UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  ___________________________________________
FORM 10-K/A
Amendment No. 1
  ___________________________________________
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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 Blvd.
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 class
Trading Symbol(s)
Name of each exchange
on which registered
Common Stock, $0.001 par value
RP
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x



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  x   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  x   No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
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
 
x
  
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  x
Based on the closing price of the registrant’s common stock on the last business day of the registrant’s most recently completed second fiscal quarter, which was June 30, 2018, the aggregate market value of its shares held by non-affiliates on that date was approximately $4,177,183,676. On February 15, 2019, 93,590,150 shares of the registrant’s Common Stock, $0.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its 2019 Annual Meeting of Stockholders to be filed within 120 days of the Registrant’s fiscal year ended December 31, 2018 are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.




Explanatory Note

On February 27, 2019, RealPage, Inc. (“we”, “us” or the “Company”) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “Original Form 10-K”). Subsequent to the filing of the Original Form 10-K, the Public Company Accounting Oversight Board (“PCAOB”) conducted an inspection of Ernst & Young LLP’s (“EY”) audit of the Company’s consolidated financial statements for the year ended December 31, 2018. In connection with this inspection, EY performed additional testing related to certain controls pertaining to our information technology (“IT”) systems and subsequently requested a reevaluation by management of those controls. As a result of this reevaluation, management identified, and we concluded, that certain individual control deficiencies over our information technology general controls (“ITGCs”), when viewed in combination, aggregated to a material weakness as of December 31, 2018. Specifically, we did not maintain effective controls over user access to certain IT systems and related changes to IT programs and data. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis. The material weakness did not result in any financial statement modifications and there have been no changes to our previously disclosed financial results.
We are filing this Amendment No. 1 to the Original Form 10-K (this “Amendment”) solely to (i) amend and restate the Controls and Procedures disclosure included in Item 9A of the Original Form 10-K to reflect the material weakness, (ii) amend Ernst & Young LLP’s related opinion on management’s assessment of our internal control over financial reporting, and (iii) amend Ernst & Young LLP’s opinion on the consolidated financial statements solely to include a reference to Ernst & Young LLP’s updated report on internal control over financial reporting included in Item 8 of the Original Form 10-K. We are also filing an updated Consent of Independent Registered Public Accounting Firm and, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), currently dated certifications by our Chief Executive Officer and Chief Financial Officer.
This Amendment does not modify, amend or update in any way the financial statements and other disclosures set forth in the Original Form 10-K and there have been no changes to the XBRL data filed in Exhibit 101 of the Original Form 10-K. In addition, except as specifically described above, this Amendment does not reflect events occurring after the filing of the Original Form 10-K, nor does it modify or update disclosures therein in any way other than as required to reflect the revisions described above. Among other things, forward-looking statements made in the Original Form 10-K have not been revised to reflect events that occurred or facts that became known to us after the filing of the Original Form 10-K, and any such forward looking statements should be read in their historical context. Accordingly, this Amendment should be read in conjunction with the Original Form 10-K.
In addition to this Amendment, we intend to file amendments to our Quarterly Reports on Form 10-Q for the first quarter ended March 31, 2019 and the second quarter ended June 30, 2019 to amend our disclosures under Item 4 Controls and Procedures therein.




TABLE OF CONTENTS
 
 
 
 
 
 
 
Item 8.
Item 9A.
 
 
 
 
 
 
Item 15.
 
 
SIGNATURES AND EXHIBIT INDEX
 


Table of Contents




PART II
Item 8. Financial Statements and Supplementary Data.


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Page
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements


2

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of RealPage, Inc.    
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of RealPage, Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and the financial statement schedule listed in the Index under Item 15(c) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2019, except for the effect of the material weakness described in the second and third paragraphs of that report, as to which the date is November 4, 2019, expressed an adverse opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2004.
Dallas, Texas
February 27, 2019



3

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of RealPage, Inc.

Opinion on Internal Control over Financial Reporting
We have audited RealPage, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives in the control criteria, RealPage, Inc. (the Company) has not maintained effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
As indicated in the accompanying “Management’s Report on Internal Control over Financial Reporting,” management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of NovelPay, LLC and ClickPay Services, Inc. (collectively known as ClickPay), LeaseLabs, Inc. (LeaseLabs), and Rentlytics, Inc. (Rentlytics), which are included in the 2018 consolidated financial statements of the Company. ClickPay constituted approximately 11% and 3% of total assets and total revenues, respectively, as of December 31, 2018. LeaseLabs constituted approximately 6% and 1% of total assets and total revenues, respectively, as of December 31, 2018. Rentlytics constituted approximately 3% and less than 1% of total assets and total revenues, respectively, as of December 31, 2018. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of ClickPay, LeaseLabs, and Rentlytics.
In our report dated February 27, 2019, we expressed an unqualified opinion that the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria. Management has subsequently identified deficiencies in controls related to information technology (IT) systems and has further concluded that the aggregation of such deficiencies represented a material weakness as of December 31, 2018. As a result, management has revised its assessment, as presented in the accompanying Management's Report on Internal Control over Financial Reporting to conclude that the Company’s internal control over financial reporting was not effective as of December 31, 2018. Accordingly, our present opinion on the effectiveness of December 31, 2018’s internal control over financial reporting as of December 31, 2018, as expressed herein, is different from that expressed in our previous report.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment. Management has identified a material weakness in controls over certain user access to IT systems and related changes to IT programs and data.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and the financial statement schedule listed in the Index under Item 15(c). This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2018 consolidated financial statements, and this report does not affect our report dated February 27, 2019, which expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

4

Table of Contents




Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ Ernst & Young LLP
Dallas, Texas
February 27, 2019, except for the effect of the material weakness described in the second and third paragraphs above, as to which the date is November 4, 2019


5

Table of Contents




RealPage, Inc.
Consolidated Balance Sheets
(in thousands, except per share and share amounts)

 
 
December 31,
 
 
2018
 
2017
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
228,159

 
$
69,343

Restricted cash
 
154,599

 
96,002

Accounts receivable, less allowances of $8,850 and $3,951 at December 31, 2018 and 2017, respectively
 
123,596

 
124,505

Prepaid expenses
 
19,214

 
12,107

Other current assets
 
15,185

 
6,622

Total current assets
 
540,753

 
308,579

Property, equipment, and software, net
 
153,528

 
148,428

Goodwill
 
1,053,119

 
751,052

Intangible assets, net
 
287,378

 
252,337

Deferred tax assets, net
 
42,602

 
44,887

Other assets
 
20,393

 
11,010

Total assets
 
$
2,097,773


$
1,516,293

Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
25,312

 
$
26,733

Accrued expenses and other current liabilities
 
95,482

 
79,379

Current portion of deferred revenue
 
120,704

 
116,622

Current portion of term loans
 
16,133

 
14,116

Customer deposits held in restricted accounts
 
154,601

 
96,057

Total current liabilities
 
412,232


332,907

Deferred revenue
 
4,902

 
5,538

Revolving facility
 

 
50,000

Term loans, net
 
287,582

 
303,261

Convertible notes, net
 
292,843

 
281,199

Other long-term liabilities
 
37,190

 
41,513

Total liabilities
 
1,034,749


1,014,418

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 December 31, 2018 and 2017, respectively
 

 

Common stock, $0.001 par value: 250,000,000 and 125,000,000 shares authorized, 95,991,162 and 87,153,085 shares issued and 93,650,127 and 83,180,401 shares outstanding at December 31, 2018 and 2017, respectively
 
96

 
87

Additional paid-in capital
 
1,187,683

 
637,851

Treasury stock, at cost: 2,341,035 and 3,972,684 shares at December 31, 2018 and 2017, respectively
 
(65,470
)
 
(61,260
)
Accumulated deficit
 
(58,793
)
 
(75,046
)
Accumulated other comprehensive (loss) income
 
(492
)
 
243

Total stockholders’ equity
 
1,063,024


501,875

Total liabilities and stockholders’ equity
 
$
2,097,773

 
$
1,516,293

See accompanying notes.

6

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RealPage, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
 
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Revenue:
 
 
 
 
 
 
On demand
 
$
833,709


$
642,622

 
$
542,531

Professional and other
 
35,771


28,341

 
25,597

Total revenue
 
869,480


670,963


568,128

Cost of revenue
 
328,382

 
258,135

 
225,539

Amortization of product technologies
 
35,797

 
22,163

 
17,669

Gross profit
 
505,301


390,665


324,920

Operating expenses:
 
 
 

 

Product development
 
118,525

 
89,452

 
73,607

Sales and marketing
 
166,607

 
140,473

 
122,457

General and administrative
 
118,208

 
112,975

 
85,013

Amortization of intangible assets
 
35,911

 
17,755

 
12,599

Total operating expenses
 
439,251

 
360,655

 
293,676

Operating income
 
66,050

 
30,010

 
31,244

Interest expense and other, net
 
(31,750
)
 
(14,769
)
 
(3,758
)
Income before income taxes
 
34,300

 
15,241

 
27,486

Income tax (benefit) expense
 
(425
)
 
14,864

 
10,836

Net income
 
$
34,725


$
377

 
$
16,650

 
 
 
 
 
 
 
Net income per share attributable to common stockholders:
 

 
 
 
 
Basic
 
$
0.40

 
$
0.00

 
$
0.22

Diluted
 
$
0.38

 
$
0.00

 
$
0.21

Weighted average common shares outstanding:
 

 

 

Basic
 
87,290

 
79,433

 
76,854

Diluted
 
91,531

 
82,398

 
77,843

See accompanying notes.


7

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RealPage, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)

 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Net income
 
$
34,725

 
$
377

 
$
16,650

Other comprehensive (loss) income:
 
 
 
 
 
 
Unrealized gain on derivative instruments, net of tax
 
61

 
318

 
400

Reclassification adjustment for (gains) losses included in earnings on derivative instruments, net of tax
 
(613
)
 
(77
)
 
136

Foreign currency translation adjustment
 
(183
)
 
55

 
(43
)
Other comprehensive (loss) income, net of tax
 
(735
)
 
296

 
493

Comprehensive income
 
$
33,990

 
$
673

 
$
17,143

See accompanying notes.


8

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RealPage, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
 
 
Common Stock
 
Additional
Paid-in
 
Accum. Other
Comprehensive
 
Accumulated
 
Treasury Stock
 
Total
Stockholders’
 
Shares
 
Amount
 
Capital
 
(Loss) Income
 
Deficit
 
Shares
 
Amount
 
Equity
Balance as of January 1, 2016
82,919

 
$
83

 
$
471,668

 
$
(546
)
 
$
(120,415
)
 
4,125

 
$
(24,338
)
 
$
326,452

Stock option exercises
1,569

 
2

 
28,487

 

 

 

 

 
28,489

Issuance of restricted stock
2,587

 
2

 
(1
)
 

 

 

 

 
1

Treasury stock purchased, at cost

 

 

 

 

 
1,863

 
(27,264
)
 
(27,264
)
Retirement of treasury stock
(1,013
)
 
(1
)
 
(5,748
)
 

 
(15,495
)
 
(1,013
)
 
21,244

 

Stock-based compensation

 

 
36,688

 

 

 

 

 
36,688

Net tax benefit from stock-based compensation

 

 
3,254

 

 

 

 

 
3,254

Other comprehensive income - derivative instruments

 

 

 
536

 

 

 

 
536

Foreign currency translation

 

 

 
(43
)
 

 

 

 
(43
)
Net income

 

 

 

 
16,650

 

 

 
16,650

Balance as of December 31, 2016
86,062

 
86

 
534,348

 
(53
)
 
(119,260
)
 
4,975

 
(30,358
)
 
384,763

Cumulative effect of adoption of ASU 2016-09

 

 
6

 

 
43,837

 

 

 
43,843

Stock option exercises
991

 
1

 
27,013

 

 

 
(354
)
 

 
27,014

Issuance of restricted stock
100

 

 
(2
)
 

 

 
(1,795
)
 
2

 

Treasury stock purchased, at cost

 

 

 

 

 
1,147

 
(30,904
)
 
(30,904
)
Stock-based compensation

 

 
46,146

 

 

 

 

 
46,146

Other comprehensive income - derivative instruments

 

 

 
241

 

 

 

 
241

Foreign currency translation

 

 

 
55

 

 

 

 
55

Equity component of convertible notes, net of issuance costs and deferred tax

 

 
61,390

 

 

 

 

 
61,390

Purchases of convertible note hedges

 

 
(62,549
)
 

 

 

 

 
(62,549
)
Issuance of warrants

 

 
31,499

 

 

 

 

 
31,499

Net income

 

 

 

 
377

 

 

 
377

Balance as of December 31, 2017
87,153


87

 
637,851

 
243

 
(75,046
)
 
3,973

 
(61,260
)
 
501,875


9

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Cumulative effect of adoption of ASU 2014-09

 

 

 

 
2,221

 

 

 
2,221

Public offering of common stock, net of $16,949 of offering costs
8,050

 
8

 
441,893

 

 

 

 

 
441,901

Issuance of common stock in connection with our acquisitions
1,361

 
2

 
75,148

 

 

 

 

 
75,150

Stock option exercises
27

 

 
2,468

 

 

 
(632
)
 
10,695

 
13,163

Issuance of restricted stock

 

 
(14,598
)
 

 

 
(1,807
)
 
14,598

 

Treasury stock purchased, at cost

 

 
473

 

 

 
1,407

 
(57,585
)
 
(57,112
)
Retirement of treasury stock
(600
)
 
(1
)
 
(7,388
)
 

 
(20,693
)
 
(600
)
 
28,082

 

Stock-based compensation

 

 
51,836

 

 

 

 

 
51,836

Other comprehensive income - derivative instruments

 

 

 
(552
)
 

 

 

 
(552
)
Foreign currency translation

 

 

 
(183
)
 

 

 

 
(183
)
Net income

 

 

 

 
34,725

 

 

 
34,725

Balance as of December 31, 2018
95,991

 
$
96

 
$
1,187,683

 
$
(492
)
 
$
(58,793
)
 
2,341

 
$
(65,470
)
 
$
1,063,024

See accompanying notes.

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RealPage, Inc.
Consolidated Statements of Cash Flows
(in thousands)
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
34,725

 
$
377

 
$
16,650

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
100,186

 
67,146

 
54,834

Amortization of debt discount and issuance costs
 
12,464

 
7,296

 
443

Deferred taxes
 
(2,179
)
 
13,791

 
8,386

Stock-based expense
 
50,641

 
45,835

 
36,852

Excess tax benefit from stock-based compensation
 

 

 
(5,998
)
Loss on disposal and impairment of long-lived assets
 
6,733

 
524

 
1,247

Acquisition-related consideration
 
284

 
684

 
(877
)
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
 
 
 
 
 
 
Accounts receivable
 
(717
)
 
(18,821
)
 
(12,239
)
Prepaid expenses and other current assets
 
(11,894
)
 
945

 
21,040

Other assets
 
(4,543
)
 
(717
)
 
(187
)
Accounts payable
 
1,266

 
268

 
652

Accrued compensation, taxes, and benefits
 
3,288

 
3,438

 
5,220

Deferred revenue
 
3,478

 
17,114

 
4,452

Customer deposits
 
57,230

 
3,055

 
(6,834
)
Other current and long-term liabilities
 
(6,155
)
 
(672
)
 
5,808

Net cash provided by operating activities
 
244,807

 
140,263

 
129,449

Cash flows from investing activities:
 
 
 
 
 
 
Purchases of property, equipment, and software
 
(50,933
)

(49,752
)
 
(75,241
)
Proceeds from disposal of property, equipment, and software
 

 

 
4,500

Acquisition of businesses, net of cash and restricted cash acquired
 
(278,563
)
 
(649,910
)
 
(66,440
)
Purchase of other investments
 
(1,800
)
 
(200
)
 
(3,000
)
Net cash used in investing activities
 
(331,296
)

(699,862
)

(140,181
)
Cash flows from financing activities:
 
 
 
 
 
 
Proceeds from term loans
 

 
199,400

 
124,688

Payments on term loans
 
(14,116
)
 
(3,551
)
 
(2,345
)
Proceeds from revolving credit facility
 
140,000

 
50,000

 

Payments on revolving credit facility
 
(190,000
)
 

 
(40,000
)
Proceeds from borrowings on convertible notes
 

 
345,000

 

Purchase of convertible senior note hedges
 

 
(62,549
)
 

Proceeds from issuance of warrants
 

 
31,499

 

Payments of deferred financing costs
 
(1,136
)
 
(10,734
)
 
(392
)
Payments on capital lease obligations
 
(227
)
 
(335
)
 
(548
)
Payments of acquisition-related consideration
 
(28,388
)
 
(8,491
)
 
(5,684
)
Proceeds from public offering, net of underwriters’ discount and offering costs
 
441,901

 

 

Proceeds from exercise of stock options
 
13,163

 
27,014

 
28,490

Excess tax benefit from stock-based compensation
 

 

 
5,998

Purchase of treasury stock related to stock-based compensation
 
(29,030
)
 
(30,904
)
 
(6,020
)
Purchase of treasury stock under share repurchase program
 
(28,082
)
 

 
(21,244
)
Net cash provided by financing activities
 
304,085


536,349


82,943

Net increase (decrease) in cash and cash equivalents
 
217,596

 
(23,250
)
 
72,211

Effect of exchange rate on cash
 
(183
)
 
55

 
(43
)
Cash, cash equivalents and restricted cash:
 
 
 
 
 
 
Beginning of period
 
165,345

 
188,540

 
116,372

End of period
 
$
382,758

 
$
165,345

 
$
188,540


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RealPage, Inc.
Consolidated Statements of Cash Flows, continued
(in thousands)

 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Supplemental cash flow information:
 
 
 
 
 
 
Cash paid for interest
 
$
18,204

 
$
6,754

 
$
2,833

Cash paid for income taxes, net of refunds
 
$
3,121

 
$
1,855

 
$
693

Non-cash investing and financing activities:
 
 
 
 
 
 
Fair value of stock consideration in connection with our acquisitions
 
$
53,334

 
$

 
$

Redemption of noncontrolling interest in connection with acquisition of ClickPay
 
$
21,816

 
$

 
$

Accrued property, equipment, and software
 
$
1,447

 
$
5,777

 
$
3,993

 
 
 
 
 
 
 
       The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets and to that shown in the Consolidated Statements of Cash Flows:
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Cash and cash equivalents
 
$
228,159

 
$
69,343

 
$
104,886

Restricted cash
 
154,599

 
96,002

 
83,654

Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows

$
382,758


$
165,345

 
$
188,540

See accompanying notes.

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RealPage, Inc.
Notes to Consolidated Financial Statements
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, 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 May 2018 and as disclosed in our Form 10-Q for the quarter ended March 31, 2018, we were the subject of a targeted email phishing campaign that led to a business email compromise, pursuant to which an unauthorized party gained access to an external third party system used by a subsidiary that we acquired in 2017. The incident resulted in the diversion of approximately $6.0 million, net of recovered funds, intended for disbursement to three clients. We immediately restored all funds to the client accounts. During the quarter ended June 30, 2018, we remediated the material weakness that gave rise to the incident and implemented additional preventive and detective control procedures.
We maintain insurance coverage to limit our losses related to criminal and network security events. During January 2019, we received approximately $1.0 million from our primary insurance carrier as a partial repayment toward our losses from the business email compromise. We are currently involved in discussions with our insurance carrier regarding coverage of the remaining losses, and intend to vigorously pursue repayment of these losses. Due to the ongoing discussions with our insurance carrier and the uncertainty regarding timing and full collectability of the loss, we recorded an allowance of $5.0 million for the remaining amount of the loss, which is included in the line “General and administrative” in the accompanying Consolidated Statements of Operations. For the year ended December 31, 2018, total charges from the phishing incident included in our Consolidated Statements of Operations was $5.4 million for losses and related expenses that are not probable of recovery.

2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements and footnotes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of RealPage, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Effective with the quarter ended September 30, 2018, we changed the presentation of our Consolidated Statements of Operations to add “Amortization of product technologies” and “Amortization of intangible assets” as separate line items within such statements. Amounts shown as amortization of product technologies were previously included within “Cost of revenue”, and amounts shown as amortization of intangible assets were previously included within the “Sales and marketing” operating expense category. We believe this revised presentation helps readers of our financial statements isolate non-cash amortization expenses that arise from our acquisitions and internally developed software.
Certain prior period amounts reported in our consolidated financial statements and notes thereto have been reclassified to conform to the current period’s presentation.
Correction of an Immaterial Error in Previously Issued Financial Statements
In the third quarter of 2018, we identified an error related to the misclassification of amortization expense related to intangible assets on certain acquired technologies, recognized as “Sales and marketing” expense. Such expense should have been recognized as a component of “Cost of revenue”. As a result, our cost of revenue was understated, and our sales and marketing expense was overstated by identical amounts, which also resulted in an overstatement of gross profit and total operating expenses by the same amount for the effected periods. There was no effect on reported revenues, net income, earnings per share, or cash flows. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we evaluated the materiality of the error from a qualitative and quantitative perspective and concluded that the effect of the misclassification was not material to our previously issued consolidated financial statements.

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We have corrected the presentation of the amortization expense for all prior periods presented in this Form 10-K. The immaterial error correction resulted in an increase of cost of revenue and reduction in sales and marketing expense of $6.9 million and $0.9 million for the years ended December 31, 2017 and 2016, respectively. There was no change in our accounting for amortization expense related to client relationship, non-compete agreements and trade name intangible assets.
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); 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 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.
Concentration 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 are limited due to a large, diverse customer base. We do not require collateral from clients. We maintain an allowance for doubtful accounts based upon the expected collectability of accounts receivable.
No single client accounted for 10% or more of our revenue or accounts receivable for the years ended December 31, 2018, 2017, or 2016.
Segment and Geographic Information
Our chief operating decision maker is our Chief Executive Officer, who reviews financial information on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, we have determined we operate as a single operating segment.
Principally, all of our revenue for the years ended December 31, 2018, 2017, and 2016 was earned in the United States. Net property, equipment, and software located in the United States amounted to $144.3 million and $140.0 million at December 31, 2018 and 2017, respectively. Net property, equipment, and software located in our international subsidiaries amounted to $9.2 million and $8.4 million at December 31, 2018 and 2017, respectively. Substantially all of the net property, equipment, and software held in our international subsidiaries was located in the Philippines, Spain, and India at both December 31, 2018 and 2017.
Cash, 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 consists of cash collected from tenants that will be remitted primarily 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 receivable are written off against the allowance when management determines a balance is uncollectible. During the years ended December 31, 2018, 2017, and 2016, we incurred bad debt expense of $3.7 million, $3.2 million, and $2.4 million, respectively.

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Property, Equipment, and Software
Property, equipment, and software are recorded at cost less accumulated depreciation and amortization, which are computed using the straight-line method over the following estimated useful lives:
Data processing and communications equipment
3 - 5 years
Furniture, fixtures, and other equipment
3 - 5 years
Software
3 - 5 years
Leasehold improvements
Shorter of lease term or estimated useful life
Software includes both purchased and internally developed software. Gains and losses from asset disposals are included in the line “General and administrative” in the Consolidated Statements of Operations.
Internally Developed Software
We capitalize certain development costs incurred in connection with software development for our solutions to be marketed to external users. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the technological feasibility stage, internal and external costs including costs of materials, services, and payroll and payroll-related costs for employees, are capitalized, if direct and incremental, until the software is available for general release to customers. Minor upgrades and enhancements are also expensed as incurred. Costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality are capitalized.
Costs incurred to develop software intended solely for our internal use, such as internal administration and finance and accounting systems, are capitalized during the application development stage. Interest on funds used to finance internally developed software up to the date the asset is ready for its intended use, is capitalized and included in the cost of the asset if the asset is actively under development. Capitalized interest was not significant for any period presented.
Amortization of internally developed software is included in “Amortization of product technologies” in the accompanying Consolidated Statements of Operations.
Impairment of Long-Lived Assets
Tangible long-lived assets held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include, but are not limited to, significant under-performance relative to current and historical or projected future operating results, significant changes in the manner of our use of the asset, or significant changes in our overall business and/or product strategies. If circumstances require that a long-lived asset group be tested for possible impairment, determination of recoverability is based on an estimate of the undiscounted cash flows expected to be generated by that long-lived asset or asset group. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, we would recognize an impairment charge equal to the excess of the carrying value over its fair value.
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. Deferred and contingent payments are included in the purchase consideration based on their 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. Contingent consideration is an obligation to make future payments to the seller contingent upon the achievement of future operational or financial targets. The fair value of these payments is estimated using a probability weighted discount model based on the achievement of the specified targets.
The valuation of the net assets acquired as well as certain elements of purchase consideration require 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. Changes to the fair value of contingent payments is reflected in “General and administrative” costs in the accompanying Consolidated Statements of Operations.

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Acquisition costs are expensed as incurred and are included in “General and administrative” in the accompanying Consolidated Statements of Operations. We include the results of operations from acquired businesses in our 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.
We evaluate impairment of goodwill either by assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or by performing a quantitative assessment. 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 a reporting unit is less than its carrying amount, we would perform a quantitative fair value test. To calculate any potential impairment, we compare the fair value of a reporting unit with its carrying amount, including goodwill. Any excess of the carrying amount of the reporting unit’s goodwill over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down. For purposes of goodwill impairment testing, we have one reporting unit.
We quantitatively evaluate indefinite-lived intangible assets by estimating the fair value of those assets based on estimated future earnings derived from the assets using the income approach. 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.
Intangible Assets
Intangible assets with determinable economic lives are carried at cost, less accumulated amortization. Our intangible assets are largely acquired in business combinations and include developed technologies, client relationships, vendor relationships, non-competition agreements and trade names. Intangible assets are amortized over the shorter of the contractual life or the estimated useful life. Intangible assets are amortized on a straight-line basis, except for client relationships which are amortized proportionately to the expected discounted cash flows derived from the asset.
Estimated useful lives for intangible assets consist of the following:
Developed technologies
3 - 7 years
Client relationships
3 - 10 years
Vendor relationships
7 years
Trade names
1 - 7 years
Non-competition agreements
5 - 10 years
Amortization of acquired developed technologies is included in “Amortization of product technologies”, and amortization of acquired client relationships, vendor relationships, non-competition agreements and trade names is included in “Amortization of intangible assets” in the accompanying Consolidated Statements of Operations.
Other Current and Long-Term Liabilities
Accrued expenses and other current liabilities consisted of the following at December 31, 2018 and 2017:
 
 
December 31,
 
 
2018
 
2017
 
 
(in thousands)
Accrued compensation, payroll taxes, and benefits
 
$
29,405

 
$
25,677

Sales tax obligations
 
3,673

 
4,930

Current portion of liabilities related to acquisitions
 
47,173

 
34,430

Lease-related liabilities
 
2,640

 
2,288

Other current liabilities
 
12,591

 
12,054

Total accrued expenses and other current liabilities
 
$
95,482

 
$
79,379


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Other long-term liabilities consisted of the following at December 31, 2018 and 2017:
 
 
December 31,
 
 
2018
 
2017
 
 
(in thousands)
Accrued lease liability
 
$
25,207

 
$
27,760

Liabilities related to acquisitions
 
10,969

 
13,000

Other long-term liabilities
 
1,014

 
753

Total other long-term liabilities
 
$
37,190

 
$
41,513

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 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 upfront fees billed at the initial order date that are not associated with an upfront 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 contract with our underwriting partner provides for contingent commissions to be paid to us in accordance with the agreement. 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 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 unites 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 license, which is recognized ratably over the service period.

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Contract 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 obligation represents 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.
Cost of Revenue
Cost of revenue consists primarily of salaries and related personnel expenses of our operations and support personnel, including training and implementation services; expenses related to the operation of our data centers; fees paid to third-party providers; allocations of facilities overhead costs; and depreciation
Sales and Marketing Expenses and Deferred Commissions
Sales and marketing expenses consist primarily of personnel and related costs, including salaries, benefits, bonuses, commissions, travel, and stock-based compensation. Other costs included are marketing and promotional events, our annual user conference, and other online and product marketing costs. We amortize sales commissions that are directly attributable to a contract over an estimated customer benefit period of three years.
Advertising costs are expensed as incurred and totaled $26.4 million, $22.8 million, and $19.4 million for the years ended December 31, 2018, 2017, and 2016, respectively.
Stock-Based Expense
We recognize compensation expense related to stock options and shares of restricted stock based on the estimated fair value of the awards on the date of grant. We generally grant time-based stock options and restricted stock awards, which vest over a specified period of time, and market-based awards, which become eligible to vest only after the achievement of a condition based upon the trading price of our common stock and vest over a specified period of time thereafter. The fair value of employee stock options is estimated on the date of grant using a binomial option pricing model, the Black-Scholes model. The fair value of our market-based restricted stock awards is estimated using a discrete model based on multiple stock price-paths developed through the use of Monte Carlo simulation.
For time-based stock options and restricted stock awards, expense is recognized on a straight-line basis over the requisite service period. Expense associated with market-based awards is recognized over the requisite service period using the graded-vesting attribution method. Share-based compensation is reduced for forfeitures once they occur.
Income Taxes
Income taxes are recorded based on the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We recognize the effect of tax rate changes on current and accumulated deferred income taxes in the period in which the rate change was enacted.
Valuation allowances are provided when it is more likely than not that all or a portion of the deferred tax asset will not be realized. The factors used to assess the need for a valuation allowance include historical earnings, our latest forecast of taxable income, and available tax planning strategies that could be implemented to realize the net deferred tax assets.
We may recognize a tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities.

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Fair Value Measurements
We measure our derivative 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.
Recently Adopted Accounting Standards
Accounting Standards Update 2014-09
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09, as amended by certain supplementary ASU’s released in 2016, replaces all current GAAP guidance on this topic and eliminates all industry-specific guidance. The new revenue recognition standard requires the recognition of revenue when promised goods or services are transferred to clients in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a client. Collectively, we refer to Topic 606 and Subtopic 340-40 as the “new revenue standard” or “ASC 606.”
We adopted the requirements of the new revenue standard on January 1, 2018 using the modified retrospective method and applied the guidance to contracts not substantially completed as of the date of initial application, or open contracts. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings at the beginning of 2018. Comparative information from prior year periods has not been restated and continues to be reported under the accounting standards in effect for those periods. The cumulative effects of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard were as follows:
 
Balance at
December 31, 2017
 
Adjustments due
to ASU 2014-09
 
Balance at
January 1, 2018
 
(in thousands)
Assets
 
 
 
 
 
Accounts receivable, less allowances
$
124,505

 
$
(7,925
)
 
$
116,580

Other current assets
$
6,622

 
$
2,771

 
$
9,393

Deferred tax assets, net
$
44,887

 
$
(780
)
 
$
44,107

Other assets
$
11,010

 
$
4,459

 
$
15,469

Liabilities
 
 
 
 
 
Current portion of deferred revenue
$
116,622

 
$
(3,696
)
 
$
112,926

Stockholders’ Equity
 
 
 
 
 
Accumulated deficit
$
(75,046
)
 
$
2,221

 
$
(72,825
)
Adoption of the new revenue standard resulted in changes to our accounting policies for revenue recognition, certain variable considerations, and commissions expense. The adoption of the new revenue standard did not have a significant effect

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on our revenue; however, it did have an impact on the timing of when we expense commission costs incurred to obtain a contract and the reserves we establish for variable consideration from credits or other pricing accommodations we provide our clients. We expect the effect of the new revenue standard to be immaterial to our revenue on an ongoing basis. The primary effect to our net income on an ongoing basis relates to the reserve for credit accommodations and deferral of incremental commission costs incurred to obtain new contracts. Under the new revenue standard, we accrue for credit accommodations in our reserve during the month of billing, and credits reduce this reserve when issued. Further, we now initially defer commission costs and amortize these costs to expense over a period of benefit that we have determined to be three years. Deferred commissions were capitalized for open contracts at the date of initial application and are capitalized for new contracts in 2018.
See Note 4 for additional required disclosures related to the impact of adopting the new revenue standard and our accounting for costs to obtain a contract.
Accounting Standards Update 2016-18
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. This ASU must be adopted retrospectively.
We adopted ASU 2016-18 effective January 1, 2018. As a result of our adoption, changes in customer deposits held in restricted accounts will result in an increase or reduction in our cash flows from operating activities. Under previous rules, such changes were largely offset by the corresponding change in restricted cash and had a minimal impact on our statement of cash flows. The prior period financial statements included in this filing have been adjusted to reflect the adoption of ASU 2016-18. The effects of those adjustments to the Consolidated Statements of Cash Flows have been summarized in the table below:
 
 
Originally Reported
 
Effect of Change
 
As Adjusted
 
 
(in thousands)
Statement of Cash Flows for the year ended December 31, 2017
 
 
 
 
 
 
Net cash provided by operating activities
 
$
137,327

 
$
2,936

 
$
140,263

Net cash used in investing activities
 
$
(709,274
)
 
$
9,412

 
$
(699,862
)
Cash, cash equivalents and restricted cash at end of period
 
$
69,343

 
$
96,002

 
$
165,345

 
 
 
 
 
 
 
Statement of Cash Flows for the year ended December 31, 2016
 
 
 
 
 
 
Net cash provided by operating activities
 
$
136,216

 
$
(6,767
)
 
$
129,449

Net cash used in investing activities
 
$
(145,141
)
 
$
4,960

 
$
(140,181
)
Cash, cash equivalents and restricted cash at end of period
 
$
104,886

 
$
83,654

 
$
188,540

Accounting Standards Update 2016-01
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10) in February 2018, which provides clarification on certain guidance issued under ASU 2016-01. Among other things, ASU 2016-01 eliminates the cost method of accounting and requires that investments in equity securities that were previously accounted for under the cost method must now be measured at fair value, with changes in fair value recognized in net income. Equity instruments that do not have readily determinable fair values may be measured 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. This ASU became effective on January 1, 2018. We hold an investment which was accounted for under the cost method of accounting prior to January 1, 2018, which does not have a readily determinable fair value and which has had no observable price change. Therefore, we continue to measure this investment at cost, less any impairment. The adoption of this standard did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
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 hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The amendments in this update will be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact of this ASU on our consolidated financial statements.

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In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands an entity’s ability to apply hedge accounting for nonfinancial and financial risk components and allows for a simplified approach for fair value hedging of interest rate risk. Certain of the amendments in this ASU as they relate to cash flow hedges, eliminate the requirement to separately record hedge ineffectiveness currently in earnings. Instead, the entire change in the fair value of the hedging instrument is recorded in Other Comprehensive Income (“OCI”), and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. ASU 2017-12 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted.
We will adopt this standard effective January 1, 2019 on a modified retrospective basis and will record a cumulative effect adjustment in the opening balance of retained earnings with an offsetting adjustment to other comprehensive income. Further, after adoption, the entire change in the fair value of our interest rate swaps will be recorded in other comprehensive income and reclassified into interest expense as interest payments are made on our variable rate debt. The changes in the ASU will not have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replace the incurred loss impairment methodology in current 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. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in fiscal years beginning after December 15, 2018. The amendments in this ASU are to be applied through a cumulative-effect adjustment to retained earnings as of the first reporting period in which the ASU is effective. We have not yet selected a transition date and are currently evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new guidance requires lessees to recognize assets and liabilities arising from all leases with a lease term of more than 12 months, including those classified as operating leases under previous accounting guidance. It also requires disclosure of key information about leasing arrangements to increase transparency and comparability among organizations.
ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, which provides for an optional transition method to allow companies to initially account for the impact of the adoption with a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019. This eliminates the requirement to restate amounts presented prior to January 1, 2019. We will adopt the standard effective January 1, 2019 under the optional transition method, or modified retrospective approach. We have elected the package of practical expedient available under the transition provisions including: (i) not reassessing whether expired or existing contracts contain leases, (ii) not reassessing lease classification, and (iii) not revaluing initial direct costs for existing leases. We also plan to elect the practical expedient which will allow aggregation of non-lease components with the related lease components when evaluating accounting treatment. We have made an accounting policy election to exempt leases with an initial term of twelve months or less from balance sheet recognition. Instead, short-term leases will be expensed over the lease term.
The adoption of this standard will materially impact our balance sheet by recognizing a right of use asset and lease liability between approximately $75.0 million and $100.0 million. The value of lease assets and lease liabilities recognized under ASU 2016-02 will change with the passage of time and from changes in specific facts and circumstances effecting the nature and timing of our contractual lease arrangements from period to period. As a result, the lease assets and lease liabilities that are recognized as of January 1, 2019 may not be indicative of amounts to be recognized in future periods. Adoption of this ASU will modify our ongoing analysis and disclosures of lease agreements. We have implemented a new lease software solution and continue to modify our business processes and internal controls as part of the adoption.

3. Acquisitions
Fiscal Year 2018
Rentlytics
In October 2018, we entered into an agreement and plan of merger whereby we acquired 100% of the capital stock of Rentlytics, Inc. (“Rentlytics”), a provider of business intelligence and data analytics software and services to the multi-family housing industry. Aggregate purchase consideration was $55.4 million, including deferred cash obligations of up to $8.0 million that will be released on the first and second anniversary dates of the closing date, subject to any indemnification claims. The acquisition was financed using cash on hand.
The acquired identified intangible assets consisted of client relationships, developed technology and trade names and were assigned estimated useful lives of ten, seven and ten years, respectively. Preliminary goodwill recognized of $42.4 million is

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primarily comprised of anticipated synergies from the expansion of our business intelligence and data analytics platform. Goodwill and acquired intangible assets are not deductible for tax purposes. Accounts receivable acquired have a gross value of $2.0 million, of which $0.4 million is estimated to be uncollectible. Acquisition costs associated with this transaction totaled $1.2 million, which also include certain change of control payments and related severance costs paid to former Rentlytics employees.
LeaseLabs
In September 2018, we acquired substantially all of the assets of LeaseLabs, Inc. (“LeaseLabs”), a full-stack marketing solutions provider to the multifamily housing industry. LeaseLabs provides online, social media and website marketing services to property management companies. Aggregate purchase consideration was $112.9 million, including deferred cash obligations of up to $11.8 million, subject to any indemnification claims, to be released on the first and second anniversary dates of the closing date, and contingent consideration of up to $9.9 million based on the collection of acquisition date accounts receivable balances during the six-month period after the acquisition date. The fair value of the contingent consideration was $7.0 million on the date of acquisition. We also issued 86,745 shares of our common stock at closing, which had a fair value of $5.3 million on the date of acquisition. We will issue shares of our common stock with a fair value of $5.0 million on the first anniversary date of the acquisition. A liability of $4.8 million has been recorded for the obligation to issue these shares. The acquisition was financed using cash on hand.
The acquired identified intangible assets consisted of client relationships, developed technology and trade names and were assigned estimated useful lives of ten, seven and ten years, respectively. Preliminary goodwill recognized of $84.7 million is primarily comprised of anticipated synergies from the expansion of our marketing platform with LeaseLabs’ marketing solutions and the combination of our marketing content, websites and lead management with LeaseLabs’ marketing solutions. Goodwill and acquired intangible assets are deductible for tax purposes. Accounts receivable acquired have a gross value of $3.5 million, of which $0.6 million is estimated to be uncollectible. Acquisition costs associated with this transaction totaled $0.4 million.
BluTrend
In July 2018, we acquired substantially all of the assets of Blu Trend, LLC (“BluTrend”), a provider of utility management services for the multifamily housing industry. The acquired assets will be integrated with our existing resident utility management platform. Aggregate purchase consideration was $8.5 million, including deferred cash obligations of up to $1.0 million, and deferred stock obligations of up to $1.0 million. The $2.0 million of deferred obligations are subject to indemnification claims as well as continued employment of certain BluTrend employees and will be released on the first and second anniversary dates of the closing date. The deferred obligations will be recognized as compensation expense over the two-year period after the acquisition date. The acquisition was financed using cash on hand.
The acquired identifiable intangible assets consisted of client relationships, developed technology and trade names and were assigned estimated useful lives of ten, five and two years, respectively. Preliminary goodwill recognized of $3.9 million is primarily comprised of anticipated synergies from integrating the BluTrend business into our utility management platform. Goodwill and the acquired identified intangible assets are deductible for tax purposes. Acquisition costs associated with this transaction totaled $0.1 million.
ClickPay
In April 2018, we acquired substantially all of the outstanding membership units of NovelPay, LLC (“NovelPay”), other than those owned by ClickPay Services, Inc. On the same day, we acquired all of the outstanding stock of ClickPay Services, Inc. (collectively with NovelPay, “ClickPay”). ClickPay provides an electronic payment platform servicing resident units across multiple segments of real estate, which offers integrated payment services to increase operational efficiencies for property owners and managers. The acquisition of ClickPay broadens our presence in the real estate industry, and solidifies the integration of our leasing platform with third-party property management systems.
We acquired ClickPay for purchase consideration of $221.1 million. The purchase consideration consisted of $139.0 million of cash, net of cash acquired of $7.5 million, the issuance of 870,168 shares of our common stock valued at $48.0 million, a deferred obligation of up to $10.2 million, and a liability of $24.7 million related to put and call option agreements, which had a fair value of $24.4 million on the date of acquisition. Approximately 187,480 shares of common stock issued at closing are subject to a holdback and subject to any indemnification claims made, will be released on the first anniversary date of the closing date. The deferred obligation requires us to issue shares of our common stock with a fair value of $9.8 million on the second anniversary date of the closing date. The acquisition of ClickPay was financed using funds available under our Credit Facility, as defined in Note 8, and cash on hand.
Pursuant to the acquisition agreement, certain holders initially retained units representing approximately 12% of the membership units of NovelPay, subject to put rights that could be exercised by the holders on or after September 1, 2018, and call rights that could be exercised by us on or after October 1, 2018. The exercise price of the put and call rights was the same

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as the per unit price of the membership units purchased at the closing. We evaluated the put and call options and determined the put and call options were embedded within the noncontrolling interests, and the economic substance represented a financing arrangement of the noncontrolling interests because of the substantially fixed exercise price and stated exercise dates. In June 2018, we and one of the remaining NovelPay noncontrolling interest holders agreed to waive the put and call exercise date, and we completed the purchase of such holder’s membership units for 395,206 shares of common stock valued at $21.8 million. In September 2018, the remaining NovelPay noncontrolling interest holders exercised their put rights, and we completed the purchase of the noncontrolling interest holders’ membership units for $2.9 million in cash. As of December 31, 2018, all outstanding membership units of NovelPay have been acquired. No earnings were attributed to the noncontrolling interests in the accompanying Consolidated Statements of Operations.
The acquired identified intangible assets consisted of developed technology, client relationships, and trade names. These intangible assets were assigned estimated useful lives of seventen and ten years, respectively. Preliminary goodwill recognized of $173.3 million is primarily comprised of anticipated synergies from leveraging ClickPay’s electronic payment platform, which is compatible with multiple third-party property management systems. Goodwill of $102.4 million arising from the acquisition of NovelPay is deductible for tax purposes; goodwill arising from the acquisition of ClickPay Services, Inc. is not. Accounts receivable acquired had a gross contractual value of $2.7 million at acquisition, of which $0.5 million was estimated to be uncollectible. Acquisition costs associated with this transaction totaled $1.6 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 each respective 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. 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 each respective acquisition date. The components of the purchase consideration and the preliminary allocation of each purchase price, including the effects of measurement period adjustments recorded as of December 31, 2018, are as follows:
 
 
ClickPay
 
BluTrend
 
LeaseLabs
 
Rentlytics
 
 
(in thousands)
Fair value of purchase consideration:
 
 
 
 
 
 
 
 
Cash, net of cash acquired
 
$
138,983

 
$
8,500

 
$
84,498

 
$
47,895

Common stock issued at closing
 
48,034

 

 
5,300

 

Deferred obligations, net
 
9,677

 

 
16,094

 
7,517

Noncontrolling interest financing
 
24,369

 

 

 

Contingent consideration
 

 

 
7,000

 

Total fair value of purchase consideration
 
$
221,063

 
$
8,500

 
$
112,892


$
55,412

 
 
 
 
 
 
 
 
 
Fair value of net assets acquired:
 
 
 
 
 
 
 
 
Restricted cash
 
$
1,313

 
$

 
$

 
$

Accounts receivable
 
2,226

 
226

 
2,853

 
1,585

Property, equipment, and software
 
89

 

 
865

 

Deferred tax asset, net
 

 

 

 
988

Intangible assets:
 
 
 
 
 
 
 
 
Developed product technologies
 
29,100

 
730

 
8,300

 
3,300

Client relationships
 
20,700

 
3,510

 
17,800

 
8,500

Trade names
 
2,900

 
30

 
1,100

 
400

Goodwill
 
173,250

 
3,887

 
84,674

 
42,351

Other assets
 
362

 
122

 
321

 
401

Accounts payable and accrued liabilities
 
(2,698
)
 
(5
)
 
(696
)
 
(763
)
Client deposits held in restricted accounts
 
(1,313
)
 

 

 

Deferred revenue
 

 

 
(2,325
)
 
(1,350
)
Deferred tax liability, net
 
(4,866
)
 

 

 

Total fair value of net assets acquired
 
$
221,063

 
$
8,500

 
$
112,892


$
55,412


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Acquisitions Prior to 2018
We completed eight acquisitions during fiscal years 2017 and 2016. A summary of each acquisition can be found in the table below:
 
 
Date of Acquisition
 
Aggregate Purchase Price
 
Closing Cash Payment, Net of Cash Acquired
 
Net Tangible Assets Acquired (Liabilities Assumed)
 
Identified Intangible Assets
 
Goodwill Recognized
 
 
 
 
(in thousands)
NWP Services Corporation
 
March 2016
 
$
68,183

 
$
62,190

 
$
18,314

 
$
16,349

 
$
33,520

AssetEye, Inc.
 
May 2016
 
$
4,911

 
$
3,749

 
$
(928
)
 
$
2,685

 
$
3,154

eSupply Systems, LLC
 
June 2016
 
$
7,046

 
$
5,461

 
$
267

 
$
3,585

 
$
3,194

Axiometrics LLC
 
January 2017
 
$
73,757

 
$
66,050

 
$
(5,963
)
 
$
25,530

 
$
54,190

American Utility Management
 
June 2017
 
$
69,412

 
$
64,775

 
$
1,107

 
$
22,398

 
$
45,907

On-Site Manager, Inc.
 
September 2017
 
$
251,109

 
$
225,300

 
$
3,197

 
$
65,320

 
$
182,592

PEX Software Limited
 
October 2017
 
$
6,031

 
$
5,103

 
$
(369
)
 
$
3,100

 
$
3,300

Lease Rent Options
 
December 2017
 
$
299,923

 
$
298,040

 
$
5,263

 
$
91,666

 
$
202,994

Purchase consideration for Axiometrics included contingent consideration of up to $5.0 million payable if certain revenue targets were achieved during the twelve-month period ending December 31, 2018. Based on information that was available at December 31, 2018, management has determined the fair value of the contingent consideration to be zero. Refer to Note 13 for additional information regarding our contingent consideration liabilities.
Deferred Obligations and Contingent Consideration Activity
The following table presents changes in our deferred cash and stock obligations and contingent consideration for the fiscal years ended December 31, 2018 and 2017:
 
Deferred Cash and Stock Obligations
 
Contingent Consideration
 
Total
 
(in thousands)
Balance at January 1, 2017
$
14,150

 
$
541

 
$
14,691

Additions, net of fair value discount
42,104

 
812

 
42,916

Cash payments
(8,215
)
 
(700
)
 
(8,915
)
Accretion expense
1,049

 

 
1,049

Change in fair value

 
(239
)
 
(239
)
Indemnification claims and other adjustments
(2,072
)
 

 
(2,072
)
Balance at December 31, 2017
47,016


414

 
47,430

Additions, net of fair value discount
36,313

 
7,000

 
43,313

Cash payments
(29,600
)
 
(247
)
 
(29,847
)
Accretion expense
1,970

 

 
1,970

Change in fair value

 
(1,167
)
 
(1,167
)
Indemnification claims and other adjustments
(3,557
)
 

 
(3,557
)
Balance at December 31, 2018
$
52,142


$
6,000

 
$
58,142


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Pro Forma Results of Acquisitions
The following table presents unaudited pro forma results of operations for the years ended December 31, 2018 and 2017, as if the aforementioned 2018 and 2017 acquisitions had occurred as of January 1, 2017 and January 1, 2016, respectively. The pro forma information includes the business combination accounting effects resulting from these acquisitions, including interest expense, tax expense or benefit, issuance of our common shares, and additional amortization resulting from the valuation of amortizable intangible assets. We prepared the pro forma financial information for the combined entities for comparative purposes only, and it is not indicative of what actual results would have been if the acquisitions had occurred at the beginning of the periods presented, or of future results.
 
 
Year Ended December 31,
 
 
2018
Pro Forma
 
2017
Pro Forma
 
 
(unaudited)
 
 
(in thousands, except per share amounts)
Total revenue
 
$
899,966

 
$
809,987

Net income (loss)
 
$
27,969

 
$
(14,210
)
Net income (loss) per share:
 
 
 
 
Basic
 
$
0.32

 
$
(0.18
)
Diluted
 
$
0.30

 
$
(0.18
)

4. Revenue Recognition
On January 1, 2018, we adopted the new revenue standard using the modified retrospective method for those contracts with remaining service obligations as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.
We recorded a net increase to opening equity of $2.2 million as of January 1, 2018 as the cumulative effect of adopting the new revenue standard. The effect on revenues of adopting the new revenue standard for the fiscal year ended December 31, 2018 is presented in the “Impact on Consolidated Financial Statements” section below.
Disaggregation of Revenue
The following table presents our revenues disaggregated by major revenue source. Sales and usage-based taxes are excluded from revenues.
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(in thousands)
On demand
 
 
 
 
 
Property management
$
186,975

 
$
167,002

 
$
152,890

Resident services
350,457

 
272,176

 
218,097

Leasing and marketing
166,361

 
123,804

 
116,505

Asset optimization
129,916

 
79,640

 
55,039

Total on demand revenue
833,709


642,622


542,531

 
 
 
 
 
 
Professional and other
35,771

 
28,341

 
25,597

Total revenue
$
869,480


$
670,963


$
568,128

On Demand Revenue
We generate the majority of our on demand revenue by licensing software-as-a-service (“SaaS”) solutions to our clients on a subscription basis. Our SaaS solutions are provided pursuant to contractual commitments that typically include a promise that we will stand ready, on a monthly basis, to deliver access to our technology platform over defined service delivery periods. These solutions represent a series of distinct services that are substantially the same and have the same pattern of transfer to the client. Revenue from our SaaS solutions is generally recognized ratably over the term of the arrangement.

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Consideration for our on demand subscription services consist of fixed, variable and usage-based fees. We invoice a portion of our fees at the initial order date and then monthly or annually thereafter. Subscription fees are generally fixed based on the number of sites and the level of services selected by the client.
We sell certain usage-based services, primarily within our property management, resident services and leasing and marketing solutions, to clients based on a fixed rate per transaction. Revenues are calculated based on the number of transactions processed monthly and will vary from month to month based on actual usage of these transaction-based services over the contract term, which is typically one year in duration. The fees for usage-based services are not associated with every distinct service promised in the series of distinct services we provide our clients. As a result, we allocate variable usage-based fees only to the related transactions and recognize them in the month that usage occurs.
As part of our resident services offerings, 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 underwriting partners charge to the policyholder and are subject to forfeiture in instances where a policyholder cancels prior to the end of the policy. The overall insurance services we provide represent a single performance obligation that qualifies as a separate series in accordance with the new revenue standard. Our contracts with our underwriting partners also provide for contingent commissions to be paid to us in accordance with the agreements. The contingent commissions are not associated with every distinct service promised in the series of distinct insurance services we provide. We generally accrue and recognize contingent commissions monthly based on estimates of the variable factors identified in the terms of the applicable agreements.
Professional Services and Other Revenues
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 revenues primarily consist of fees for implementation services, consulting services and training. Professional services are billed either on a fixed rate per hour (time) and materials basis or on a fixed price basis. Professional services are typically sold bundled in a contract with other on demand solutions but may be sold separately. For bundled arrangements, we allocate the transaction price to separate services based on their relative standalone selling prices if a service is separately identifiable from other items in the bundled arrangement and if a client can benefit from it on its own or with other resources readily available to the client.
Other revenues consist of submeter equipment sales that include related installation services, sales of other equipment and on premise software sales. Submeter hardware and installation services are considered to be part of a single performance obligation due to the significance of the integration and interdependency of the installation services with the meter equipment. Our typical payment terms for submeter installations require a percentage of the overall transaction price to be paid upfront, with the remainder billed as progress payments. We recognize submeter revenue in proportion to the number of fully 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, which occurs at a point in time, typically upon delivery to the client.
The majority of on premise revenue consists of maintenance renewals from clients who renew for an additional one-year term. Maintenance renewal revenue is recognized ratably over the service period based upon the standalone selling price of that service obligation.
Contract Balances
Contract assets generally consist of amounts recognized as revenue before they can be invoiced to clients or amounts invoiced to clients prior to the period in which the service is provided where the right to payment is subject to conditions other than just the passage of time. These contract assets are included in “Accounts receivable” in the accompanying Consolidated Financial Statements and related disclosures. Contract liabilities are comprised of billings or payments received from our clients in advance of performance under the contract. We refer to these contract liabilities as “Deferred revenue” in the accompanying Consolidated Financial Statements and related disclosures. We recognized $113.7 million of on demand revenue during the year ended December 31, 2018, which was included in the line “Deferred revenue” in the accompanying Consolidated Balance Sheets as of the beginning of the period.
Contract Acquisition Costs
We capitalize certain commissions as incremental costs of obtaining a contract with a client if we expect to recover those costs. The commissions are capitalized and amortized over a period of benefit determined to be three years. As of December 31, 2018, the current and noncurrent balances of capitalized commissions costs recorded in the lines “Other current assets” and “Other assets” in the accompanying Consolidated Balance Sheets were $6.7 million and $7.8 million, respectively. During the year ended December 31, 2018, we amortized commission costs totaling $5.4 million. No impairment loss was recognized in relation to these capitalized costs.

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Remaining Performance Obligations
Certain clients commit to purchase our solutions for terms ranging from two to seven years. We expect to recognize approximately $414.7 million of revenue in the future related to performance obligations for on demand contracts with an original duration greater than one year that were unsatisfied or partially unsatisfied as of December 31, 2018. Our estimate does not include amounts related to:
professional and usage-based services that are billed and recognized based on services performed in a certain period;
amounts attributable to unexercised contract renewals that represent a material right; or
amounts attributable to unexercised client options to purchase services that do not represent a material right.
We expect to recognize revenue on approximately 68.8% of the remaining performance obligations over the next 24 months, with the remainder recognized thereafter. Revenue from remaining performance obligations for professional service contracts as of December 31, 2018 was immaterial.
Impact on Consolidated Financial Statements
The following tables summarize the effects of the adoption of ASU 2014-09 on selected line items within our Consolidated Statements of Operations and Balance Sheets:
 
Year Ended December 31, 2018
 
As reported
 
Balances without adoption of ASU 2014-09
 
Effect of Change
on Net Income
Higher/(Lower)
 
(in thousands)
Revenue
 
 
 
 
 
On demand
$
833,709

 
$
835,465

 
$
(1,756
)
Professional and other
35,771

 
32,886

 
2,885

Total revenue
$
869,480

 
$
868,351

 
$
1,129

Operating expenses
 
 
 
 
 
Sales and marketing
$
166,607

 
$
174,578

 
$
7,971

 
 
 
 
 
 
Net income before income taxes
$
34,300

 
$
25,200

 
$
9,100

Income tax expense (benefit)
(425
)
 
(2,608
)
 
(2,183
)
Net income
$
34,725

 
$
27,808

 
$
6,917

 
Balances at December 31, 2018 - as reported
 
Balances at December 31, 2018 without adoption of ASU 2014-09
 
Effect of Change
Higher/(Lower)
 
(in thousands)
Assets
 
 
 
 
 
Accounts receivable, less allowances
$
123,596

 
$
130,742

 
$
(7,146
)
Other current assets
$
15,185

 
$
8,198

 
$
6,987

Other assets
$
20,393

 
$
12,114

 
$
8,279

Liabilities
 
 
 
 
 
Current portion of deferred revenue
$
120,704

 
$
125,078

 
$
(4,374
)
Deferred revenue
$
4,902

 
$
4,902

 
$

The adoption of ASU 2014-09 had no net effect on the Consolidated Statements of Cash Flows for the year ended December 31, 2018.


27


5. Accounts Receivable
Accounts receivable consisted of the following at December 31, 2018 and 2017:
 
 
December 31,
 
 
2018
 
2017
 
 
(in thousands)
Trade receivables from clients
 
$
120,767

 
$
115,354

Insurance commissions receivable
 
11,679

 
13,102

Accounts receivable, gross
 
132,446

 
128,456

Less: Allowances
 
(8,850
)
 
(3,951
)
Accounts receivable, net
 
$
123,596

 
$
124,505

Trade receivables include amounts billed to our clients, primarily under our on demand subscription solutions. Trade receivables also includes amounts invoiced to clients prior to the period in which the service is provided and amounts for which we have met the requirements to recognize revenue in advance of invoicing the client. Insurance commissions receivable consists of commissions derived from the sale of insurance products to individuals and contingent commissions related to those policies. Contingent commissions are determined based on a calculation that considers earned agent commissions, a percent of premium retained by our underwriting partner, incurred losses, and profit retained by our underwriting partner during the time period. Contingent commissions receivables are recorded at their estimated net realizable value, based on estimates and considerations which include, but are not limited to, the historical and projected loss rates incurred by the underlying policies.

6. Property, Equipment, and Software
Property, equipment, and software consisted of the following at December 31, 2018 and 2017:
 
 
December 31,
 
 
2018
 
2017
 
 
(in thousands)
Leasehold improvements
 
$
63,391

 
$
59,179

Data processing and communications equipment
 
68,015

 
83,922

Furniture, fixtures, and other equipment
 
33,840

 
28,752

Software
 
131,437

 
107,924

Property, equipment, and software, gross
 
296,683

 
279,777

Less: Accumulated depreciation and amortization
 
(143,155
)
 
(131,349
)
Property, equipment, and software, net
 
$
153,528

 
$
148,428

Depreciation and amortization expense for property, equipment, and purchased software was $28.5 million, $27.2 million, and $24.5 million for the years ended December 31, 2018, 2017, and 2016, respectively.
The unamortized amount of capitalized software development costs was $54.9 million and $45.5 million at December 31, 2018 and 2017, respectively. Amortization expense related to capitalized software development costs totaled $11.9 million, $8.0 million, and $5.8 million during the years ended December 31, 2018, 2017, and 2016, respectively.


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Table of Contents




7. Goodwill and Identified Intangible Assets
Changes in the carrying amount of goodwill during the years ended December 31, 2018 and 2017, were as follows, in thousands:
Balance at January 1, 2017
 
$
259,938

Goodwill acquired
 
491,079

Measurement period and other adjustments
 
35

Balance at December 31, 2017
 
751,052

Goodwill acquired
 
304,162

Measurement period and other adjustments
 
(2,095
)
Balance at December 31, 2018
 
$
1,053,119

We completed our annual goodwill impairment test during the fourth quarter of the fiscal year ended December 31, 2018. Based on the results of the quantitative analysis, we concluded that there was no impairment of goodwill. In 2017 or 2016, we performed qualitative assessments which did not result in the impairment of goodwill.
Intangible assets consisted of the following at December 31, 2018 and 2017:
 
 
December 31, 2018
 
December 31, 2017
 
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
(in thousands)
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Developed technologies
 
$
207,310

 
$
(100,445
)
 
$
106,865