NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Nature of Business
AppFolio, Inc. (“we” or “AppFolio”) provides industry-specific, cloud-based software solutions for small and medium-sized businesses (“SMBs”) in the property management industry and solo practitioners and small law firms in the legal industry. We refer to solo practitioners and small law firms as SMBs in connection with our legal vertical in this Quarterly Report. Our platform is designed to be the system of record to automate essential business processes and the system of engagement to enhance business interactions between our customers and their clients and vendors. We also offer optional, but often mission-critical, Value+ services, which are seamlessly built into our core solutions.
2. Summary of Significant Accounting Policies
Basis of Presentation and Significant Accounting Policies
The accompanying unaudited Condensed Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these Condensed Consolidated Financial Statements should be read in conjunction with our audited consolidated financial statements and the related notes included in our Annual Report filed with the SEC on February 27, 2017. The year-end condensed balance sheet was derived from our audited consolidated financial statements. Our unaudited interim Condensed Consolidated Financial Statements have been prepared on a basis consistent with that used to prepare our audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of the Condensed Consolidated Financial Statements. The operating results for the
three
months ended
March 31, 2017
, are not necessarily indicative of the results expected for the full year ending
December 31, 2017
.
Reclassifications
We reclassified certain amounts in our Condensed Consolidated Statements of Cash Flows within the cash from investing activities section in the prior year to conform to the current year's presentation.
Changes in Accounting Policies
Except as described below under
Recently Adopted Accounting Pronouncements
, there have been no significant changes in our accounting policies from those disclosed in our annual consolidated financial statements and the related notes included in our Annual Report.
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 revenues and expenses during the reporting period. Actual results could differ materially from those estimates. On an ongoing basis, management evaluates its estimates based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Net Income (Loss) per Share
The net income (loss) per common share was the same for our Class A and Class B common shares because they are entitled to the same liquidation and dividend rights. The following table presents a reconciliation of our weighted average number of Class A and Class B common shares used to compute net income (loss) per share (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
Weighted average shares outstanding
|
|
33,747
|
|
|
33,571
|
|
Less: Weighted average unvested restricted shares subject to repurchase
|
|
41
|
|
|
108
|
|
Weighted average common shares outstanding; basic
|
|
33,706
|
|
|
33,463
|
|
|
|
|
|
|
Weighted average common shares outstanding; basic
|
|
33,706
|
|
|
33,463
|
|
Plus: Weighted average options, RSUs and restricted shares used to compute diluted net income per share
|
|
1,059
|
|
|
—
|
|
Weighted average common shares outstanding; diluted
|
|
34,765
|
|
|
33,463
|
|
We have excluded contingently issuable performance based options ("PBOs") and performance based restricted stock units ("PSUs") since they are contingent upon the satisfaction of pre-defined performance measures within our weighted average number of shares used to compute diluted net income per share (dilutive common shares) and from the disclosure of anti-dilutive shares. These shares are included in the weighted-average dilutive common shares only if the performance measures are met as of the end of the reporting period. Approximately
784,000
shares are not included in the computation of diluted net income per share for the quarter ended March 31, 2017, as their respective performance measures have not been met.
Because we reported a net loss for the three months ended March 31, 2016, all potentially dilutive common shares are anti-dilutive for that period and have been excluded from the calculation of net loss per share.
The following table presents the number of anti-dilutive common shares excluded from the calculation of weighted average number of shares used to compute diluted net income (loss) per share as of
March 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Options to purchase common stock
|
|
4
|
|
|
1,356
|
|
Unvested restricted stock awards
|
|
—
|
|
|
97
|
|
Unvested restricted stock units
|
|
12
|
|
|
370
|
|
Contingent restricted stock units
(1)
|
|
17
|
|
|
87
|
|
Total shares excluded from net income (loss) per common share
|
|
33
|
|
|
1,910
|
|
(1)
The reported shares are based on a fixed price restricted stock unit (“RSU”) commitment for which the number of shares has not been determined at the grant date. The
17,000
and
87,000
shares included in the table above are based on the closing price of our Class A common stock at March 31, 2017 and 2016, respectively, divided by the fixed price commitment to issue shares in the future.
Recently Adopted Accounting Pronouncements
Under the Jumpstart our Business Startups Act (the “JOBS Act”), we meet the definition of an emerging growth company. We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, Compensation - Stock Compensation (Topic 781),
Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"), which amends and simplifies the accounting for share-based payment awards in three areas: (1) income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. ASU 2016-19 also provides an accounting policy election to account for forfeitures as they occur. We adopted this guidance on January 1, 2017. The impact to the Company’s consolidated financial statements was not material due to the full valuation allowance on
our deferred tax assets. We have elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized each period.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08,
Revenue from Contracts with Customers
(Topic 606): Principal versus Agent Considerations
(“ASU 2016-08”); ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
(“ASU 2016-10”); ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12”); and ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
(“ASU 2016-20”)
.
The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenue standards”). The new revenue standards will be effective on January 1, 2018. Early adoption is permitted as of January 1, 2017. The Company will adopt the new revenue standards on January 1, 2018. The standard permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and we are currently evaluating the effect that the new revenue standards will have on our consolidated financial statements and related disclosures. Based on our preliminary assessments, we do not expect there will be a material impact to our revenues upon adoption. We are continuing to evaluate the impact to our revenues related to our pending adoption of Topic 606 and our preliminary assessments are subject to change. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to recognition of costs related to obtaining customer contracts. Under the Company's current policy election under GAAP, sales commissions and other incremental costs to acquire contracts are expensed as incurred. Under the new revenue standards, such costs will be deferred and recognized over a period of time. We are still evaluating the new revenue standards and assessing the impact this identified difference in accounting treatment may have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842) ("ASU 2016-02"). Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We anticipate this standard will have a material impact on our consolidated financial statements. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to our accounting and reporting of our operating leases on our balance sheet.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which amends the current accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions and reasonable and supportable forecasts. This guidance amends the accounting for credit losses for available-for-sale securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period after December 15, 2018. We do not expect the adoption of this guidance to have a material impact on our financial condition, results of operations, cash flows or disclosures.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
("ASU 2016-15"), which provides cash flow statement classification guidance for debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We have not determined the effect of this guidance on our statement of cash flows.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
(ASU 2016-16), which changes the timing of when certain intercompany transactions are recognized within the
provision for income taxes. ASU 2016-16 is effective on January 1, 2018. Early adoption is permitted. We have not determined the effect of this guidance on our financial condition, results of operations, cash flows or disclosures.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(ASU 2016-18), which provides amendments to current guidance to address the classification and presentation of changes in restricted cash in the statement of cash flows. ASU 2014-09 is effective on January 1, 2018 and early adoption is permitted. We are still evaluating the effect of this guidance on our financial statements, although we expect that adoption will change the current presentation of restricted cash on our statement of cash flows as well as require additional disclosures to reconcile cash and cash equivalents per the balance sheet to cash and cash equivalents on the statement of cash flows.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
("ASU 2017-04"), which eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for public entities for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on dates after January 1, 2017. We do not expect the adoption of this guidance to have a material impact on our financial condition, results of operations, cash flows or disclosures.
In March 2017, the FASB issued ASU No. 2017-08,
Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities
(“ASU 2017-08”)
.
ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, ASU 2017-08 requires the premium to be amortized to the earliest call date. ASU 2017-08 does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public companies, ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We do not expect the adoption of this guidance to have a material impact on our financial condition, results of operations, cash flows or disclosures since our current accounting policy is in accordance with ASU 2017-08.
3. Investment Securities and Fair Value Measurements
Investment Securities
Investment securities classified as available-for-sale consisted of the following at
March 31, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
Corporate bonds
|
$
|
30,804
|
|
|
$
|
14
|
|
|
$
|
(37
|
)
|
|
$
|
30,781
|
|
Agency securities
|
9,286
|
|
|
—
|
|
|
(16
|
)
|
|
9,270
|
|
Certificates of deposit
|
4,227
|
|
|
11
|
|
|
(1
|
)
|
|
4,237
|
|
Total available-for-sale investment securities
|
$
|
44,317
|
|
|
$
|
25
|
|
|
$
|
(54
|
)
|
|
$
|
44,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
Corporate bonds
|
$
|
30,492
|
|
|
$
|
9
|
|
|
$
|
(56
|
)
|
|
$
|
30,445
|
|
Agency securities
|
6,248
|
|
|
—
|
|
|
(20
|
)
|
|
6,228
|
|
Certificates of deposit
|
5,472
|
|
|
16
|
|
|
—
|
|
|
5,488
|
|
Total available-for-sale investment securities
|
$
|
42,212
|
|
|
$
|
25
|
|
|
$
|
(76
|
)
|
|
$
|
42,161
|
|
We had certain investment securities in an unrealized loss position at
March 31, 2017
and
December 31, 2016
, and none of these securities have been in a continuous unrealized loss position for more than 12 months. These unrealized loss positions are considered temporary and there were no impairments considered "other-than-temporary" as it is more likely than not we will hold the securities until maturity or a recovery of the cost basis.
At
March 31, 2017
and
December 31, 2016
, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Amortized Cost
|
|
Estimated Fair Value
|
|
Amortized Cost
|
|
Estimated Fair Value
|
Due in 1 year or less
|
$
|
19,367
|
|
|
$
|
19,355
|
|
|
$
|
15,475
|
|
|
$
|
15,473
|
|
Due after 1 year through 3 years
|
24,950
|
|
|
24,933
|
|
|
26,737
|
|
|
26,688
|
|
Total available-for-sale investment securities
|
$
|
44,317
|
|
|
$
|
44,288
|
|
|
$
|
42,212
|
|
|
$
|
42,161
|
|
During the
three
months ended
March 31, 2017
and
2016
, we had sales and maturities (which includes calls) of investment securities, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Gross Realized Gains
|
|
Gross Realized Losses
|
|
Gross Proceeds from Sales
|
|
Gross Proceeds from Maturities
|
Corporate bonds
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,200
|
|
Certificates of deposit
|
—
|
|
|
—
|
|
|
—
|
|
|
1,245
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Gross Realized Gains
|
|
Gross Realized Losses
|
|
Gross Proceeds from Sales
|
|
Gross Proceeds from Maturities
|
Agency securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,500
|
|
|
$
|
3,000
|
|
Corporate bonds
|
—
|
|
|
—
|
|
|
3,005
|
|
|
—
|
|
Treasury bills
|
—
|
|
|
—
|
|
|
2,000
|
|
|
3,830
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,505
|
|
|
$
|
6,830
|
|
For the
three
months ended
March 31, 2017
and
2016
, we received interest income net of the amortization and accretion of the premium and discount of
$0.1 million
.
Fair Value Measurements
Recurring Fair Value Measurements
Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of
March 31, 2017
and
December 31, 2016
, by level within the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair
Value
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
2,909
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,909
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
Corporate bonds
|
—
|
|
|
30,781
|
|
|
—
|
|
|
30,781
|
|
Agency securities
|
—
|
|
|
9,270
|
|
|
—
|
|
|
9,270
|
|
Certificates of deposit
|
4,237
|
|
|
—
|
|
|
—
|
|
|
4,237
|
|
Total Assets
|
$
|
7,146
|
|
|
$
|
40,051
|
|
|
$
|
—
|
|
|
$
|
47,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair
Value
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
4,849
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,849
|
|
Available-for-sale - investment securities:
|
|
|
|
|
|
|
|
Corporate bonds
|
—
|
|
|
30,445
|
|
|
—
|
|
|
30,445
|
|
Agency securities
|
—
|
|
|
6,228
|
|
|
—
|
|
|
6,228
|
|
Certificates of deposit
|
5,488
|
|
|
—
|
|
|
—
|
|
|
5,488
|
|
Total Assets
|
$
|
10,337
|
|
|
$
|
36,673
|
|
|
$
|
—
|
|
|
$
|
47,010
|
|
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.
There were no changes to our valuation techniques used to measure asset and liability fair values on a recurring basis during the
three
months ended
March 31, 2017
. The valuation techniques for the items in the table above are as follows:
Cash and Cash Equivalents
As of
March 31, 2017
and
December 31, 2016
, cash and cash equivalents include cash invested in money market funds. Market prices are based on market prices for identical assets.
Available-for-Sale - Investment Securities
The fair value of our investment securities is based on pricing determined using inputs other than quoted prices that are observable either directly or indirectly such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.
Non-Recurring Fair Value Measurements
Certain assets, including goodwill, intangible assets and our note receivable with SecureDocs are also subject to measurement at fair value on a non-recurring basis using Level 3 measurement when they are deemed to be impaired as a result of an impairment review. For the
three
months ended
March 31, 2017
and
2016
, no impairments were identified on those assets required to be measured at fair value on a non-recurring basis.
4. Internal-Use Software Development Costs
Internal-use software development costs were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Internal use software development costs, gross
|
|
$
|
36,411
|
|
|
$
|
33,545
|
|
Less: Accumulated amortization
|
|
(20,048
|
)
|
|
(18,006
|
)
|
Internal use software development costs, net
|
|
$
|
16,363
|
|
|
$
|
15,539
|
|
Capitalized software development costs were
$2.9 million
and
$2.4 million
for the three months ended
March 31, 2017
and
2016
. Amortization expense with respect to software development costs totaled
$2.0 million
and
$1.3 million
for the three months ended
March 31, 2017
and
2016
.
Future amortization expense with respect to capitalized software development costs as of
March 31, 2017
, is estimated as follows (in thousands):
|
|
|
|
|
|
Years Ending December 31,
|
2017
|
|
$
|
6,211
|
|
2018
|
|
6,601
|
|
2019
|
|
3,322
|
|
2020
|
|
229
|
|
Total amortization expense
|
|
$
|
16,363
|
|
5. Intangible Assets
Intangible assets consisted of the following as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
Gross Carrying
Value
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
Customer relationships
|
|
$
|
790
|
|
|
$
|
(431
|
)
|
|
$
|
359
|
|
Technology
|
|
4,811
|
|
|
(3,271
|
)
|
|
1,540
|
|
Trademarks
|
|
930
|
|
|
(447
|
)
|
|
483
|
|
Partner relationships
|
|
680
|
|
|
(453
|
)
|
|
227
|
|
Non-compete agreements
|
|
40
|
|
|
(27
|
)
|
|
13
|
|
Domain names
|
|
273
|
|
|
(250
|
)
|
|
23
|
|
Patents
|
|
284
|
|
|
(173
|
)
|
|
111
|
|
|
|
$
|
7,808
|
|
|
$
|
(5,052
|
)
|
|
$
|
2,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
Customer relationships
|
|
$
|
790
|
|
|
$
|
(392
|
)
|
|
$
|
398
|
|
Technology
|
|
4,811
|
|
|
(3,070
|
)
|
|
1,741
|
|
Trademarks
|
|
930
|
|
|
(416
|
)
|
|
514
|
|
Partner relationships
|
|
680
|
|
|
(397
|
)
|
|
283
|
|
Non-compete agreements
|
|
40
|
|
|
(23
|
)
|
|
17
|
|
Domain names
|
|
273
|
|
|
(241
|
)
|
|
32
|
|
Patents
|
|
284
|
|
|
(164
|
)
|
|
120
|
|
|
|
$
|
7,808
|
|
|
$
|
(4,703
|
)
|
|
$
|
3,105
|
|
Amortization expense for the three months ended
March 31, 2017
and
2016
, was
$0.3 million
and
$0.4 million
, respectively.
As of
March 31, 2017
, estimated future amortization of intangible assets was as follows (in thousands):
|
|
|
|
|
|
Years Ending December 31,
|
2017
|
|
$
|
1,031
|
|
2018
|
|
928
|
|
2019
|
|
352
|
|
2020
|
|
259
|
|
2021
|
|
124
|
|
Thereafter
|
|
62
|
|
Total amortization expense
|
|
$
|
2,756
|
|
6. Commitments and Contingencies
Lease Obligations
As of
March 31, 2017
, we had operating lease obligations of approximately
$10.8 million
through 2022. We recorded rent expense of
$0.5 million
for the three months ended
March 31, 2017
and
2016
.
In February 2017, we signed a lease amendment for 50 Castilian Drive in Santa Barbara, California, our corporate headquarters. This amendment extends the term from February 2018 to December 2021. The total commitment under this lease extension is
$3.1 million
. All other terms and conditions from the original lease and previous amendments remain the same.
Line of Credit
We are party to a Credit Agreement with Wells Fargo, as administrative agent, and the lenders that are parties thereto (as amended, the “Credit Agreement”). Under the terms of the Credit Agreement, the lenders made available to us a
$25.0 million
revolving line of credit (the “Revolving Facility”). Borrowings under the Revolving Facility are subject to the satisfaction of customary conditions. The Revolving Facility matures on October 9, 2020; however, we can make payments on, and cancel in full, the Revolving Facility at any time without premium or penalty.
As of
March 31, 2017
and
December 31, 2016
, there was
no
outstanding balance under the Credit Agreement and we are in compliance with the financial covenants under the Revolving Facility.
Insurance
We have a wholly owned subsidiary, Terra Mar Insurance Company, Inc. (“Terra Mar”), which was established to provide our customers with the option to purchase tenant liability insurance. If our customers choose to use our insurance services, they are issued an insurance policy underwritten by our third-party service provider. The policy has a limit of
$100,000
per incident for each insured residence. We have entered into a reinsurance agreement with our third-party service provider and, as a result, we assume a
100%
quota share of the tenant liability insurance provided to our customers through our third-party service provider. Included in cost of revenue we accrue for reported claims and an estimate of losses incurred but not reported by our property manager customers, as we bear the risk related to claims. Our liability for reported claims and incurred but not reported claims as of
March 31, 2017
and
December 31, 2016
was
$0.4 million
and
$0.3 million
, respectively, and is included in
Other current liabilities
on the Condensed Consolidated Balance Sheets.
Included in
Other assets
as of
March 31, 2017
and
December 31, 2016
, are
$1.0 million
and
$1.2 million
, respectively, of deposits held with a third party related to requirements to maintain collateral for our insurance services.
Litigation
From time to time, we may become subject to certain legal proceedings, including without limitation claims and/or litigation matters, arising in the ordinary course of business. We are not currently a party to any such legal proceedings, nor are we aware of any pending or threatened litigation, that 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. 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. The maximum potential amount of future payments we could be required to make under these indemnification provisions is indeterminable. We have never paid a material claim, nor have we been sued in connection with these indemnification arrangements. As of
March 31, 2017
and
December 31, 2016
, we had not accrued a liability for these indemnification arrangements because we have determined that the likelihood of incurring a payment obligation, if any, in connection with these indemnification arrangements is not probable or reasonably possible and the amount or range of amounts of any such liability is not reasonably estimable.
7. Stock-Based Compensation
Stock Options
A summary of our stock option activity for the
three
months ended
March 31, 2017
, 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, 2016
|
|
1,718
|
|
|
$
|
8.75
|
|
|
8.2
|
Options granted
|
|
132
|
|
|
23.80
|
|
|
|
Options exercised
|
|
(41
|
)
|
|
3.53
|
|
|
|
Options cancelled/forfeited
|
|
(14
|
)
|
|
9.54
|
|
|
|
Options outstanding as of March 31, 2017
|
|
1,795
|
|
|
$
|
9.97
|
|
|
8.1
|
During the
three
months ended
March 31, 2017
, we granted PSOs to purchase up to
132,000
shares of our Class A common stock. The PSOs have a weighted average exercise price of
$23.80
per share. Vesting of the PSOs is based on achievement of a pre-established free cash flow performance metric for the year ended December 31, 2019, and continued employment throughout the performance period. The number of PSOs granted, as included in the above table, assumes achievement of the performance metric at the maximum level, which is
165%
of the targeted performance metric. Thus, for performance at
100%
of the targeted metric, approximately
61%
of the PSOs would vest. For performance at
80%
of the targeted metric, approximately
48%
of the PSOs would vest. For performance below
80%
of the 2019 targeted metric,
no
PSOs would vest, all previously recognized compensation expense for PSOs would be reversed, and
no
compensation expense would be recognized.
Included in the options outstanding as of
March 31, 2017
, are
500,000
PSOs granted in 2016, which are based on achievement of a pre-established free cash flow performance metric for the years ended December 31, 2017 and 2018. The number of PSOs granted in 2016 related to the performance metrics for the years ended December 31, 2016, 2017 and 2018, assumed achievement of the performance metric at the maximum level, which is
150%
of the targeted performance metric. Thus, for performance at
100%
of the targeted metric, approximately
67%
of the PSOs would vest. For performance at
80%
of the targeted metric, approximately
33%
of the PSOs would vest. For performance below
80%
of the 2018 targeted metric,
no
PSOs would vest, all previously recognized compensation expense for PSOs would be reversed, and
no
compensation expense would be recognized. For performance below
50%
of the 2017 targeted metric,
no
PSOs would vest, all previously recognized compensation expense for PSOs would be reversed, and
no
compensation expense would be recognized.
During the
three
months ended
March 31, 2017
,
247,000
of the PSOs vested based on the achievement of
148%
of the pre-established free cash flow performance metric for the year ended December 31, 2016, and
3,000
shares were cancelled as a result of the PSOs being granted at
150%
of the target metric. During the year ended December 31, 2016,
$1.0 million
of expense was recognized related to the PSOs that vested during the
three
months ended
March 31, 2017
.
We recognize expense for the PSOs based on the grant date fair value of the PSOs that we determine are probable of vesting. Adjustments to compensation expense are made each period based on changes in our estimate of the number of PSOs that are probable of vesting. Our stock-based compensation expense for stock options, including the PSOs for the three months ended
March 31, 2017
and
2016
, was
$537,000
and
$287,000
, respectively.
The fair value of stock options granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following table summarizes information relating to our stock options granted during the
three
months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2017
|
|
2016
|
Stock options granted (in thousands)
|
|
132
|
|
|
250
|
|
Weighted average exercise price per share
|
|
$
|
23.80
|
|
|
$
|
11.70
|
|
Weighted average grant-date fair value per share
|
|
$
|
9.29
|
|
|
$
|
4.15
|
|
Weighted average Black-Scholes model assumptions:
|
|
|
|
|
Risk-free interest rate
|
|
2.04
|
%
|
|
1.28
|
%
|
Expected term (in years)
|
|
6.4
|
|
|
5.4
|
|
Expected volatility
|
|
35
|
%
|
|
37
|
%
|
Expected dividend yield
|
|
—
|
|
|
—
|
|
As of
March 31, 2017
, the total estimated remaining stock-based compensation expense for unvested stock options, including the PSOs, was
$3.4 million
, which is expected to be recognized over a weighted average period of
2.0
years.
Restricted Stock Units
A summary of activity in connection with our RSUs for the
three
months ended
March 31, 2017
, follows (number of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted- Average Grant Date Fair Value per Share
|
Unvested as of December 31, 2016
|
|
496
|
|
|
$
|
13.34
|
|
Granted
|
|
260
|
|
|
24.23
|
|
Vested
|
|
(111
|
)
|
|
12.07
|
|
Forfeited
|
|
(12
|
)
|
|
12.82
|
|
Unvested as of March 31, 2017
|
|
633
|
|
|
$
|
18.05
|
|
During the
three
months ended
March 31, 2017
, we granted
151,000
RSUs that vest annually over
four years
and
96,000
PSUs that vest based upon achievement of a pre-established free cash flow performance metric for the year ended December 31, 2019, and continued employment throughout the performance period. The number of PSUs granted, as included in the above table, assumes achievement of the performance metric at
100%
of the targeted performance metric. The actual number of shares to be issued at the end of the performance period will range from
0%
to
165%
of the initial target awards. For performance at
150%
of the targeted metric in 2019, up to
165%
of the PSUs would vest. For performance below
80%
of the targeted metric in 2019,
no
PSUs would vest and
no
compensation expense would be recognized, and all previously recognized compensation expense for PSUs would be reversed.
During the
three
months ended
March 31, 2017
,
41,000
of the PSUs vested related to the achievement of
148%
of the pre-established free cash flow performance metric for the year ended December 31, 2016, and an additional
13,000
shares were granted and vested as a result of the attainment of the 2016 performance metric as approved by our Board of Directors. During the year ended December 31, 2016,
$479,000
of expense was recognized related to the PSUs vested during the
three
months ended
March 31, 2017
.
Included in the unvested RSUs as of
March 31, 2017
, are
56,000
PSUs granted in 2016, which are based on achievement of a pre-established free cash flow performance metric for the years ended December 31, 2017 and 2018, and continued employment throughout the performance period. The number of PSUs granted in 2016 related to the performance metrics for the years ended December 31, 2017 and 2018, assumes achievement of the performance metric at
100%
of the targeted performance metric. The actual number of shares to be issued at the end of the performance period will range from
0%
to
150%
of the initial target awards. For performance at
150%
of the targeted metric,
150%
of the PSUs would vest. For performance below
80%
of the targeted metric for 2018,
no
PSUs would vest and
no
compensation expense would be recognized, and all previously recognized compensation expense for PSUs would be reversed. For performance below
50%
of the targeted metric for 2017,
no
PSUs would vest and
no
compensation expense would be recognized and all previously recognized compensation expense for PSUs would be reversed.
We recognize expense for the PSUs based on the grant date fair value of the PSUs that we determine are probable of vesting. Adjustments to compensation expense are made each period based on changes in our estimate of the number of PSUs that are probable of vesting. Our stock-based compensation expense for the RSUs and PSUs for the three months ended
March 31, 2017
and
2016
, was
$597,000
and
$111,000
, respectively.
As of
March 31, 2017
, the total remaining estimated stock-based compensation expense for the RSUs and PSUs was
$9.9 million
, which is expected to be recognized over a weighted average period of
3.0
years.
Restricted Stock Awards
A summary of activity in connection with our restricted stock awards for the
three
months ended
March 31, 2017
, follows (number of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value per Share
|
Unvested as of December 31, 2016
|
|
46
|
|
|
$
|
8.55
|
|
Granted
|
|
—
|
|
|
—
|
|
Vested
|
|
(9
|
)
|
|
2.43
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Unvested as of March 31, 2017
|
|
37
|
|
|
$
|
10.13
|
|
We have the right to repurchase any unvested restricted stock awards. Restricted stock awards vest over a
four
-year period for employees and a
one
-year period for non-employee directors. We recognized stock-based compensation expense of
$101,000
and
$115,000
for the three months ended
March 31, 2017
and
2016
, respectively.
As of
March 31, 2017
, the total remaining stock-based compensation expense for unvested restricted stock awards with a repurchasing right was
$141,000
which is expected to be recognized over a weighted average period of
1.0 year
.
8. Income Taxes
Our effective tax rate differs from the U.S. Federal statutory rate of
34%
primarily because our losses have been offset by a valuation allowance due to uncertainty as to the realization of those losses.
For the
three
months ended
March 31, 2017
, we recorded income tax expense of
$11,000
on pre-tax income of
$0.7 million
for an effective tax rate of
1.6%
. The income tax expense is based on our payments of state minimum taxes and the amortization of tax deductible goodwill that is not an available source of income to realize the deferred tax asset.
For the
three
months ended
March 31, 2016
, we recorded income tax expense of
$24,000
on pre-tax losses of
$3.6 million
for an effective tax rate of
(0.67%)
. The income tax expense is based on our payments of state minimum taxes and the amortization of tax deductible goodwill that is not an available source of income to realize the deferred tax asset.
9. Revenue and Other Information
The following table presents our revenue categories for the
three
months ended
March 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2017
|
|
2016
|
Core solutions
|
|
$
|
13,106
|
|
|
$
|
9,763
|
|
Value+ services
|
|
17,764
|
|
|
12,255
|
|
Other
|
|
1,256
|
|
|
1,193
|
|
Total revenues
|
|
$
|
32,126
|
|
|
$
|
23,211
|
|
Core solutions revenue includes our subscription fees which are designed to scale to the size of our customers’ businesses. We recognize subscription revenue ratably over the terms of the subscription agreements, which typically range
from one month to one year. Revenue from subscription services is impacted by a number of factors, including the change in the number and type of our customers, the size and needs of our customers’ businesses and our customer renewal rates.
Value+ services revenue includes revenue from subscriptions or usage-based fees. Subscription Value+ services include website hosting services and contact center services. Usage-based Value+ services include fees for electronic payment processing, applicant screening services, our tenant liability insurance program, collections, and online vacancy advertising services. Revenue from Value+ services is impacted by a number of factors, including the number of new and existing customers that adopt and utilize our Value+ service, the size and needs of our customers and our customer renewal rates.
Other revenue includes one-time services related to on-boarding our core solutions, website design services and online vacancy advertising services offered to legacy RentLinx customers.
Our revenue is generated primarily from U.S. customers. All of our property and equipment is located in the U.S.