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Table of Contents

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020.
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)
Delaware26-0359894
(State of incorporation or organization)(I.R.S. Employer Identification No.)
50 Castilian Drive93117
   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 classTrading SymbolName of each exchange on which registered
Class A Common Stock, $0.0001 par valueAPPFNASDAQ 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 November 2, 2020, the number of shares of the registrant’s Class A common stock outstanding was 18,098,284 and the number of shares of the registrant’s Class B common stock outstanding was 16,229,904.


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TABLE OF CONTENTS
 
SectionPage No.
 



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2020 (this "Quarterly Report"), includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which statements are subject to considerable risks and uncertainties. Forward-looking statements include all statements that are not statements of historical facts and can be identified by words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts, “projects,” “seeks,” “should,” “will,” “would” or similar expressions and the negatives of those expressions. Forward-looking statements also include the assumptions underlying or relating to such statements. In particular, forward-looking statements contained in this Quarterly Report relate to, among other things:
our future or assumed financial condition, results of operations and liquidity;
business forecasts and plans;
trends affecting our business and industry, and the economy as a whole;
capital needs and financing plans;
capital resource allocation plans;
share repurchase plans;
research and product development plans;
future products and Value+ services;
growth in the size of our business and number of customers;
strategic plans and objectives;
the impact of acquisitions, investments and divestitures;
changes in the competitive environment;
commitments and contingencies, including with respect to the outcome of legal proceedings or regulatory matters;
the application of accounting guidance, including the impact from adoption of recent accounting pronouncements; and
the impacts of, and our response to, the novel coronavirus ("COVID-19") pandemic.
We caution you that the foregoing list may not include all of the forward-looking statements made in this Quarterly Report.
Our forward-looking statements are based on our management’s current beliefs, assumptions and expectations about future events and trends, which affect or may affect our business, strategy, operations, financial performance or liquidity. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to numerous known and unknown risks and uncertainties and are made in light of information currently available to us. Our actual financial condition and results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (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.
Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time to time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual future results to be materially different from those expressed or implied by any forward-looking statements.
Forward-looking statements speak only as of the date they were made, and, except to the extent required by law or the rules of the NASDAQ Global Market, we undertake no obligation to update or review any forward-looking statement because of new information, future events or other factors.
We qualify all of our forward-looking statements by these cautionary statements.

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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements

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APPFOLIO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except par values)
 
 September 30,
2020
December 31,
2019
Assets
Current assets
Cash and cash equivalents$144,028 $15,813 
Investment securities—current32,689 22,876 
Accounts receivable, net9,416 7,562 
Prepaid expenses and other current assets15,720 15,540 
Total current assets201,853 61,791 
Investment securities—noncurrent5,135 12,089 
Property and equipment, net26,565 14,744 
Operating lease right-of-use assets24,645 27,803 
Capitalized software, net33,543 30,023 
Goodwill56,147 58,425 
Intangible assets, net17,544 21,377 
Deferred taxes14,826 27,574 
Other long-term assets6,014 6,276 
Total assets$386,272 $260,102 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$3,591 $1,927 
Accrued employee expenses18,379 17,758 
Accrued expenses13,546 10,833 
Deferred revenue2,457 4,586 
Income tax payable13,571  
Other current liabilities4,607 11,139 
Term loan, net—current portion 1,208 
Total current liabilities56,151 47,451 
Operating lease liabilities32,755 33,312 
Term loan, net 47,375 
Deferred taxes10,130  
Other long-term liabilities2,720 14 
Total liabilities101,756 128,152 
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.0001 par value, 25,000 shares authorized and no shares issued and outstanding as of September 30, 2020 and December 31, 2019  
Class A common stock, $0.0001 par value, 250,000 shares authorized as of September 30, 2020 and December 31, 2019; 18,450 and 16,923 shares issued as of September 30, 2020 and December 31, 2019, respectively; 18,031 and 16,552 shares outstanding as of September 30, 2020 and December 31, 2019, respectively2 2 
Class B common stock, $0.0001 par value, 50,000 shares authorized as of September 30, 2020 and December 31, 2019; 16,282 and 17,594 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively2 2 
Additional paid-in capital159,296 161,509 
Accumulated other comprehensive income90 33 
Treasury stock, at cost, 419 and 371 shares of Class A common stock as of September 30, 2020 and December 31, 2019, respectively(25,756)(21,562)
Retained earnings (accumulated deficit)150,882 (8,034)
Total stockholders’ equity284,516 131,950 
Total liabilities and stockholders’ equity$386,272 $260,102 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
 
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Revenue$84,086 $67,935 $237,624 $188,650 
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization)32,752 25,930 89,124 75,239 
Sales and marketing14,894 12,636 43,117 37,087 
Research and product development13,454 10,602 36,794 28,422 
General and administrative12,946 8,955 36,303 25,361 
Depreciation and amortization6,680 5,678 19,751 16,169 
Total costs and operating expenses80,726 63,801 225,089 182,278 
Income from operations3,360 4,134 12,535 6,372 
Other income (expense), net187,747 (11)187,759 (68)
Interest expense, net(853)(400)(1,909)(1,324)
Income before provision for (benefit from) income taxes190,254 3,723 198,385 4,980 
Provision for (benefit from) income taxes52,578 (1,255)39,469 (26,874)
Net income$137,676 $4,978 $158,916 $31,854 
Net income per common share:
Basic$4.01 $0.15 $4.64 $0.94 
Diluted$3.86 $0.14 $4.46 $0.90 
Weighted average common shares outstanding:
Basic34,296 34,047 34,241 33,991 
Diluted35,665 35,421 35,662 35,406 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

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APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)

 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Net income$137,676 $4,978 $158,916 $31,854 
Other comprehensive (loss) income:
    Changes in unrealized (losses) gains on investment securities(41)20 57 216 
Comprehensive income$137,635 $4,998 $158,973 $32,070 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

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APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
AccumulatedRetained
AdditionalOtherEarnings/
Common StockCommon StockPaid-inComprehensiveTreasury(Accumulated
Class AClass BCapitalIncomeStockDeficit)Total
SharesAmountSharesAmount
Balance as of December 31, 201916,552 $2 17,594 $2 $161,509 $33 $(21,562)$(8,034)$131,950 
Exercise of stock options17 — — — 97 — — — 97 
Stock-based compensation— — — — 1,365 — — — 1,365 
Vesting of restricted stock units, net of shares withheld for taxes91 — — — (6,458)— — — (6,458)
Conversion of Class B stock to Class A stock58 — (58)— — — — —  
Other comprehensive income— — — — — 132 — — 132 
Repurchase of common stock(48)— — — — — (4,194)— (4,194)
Net income— — — — — — — 1,983 1,983 
Balance as of March 31, 202016,670 $2 17,536 $2 $156,513 $165 $(25,756)$(6,051)$124,875 
Exercise of stock options32 — — — 232 — — — 232 
Stock-based compensation— — — — 3,406 — — — 3,406 
Vesting of restricted stock units, net of shares withheld for taxes50 — — — (3,232)— — — (3,232)
Conversion of Class B stock to Class A stock197 — (197)— — — — —  
Issuance of restricted stock awards3 — — — — — — —  
Other comprehensive loss— — — — — (34)— — (34)
Net income— — — — — — — 19,257 19,257 
Balance as of June 30, 202016,952 $2 17,339 $2 $156,919 $131 $(25,756)$13,206 $144,504 
Exercise of stock options10 — — — 74 — — — 74 
Stock-based compensation— — — — 3,572 — — — 3,572 
Vesting of restricted stock units, net of shares withheld for taxes12 — — — (1,269)— — — (1,269)
Conversion of Class B stock to Class A stock1,057 — (1,057)— — — — —  
Other comprehensive loss— — — — — (41)— — (41)
Net income— — — — — — — 137,676 137,676 
Balance as of September 30, 202018,031 $2 16,282 $2 159,296 $90 $(25,756)$150,882 $284,516 







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APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
Accumulated
AdditionalOther
Common StockCommon StockPaid-inComprehensiveTreasuryAccumulated
Class AClass BCapital(Loss) IncomeStockDeficitTotal
SharesAmountSharesAmount
Balance as of December 31, 201815,789 $2 18,109 $2 $157,898 $(178)$(21,562)$(44,316)$91,846 
Exercise of stock options14 — — — 90 — — — 90 
Stock-based compensation— — — — 1,831 — — — 1,831 
Vesting of restricted stock units, net of shares withheld for taxes58 — — — (2,572)— — — (2,572)
Vesting of early exercised shares— — — — 6 — — — 6 
Conversion of Class B stock to Class A stock38 — (38)— — — — —  
Other comprehensive income— — — — — 129 — — 129 
Net income— — — — — — — 3,725 3,725 
Balance as of March 31, 201915,899 $2 18,071 $2 $157,253 $(49)$(21,562)$(40,591)$95,055 
Exercise of stock options23 — — — 109 — — — 109 
Stock-based compensation— — — — 2,080 — — — 2,080 
Vesting of restricted stock units, net of shares withheld for taxes42 — — — (2,247)— — — (2,247)
Conversion of Class B stock to Class A stock119 — (119)— — — — —  
Issuance of restricted stock awards3 — — — — — — —  
Other comprehensive income— — — — — 67 — — 67 
Net income— — — — — — — 23,151 23,151 
Balance as of June 30, 201916,086 $2 17,952 $2 $157,195 $18 $(21,562)$(17,440)$118,215 
Exercise of stock options9 — — — 60 — — — 60 
Stock-based compensation— — — — 2,678 — — — 2,678 
Vesting of restricted stock units, net of shares withheld for taxes11 — — — (534)— — — (534)
Conversion of Class B stock to Class A stock267 — (267)— — — — —  
Issuance of restricted stock awards— — — — — — — —  
Other comprehensive income— — — — — 20 — — 20 
Net income— — — — — — — 4,978 4,978 
Balance as of September 30, 201916,373 $2 17,685 $2 $159,399 $38 $(21,562)$(12,462)$125,417 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

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APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 Nine Months Ended
September 30,
 20202019
Cash from operating activities
Net income$158,916 $31,854 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization19,751 16,169 
Amortization of operating lease right-of-use assets2,973 3,016 
Deferred income taxes22,878 (27,032)
Stock-based compensation6,808 5,431 
Gain on sale of business(187,636) 
Other170 136 
Changes in operating assets and liabilities:
Accounts receivable(2,229)(2,778)
Prepaid expenses and other current assets(859)(4,403)
Other assets(320)1,129 
Accounts payable695 270 
Accrued employee expenses1,919 486 
Accrued expenses5,931 (14)
Deferred revenue815 1,039 
Operating lease liabilities(1,135)(2,886)
Other liabilities16,539 996 
Net cash provided by operating activities45,216 23,413 
Cash from investing activities
Purchases of available-for-sale investments(29,879)(10,690)
Proceeds from sales of available-for-sale investments13,942 2,750 
Proceeds from maturities of available-for-sale investments13,300 11,000 
Purchases of property, equipment and intangible assets(16,551)(4,115)
Additions to capitalized software(19,697)(15,669)
Cash paid in business acquisition, net of cash acquired (54,004)
Proceeds from sale of business, net of cash divested191,427  
Net cash provided by (used in) investing activities152,542 (70,728)
Cash from financing activities
Proceeds from stock option exercises402 259 
Tax withholding for net share settlement(10,959)(5,541)
Payment of contingent consideration(5,977) 
Proceeds from issuance of debt50,752 1,697 
Principal payments on debt(99,565)(2,634)
Payment of debt issuance costs (420)
Purchase of treasury stock(4,194) 
Net cash used in financing activities(69,541)(6,639)
Net increase (decrease) in cash, cash equivalents and restricted cash128,217 (53,954)
Cash, cash equivalents and restricted cash
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APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 Nine Months Ended
September 30,
 20202019
Beginning of period16,247 74,506 
End of period$144,464 $20,552 
Noncash investing and financing activities
Purchases of property and equipment included in accounts payable and accrued expenses$1,748 $1,613 
Additions of capitalized software included in accrued and accrued employee expenses756 601 
Stock-based compensation capitalized for software development1,535 1,321 
Purchase consideration for acquisitions included in other current liabilities 5,977 

    The following table presents a reconciliation of cash, cash equivalents and restricted cash reported within our Condensed Consolidated Balance Sheets to the total of the same such amounts shown above (in thousands):
September 30,
20202019
Cash and cash equivalents$144,028 $20,121 
Restricted cash included in other assets436 431 
Total cash, cash equivalents and restricted cash$144,464 $20,552 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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APPFOLIO, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Nature of Business
    AppFolio, Inc.'s (the "Company," “we,” "us" or "our") mission is to revolutionize vertical industry businesses by providing great software and services. We offer industry-specific, cloud-based business software solutions, services and data analytics to our customers. Although specific functionality varies by product, our core solutions address common business operations and interactions of our customers' businesses. In addition to our core solutions, we offer a range of optional, but often business-critical, Value+ services. Our Value+ services are built to enhance, automate and streamline processes and support workflows essential to our customers' businesses.
    Our real estate software solutions represent approximately 90% of our revenue as of September 30, 2020. The significant majority of our customers in the real estate vertical use our property management solutions, which provide our property management customers, including third-party property managers and owner-operators who manage single- and multi-family residences, community associations, commercial properties, and student housing, as well as mixed real estate portfolios, with a system of record to automate essential business processes, a system of engagement to enhance business interactions between our customers and their clients and other stakeholders, and a system of intelligence designed to leverage data to predict and optimize business workflows in order to enable superior customer experiences and increase efficiency across our customers' businesses. We also provide software solutions to real estate investment managers.
During the periods covered by this Quarterly Report, we also provided software solutions and services to the legal vertical that enabled law firms to administer their practice and manage their caseloads more efficiently by centralizing case details in a single system of record and system of engagement.
As previously disclosed, on September 30, 2020, the Company completed its divestiture of 100% of the issued and outstanding equity interests of MyCase, Inc. ("MyCase"), a former wholly owned subsidiary of the Company that provided such legal practice and case management software solutions to our legal customers. The Company sold MyCase to Mockingbird AcquisitionCo Inc., a Delaware corporation (“Buyer”) affiliated with funds advised by Apax Partners LLP, for $193.0 million pursuant to a Stock Purchase Agreement, dated September 7, 2020 (the “Purchase Agreement”), by and among Buyer, the Company and MyCase (the “MyCase Transaction”). In connection with the closing of the MyCase Transaction, and in accordance with the terms of the Purchase Agreement, the Company and MyCase entered into certain ancillary agreements, including relating to certain post-closing transition services to be provided by the Company to MyCase at fair market value, as well as an intellectual property licensing agreement for certain software and patents for which no ongoing licensing fees will be received. We recognized a pre-tax gain on the sale of $187.6 million on the MyCase Transaction.
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 March 2, 2020. 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, 2020 are not necessarily indicative of the results expected for the full year ending December 31, 2020.
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.
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Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue, expenses, other income, and provision for income taxes during the reporting period. Assets and liabilities which are subject to judgment and use of estimates include the fair value of assets and liabilities assumed in business combinations, fair value of financial instruments, capitalized software 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, and valuation and assumptions underlying stock-based compensation and other equity instruments.
During early calendar year 2020, the novel coronavirus disease ("COVID-19") spread globally, including to every state in the United States. The global pandemic has created and may continue to create significant uncertainty in a wide variety of industries and markets and has prompted many federal, state, local, and foreign governments to adopt various orders and restrictions in an attempt to control the spread and mitigate the impact of the disease, which may reduce demand for our core solutions and/or Value+ services, impact the productivity of our workforce, reduce our access to capital, and harm our business and results of operations. These potential impacts are only amplified by the length of time they remain in place, as the cumulative effect upon our customers and their businesses may only exacerbate potential harm to our business and results of operations.
In light of the unknown duration and severity of COVID-19, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of September 30, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for credit losses, the carrying value of goodwill and other long-lived assets, performance-based compensation and income taxes.
As of the date of our Condensed Consolidated Financial Statements, we are not aware of any specific event or circumstance that would require us to update our estimates or judgments or to revise the carrying value of our assets or liabilities. However, these estimates and judgments may change as new events occur and additional information is obtained, which may result in changes being recognized in our consolidated financial statements in future periods. While we considered the effects of COVID-19 in our estimates and assumptions, due to the level of uncertainty regarding the economic and operational impacts of COVID-19 on our business, there may be other judgments and assumptions that we have not considered. Such judgments and assumptions could result in a meaningful impact on our financial statements in future periods. Actual results could differ from those estimates and any such differences may have a material impact on our financial statements.
Net Income per Common Share
Net income per common share was the same for shares of our Class A and Class B common stock because they are entitled to the same liquidation and dividend rights and are therefore combined in the table below. The following table presents a reconciliation of the weighted average number of shares of our Class A and Class B common stock used to compute net income per common share (in thousands):
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Weighted average common shares outstanding34,301 34,050 34,246 33,995 
Less: Weighted average unvested restricted shares subject to repurchase5 3 5 4 
Weighted average common shares outstanding; basic34,296 34,047 34,241 33,991 
Plus: Weighted average options, restricted stock units and restricted shares used to compute diluted net income per common share1,369 1,374 1,421 1,415 
Weighted average common shares outstanding; diluted35,665 35,421 35,662 35,406 
For the three and nine months ended September 30, 2020 and 2019, an aggregate of 130,000 and 361,000 shares, respectively, underlying performance-based stock options ("PSOs") and performance-based restricted stock units ("PSUs") were not included in the computations of diluted and anti-dilutive shares as they are considered contingently issuable upon the satisfaction of pre-defined performance measures and their respective performance measures have not been met.
Restricted stock units ("RSUs") with an anti-dilutive effect were excluded from the calculation of weighted average number of shares used to compute diluted net income per common share and they were not material for the three and nine months ended September 30, 2020 and 2019.
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Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 investment securities and purchased financial assets with credit deterioration. We adopted ASU 2016-13 on January 1, 2020. The adoption of this guidance did not have a material impact on our financial condition, results of operations, cash flows or disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"), a series of amendments which align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. We adopted ASU 2018-15 on January 1, 2020. The adoption of this guidance did not have a material impact on our financial condition, results of operations, cash flows or disclosures.
Recent Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). This amendment was issued to simplify the accounting for income taxes by removing certain exceptions for recognizing deferred taxes, performing intraperiod allocation, and calculating income taxes in interim periods. Further, ASU 2019-12 adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax basis goodwill and allocating taxes to members of a consolidated group. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. This guidance is effective for interim and annual periods beginning after December 15, 2020 with early adoption permitted. 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.
3. Divestitures and Business Combinations
Divestiture of MyCase
On September 30, 2020, we completed the MyCase Transaction for $193.0 million, consisting of $192.2 million of cash proceeds, plus a $2.2 million employee retention bonus pool funded by the Company, less cash divested of $0.8 million and a preliminary working capital adjustment of $0.6 million. The retention bonus pool is refundable to the Company to the extent that MyCase employees are terminated prior to the retention period, which is one year from the closing date of the MyCase Transaction. A portion of the cash proceeds was used to pay all outstanding borrowings under the Credit Facility. Refer to Note 8, Long-Term Debt, of our Condensed Consolidated Financial Statements for more information about the termination of the Credit Facility.
We recognized a pre-tax gain on the sale of $187.6 million on the MyCase Transaction, consisting of cash proceeds of $192.2 million, less net assets divested of $4.6 million. Net assets divested is primarily comprised of capitalized software of $3.9 million, deferred revenue of $2.8 million and goodwill allocated to MyCase of $2.3 million. The gain on the sale is included within Other income (expense), net in our Condensed Consolidated Statements of Operations. Income received in relation to the transition services to be provided by the Company to MyCase will be included within Other income (expense), net in our Condensed Consolidated Statements of Operations. Refer to Note 1, Nature of Business, of our Condensed Consolidated Financial Statements for more information about the MyCase Transaction.     
Acquisition of Dynasty
On January 7, 2019, we acquired 100% of the voting equity interest of Dynasty Marketplace, Inc. ("Dynasty") for $60.2 million, of which $6.0 million (the "Holdback Amount") was retained by the Company to satisfy any necessary adjustments, including without limitation certain indemnification claims. The balance of the Holdback Amount, less any amount retained with respect to any unresolved indemnification claims, was released to the stockholders of Dynasty on January 10, 2020 in accordance with the terms of the purchase agreement. Dynasty is a provider of advanced artificial intelligence solutions for the real estate vertical, which automate leasing communications, replace manual tasks and help customers grow their portfolios.
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The transaction was accounted for using the acquisition method and, as a result, assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. Determining the fair value of assets acquired and liabilities assumed requires management to make significant judgments and estimates, including the selection of valuation methodologies and comparable companies, estimates of future revenue and cash flows, discount rates, and the software decay rate and database ramp up rate. The following table summarizes the final purchase price allocation (in thousands), as well as the estimated useful lives of the acquired intangible assets over which they are amortized on a straight-line basis, as this approximates the pattern in which we expect the economic benefits will be consumed:
Amount
(in thousands)
Estimated Useful Life (in years)
Total current assets$305 
Identified intangible assets:
Technology5,730 4.0
Database4,710 10.0
Customer relationships1,110 5.0
Backlog470 1.0
Trademark & trade name1,390 10.0
Non-compete agreement7,340 5.0
Total intangible assets subject to amortization20,750 6.0
Goodwill42,877 Indefinite
Other noncurrent assets35 
Total assets acquired63,967 
Accrued and other liabilities48 
Deferred tax liability, net 3,711 
Total liabilities assumed3,759 
Purchase consideration$60,208 

Goodwill is mainly attributable to synergies expected from the acquisition and assembled workforce and is non-deductible for U.S. federal income tax purposes.
We incurred a total of $0.3 million in transaction costs related to the acquisition and expensed all transaction costs incurred during the period in which such service was received.
Pro Forma Results
The following unaudited pro forma information has been prepared for illustrative purposes only, and assumes that the aforementioned Dynasty acquisition occurred on January 1, 2018, and includes pro forma adjustments related to the amortization of acquired intangible assets, elimination of historical interest and amortization expense, income taxes, compensation arrangements, and the transaction costs incurred. The unaudited pro forma results have been prepared based on estimates and assumptions, which we believe are reasonable; however, they are not necessarily indicative of the consolidated results of operations had the acquisitions occurred at the beginning of the periods presented, or of future results of operations. The unaudited pro forma results are as follows (in thousands):
Three Months Ended September 30, 2019Nine Months Ended September 30, 2019
Revenue$67,935 $188,685 
Net income4,978 27,911 


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4. Investment Securities and Fair Value Measurements
Investment Securities
Investment securities classified as available-for-sale consisted of the following as of September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020
Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Agency securities$3,104 $34 $ $3,138 
Treasury securities34,618 68  34,686 
Total available-for-sale investment securities$37,722 $102 $ $37,824 
December 31, 2019
Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Corporate bonds$9,597 $18 $(1)$9,614 
Agency securities11,101 17  11,118 
Treasury securities14,222 12 (1)14,233 
Total available-for-sale investment securities$34,920 $47 $(2)$34,965 
For available-for-sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of these criteria is met, the security’s amortized cost basis is written down to fair value through income. For securities in an unrealized loss position that do not meet these criteria, we evaluate whether the decline in fair value has resulted from credit loss or other factors. If this assessment indicates a credit loss exists, the credit-related portion of the loss is recorded as an allowance for losses on the security. No allowance for credit losses for available-for-sale investment securities was recorded as of September 30, 2020.
As of September 30, 2020 and December 31, 2019, the contractual maturities of our investments did not exceed 36 months. The fair values of available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands):
September 30, 2020December 31, 2019
Amortized CostEstimated Fair ValueAmortized CostEstimated Fair Value
Due in one year or less$32,658 $32,689 $22,846 $22,876 
Due after one year through three years5,064 5,135 12,074 12,089 
Total available-for-sale investment securities$37,722 $37,824 $