☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023.
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission File Number 001-37468
AppFolio, Inc.
(Exact name of registrant as specified in its charter)
Delaware
26-0359894
(State of incorporation or organization)
(I.R.S. Employer Identification No.)
70 Castilian Drive
93117
Santa Barbara,
California
(Address of principal executive offices)
(Zip Code)
(805) 364-6093
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A common stock, $0.0001 par value
APPF
NASDAQ Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 19, 2023, the number of shares of the registrant’s Class A common stock outstanding was 21,645,690 and the number of shares of the registrant’s Class B common stock outstanding was 14,116,418
This Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2023 (this "Quarterly Report"), contains forward-looking statements within the meaning of federal securities laws, which statements involve substantial risks and uncertainties. The forward-looking statements made in this Quarterly Report are based primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects and relate only to events as of the date on which the statements are made. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “might,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report and "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (our "Annual Report"), as well as in the other reports we file with the Securities and Exchange Commission (the "SEC"). You should read this Quarterly Report, and the other documents we file with the SEC, with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. As such, you should not rely upon forward-looking statements as predictions of future events. Examples of forward-looking statements include, among others, statements made regarding changes in the competitive environment, responding to customer needs, research and product development plans, future products and services, growth in the size of our business and number of customers, strategic plans and objectives, business forecasts and plans, our future or assumed financial condition, results of operations and liquidity, trends affecting our business and industry, capital needs and financing plans, capital resource allocation plans, share repurchase plans, and commitments and contingencies, including with respect to the outcome of legal proceedings or regulatory matters. Any forward-looking statement made by us in this Quarterly Report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law.
The following table presents a reconciliation of cash, cash equivalents and restricted cash reported within our Condensed Consolidated Balance Sheets to the total of the same such amounts shown above (in thousands):
September 30,
2023
2022
Cash and cash equivalents
$
59,937
$
67,232
Restricted cash included in other assets
250
250
Total cash, cash equivalents and restricted cash
$
60,187
$
67,482
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Nature of Business
AppFolio, Inc. ("we," "us" or "our") is a leading provider of cloud business management solutions for the real estate industry. Our solutions are designed to enable our customers to digitally transform their businesses, address critical business operations and deliver a better customer experience. Digital transformation is effectively a requirement for business success in the modern world, and the way we work and live requires powerful software solutions.
2. Summary of Significant Accounting Policies
Basis of Presentation and Significant Accounting Policies
The accompanying unaudited Condensed Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these Condensed Consolidated Financial Statements should be read in conjunction with our audited consolidated financial statements and the related notes included in our Annual Report, which was filed with the SEC on February 9, 2023. The year-end condensed balance sheet was derived from our audited consolidated financial statements. Our unaudited interim Condensed Consolidated Financial Statements include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of our Condensed Consolidated Financial Statements. The operating results for the nine months ended September 30, 2023 are not necessarily indicative of the results expected for the full year ending December 31, 2023.
Reclassification
We reclassified certain amounts in our Condensed Consolidated Statements of Cash Flows within the cash flows from operating activities section in the prior year to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue, expenses, other income, and provision for income taxes during the reporting period. Assets and liabilities which are subject to judgment and use of estimates include the fair value of financial instruments, capitalized software development costs, period of benefit associated with deferred costs, incremental borrowing rate used to measure operating lease liabilities, the recoverability of goodwill and long-lived assets, income taxes, useful lives associated with property and equipment and intangible assets, contingencies, assumptions underlying performance-based compensation (whether cash or stock-based), and assumptions underlying stock-based compensation. Actual results could differ from those estimates and any such differences may have a material impact on our Condensed Consolidated Financial Statements.
Net income (loss) per common share was the same for shares of our Class A and Class B common stock because they are entitled to the same liquidation and dividend rights and are therefore combined in the table below.The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2023
2022
2023
2022
Basic net income (loss) per share:
Numerator
Net income (loss)
$
26,445
$
(4,162)
$
(27,566)
$
(48,419)
Less: undistributed earnings to participating securities
5
—
—
—
Net income (loss) attributable to common stockholders
$
26,440
$
(4,162)
$
(27,566)
$
(48,419)
Denominator
Weighted average common shares outstanding
35,697
35,049
35,574
34,941
Less: Weighted average unvested restricted shares subject to repurchase
6
6
7
5
Weighted average common shares outstanding; basic
35,691
35,043
35,567
34,936
Net income (loss) per common share; basic
$
0.74
$
(0.12)
$
(0.78)
$
(1.39)
Diluted net income (loss) per share:
Numerator
Net income (loss) attributable to common stockholders
$
26,440
$
(4,162)
$
(27,566)
$
(48,419)
Denominator
Weighted average common shares outstanding; basic
35,691
35,043
35,567
34,936
Add: Weighted average dilutive options outstanding
306
—
—
—
Add: Weighted average dilutive RSUs outstanding
485
—
—
—
Weighted average common shares outstanding; diluted
36,482
35,043
35,567
34,936
Net income (loss) per common share; diluted
$
0.72
$
(0.12)
$
(0.78)
$
(1.39)
Potentially dilutive securities that are not included in the calculation of diluted net income (loss) per share because doing so would be antidilutive are as follows (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2023
2022
2023
2022
Unvested Restricted Stock Awards
6
6
6
6
Options
120
659
418
659
Restricted Stock Units
—
1,187
1,214
1,187
Total potentially dilutive securities
126
1,852
1,638
1,852
Recent Accounting Pronouncements Adopted
In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers," as if the acquirer had originated the contracts. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We adopted ASU 2021-08 on January 1, 2023. Adoption did not have an impact on our Condensed Consolidated Financial Statements.
3. Investment Securities and Fair Value Measurements
Investment Securities
Investment securities classified as available-for-sale consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):
September 30, 2023
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Agency securities
$
11,264
$
—
$
(90)
$
11,174
Treasury securities
120,801
2
(388)
120,415
Total available-for-sale investment securities
$
132,065
$
2
$
(478)
$
131,589
December 31, 2022
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Corporate bonds
$
17,497
$
2
$
(112)
$
17,387
Agency securities
17,507
—
(484)
17,023
Treasury securities
81,605
—
(1,557)
80,048
Total available-for-sale investment securities
$
116,609
$
2
$
(2,153)
$
114,458
As of September 30, 2023, the decline in fair value below amortized cost basis was not considered other than temporary as it is more likely than not we will hold the securities until maturity or recovery of the cost basis. No allowance for credit losses for available-for-sale investment securities was recorded as of September 30, 2023 or December 31, 2022.
The fair values of available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands):
September 30, 2023
December 31, 2022
Amortized Cost
Estimated Fair Value
Amortized Cost
Estimated Fair Value
Due in one year or less
$
132,065
$
131,589
$
90,822
$
89,297
Due after one year through three years
—
—
25,787
25,161
Total available-for-sale investment securities
$
132,065
$
131,589
$
116,609
$
114,458
During the nine months ended September 30, 2023 and 2022, we had sales and maturities of investment securities, as follows (in thousands):
The following tables present our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 by level within the fair value hierarchy (in thousands):
September 30, 2023
Level 1
Level 2
Total Fair Value
Cash equivalents:
Money market funds
$
34,825
$
—
$
34,825
Treasury securities
9,928
—
9,928
Available-for-sale investment securities:
Agency securities
—
11,174
11,174
Treasury securities
120,415
—
120,415
Total
$
165,168
$
11,174
$
176,342
December 31, 2022
Level 1
Level 2
Total Fair Value
Cash equivalents:
Money market funds
$
41,973
$
—
$
41,973
Treasury securities
1,287
—
1,287
Available-for-sale investment securities:
Corporate bonds
—
17,387
17,387
Agency securities
—
17,023
17,023
Treasury securities
80,048
—
80,048
Total
$
123,308
$
34,410
$
157,718
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short maturity of these items.
Fair value for our Level 1 investment securities is based on market prices for identical assets. Our Level 2 securities were priced by a pricing vendor. The pricing vendor utilizes the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, other observable inputs like market transactions involving comparable securities are used.
Capitalized software development costs were as follows (in thousands):
September 30, 2023
December 31, 2022
Capitalized software development costs, gross
$
126,979
$
129,749
Less: Accumulated amortization
(102,958)
(94,434)
Capitalized software development costs, net
$
24,021
$
35,315
Capitalized software development costs were $1.6 million and $4.5 million for the three months ended September 30, 2023 and 2022, respectively, and $3.9 million and $12.8 million for the nine months ended September 30, 2023 and 2022, respectively. Amortization expense with respect to capitalized software development costs totaled $4.4 million and $5.9 million for the three months ended September 30, 2023 and 2022, respectively, and $15.2 million and $18.0 million for the nine months ended September 30, 2023 and 2022, respectively. During the three and nine months ended September 30, 2023, we disposed of $2.8 million and $6.3 million, respectively, of fully amortized capitalized software development costs.
Future amortization expense with respect to capitalized software development costs as of September 30, 2023 is estimated as follows (in thousands):
Intangible assets consisted of the following (in thousands, except years):
September 30, 2023
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Weighted Average Useful Life in Years
Customer relationships
$
1,670
$
(1,615)
$
55
5.0
Database
4,710
(2,237)
2,473
10.0
Technology
6,539
(6,539)
—
4.0
Trademarks and trade names
1,520
(1,443)
77
5.0
Partner relationships
680
(680)
—
3.0
Non-compete agreements
7,340
(6,973)
367
5.0
Domain names
90
(86)
4
5.0
Patents
252
(252)
—
5.0
Total intangible assets, net
$
22,801
$
(19,825)
$
2,976
5.8
December 31, 2022
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Weighted Average Useful Life in Years
Customer relationships
$
1,670
$
(1,448)
$
222
5.0
Database
4,710
(1,884)
2,826
10.0
Technology
6,539
(6,539)
—
4.0
Trademarks and trade names
1,520
(1,211)
309
5.0
Partner relationships
680
(680)
—
3.0
Non-compete agreements
7,340
(5,872)
1,468
5.0
Domain names
90
(82)
8
5.0
Patents
252
(252)
—
5.0
Total intangible assets, net
$
22,801
$
(17,968)
$
4,833
4.7
Amortization expense with respect to intangible assets totaled $0.6 million and $1.1 million for the three months ended September 30, 2023 and 2022, respectively, and $1.9 million and $3.4 million for the nine months ended September 30, 2023 and 2022, respectively. Future amortization expense with respect to intangible assets as of September 30, 2023 is estimated as follows (in thousands):
Accrued employee expenses consisted of the following (in thousands):
September 30, 2023
December 31, 2022
Accrued vacation
$
13,576
$
12,067
Accrued bonuses
9,113
13,806
Accrued severance and related personnel cost
8,722
496
Accrued payroll and other
10,682
8,007
Total accrued employee expenses
$
42,093
$
34,376
In the nine months ended September 30, 2023, we expensed and paid $14.9 million of severance related to separation costs associated with our former Chief Executive Officer's Transition and Separation Agreement, dated March 1, 2023 ("Separation Agreement").
In the third quarter of 2023, we accrued $10.3 million of severance and related personnel costs associated with our workforce reduction. We expect the associated liabilities to be substantially paid out in cash by the end of the fourth quarter of 2023. Refer to Note 12, Workforce Reduction for additional information.
7. Leases
Operating leases for our corporate offices have remaining lease terms ranging from one to ten years, some of which include options to extend the leases for up to ten years. These options to extend have not been recognized as part of our operating lease right-of-use assets and lease liabilities as it is not reasonably certain that we will exercise these options. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. Certain leases contain provisions for property-related costs that are variable in nature for which we are responsible, including common area maintenance, which are expensed as incurred.
The components of lease expense recognized in the Condensed Consolidated Statements of Operations were as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023
2022
2023
2022
Operating lease cost
$
1,027
$
1,254
$
3,303
$
4,169
Variable lease cost
372
308
1,393
683
Total lease cost
$
1,399
$
1,562
$
4,696
$
4,852
Lease-related assets and liabilities were as follows (in thousands):
September 30, 2023
December 31, 2022
Assets
Operating lease right-of-use assets
$
19,799
$
23,485
Liabilities
Other current liabilities
$
3,056
$
3,357
Operating lease liabilities
41,108
50,237
Total lease liabilities
$
44,164
$
53,594
During the second quarter of 2022, we decided to exit and make available for sublease certain leased office spaces. As a result, we recorded an impairment of $19.4 million consisting of $15.7 million related to the right-of-use assets and $3.7 million related to property and equipment associated with our leased office spaces. These charges were recorded in the Condensed Consolidated Statements of Operations.
In January 2023, we entered into an amendment to the lease agreement for our San Diego facility (the "San Diego Lease"). We remeasured the lease liability and recorded a reduction to the lease liability and right-of-use asset using the discount rate at the modification date, which resulted in a gain of $2.4 million in the Condensed Consolidated Statements of Operations.
In June 2023, we entered into a second amendment to reduce the rentable square footage and our future rental payment obligations under the San Diego Lease pursuant to which we made a one-time payment of $2.9 million. We again remeasured the lease liability and recorded a reduction to the lease liability using the discount rate at the modification date. As a result, we recorded a gain of $1.9 million in the Condensed Consolidated Statements of Operations.
In July 2023, we entered into an agreement to sublet one of our office spaces in Santa Barbara through December 31, 2031 (the "Santa Barbara 90 Sublease"). The total rental commitment over the term of the Santa Barbara 90 Sublease is $6.1 million. We performed impairment testing in accordance with ASC 360, and no impairment related to the right-of-use assets was recorded for the three months ended September 30, 2023.
Future minimum lease payments under non-cancellable leases as of September 30, 2023 were as follows (in thousands):
Years ending December 31,
2023(1)
$
(33)
2024(1)
5,349
2025
6,168
2026
6,346
2027
6,528
Thereafter
31,090
Total future minimum lease payments
55,448
Less: imputed interest
(11,284)
Total
$
44,164
(1) Future minimum lease payments for the years ending December 31, 2023 and 2024 are presented net of tenant improvement allowances of $1.5 million and $0.5 million respectively.
8. Commitments and Contingencies
Legal Liability to Landlord Insurance
We have a wholly owned subsidiary, Terra Mar Insurance Company, Inc., which was established in connection with reinsuring liability to landlord insurance policies offered to our customers by our third-party service provider. Each policy has a limit of $100 thousand per incident. We assume a 100% quota share of the liability to landlord insurance policies placed with our customers by our third-party service provider. We accrue for reported claims, and include an estimate of losses incurred but not reported by our property manager customers, in cost of revenue because we bear the risk related to all such claims. Our estimated liability for reported claims and incurred but not reported claims as of September 30, 2023 and December 31, 2022 was $3.8 million and $2.7 million, respectively, and is included in Other current liabilities on our Condensed Consolidated Balance Sheets.
Included in Prepaid expenses and other current assets as of September 30, 2023 and December 31, 2022 are $3.1 million and $4.5 million, respectively, of deposits held with a third party related to requirements to maintain collateral for this insurance service.
Legal Proceedings
From time to time we may become involved in various legal proceedings, investigative inquiries, and other disputes arising from or related to matters incident to the ordinary course of our business activities. We are not currently a party to any matters, nor are we aware of any pending or threatened matters, that we believe would have a material adverse effect on our business, operating results, cash flows or financial condition should such proceedings be resolved unfavorably.
In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, business partners, investors, directors, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of any applicable agreements, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from our services or our acts or omissions. These indemnification provisions may survive termination of the underlying agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions may not be subject to maximum loss clauses and is indeterminable. We have not incurred any costs as a result of such indemnification obligations and have not recorded any liabilities related to such obligations in the Condensed Consolidated Financial Statements.
9. Stock-Based Compensation
Stock Options
A summary of activity in connection with our stock options for the nine months ended September 30, 2023, is as follows (number of shares in thousands):
Number of Shares
Weighted Average Exercise Price per Share
Weighted Average Remaining Contractual Life in Years
Options outstanding as of December 31, 2022
516
$
12.90
2.7
Options granted
120
129.74
Options exercised
(218)
9.74
Options outstanding as of September 30, 2023
418
$
47.89
3.4
During the nine months ended September 30, 2023, we granted our Chief Executive Officer 120,000 stock options of our Class A common stock. These stock options vest based on service conditions with one-third vesting at the end of each of the years ending December 31, 2025, 2026 and 2027. No stock options were granted during the nine months ended September 30, 2022.
Our stock-based compensation expense for stock options was $0.4 million and $1.0 million for the three and nine months ended September 30, 2023, respectively. There was no stock-based compensation expense for stock options in the same periods in the prior year.
The fair value of stock options granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following table summarizes information relating to our stock options granted during nine months ended September 30, 2023:
Weighted average grant-date fair value per share
$
67.23
Weighted average Black-Scholes model assumptions:
Risk-free interest rate
4.06
%
Expected term (in years)
6.92
Expected volatility
44
%
Expected dividend yield
—
As of September 30, 2023, the total estimated remaining stock-based compensation expense for the aforementioned stock options was $7.1 million, which is expected to be recognized over a weighted average period of 4.3 years.
A summary of activity in connection with our RSUs for the nine months ended September 30, 2023, is as follows (number of shares in thousands):
Number of Shares
Weighted Average Grant Date Fair Value per Share
Unvested as of December 31, 2022
1,162
$
116.88
Granted
639
123.25
Vested
(360)
117.04
Forfeited
(227)
115.86
Unvested as of September 30, 2023
1,214
$
120.38
Unvested RSUs as of September 30, 2023 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 September 30, 2023, 0.1 million are subject to vesting based on the achievement of pre-established performance metrics for the year ending December 31, 2023 and will vest over a three year period, assuming continued employment through each vesting date. The actual number of shares to be issued at the end of the performance period will range from 0% to 142% of the target number of shares depending on achievement relative to the performance metric over the applicable period. The remaining unvested PSUs as of September 30, 2023 are primarily subject to vesting based on the achievement of pre-established performance metrics for three year measurement periods ending December 31, 2023, assuming continued employment throughout the performance period. The actual number of shares to be issued at the end of the performance period will range from 0% to 100% of the initial target awards. Achievement of the performance metric between 100% and 150% of the performance target will result in a performance-based cash bonus payment between 0% and 65% of the initial target awards.
We recognized stock-based compensation expense for the RSUs and PSUs of $14.8 million and $11.5 million for the three months ended September 30, 2023 and 2022, respectively, and $39.0 million and $29.8 million for the nine months ended September 30, 2023 and 2022, respectively. Excluded from stock-based compensation expense is capitalized software development costs of $0.3 million and $0.8 million for the three months ended September 30, 2023 and 2022, respectively, and $0.6 million and $2.1 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, the total estimated remaining stock-based compensation expense for the aforementioned RSUs and PSUs was $103.8 million, which is expected to be recognized over a weighted average period of 2.5 years.
Restricted Stock Awards
A summary of activity in connection with our restricted stock awards ("RSAs") for the nine months ended September 30, 2023 is as follows (number of shares in thousands):
Number of Shares
Weighted Average Grant Date Fair Value per Share
Unvested as of December 31, 2022
6
$
96.33
Granted
6
151.83
Vested
(6)
96.33
Unvested as of September 30, 2023
6
$
151.83
We have the right to repurchase any unvested RSAs subject to certain conditions. RSAs vest over a one-year period. Our stock-based compensation expense for RSAs was not material for the periods presented.
As of September 30, 2023, the total estimated remaining stock-based compensation expense for unvested RSAs with a repurchase right was $0.7 million, which is expected to be recognized over a weighted average period of 0.7 years.
10. Income Taxes
For the three and nine months ended September 30, 2023, we applied the discrete effective tax rate method, as allowed by ASC 740-270-30-18, “Income Taxes—Interim Reporting,” to calculate our interim income tax provision. The discrete method is applied when the application of the estimated annual effective tax rate yields an estimate that is not reliable and the
actual effective rate for the year-to-date results represents the best estimate of the annual effective tax rate. We believe that the use of the estimated annual effective tax rate method is not reliable because small changes in the projected ordinary annual income would result in significant variability in the estimated annual effective tax rate. As a result of applying the discrete method approach, we recorded a year-to-date tax expense on our year-to-date pre-tax losses as of September 30, 2023. The income tax expense is predominantly driven by the estimated tax liabilities attributable to certain permanent and temporary tax differences, most notably the capitalization of research and development expenses, without a corresponding deferred tax benefit due to our full valuation allowance position.
For the three and nine months ended September 30, 2023, we recorded income tax benefit of $(25.0) million and income tax expense of $4.6 million, respectively, representing an effective tax rate of (1697)% and (20)%, respectively. The effective tax rate as compared to the U.S. federal statutory rate of 21% differs primarily due to the change in valuation allowance against deferred tax assets, non-deductible officers' compensation and state income taxes, partially offset by tax benefits from stock-based compensation and research and development tax credits.
We assess our ability to realize our deferred tax assets on a quarterly basis and we establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. We weigh all available positive and negative evidence, including our earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies.
There were no material changes to our unrecognized tax benefits during the nine months ended September 30, 2023, and we do not expect to have any significant changes to unrecognized tax benefits through the remainder of the year.
11. Revenue and Other Information
The following table presents our revenue categories for the three and nine months ended September 30, 2023 and 2022 (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2023
2022
2023
2022
Core solutions
$
39,756
$
33,940
$
115,440
$
97,163
Value Added Services
123,188
88,399
326,108
241,349
Other
2,496
2,740
7,067
9,313
Total revenue
$
165,440
$
125,079
$
448,615
$
347,825
Our revenue is generated primarily from customers in the United States. All of our property and equipment is located in the United States.
Deferred Revenue
Deferred revenue as of September 30, 2023 and December 31, 2022 was $1.0 million and $0.9 million, respectively, and is included in Other current liabilities on our Condensed Consolidated Balance Sheets. During the nine months ended September 30, 2023 and 2022, we recognized $0.8 million and $2.3 million of revenue, respectively, which were included in the deferred revenue balances as of December 31, 2022 and 2021, respectively.
Remaining Performance Obligations
As of September 30, 2023, the total non-cancelable remaining performance obligations ("RPO") under our contracts with customers was $30 million, and we expect to recognize revenue on approximately 51% of these RPO over the following 12 months, with the balance to be recognized thereafter.
12. Workforce Reduction
During the three months ended September 30, 2023, we announced a plan to reduce our workforce by 149 employees in order to scale the business more efficiently. Impacted employees were notified in August 2023. There were no workforce reductions during the three and nine months ended September 30, 2022.
The following table presents the total severance and related personnel costs by function, for the three and nine months ended September 30, 2023 (in thousands):
(1) Total severance and related personnel costs include $1.8 million of accelerated stock-based compensation expense recognized during the three months ended September 30, 2023.
The following is a summary of changes in the accrued severance and related personnel cost, within Accrued Employee Expenses on the Condensed Consolidated Balance Sheets (in thousands):
Accrued Severance and Related Personnel Cost
Balance as of December 31, 2022
$
—
Severance and related personnel cost
10,278
Cash Payments
(1,801)
Balance as of September 30, 2023
$
8,477
The remaining accrued severance will be substantially paid out in cash by the end of the fourth quarter of 2023.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our Condensed Consolidated Financial Statements and the related notes included elsewhere in this Quarterly Report and in our Annual Report. This discussion and analysis contains forward-looking statements that are based on our current expectations and reflect our plans, estimates and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the section entitled “Risk Factors” in our Annual Report, as well as our other public filings with the SEC. Please also refer to the section of this Quarterly Report entitled "Forward-Looking Statements" for additional information.
Overview
We are a leading provider of cloud business management solutions for the real estate industry. Our solutions are designed to enable our property manager customers to digitally transform their businesses, address critical business operations and deliver a better customer experience. Our products assist our customers with an interconnected and growing network of stakeholders in their business ecosystems, including property owners, real estate investment managers, rental prospects, residents, and service providers, and provide key functionality related to critical transactions across the real estate lifecycle, including screening potential tenants, sending and receiving payments and risk mitigation services. AppFolio’s intuitive interface, coupled with streamlined and automated workflows, make it easier for our customers to eliminate redundant and manual processes so they can deliver a great experience for their network of stakeholders while improving financial and operational performance.
We rely heavily on our talented team of employees to execute our growth plans and achieve our long-term strategic objectives. We believe our people are at the heart of our success and our customers' success, and we have worked hard not only to attract and retain talented individuals, but also to provide a challenging and rewarding work environment to motivate and develop our valuable human capital. As we navigate the challenges of increased competition for talent, we continue to evolve our compensation and employee reward practices.
Property management units under management. We believe that our ability to increase our number of property management units under management is an indicator of our market penetration, growth, and potential future business opportunities. We define property management units under management as active or committed units under management at the period end date. We had 7.8 million and 7.1 million property management units under management as of September 30, 2023 and 2022, respectively.
Our core solutions and certain of our Value Added Services are offered on a subscription basis. Our core solutions subscription fees vary by property type and are designed to scale with the size of our customers’ businesses. We recognize revenue for subscription-based services on a straight-line basis over the contract term beginning on the date that our service is made available. We generally invoice monthly or, to a lesser extent, annually in advance of the subscription period.
We also offer certain Value Added Services, which are not covered by our subscription fees, on a per-use basis. Usage-based fees are charged either as a percentage of the transaction amount (e.g., for certain of our payment services) or on a flat fee per transaction basis with no minimum usage commitments (e.g., for our tenant screening and risk mitigation services). We recognize revenue for usage-based services in the period the service is rendered. Our payments services fees are recorded gross of the interchange and payment processing related fees. We generally invoice our usage-based services on a monthly basis or collect the fee at the time of service. A significant majority of our Value Added Services revenue comes from the use of our payment services, tenant screening services, and risk mitigation services.
We charge our customers for assistance onboarding onto our core solutions and for certain other non-recurring services. We generally invoice for these other services in advance of the services being completed and recognize revenue in the period the service is rendered. We generate revenue from the legacy customers of previously acquired businesses by providing services outside of our property management core solution platform. Revenue derived from these services is recorded in Other revenue. As of September 30, 2023 and 2022, we had 19,418 and 18,109 property management customers, respectively.
Costs and Operating Expenses
Cost of Revenue (Exclusive of Depreciation and Amortization). Many of our Value Added Services are facilitated by third-party service providers. Cost of revenue paid to these third-party service providers includes the cost of electronic interchange and payment processing-related services to support our payments services, the cost of credit reporting services for our tenant screening services, and various costs associated with our risk mitigation service providers. These third-party costs vary both in amount and as a percent of revenue for each Value Added Service offering. Cost of revenue also consists of personnel-related costs for our employees focused on customer service and the support of our operations (including salaries, performance-based compensation, benefits, and stock-based compensation), platform infrastructure costs (such as data center operations and hosting-related costs), and allocated shared and other costs. Cost of revenue excludes depreciation of property and equipment, amortization of capitalized software development costs and amortization of intangible assets.
Sales and Marketing. Sales and marketing expense consists of personnel-related costs for our employees focused on sales and marketing (including salaries, sales commissions, performance-based compensation, benefits, and stock-based compensation), costs associated with sales and marketing activities, and allocated shared and other costs. Marketing activities include advertising, online lead generation, lead nurturing, customer and industry events, and the creation of industry-related content and collateral. We focus our sales and marketing efforts on generating awareness of our software solutions, creating sales leads, establishing and promoting our brands, and cultivating an educated community of successful and vocal customers.
Research and Product Development. Research and product development expense consists of personnel-related costs for our employees focused on research and product development(including salaries, performance-based compensation, benefits, and stock-based compensation), fees for third-party development resources, and allocated shared and other costs. Our research and product development efforts are focused on expanding functionality and the ease of use of our existing software solutions by adding new core functionality, Value Added Services and other improvements, as well as developing new products and services. We capitalize our software development costs that meet the criteria for capitalization. Amortization of capitalized software development costs is included in depreciation and amortization expense.
General and Administrative. General and administrative expense consists of personnel-related costs for employees in our executive, finance, information technology, human resources, legal, compliance, corporate development and administrative organizations (including salaries, performance-based cash compensation, benefits, and stock-based compensation). In addition, general and administrative expense includes fees for third-party professional services (including audit, legal, compliance, and tax services), transaction costs related to sales of subsidiary businesses, regulatory fees, other corporate expenses, impairment of long-lived assets, gains on lease modifications, and allocated shared and other costs.
Depreciation and Amortization. Depreciation and amortization expense includes depreciation of property and equipment, amortization of capitalized software development costs, and amortization of intangible assets. We depreciate or amortize property and equipment, software development costs, and intangible assets over their expected useful lives on a straight-line basis, which approximates the pattern in which the economic benefits of the assets are consumed.
Other Income (Loss), Net. Other income (loss), net includes gains and losses associated with the sale of businesses and property and equipment.
Interest Income, Net. Interest income, net includes interest earned on investment securities, amortization and accretion of the premium and discounts paid from the purchase of investment securities, and interest earned on cash deposited in our bank accounts.
Provision for (Benefit from) Income Taxes. Provision for income taxes consists of federal and state income taxes in the United States.
Results of Operations
Revenue
Three Months Ended September 30,
Change
Nine Months Ended September 30,
Change
2023
2022
Amount
%
2023
2022
Amount
%
(dollars in thousands)
Core solutions
$
39,756
$
33,940
$
5,816
17
%
$
115,440
$
97,163
$
18,277
19
%
Value Added Services
123,188
88,399
34,789
39
%
326,108
241,349
84,759
35
%
Other
2,496
2,740
(244)
(9)
%
7,067
9,313
(2,246)
(24)
%
Total revenue
$
165,440
$
125,079
$
40,361
32
%
$
448,615
$
347,825
$
100,790
29
%
The increase in revenue for the three and nine months ended September 30, 2023, compared to the same periods in the prior year, was primarily attributable to an increase in the usage of our payments, tenant screening, and risk mitigation services. During the three and nine month period ended September 30, 2023, we also experienced growth of 10% in the number of property management units under management compared to the same periods in the prior year, which drove growth in users of our subscription and usage-based services.
We expect total revenue for the year ending December 31, 2023 to increase compared to the year ended December 31, 2022 as we continue to add new customers and property management units under management, along with increased adoption and utilization of our Value Added Services.
Cost of Revenue (Exclusive of Depreciation and Amortization)
Three Months Ended September 30,
Change
Nine Months Ended September 30,
Change
2023
2022
Amount
%
2023
2022
Amount
%
(dollars in thousands)
Cost of revenue (exclusive of depreciation and amortization)
$62,739
$
50,707
$
12,032
24
%
$
176,801
$
141,484
$
35,317
25
%
Percentage of revenue
37.9
%
40.5
%
39.4
%
40.7
%
Stock-based compensation, included above
$
1,149
$
789
$
360
46
%
$
2,905
$
1,873
$
1,032
55
%
Percentage of revenue
0.7
%
0.6
%
0.6
%
0.5
%
For the three and nine months ended September 30, 2023, expenditures to third-party service providers related to the delivery of our Value Added Services increased $8.2 million and $23.4 million, respectively, compared to the same periods in the prior year. This increase was directly associated with the increased adoption and utilization of our Value Added Services. Personnel-related costs, including stock-based and performance-based compensation, necessary to support growth and key investments, increased $3.6 million and $9.8 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. Included in the increase in personnel-related costs was $2.4 million of severance and related personnel costs associated with the workforce reduction in the third quarter of 2023. Allocated shared and other costs increased by $2.1 million for the nine months ended September 30, 2023 compared to the same period in the prior year, primarily related to platform infrastructure, software and other costs incurred in support of our overall growth.
As a percentage of revenue, cost of revenue (exclusive of depreciation and amortization) fluctuates primarily based on the mix of Value Added Services revenue in the period, given the varying percentage of revenue we pay to third-party service providers. We expect cost of revenue (exclusive of depreciation and amortization) for the year ending December 31, 2023, to decrease as a percentage of revenue compared to the year ended December 31, 2022, primarily due to changes in product mix.
Sales and marketing expense for the three and nine months ended September 30, 2023 increased primarily due to increases in personnel-related costs, including stock-based and performance-based compensation, necessary to support growth in the business of $4.0 million and $7.4 million compared to the same period in the prior year. Included in the increase in personnel-related costs was $3.8 million of severance and related personnel costs associated with the workforce reduction in the third quarter of 2023. Advertising costs increased by $2.1 million for the nine months ended September 30, 2023 compared to the same period in the prior year due to increased promotional activities, which was partially offset by lower allocated shared and other costs.
The decrease in stock-based compensation for the three and nine months ended September 30, 2023 was primarily due to the reversal of expense for unvested equity awards as a result of changes in our leadership team.
We expect sales and marketing expense for the year ending December 31, 2023 to decrease as a percentage of revenue compared to the year ended December 31, 2022, as we continue to leverage headcount efficiencies.
Research and Product Development
Three Months Ended September 30,
Change
Nine Months Ended September 30,
Change
2023
2022
Amount
%
2023
2022
Amount
%
(dollars in thousands)
Research and product development
$
41,592
$
28,959
$
12,633
44
%
$
116,517
$
79,966
$
36,551
46
%
Percentage of revenue
25.1
%
23.2
%
26.0
%
23.0
%
Stock-based compensation, included above
$
6,064
$
4,330
$
1,734
40
%
$
15,851
$
11,160
$
4,691
42
%
Percentage of revenue
3.7
%
3.5
%
3.5
%
3.2
%
Research and product development expense for the three and nine months ended September 30, 2023 increased primarily due to an increase in personnel-related costs, including stock-based and performance-based compensation, net of capitalized software development costs, of $11.8 million and $34.8 million, respectively, compared to the same periods in the prior year. The increase in personnel-related costs was primarily due to headcount growth within our research and product development organization, higher salaries, and $3.4 million of severance and related personnel costs associated with the workforce reduction in the third quarter of 2023. Allocated shared and other costs also increased by $1.7 million for the nine months ended September 30, 2023 compared to the same period in the prior year, driven by expenses supporting our growth.
We expect research and product development expenses for the year ending December 31, 2023 to increase as a percentage of revenue compared to the year ended December 31, 2022, as we continue to invest in our research and product development organization to support our strategy to expand the use cases of our product capabilities to the larger customer segment.
General and administrative expense for the three months ended September 30, 2023 increased compared to the same period in the prior year primarily due to an increase in personnel-related costs, including stock-based and performance-based compensation of $3.5 million and an increase in allocated shared and other costs of $1.1 million. The increase in personnel-related costs was primarily due to severance and related personnel costs associated with the workforce reduction in the third quarter of 2023.
General and administrative expense for the nine months ended September 30, 2023 decreased compared to the same period in the prior year primarily due to lease-related asset impairment charges of $19.8 million recognized in the nine months ended September 30, 2022 that did not recur in 2023. In addition, there was a decrease of $4.3 million due to gains related to lease modifications for the nine months ended September 30, 2023, compared to the same period in the prior year. This was partially offset by an increase in personnel-related costs, including stock-based and performance-based compensation, in the nine months ended September 30, 2023 of $21.0 million compared to the same period in the prior year. The increase in personnel-related costs for the nine months ended September 30, 2023 was driven primarily by the separation costs associated with our former Chief Executive Officer's Separation Agreement and the severance related costs associated with the workforce reduction in the third quarter of 2023. For further information see Note 6, Accrued Employee Expenses, and Note 12, Workforce Reduction, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
For the three and nine months ended September 30, 2023, stock-based compensation increased due to additional grants to current and new employees and incremental expense associated with the workforce reduction in the third quarter of 2023.
We expect general and administrative expenses for the year ending December 31, 2023 to decrease as a percentage of revenue compared to the year ended December 31, 2022, as we continue to leverage headcount efficiencies.
Depreciation and Amortization
Three Months Ended September 30,
Change
Nine Months Ended September 30,
Change
2023
2022
Amount
%
2023
2022
Amount
%
(dollars in thousands)
Depreciation and amortization
$
7,568
$
8,241
$
(673)
(8)
%
$
22,055
$
24,977
$
(2,922)
(12)
%
Percentage of revenue
4.6
%
6.6
%
4.9
%
7.2
%
Depreciation and amortization expense for the three and nine months ended September 30, 2023 decreased, compared to the same periods in the prior year, primarily due to decreased amortization expense associated with capitalized software development and intangible balances.
We expect depreciation and amortization expenses for the year ending December 31, 2023 to decrease as a percentage of revenue compared to the year ended December 31, 2022 due to a decrease in amortization of accumulated capitalized software development balances.
Interest income for the three and nine months ended September 30, 2023 increased, compared to the same periods in the prior year, primarily due to higher interest rates.
(Benefit from) Provision for Income Taxes
Three Months Ended September 30,
Change
Nine Months Ended September 30,
Change
2023
2022
Amount
%
2023
2022
Amount
%
(dollars in thousands)
Income (loss) before provision for income taxes
$
1,472
$
(3,224)
$
4,696
(146)%
$
(22,932)
$
(47,530)
$
24,598
(52)%
(Benefit from) provision for income taxes
$
(24,973)
$
938
$
(25,911)
*
$
4,634
$
889
$
3,745
*
Effective tax rate
(1,697)
%
(29)
%
(20)
%
(2)
%
*Percentage not meaningful
Our effective tax rates for the three and nine months ended September 30, 2023 differ from the U.S. federal statutory rate of 21% primarily due to the change in valuation allowance against deferred tax assets, non-deductible officers' compensation and state income taxes, partially offset by tax benefits from stock-based compensation and research and development tax credits. Our effective tax rates for the three and nine months ended September 30, 2022 differ from the U.S. federal statutory rate of 21% primarily due to the significance of the benefits associated with stock-based compensation expense, research and development tax credits, offset by the change in the valuation allowance against deferred taxes.
Prior to the three and nine months ended September 30, 2023, we have been calculating our provision for (benefit from) income taxes on a quarterly basis by applying an estimated annual effective tax rate to income/loss from operations adjusted for the tax effect of discrete items recognized during the quarter.
For the three and nine months ended September 30, 2023, we applied the discrete effective tax rate method to calculate our interim income tax provision. The discrete method is applied when the application of the estimate annual effective tax rate yields an estimate that is not reliable and the actual effective rate for the year-to-date results represents the best estimate of the annual effective tax rate. We believe that the use of the estimated annual effective tax rate method is not reliable because small changes in the projected ordinary annual income would result in significant variability in the estimated annual effective tax rate. As a result of applying the discrete method approach, we recorded a year-to-date tax expense on our year-to-date pre-tax losses as of September 30, 2023. The income tax expense is predominantly driven by the estimated tax liabilities attributable to certain permanent and temporary tax differences, most notably the capitalization of research and development expenses, without a corresponding deferred tax benefit due to our full valuation allowance position.
The decrease in our effective tax rate for the three and nine months ended September 30, 2023, as compared to the same period in 2022, is primarily due to the significant increase in our pre-tax income and increase in tax expense attributable to the change in valuation allowance against deferred tax assets, higher non-deductible officers’ compensation, state income taxes, and capitalized research and development expenses as required by a change in U.S. tax law effective January 1, 2022.
Liquidity and Capital Resources
Our principal sources of liquidity continue to be cash, cash equivalents, and investment securities totaling $191.5 million, as well as cash flows generated from our operations. We have financed our operations primarily through cash generated from operations. We believe that our existing cash and cash equivalents, investment securities, and cash generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.
Capital Requirements
Our future capital requirements will depend on many factors, including continued market acceptance of our software solutions, changes in the number of our customers, adoption and utilization of our Value Added Services by new and existing customers, the timing and extent of the introduction of new core functionality, products and Value Added Services, and the timing and extent of our investments across our organization. In addition, we have in the past entered into, and may in the future enter into, arrangements to acquire or invest in new technologies or markets adjacent to those we serve today. Furthermore, our Board of Directors has authorized the repurchase of up to $100.0 million of shares of our Class A common stock from time to time. To date, we have repurchased $4.2 million of our Class A common stock under the share repurchase program.
The following table summarizes our cash flows for the periods indicated (in thousands):
Nine Months Ended September 30,
2023
2022
Net cash provided by operating activities
$
29,100
$
19,284
Net cash used in investing activities
(22,351)
(5,083)
Net cash used in financing activities
(17,581)
(5,002)
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(10,832)
$
9,199
Operating Activities
Our primary source of operating cash inflows is cash collected from our customers in connection with their use of our core solutions and Value Added Services. Our primary uses of cash from operating activities are for personnel-related expenditures and third-party costs incurred to support the delivery of our software solutions.
The net increase in cash provided by operating activities for the nine months ended September 30, 2023, compared to the same period in the prior year, was primarily due to an increase in cash collections from customers, partially offset by the payment of separation costs in the second quarter of 2023 related to our former Chief Executive Officer's Separation Agreement.
Investing Activities
Cash used in investing activities is generally composed of purchases of investment securities, maturities and sales of investment securities, purchases of property and equipment, and additions to capitalized software development.
The net increase in cash used in investing activities for the nine months ended September 30, 2023, compared to the same period in the prior year, was primarily due to higher purchases of available-for-sale investment securities.
Financing Activities
Cash used in financing activities is generally composed of net share settlements for employee tax withholdings associated with the vesting of equity awards offset by proceeds from the exercise of stock options.
The net increase in cash used in financing activities for the nine months ended September 30, 2023, compared to the same period in the prior year, was primarily due to an increase in net share settlements for employee tax withholdings associated with the vesting of equity awards.
Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements and the related notes are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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.
There have been no changes to our critical accounting policies and estimates described in our Annual Report that have had a material impact on our Condensed Consolidated Financial Statements and related notes.
Item 3. Qualitative and Quantitative Disclosure about Market Risk
Interest Rate Risk
Investment Securities
As of September 30, 2023, we had$131.6 million of investment securities consisting of United States government agency securities, and treasury securities. The primary objective of investing in securities is to support our liquidity and capital needs. We did not purchase these investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.
Our investment securities are exposed to market risk due to interest rate fluctuations. While fluctuations in interest rates do not impact our interest income from our investment securities as all of these securities have fixed interest rates, changes in interest rates may impact the fair value of the investment securities. Since our investment securities are held as available for sale, all changes in fair value impact our other comprehensive (loss) income unless an investment security is considered impaired in which case changes in fair value are reported in other expense. As of September 30, 2023, a hypothetical 100 basis point decrease in interest rates would have resulted in an increase in the fair value of our investment securities of approximately $0.5 million and a hypothetical 100 basis point increase in interest rates would have resulted in a decrease in the fair value of our investment securities of approximately $0.5 million. This estimate is based on a sensitivity model which measures an instant change in interest rates by 100 basis points at September 30, 2023.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the supervision and participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and other procedures designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Based on our management's evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we are involved in various investigative inquiries, legal proceedings and other disputes arising from or related to matters incident to the ordinary course of our business activities, including actions with respect to intellectual property, employment, labor, regulatory and contractual matters. Although the results of such investigative inquiries, legal proceedings and other disputes cannot be predicted with certainty, we believe that we are not currently a party to any matters which, if determined adversely to us, would, individually or taken together, have a material adverse effect on our business, operating results, financial condition or cash flows. However, regardless of the merit of any matters raised or the ultimate outcome, investigative inquiries, legal proceedings and other disputes may generally have an adverse impact on us as a result of defense and settlement costs, diversion of management resources, and other factors.
Item 1A. Risk Factors
An investment in our Class A common stock involves risks. Before making an investment decision, you should carefully consider all of the information in this Quarterly Report, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Condensed Consolidated Financial Statements and related notes. In addition, you should carefully consider the risks and uncertainties described in the section entitled “Risk Factors” in our Annual Report, which was filed with the SEC on February 9, 2023, as well as in our other public filings with the SEC. If any of the identified risks are realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that case, the trading price of our Class A common stock may decline, and you could lose all or part of your investment. In addition, other risks of which we are currently unaware, or which we do not currently view as material, could have a material adverse effect on our business, financial condition, operating results and prospects. As of the date of this report, there have been no material changes to the risk factors previously disclosed in the Annual Report. We may, however, disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
Item 5. Other Information
On May 5, 2023, Janet Kerr, a member of our Board of Directors, entered into a prearranged stock selling plan for the sale of up to 1,000 shares of the Company's Class A common stock between August 4, 2023 and December 31, 2023. Ms. Kerr's trading plan was entered into during an open insider trading window and was intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Exchange Act of 1934, as amended, and the Company's policies regarding insider transactions. On August 21, 2023, Ms. Kerr’s trading plan automatically terminated and expired pursuant to its terms in connection with the completed sale of all 1,000 shares subject to the trading plan.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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The certifications attached as Exhibit 32.1 accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the registrant for purposes of Section 18 of the Exchange Act, and are not to be incorporated by reference into any of the registrant’s filings under the Securities Act or the Exchange Act, whether made before or after the date of this Quarterly Report, irrespective of any general incorporation language contained in any such filing.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
