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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
or
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: 001-34846 
RealPage, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2788861
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)

2201 Lakeside Boulevard, Richardson, Texas 75082-4305
(Address of principal executive offices)
(Zip Code)
(972) 820-3000
(Registrant’s telephone number, including area code) 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange
on which registered
Common Stock, $0.001 par valueRPThe NASDAQ Stock Market LLC
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 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 such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 filerAccelerated 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  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
ClassOctober 26, 2020
Common Stock, $0.001 par value101,851,538


Table of Contents
INDEX


Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
RealPage, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except per share and share amounts)
September 30, 2020December 31, 2019
 (unaudited)
Assets
Current assets:
Cash and cash equivalents$612,118 $197,154 
Restricted cash231,351 243,323 
Accounts receivable, less allowances of $12,186 and $10,271 at September 30, 2020 and December 31, 2019, respectively
130,118 143,127 
Prepaid expenses34,802 24,539 
Other current assets32,187 27,387 
Total current assets1,040,576 635,530 
Property, equipment, and software, net176,994 163,282 
Right-of-use assets113,557 121,941 
Goodwill1,725,872 1,611,749 
Intangible assets, net350,400 372,996 
Deferred tax assets, net21,925 33,812 
Other assets27,550 30,507 
Total assets$3,456,874 $2,969,817 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$40,935 $40,092 
Accrued expenses and other current liabilities106,659 89,038 
Current portion of deferred revenue134,003 134,148 
Current portion of term loans30,000 18,750 
Convertible notes, net314,935  
Customer deposits held in restricted accounts232,554 243,316 
Total current liabilities859,086 525,344 
Deferred revenue4,724 4,793 
Revolving facility 230,000 
Term loans, net553,201 575,313 
Convertible notes, net285,462 305,188 
Lease liabilities, net of current portion124,452 133,313 
Other long-term liabilities41,835 22,940 
Total liabilities1,868,760 1,796,891 
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.001 par value: 10,000,000 shares authorized and zero shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
  
Common stock, $0.001 par value: 250,000,000 shares authorized, 102,260,247 and 96,100,296 shares issued and 101,923,802 and 94,744,157 shares outstanding at September 30, 2020 and December 31, 2019, respectively
102 96 
Additional paid-in capital1,578,661 1,222,356 
Treasury stock, at cost: 336,445 and 1,356,139 shares at September 30, 2020 and December 31, 2019, respectively
(10,468)(39,483)
Retained earnings (deficit)25,036 (7,695)
Accumulated other comprehensive loss(5,217)(2,348)
Total stockholders’ equity1,588,114 1,172,926 
Total liabilities and stockholders’ equity$3,456,874 $2,969,817 
See accompanying notes.
1

Table of Contents
RealPage, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Revenue:
On demand$290,239 $245,637 $837,269 $707,341 
Professional and other7,910 9,565 23,160 26,028 
Total revenue298,149 255,202 860,429 733,369 
Cost of revenue111,497 98,783 331,120 284,685 
Amortization of product technologies14,236 10,315 42,539 29,729 
Gross profit172,416 146,104 486,770 418,955 
Operating expenses:
Product development34,066 27,866 97,047 85,914 
Sales and marketing55,563 51,906 159,644 145,849 
General and administrative37,909 31,249 120,836 87,702 
Amortization of intangible assets11,206 10,444 33,872 30,682 
Total operating expenses138,744 121,465 411,399 350,147 
Operating income33,672 24,639 75,371 68,808 
Interest expense and other, net(13,305)(8,764)(38,732)(22,773)
Income before income taxes20,367 15,875 36,639 46,035 
Income tax expense4,026 4,171 3,392 7,996 
Net income$16,341 $11,704 $33,247 $38,039 
Net income per share attributable to common stockholders:
Basic$0.16 $0.13 $0.35 $0.41 
Diluted$0.16 $0.12 $0.33 $0.39 
Weighted average common shares outstanding:
Basic99,334 92,239 95,926 91,884 
Diluted103,385 97,114 99,898 96,392 

See accompanying notes.
2

Table of Contents
RealPage, Inc.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Net income$16,341 $11,704 $33,247 $38,039 
Other comprehensive income (loss):
Unrealized gain (loss) on derivative instruments, net of tax309 (143)(3,654)(1,720)
Reclassification adjustment for losses (gains) included in earnings on derivative instruments, net of tax332 (135)841 (578)
Foreign currency translation adjustment269 258 (56)277 
Other comprehensive income (loss), net of tax910 (20)(2,869)(2,021)
Comprehensive income$17,251 $11,684 $30,378 $36,018 

See accompanying notes.
3

Table of Contents
RealPage, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(unaudited)
 
Nine-Month Period Ended September 30, 2020
Common StockAdditional
Paid-in Capital
Accumulated Other Comprehensive LossRetained Earnings (Deficit)Treasury StockTotal
Stockholders’ Equity
 SharesAmountSharesAmount
Balance as of January 1, 202096,100 $96 $1,222,356 $(2,348)$(7,695)1,356 $(39,483)$1,172,926 
Public offering of common stock, net5,847 6 334,120 — — — — 334,126 
Stock option exercises246 — (375)— — (250)8,398 8,023 
Issuance of restricted stock77 — (40,252)— — (1,376)40,752 500 
Treasury stock purchased, at cost— — 9,596 — — 616 (20,775)(11,179)
Retirement of treasury stock(10)— (124)— (516)(10)640  
Stock-based compensation— — 40,884 — — — — 40,884 
Purchase of capped call instrument— — (39,365)— — — — (39,365)
Equity component of convertible senior notes, net of issuance costs and deferred tax— — 51,821 — — — — 51,821 
Other comprehensive loss - derivative instruments— — — (2,813)— — — (2,813)
Foreign currency translation— — — (56)— — — (56)
Net income— — — — 33,247 — — 33,247 
Balance as of September 30, 2020102,260 $102 $1,578,661 $(5,217)$25,036 336 $(10,468)$1,588,114 

See accompanying notes.

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RealPage, Inc.
Condensed Consolidated Statements of Stockholders’ Equity, continued
(in thousands)
(unaudited
 
Three-Month Period Ended September 30, 2020
Common StockAdditional
Paid-in Capital
Accumulated Other Comprehensive LossRetained Earnings (Deficit)Treasury StockTotal
Stockholders’ Equity
 SharesAmountSharesAmount
Balance as of July 1, 2020102,206 $102 $1,561,672 $(6,127)$8,695 216 $(4,527)$1,559,815 
Stock option exercises14 — 301 — — — — 301 
Issuance of restricted stock40 — 500 — — — — 500 
Treasury stock purchased, at cost— — 1,645 — — 120 (5,941)(4,296)
Stock-based compensation— — 14,543 — — — — 14,543 
Other comprehensive income - derivative instruments— — — 641 — — — 641 
Foreign currency translation— — — 269 — — — 269 
Net income— — — — 16,341 — — 16,341 
Balance as of September 30, 2020102,260 $102 $1,578,661 $(5,217)$25,036 336 $(10,468)$1,588,114 

See accompanying notes.
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RealPage, Inc.
Condensed Consolidated Statements of Stockholders’ Equity, continued
(in thousands)
(unaudited)

Nine-Month Period Ended September 30, 2019
Common StockAdditional
Paid-in Capital
Accumulated Other Comprehensive LossRetained Earnings (Deficit)Treasury StockTotal
Stockholders’ Equity
 SharesAmountSharesAmount
Balance as of January 1, 201995,991 $96 $1,187,683 $(492)$(58,793)2,341 $(65,470)$1,063,024 
Cumulative effect of adoption of ASU 2017-12, Derivatives and Hedging
— — — 25 (25)— —  
Issuance of common stock in connection with our acquisitions234 — 14,846 — — — — 14,846 
Stock option exercises32 — (1,962)— — (200)6,416 4,454 
Issuance of restricted stock7 — (40,733)— — (1,331)41,232 499 
Treasury stock purchased, at cost— — 2,375 — — 509 (19,146)(16,771)
Retirement of treasury stock(12)— (152)— (592)(12)744  
Stock-based compensation— — 47,242 — — — — 47,242 
Other comprehensive loss- derivative instruments— — — (2,298)— — — (2,298)
Foreign currency translation— — — 277 — — — 277 
Net income— — — — 38,039 — — 38,039 
Balance as of September 30, 201996,252 $96 $1,209,299 $(2,488)$(21,371)1,307 $(36,224)$1,149,312 

See accompanying notes.



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RealPage, Inc.
Condensed Consolidated Statements of Stockholders’ Equity, continued
(in thousands)
(unaudited)

Three-Month Period Ended September 30, 2019
Common StockAdditional
Paid-in Capital
Accumulated Other Comprehensive LossRetained Earnings (Deficit)Treasury StockTotal
Stockholders’ Equity
 SharesAmountSharesAmount
Balance as of July 1, 201996,152 $96 $1,189,875 $(2,468)$(33,075)1,292 $(34,109)$1,120,319 
Issuance of common stock in connection with our acquisitions80 — 5,000 — — — — 5,000 
Stock option exercises13 — (685)— — (62)2,070 1,385 
Issuance of restricted stock7 — (1,734)— — (63)2,233 499 
Treasury stock purchased, at cost— — 755 — — 140 (6,418)(5,663)
Stock-based compensation— — 16,088 — — — — 16,088 
Other comprehensive loss- derivative instruments— — — (278)— — — (278)
Foreign currency translation— — — 258 — — — 258 
Net income— — — — 11,704 — — 11,704 
Balance as of September 30, 201996,252 $96 $1,209,299 $(2,488)$(21,371)1,307 $(36,224)$1,149,312 

See accompanying notes.
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RealPage, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 Nine Months Ended September 30,
 20202019
Cash flows from operating activities:
Net income$33,247 $38,039 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization102,553 86,106 
Amortization of debt discount and issuance costs14,320 10,189 
Amortization of right-of-use assets10,269 8,684 
Deferred taxes2,915 8,031 
Stock-based expense44,349 47,276 
Loss on disposal and impairment of other long-lived assets12 259 
Change in fair value of equity investment (2,600)
Acquisition-related consideration(786)1,093 
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Accounts receivable16,950 (5,087)
Prepaid expenses and other current assets(13,972)(4,746)
Other assets2,515 171 
Accounts payable(655)7,836 
Accrued compensation, taxes, and benefits10,279 (1,620)
Deferred revenue(4,115)1,517 
Customer deposits(14,211)(1,034)
Other current and long-term liabilities4,391 (7,969)
Net cash provided by operating activities208,061 186,145 
Cash flows from investing activities:
Purchases of property, equipment, and software(48,311)(38,511)
Acquisition of businesses, net of cash and restricted cash acquired(129,696)(50,059)
Purchase of other investment (1,750)
Net cash used in investing activities(178,007)(90,320)
Cash flows from financing activities:
Proceeds from term loans 300,000 
Payments on term loans(11,250)(304,996)
Payments on revolving credit facility(230,000) 
Proceeds from borrowings on convertible notes345,000  
Purchase of capped call hedge(39,365) 
Payments of deferred financing costs(7,485)(3,306)
Payments on finance lease obligations(2,464)(2,879)
Payments of acquisition-related consideration(12,260)(26,343)
Proceeds from public offering, net of underwriters’ discount and offering costs334,126  
Proceeds from exercise of stock options8,023 4,454 
Purchase of treasury stock related to stock-based compensation(10,516)(16,771)
Other financing activities, net(815) 
Net cash provided by (used in) financing activities372,994 (49,841)
Net increase in cash, cash equivalents and restricted cash403,048 45,984 
Effect of exchange rate on cash(56)277 
Cash, cash equivalents and restricted cash:
Beginning of period440,477 382,758 
End of period$843,469 $429,019 
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RealPage, Inc.
Condensed Consolidated Statements of Cash Flows, continued
(in thousands)
(unaudited)
 Nine Months Ended September 30,
 20202019
Supplemental cash flow information:
Cash paid for interest$18,509 $15,740 
Cash paid for income taxes, net$1,657 $1,872 
Right-of-use assets obtained in exchange for operating lease obligations$5,127 $21,192 
Non-cash investing and financing activities:
Accrued property, equipment, and software$2,447 $2,259 
Acquisition-related liabilities settled with equity$ $14,846 
       The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets and that shown in the Condensed Consolidated Statements of Cash Flows:
September 30, 2020December 31, 2019
Cash and cash equivalents$612,118 $197,154 
Restricted cash231,351 243,323 
Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash flows$843,469 $440,477 

See accompanying notes.
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RealPage, Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
1. The Company
RealPage, Inc., a Delaware corporation (together with its subsidiaries, the “Company” or “we” or “us”), is a leading global provider of software and data analytics to the real estate industry. Our platform of data analytics and software solutions enables the rental real estate industry to manage property operations (such as marketing, pricing, screening, leasing, payment processing and accounting), identify opportunities through market intelligence, and obtain data-driven insight for better operational and financial decision-making. Our integrated, on demand platform provides a single point of access and a massive repository of real-time lease transaction data, including prospect, renter, and property data. By leveraging data as well as integrating and streamlining a wide range of complex processes and interactions among the rental real estate ecosystem (owners, managers, prospects, renters, service providers, and investors), our platform helps our clients improve financial and operational performance and prudently place and harvest capital.
During the quarter ended September 30, 2020, we continued to respond to the challenges that the evolving COVID-19 virus (“COVID-19”) pandemic created for us and our customers. Almost all of our staff continued to operate in a work-from-home environment while simultaneously supporting our customers as they used our software services to sustain their operations while reducing in-person interactions with their customers. Portions of our business, including our electronic payment processing services, experienced continued growth during the quarter. Certain of our other services that experienced lower transactional volumes during the second quarter as a result of COVID-19 began returning to more normalized levels during the third quarter. Many countries, including the United States, are still experiencing high levels of new COVID-19 infections, and the ultimate severity and duration of the outbreak and its effect on our future operations is uncertain. It is possible that the COVID-19 pandemic, the measures taken by the governments of countries affected, and the resulting economic impact could still materially adversely affect our future results of operations, cash flows and financial position, as well as the financial health of our customers.

2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements and footnotes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. We believe that the disclosures made are appropriate and conform to those rules and regulations, and that the condensed or omitted information is not misleading.
The unaudited Condensed Consolidated Financial Statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.
These financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 2, 2020 (“Annual Report on Form 10-K”).
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Our cash accounts are maintained at various high credit quality financial institutions and may exceed federally insured limits. We have not experienced any losses in such accounts.
Substantially all of our accounts receivable are derived from clients in the residential rental housing market. Concentrations of credit risk with respect to accounts receivable and revenue have historically been limited because our customers are geographically dispersed across primarily the United States. Furthermore, no single client accounted for 10% or more of our revenue or accounts receivable for the three or nine months ended September 30, 2020 or 2019. We do not require collateral from clients.
The financial health of our customers, including their ability to generate cash flows sufficient to meet their obligations to us, is dependent on, among other things, the ability of their residents to meet their lease obligations on a consistent and timely basis. A portion of those residents have already been, or may in the future be, affected by the general business closures and limitations resulting from the COVID-19 pandemic. The degree to which our customers will be adversely affected by COVID-19 is still not yet fully known and will be affected by several factors including the severity and duration of what has
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become a prolonged outbreak in the United States, the effect of the expiration of initial government subsidies, and the scope and duration of any new subsidies that may be provided to both residents, owners and managers of rental properties and other businesses in general.
We maintain an allowance for credit losses based upon the expected collectability of accounts receivable using historical loss rates adjusted for forward-looking assumptions based on management’s judgments. During the nine months ended September 30, 2020, we have not recognized additional allowances as a result of COVID-19. Nevertheless, our reserves may not be sufficient if the effects of COVID-19 on our customers become more severe or continue for an extended term. We continue to work closely with our customers to help them address the operational challenges they face as a result of COVID-19, and we will adjust our estimates of reserves for credit losses in future periods as appropriate.
Segment and Geographic Information
Our chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, we have determined we operate as a single reporting segment and operating unit.
Principally, all of our revenue for the three and nine months ended September 30, 2020 and 2019 was earned in the United States. Net property, equipment, and software located in the United States amounted to $167.1 million and $154.5 million at September 30, 2020 and December 31, 2019, respectively. Net property, equipment, and software located in our international subsidiaries amounted to $9.9 million and $8.8 million at September 30, 2020 and December 31, 2019, respectively. Substantially all of the net property, equipment, and software held in our international subsidiaries was located in the Philippines and India at both September 30, 2020 and December 31, 2019.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Such significant estimates include, but are not limited to, the determination of the allowances against our accounts receivable; useful lives of intangible assets; impairment assessments on long-lived assets (including goodwill and indefinite-lived intangible assets); contingent commissions related to the sale of insurance products; fair value of acquired net assets and contingent consideration in connection with business combinations; the nature and timing of the satisfaction of performance obligations and related reserves; fair values of stock-based awards; loss contingencies; and the recognition, measurement and valuation of current and deferred income taxes. Actual results could differ from these estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the result of which forms the basis for making judgments about the carrying value of assets and liabilities. For greater detail regarding these accounting policies and estimates, refer to our Annual Report on Form 10-K.
During 2020, we have taken specific steps in response to COVID-19, including employing work-from-home strategies, in order to continue to provide services to our customers without any significant interruption in those services. We have considered COVID-19 in preparing the estimates used in the preparation of our financial statements for the three and nine months ended September 30, 2020, but the ultimate effect on our financial results and those of our customers in the near and long term is still uncertain. We will continue to revise our estimates in future periods for additional changes brought about by the evolving COVID-19 pandemic or other issues as additional information becomes available.
Cash and Cash Equivalents and Restricted Cash
We consider all highly liquid investments with an initial maturity of three months or less at the date of purchase to be cash equivalents. The fair value of our cash and cash equivalents approximates carrying value.
Restricted cash primarily consists of cash collected from tenants that will be remitted to our clients.
Accounts Receivable
Accounts receivable primarily represent trade receivables from clients recorded at the invoiced amount, net of allowances which are based on our historical experience, the aging of our trade receivables, and management judgment.
Trade receivables are written off against the allowance when management determines a balance is uncollectible. We incurred bad debt expense of $0.8 million and $0.5 million for the three months ended, and $3.1 million and $1.9 million for the nine months ended September 30, 2020 and 2019, respectively.
Internally Developed Software
Costs incurred to develop software intended for our internal use are capitalized during the application development stage. Capitalization of such costs ceases once the project is substantially complete and ready for its intended use. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditure will result in additional functionality. Costs related to preliminary project activities and post-implementation operating activities are expensed as incurred.
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Internally developed software costs are included in “Property, equipment, and software, net” in the accompanying Condensed Consolidated Balance Sheets and are amortized on a straight-line basis over their expected useful lives. Amortization of internally developed software is included in “Amortization of product technologies” in the accompanying Condensed Consolidated Statements of Operations.
Business Combinations
We allocate the fair value of the purchase consideration of our acquisitions to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Purchase consideration includes assets transferred, liabilities assumed, and/or equity interests issued by us, all of which are measured at their fair value as of the date of acquisition. Our business combination transactions may be structured to include a combination of up-front, deferred and contingent payments to be made at specified dates subsequent to the date of acquisition. These payments may include a combination of cash and equity and are generally settled within one to four years from the date of acquisition. Deferred and contingent payments determined to be purchase consideration are recorded at fair value as of the acquisition date. Deferred obligations are generally subject to adjustments specified in the underlying purchase agreement related to the seller’s indemnification obligations, including indemnification assets that contractually can be recorded as a reduction to outstanding deferred obligations. Our contingent consideration arrangements are obligations to make future payments to sellers contingent upon the achievement of future operational or financial targets and are remeasured to fair value at the end of each reporting period until the obligations are settled.
The valuation of the net assets acquired as well as certain elements of purchase consideration requires management to make significant estimates and assumptions, especially with respect to future expected cash flows, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain, and, as a result, actual results may differ from estimates. During the measurement period, we may record adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill. Subsequent changes to the fair value of contingent consideration are reflected in “General and administrative” in the accompanying Condensed Consolidated Statements of Operations.
Acquisition costs are expensed as incurred and are included in “General and administrative” in the accompanying Condensed Consolidated Statements of Operations. We include the results of operations from acquired businesses in our condensed consolidated financial statements from the effective date of the acquisition.
Goodwill and Indefinite-Lived Intangible Assets
We test goodwill and indefinite-lived intangible assets for impairment separately on an annual basis in the fourth quarter of each year, or more frequently if circumstances indicate that the assets may not be recoverable. For purposes of goodwill impairment testing, we have one reporting unit.
We evaluate impairment of goodwill either by assessing qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount, or by performing a quantitative assessment. Qualitative factors include industry and market considerations, overall financial performance, and other relevant events and circumstances affecting the reporting unit. If we choose to perform a qualitative assessment and after considering the totality of events or circumstances, we determine it is more likely than not that the fair value of our reporting unit is less than its carrying amount, we would perform a quantitative fair value test. Our quantitative impairment assessment utilizes a weighted combination of a discounted cash flow model (known as the income approach) and comparisons to publicly traded companies engaged in similar businesses (known as the market approach). These approaches involve judgmental assumptions, including forecasted future cash flows expected to be generated by the business over an extended period of time, long-term growth rates, the identification of comparable companies, and our discount rate based on our weighted average cost of capital. These assumptions are predominately unobservable inputs and considered Level 3 measurements. We adopted ASU 2017-04, Intangibles - Goodwill and Other, which simplifies the testing for goodwill impairment by eliminating the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment, prospectively on January 1, 2020. To calculate any potential impairment when we perform a quantitative test, we compare the fair value of our reporting unit with its carrying amount, including goodwill. Any excess of the carrying amount of the reporting unit over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down.
We quantitatively evaluate indefinite-lived intangible assets for impairment by estimating the fair value of those assets based on estimated future earnings derived from the assets using the income approach. Key assumptions for this assessment include forecasted future cash flows from estimated royalty rates and our discount rate based on our weighted average cost of capital. These assumptions are unobservable Level 3 measurements. Assets with indefinite lives that have been determined to be inseparable due to their interchangeable use are grouped into single units of accounting for purposes of testing for impairment. If the carrying amount of an identified intangible asset with an indefinite life exceeds its fair value, we would recognize an impairment loss equal to the excess of carrying value over fair value.
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Leases
We determine if an arrangement contains a lease at inception. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and the corresponding lease liabilities represent our obligation to make lease payments arising from the lease. Our ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The ROU asset is reduced for tenant incentives and excludes any initial direct costs incurred. For our real estate contracts with lease and non-lease components, we have elected to combine the lease and non-lease components into a single lease component. The implicit rate within our leases are generally not readily determinable, and instead we use our incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment. We determine our incremental borrowing rate for each lease using our current borrowing rate, adjusted for various factors including collateralization and term to align with the terms of the lease. Certain of our leases include options to extend the lease. Our lease values include options to extend the lease when it is reasonably certain we will exercise such options.
Operating and finance leases are included in “Right-of-use assets”, “Accrued expenses and other current liabilities”, and “Lease liabilities, net of current portion” in the accompanying Condensed Consolidated Balance Sheets.
Lease expenses for minimum lease payments for operating leases are recognized on a straight-line basis over the lease term. Amortization expense of the ROU asset for finance leases is recognized on a straight-line basis over the lease term and interest expense for finance leases is recognized based on the incremental borrowing rate.
We have elected not to recognize a lease liability or ROU asset for short-term leases, defined as those which have an initial term of twelve months or less.
Deferred Revenue
For several of our solutions, we invoice our clients in annual, monthly, or quarterly installments in advance of the commencement of the service period. Deferred revenue is recognized when billings are due or payments are received in advance of revenue recognition from our subscription and other services. Accordingly, the deferred revenue balance does not represent the total contract value of annual subscription agreements.
Revenue Recognition
Revenues are derived from on demand software solutions, professional services and other goods and services. We recognize revenue as we satisfy one or more service obligations under the terms of a contract, generally as control of goods and services are transferred to our clients. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. We include estimates of variable consideration in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur. We estimate and accrue a reserve for credits and other adjustments as a reduction to revenue based on several factors, including past history.
On Demand Revenue
Our on demand revenue consists of license and subscription fees, transaction and payment processing fees related to certain of our software-enabled value-added services, and commissions derived from our selling certain risk mitigation services.
We generally recognize revenue from subscription fees on a straight-line basis over the access period beginning on the date that we make our service available to the client. Our subscription agreements generally are non-cancellable, have an initial term of one year or longer and are billed either monthly, quarterly or annually in advance. Non-refundable up-front fees billed at the initial order date that are not associated with an up-front service obligation are recognized as revenue on a straight-line basis over the period in which the client is expected to benefit, which we consider to be three years.
We recognize revenue from transaction fees in the month the related services are performed based on the amount we have the right to invoice.
We offer risk mitigation services to our clients by acting as an insurance agent and derive commission revenue from the sale of insurance products to our clients’ residents. The commissions are based upon a percentage of the premium that the insurance company charges to the policyholder and are subject to forfeiture in instances where a policyholder cancels prior to the end of the policy. Our contracts with our underwriting partners provide for contingent commissions to be paid to us in accordance with the agreements. Our estimate of contingent commission revenue considers the variable factors identified in the terms of the applicable agreement. We recognize commissions related to these services as earned ratably over the policy term and insurance commission receivable in “Accounts receivable, less allowances”.
Professional and Other Revenue
Professional services and other revenues generally consist of the fees we receive for providing implementation and consulting services, submeter equipment and ongoing maintenance of our existing on premise licenses.
Professional services are billed either on a time and materials basis or on a fixed price basis, and revenue is recognized
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over time as we perform the obligation. Professional services are typically sold bundled in a contract with other on demand solutions but may be sold separately. Professional service contracts sold separately generally have terms of one year or less. For bundled arrangements, where we account for individual services as a separate performance obligation, the transaction price is allocated between separate services in the bundle based on their relative standalone selling prices.
Other revenues consist primarily of submeter equipment sales that include related installation services. Such sales are considered bundled, and revenue from these bundled sales is recognized in proportion to the number of installed units completed to date as compared to the total contracted number of units to be provided and installed. For all other equipment sales, we generally recognize revenue when control of the hardware has transferred to our client.
Revenue recognized for on premise software sales generally consists of annual maintenance renewals on existing term or perpetual licenses, which is recognized ratably over the service period.
Contracts with Multiple Performance Obligations
The majority of the contracts we enter into with clients, including multiple contracts entered into at or near the same time with the same client, require us to provide one or more on demand software solutions, professional services and may include equipment. For these contracts, we account for individual performance obligations separately: i) if they are distinct or ii) if the promised obligations represent a series of distinct services that are substantially the same and have the same pattern of transfer to the client. Once we determine the performance obligations, we determine the transaction price, which includes estimating the amount of variable consideration, if any, to be included in the transaction price. For contracts with multiple performance obligations, we allocate the transaction price to the separate performance obligations on a relative standalone selling price basis. The standalone selling prices of our service are estimated using a market assessment approach based on our overall pricing objectives taking into consideration market conditions and other factors including the number of solutions sold, client demographics and the number and types of users within our contracts.
Sales, value add, and other taxes we collect from clients and remit to governmental authorities are excluded from revenues.
Fair Value Measurements
We measure our financial instruments and acquisition-related contingent consideration obligations at fair value at each reporting period using a fair value hierarchy. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable, and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 - Inputs are derived from valuation techniques in which one or more of the significant inputs or value drivers are unobservable.
The categorization of an asset or liability is based on the inputs described above and does not necessarily correspond to our perceived risk of that asset or liability. Moreover, the methods used by us may produce a fair value calculation that is not indicative of the net realizable value or reflective of future fair values. Furthermore, although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments and non-financial assets and liabilities could result in a different fair value measurement at the reporting date.
Certain financial instruments, which may include cash, cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses are recorded at their carrying amounts, which approximates their fair values due to their short-term nature.
We hold an equity investment which does not have a readily determinable fair value. We measure this investment at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.
Recently Adopted Accounting Standards
Accounting Standards Update 2016-13
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replaced the incurred loss impairment methodology in GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Our financial assets
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in the scope of ASU 2016-13 mainly consist of short-term trade receivables. We have also considered contract assets in our evaluation. Historically, our actual credit losses have not been material. In addition to continuing to individually assess overdue customer balances for expected credit losses, we have implemented modifications to our historical methodology that reflect the expected credit losses on receivables considering both historical experience and forward-looking assumptions. We adopted ASU 2016-13 using the modified retrospective approach on January 1, 2020, resulting in no cumulative adjustment to retained earnings. The adoption of this ASU did not have a material impact on our Condensed Consolidated Financial Statements. We will continue to actively monitor the impact of the COVID-19 pandemic on expected credit losses.
The rollforward of the allowance for credit losses, a component of our allowance for accounts receivable, as of September 30, 2020 was as follows (in thousands):
Balance as of January 1, 2020$4,545 
Provision for credit losses1,097 
Write-offs, net of recoveries(527)
Balance as of March 31, 20205,115 
Provision for credit losses1,168 
Write-offs, net of recoveries(740)
Balance as of June 30, 20205,543 
Provision for credit losses800 
Write-offs, net of recoveries(682)
Balance as of September 30, 2020$5,661 

Accounting Standards Update 2018-15
In August 2018, the FASB issued ASU 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. This ASU aligns the requirements for capitalizing implementation costs incurred in a cloud-based hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted ASU 2018-15 prospectively as of January 1, 2020. The impact to our financial statements will depend on the nature of our future cloud computing arrangements; however, this standard did not have a material impact on our financial statements as of September 30, 2020.
Accounting Standards Update 2020-04
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for activities related to reference rate reform that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections, as applicable, as additional changes in the market occur.  
Recently Issued Accounting Standards
Accounting Standards Update 2019-12
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 will be effective for interim and annual periods beginning after December 15, 2020. Early adoption is permitted. We are currently evaluating the impact of adopting this standard on our consolidated financial statements, however we do not expect it to have a material impact.
Accounting Standards Update 2020-06
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU simplifies the accounting for certain convertible instruments by eliminating the requirement to separate convertible notes into debt and equity components, instead allowing for the convertible debt to be accounted for as a single liability measured at its amortized cost. These changes will reduce reported interest expense to an amount more closely aligned with the convertible debt instrument’s coupon interest rate and increase reported net income for
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entities that have issued a convertible instrument that was bifurcated according to existing GAAP. Furthermore, this ASU amends the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method. Our use of the treasury stock method will no longer be available. ASU 2020-06 will be effective for fiscal years beginning after December 15, 2021, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2020. We expect to early adopt this ASU effective January 1, 2021 and are still assessing our method of adoption. Under ASU 2020-06, we expect our total remaining interest expense over the contractual terms of our convertible debt to be approximately $73.0 million less than under the existing accounting standards. We continue to evaluate the impact of the guidance on our net income, basic and dilutive earnings per share.

3. Acquisitions
2020 Acquisitions
Chirp
On September 21, 2020, we entered into an Agreement and Plan of Merger, by which we acquired all the outstanding stock of Chirp Systems, Inc. (“Chirp”), a provider of smart access software and technology solutions to the multifamily housing industry. Aggregate purchase consideration was $16.8 million, including contingent consideration of up to $10.0 million that is tied to operational performance targets through 2022, and deferred cash obligations of up to $1.3 million, subject to working capital adjustments and indemnification claims. The acquisition was financed with cash on hand. The parent company of one of the significant selling shareholders of Chirp is a customer of RealPage. In addition, a member of the board of directors of that customer is also a member of our board of directors.
Certain executives of Chirp at or near the transaction date were provided up to $5.0 million in retention incentives tied to post acquisition employment service and the achievement of performance targets by December 31, 2023. The incentives will be in the form of restricted stock grants that may be settled in the future in stock or cash, at our option. As of September 30, 2020, we expect the executives to earn a payout of $1.7 million under these awards, and we will update this estimate on a quarterly basis. As these awards are tied in part to employment services, we will record the estimated amount as stock-based compensation expense over the requisite service period.
The acquired identified intangible assets consist of developed technology and client relationships that were each assigned estimated useful lives of seven years. Preliminary goodwill recognized of $12.1 million is primarily comprised of expansion of our product offerings into the smart access market as part of our CommunityConnect business as well as anticipated synergies from sale of such products to our existing customers. Goodwill and the acquired intangible assets are not deductible for tax purposes. Acquisition costs associated with this transaction totaled $0.2 million.
Stratis
On August 31, 2020, we entered into an Agreement and Plan of Merger, by which we acquired all the outstanding stock of Stratis IoT, Inc. (“Stratis”), a provider of software, technology and services that enable smart apartments and intelligent buildings, including a software-as-a-service (“SaaS”) platform specifically built for the complexities of the multifamily and student housing industries. Aggregate purchase consideration was $64.8 million, including deferred cash obligations of up to $6.0 million, subject to working capital adjustments and indemnification claims. The acquisition was financed with cash on hand.
Certain employees of Stratis at or near the transaction date were provided up to $15.0 million in retention incentives tied to post acquisition employment service and the achievement of performance targets by June 30, 2024. The incentives will be in the form of restricted stock grants that may be settled in the future in stock or cash, at our option. As of September 30, 2020, we expect the employees to earn a payout of $5.0 million under these awards, and we will update this estimate on a quarterly basis. As these awards are tied in part to employment services, we will record the estimated amount as stock-based compensation expense over the requisite service period.
The acquired identified intangible assets consisted of developed technology, client relationships, and trade names that were assigned estimated useful lives of seven, ten and three years, respectively. Preliminary goodwill recognized of $50.5 million is primarily comprised of expansion of our product offerings into the smart devices and intelligent building market as part of our CommunityConnect business as well as anticipated synergies from sale of such products to our existing customers. Goodwill and the acquired intangible assets are not deductible for tax purposes. Acquisition costs associated with this transaction totaled $0.6 million.
Modern Message
On January 22, 2020, we entered into an Agreement and Plan of Merger, by which we acquired all the outstanding stock of Modern Message Inc. (“Modern Message”), a provider of resident engagement solutions to the multifamily housing industry. Aggregate purchase consideration was $64.7 million, including deferred cash obligations of up to $2.0 million, subject to working capital adjustments and indemnification claims. In addition, the Agreement and Plan of Merger provided for retention
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incentives for certain executives in the form of restricted stock grants that are tied to post-acquisition employment service. These shares were granted during the first quarter of 2020, and had an aggregate grant date fair value of $10.7 million which will be recognized as stock-based compensation over the requisite service period. The acquisition was financed with cash on hand.
The acquired identified intangible assets consisted of developed technology, client relationships, and trade names that were assigned estimated useful lives of five, nine and five years, respectively. Preliminary goodwill recognized of $49.3 million is primarily comprised of anticipated synergies from the expansion of our resident engagement platform. Goodwill and the acquired intangible assets are not deductible for tax purposes. Acquisition costs associated with this transaction totaled $0.6 million.
Purchase Consideration and Purchase Price Allocations
The estimated fair values of assets acquired and liabilities assumed are provisional and are based primarily on the information available as of the acquisition date. We believe this information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but we are awaiting additional information necessary to finalize those values including the fair value of intangible assets acquired, analysis of in-process contracts and the related deferred revenue fair value analysis, and potential forgiveness of an assumed liability related to a loan obtained by Stratis prior to the acquisition under the Paycheck Protection Program of the Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”). Therefore, the provisional measurements of fair value are subject to change, and such changes could be significant. We expect to finalize the valuation of these assets and liabilities as soon as practicable, but no later than one year from the acquisition closing date. The components of the purchase consideration and the preliminary allocation of purchase price as of September 30, 2020 are as follows:
Modern MessageStratisChirp
(in thousands)
Fair value of purchase consideration:
Cash, net of cash acquired$62,749 $58,948 $11,248 
Deferred obligations, net1,998 5,802 1,202 
Contingent consideration  4,300 
Total fair value of purchase consideration$64,747 $64,750 $16,750 
Fair value of net assets acquired: