based cash bonus payment between 0 % and 65 % of the initial target awards. 54 We recognized stock-based compensation expense for the RSUs and PSUs of $ 43.3 million, $ 17.3 million and $ 10.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. Excluded from stock-based compensation expense is capitalized software development costs of $ 3.0 million, $ 2.7 million, and $ 2.1 million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, the total estimated remaining stock-based compensation expense for the aforementioned RSUs and PSUs was $ 100.1 million, which is expected to be recognized over a weighted average period of 2.6 years. The total fair value of RSUs and PSUs vested during the years ended December 31, 2022, 2021 and 2020 was approximately $ 27.5 million, $ 26.6 million and $ 32.0 million, respectively. Restricted Stock Awards A summary of activity in connection with our RSAs for the year ended December 31, 2022 is as follows (number of shares in thousands): Number of Shares Weighted- Average Grant Date Fair Value per Share Unvested as of December 31, 2021 4 $ 144.33 Granted 6 96.33 Vested ( 4 ) 144.33 Unvested as of December 31, 2022 6 $ 96.33 We have the right to repurchase any unvested RSAs subject to certain conditions. Restricted stock awards vest over a one-year period. Our stock-based compensation expense for RSAs was not material for the periods presented. As of December 31, 2022, the total estimated remaining stock-based compensation expense for unvested restricted stock awards with a repurchase right was $ 0.3 million, which is expected to be recognized over a weighted average period of 0.5 years. 13. Income Taxes The effective tax rate as compared to the U.S. federal statutory rate of 21 % differs primarily due to change in valuation allowance against deferred taxes and non-deductible expenses, partially offset by state income taxes and tax benefits associated with stock-based compensation expense and research and development tax credits. Set forth below is a reconciliation of the components that caused our provision for income taxes to differ from amounts computed by applying the United States federal statutory rate: Year Ended December 31, 2022 2021 2020 U.S. federal statutory income tax rate 21 % 21 % 21 % State and local income taxes, net of federal benefit 9 ( 214 ) 3 Stock-based compensation expense 7 ( 426 ) ( 3 ) Non-deductible officers' compensation ( 6 ) 47 — Meals and entertainment — 3 — Change in valuation allowance ( 37 ) 795 — Other permanent differences ( 1 ) 20 1 Research and development tax credits 5 ( 205 ) ( 2 ) Provision for income taxes ( 2 ) % 41 % 20 % 55 The provision for income tax consists of the following (in thousands): Year Ended December 31, 2022 2021 2020 Current Federal $ 1,313 $ 20 $ 3,982 State and local 686 346 5,444 Total current 1,999 366 9,426 Deferred Federal ( 854 ) ( 10,966 ) 27,982 State and local 257 11,306 1,020 Total deferred ( 597 ) 340 29,002 Total income tax provision $ 1,402 $ 706 $ 38,428 The components of deferred tax assets (liabilities) were as follows (in thousands): December 31, 2022 2021 Deferred income tax assets: Net operating loss carryforwards $ 5,802 $ 10,849 Research and development tax credits 18,558 15,966 Capitalized research and software costs 14,706 — Stock-based compensation 5,105 3,965 Lease liability 14,260 13,983 Other 3,614 2,853 Total deferred tax assets 62,045 47,616 Valuation allowance ( 43,776 ) ( 17,217 ) Deferred tax assets, net of valuation allowance 18,269 30,399 Deferred tax liabilities: 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 ) Lease asset ( 6,249 ) ( 11,056 ) Other ( 2,634 ) ( 1,171 ) Total deferred tax liabilities ( 18,954 ) ( 32,077 ) Total net deferred tax liabilities $ ( 685 ) $ ( 1,678 ) At December 31, 2022, we had state net operating loss carryforwards $ 66.0 million. The state net operating losses will begin to expire in 2028. At December 31, 2022, we also had federal and state research and development credit carryforwards of $ 8.7 million and $ 19.3 million, respectively. The federal credit carryforwards will begin to expire in 2040, while the state credit carryforwards apply indefinitely. Utilization of our net operating loss and credit carryforwards may be subject to annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. We have undertaken an analysis and have determined that there are no limitations on the tax attributes at December 31, 2022. 56 The change in the valuation allowance are as follows (in thousands): Year Ended December 31, 2022 2021 2020 Valuation allowance, at beginning of year $ 17,217 $ — $ — Increase in valuation allowance 26,559 17,217 — Valuation allowance, at end of year $ 43,776 $ 17,217 $ — The following is a reconciliation of the total amounts of reserves for unrecognized tax benefits from uncertain tax positions (in thousands): Year Ended December 31, 2022 2021 2020 Unrecognized tax benefit beginning of year $ 7,816 $ 6,141 $ 4,421 Increases-tax positions in current year 1,639 1,675 1,720 Unrecognized tax benefit end of year $ 9,455 $ 7,816 $ 6,141 The unrecognized tax benefits are recorded as a reduction to the deferred tax assets and liabilities. At December 31, 2022 and 2021, we had no accrued interest and penalties related to uncertain income tax positions. We do not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months. We are subject to taxation in the United States and various states. Due to the net operating loss carryforwards, our federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions for all years since inception. 14. Revenue and Other Information The following table presents our revenue categories (in thousands): Year Ended December 31, 2022 2021 2020 Core solutions $ 132,541 $ 105,148 $ 100,938 Value Added Services 327,636 241,289 195,146 Other 11,706 12,933 13,972 Total revenue $ 471,883 $ 359,370 $ 310,056 Our revenue is generated primarily from United States customers. All of our property and equipment is located in the United States. 15. Retirement Plans We have a 401(k) retirement and savings plan made available to all employees. We may, at our discretion, make matching contributions to the 401(k) plan. Cash contributions to the plan were $ 5.9 million, $ 4.0 million, and $ 3.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 57