UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

☒

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

☒~~Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934~~

For the quarterly period ended ~~December 31, 2017~~September 30, 2021

☐

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

☐~~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 001-36348

~~PAYLOCITY HOLDING CORPORATION~~

~~(Exact name of registrant as specified in its charter)~~

~~Delaware~~

~~46-4066644~~

~~(State or other jurisdiction of~~

~~incorporation or organization)~~

~~(IRS Employer~~

~~Identification No.)~~

~~3850 N. Wilke Road~~

~~Arlington Heights, Illinois~~

~~60004~~

~~(Address of principal executive offices)~~

~~(Zip Code)~~

~~(847) 463-3200~~

~~(Registrant’s telephone number, including area code)~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

~~Large Accelerated Filer~~	☒	~~Accelerated Filer~~	☐

~~Non-Accelerated Filer~~	~~☐ (Do not check if a smaller reporting company)~~	~~Smaller Reporting Company~~	☐

~~Emerging Growth Company~~	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

~~Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒~~

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 52,603,746 shares of Common Stock, $0.001 par value per share, as of February 2, 2018.

~~Table of Contents~~

~~Paylocity Holding Corporation~~

~~Form 10-Q~~

~~For the Quarterly Period Ended December 31, 2017~~

~~TABLE OF CONTENTS~~


		~~Page~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. FINANCIAL STATEMENTS~~

~~Unaudited Consolidated Balance Sheets~~		2

~~Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)~~		3

~~Unaudited Consolidated Statement of Changes in Stockholders’ Equity~~		4

~~Unaudited Consolidated Statements of Cash Flows~~		5

~~Notes to the Unaudited Consolidated Financial Statements~~		6

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~		16

~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~		31

~~ITEM 4. CONTROLS AND PROCEDURES~~		31

~~PART II. OTHER INFORMATION~~

~~ITEM 1. LEGAL PROCEEDINGS~~		33

~~ITEM 1A. RISK FACTORS~~		33

~~ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~		51

~~ITEM 3. DEFAULTS UPON SENIOR SECURITIES~~		52

~~ITEM 4. MINE SAFETY DISCLOSURES~~		52

~~ITEM 5. OTHER INFORMATION~~		52

~~ITEM 6. EXHIBITS~~		52

~~SIGNATURES~~		54

~~Table of Contents~~

~~PART I~~

~~FINANCIAL INFORMATION~~

~~Item 1. Financial Statements~~

PAYLOCITY HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

46-4066644

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

1400 American Lane

Schaumburg, Illinois

60173

(Address of principal executive offices)

(Zip Code)

(847) 463-3200

(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, par value $0.001 per share	PCTY	The NASDAQ Global Select Market LLC

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐


Large Accelerated Filer	☒	Accelerated Filer	☐

Non-Accelerated Filer	☐	Smaller Reporting Company	☐

		Emerging Growth Company	☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 55,026,308 shares of Common Stock, $0.001 par value per share, as of October 29, 2021.

Table of Contents

Paylocity Holding Corporation

Form 10-Q

For the Quarterly Period Ended September 30, 2021

TABLE OF CONTENTS


		Page

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Unaudited Consolidated Balance Sheets		2

Unaudited Consolidated Statements of Operations and Comprehensive Income		3

Unaudited Consolidated Statement of Changes in Stockholders’ Equity		4

Unaudited Consolidated Statements of Cash Flows		5

Notes to the Unaudited Consolidated Financial Statements		6

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		19

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		30

ITEM 4. CONTROLS AND PROCEDURES		31

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		32

ITEM 1A. RISK FACTORS		32

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		32

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		32

ITEM 4. MINE SAFETY DISCLOSURES		32

ITEM 5. OTHER INFORMATION		32

ITEM 6. EXHIBITS		32

SIGNATURES		34

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Balance Sheets

(in thousands, except per share data)


	June 30,		September 30,
	2021		2021
Assets
Current assets:
Cash and cash equivalents	$	202,287	$	66,431
Corporate investments		4,456		3,151
Accounts receivable, net		6,267		8,094
Deferred contract costs		44,230		46,928
Prepaid expenses and other		15,966		21,903
Total current assets before funds held for clients		273,206		146,507
Funds held for clients		1,759,677		3,185,520
Total current assets		2,032,883		3,332,027
Capitalized internal-use software, net		45,018		48,719
Property and equipment, net		59,835		62,265
Operating lease right-of-use assets		43,984		44,249
Intangible assets, net		13,027		37,175
Goodwill		33,650		68,022
Long-term deferred contract costs		170,663		179,079
Long‑term prepaid expenses and other		4,223		7,399
Deferred income tax assets		11,602		32,602
Total assets	$	2,414,885	$	3,811,537

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,230	$	6,910
Accrued expenses		103,109		81,017
Total current liabilities before client fund obligations		107,339		87,927
Client fund obligations		1,759,677		3,185,520
Total current liabilities		1,867,016		3,273,447
Long-term operating lease liabilities		67,201		66,684
Other long-term liabilities		1,958		1,905
Deferred income tax liabilities		1,780		1,928
Total liabilities	$	1,937,955	$	3,343,964
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 authorized, 0 shares issued and outstanding at June 30, 2021 and September 30, 2021	$	—	$	—
Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2021 and September 30, 2021; 54,594 shares issued and outstanding at June 30, 2021 and 55,019 shares issued and outstanding at September 30, 2021		55		55
Additional paid-in capital		241,718		201,504
Retained earnings		235,091		266,023
Accumulated other comprehensive income (loss)		66		(9)
Total stockholders' equity	$	476,930	$	467,573
Total liabilities and stockholders’ equity	$	2,414,885	$	3,811,537

June 30,

December 31,

2017

2017

Assets

Current assets:

Cash and cash equivalents

$
103,468

$
111,027

Accounts receivable, net

2,040

2,739

Prepaid expenses and other

14,879

7,456

Total current assets before funds held for clients

120,387

121,222

Funds held for clients

942,459

1,345,702

Total current assets

1,062,846

1,466,924

Long-term prepaid expenses

1,535

1,072

Capitalized internal-use software, net

17,394

18,786

Property and equipment, net

40,756

48,354

Intangible assets, net

8,907

8,189

Goodwill

6,003

6,003

Total assets

$
1,137,441

$
1,549,328

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$
2,046

$
1,794

Accrued expenses

30,301

29,128

Total current liabilities before client fund obligations

32,347

30,922

Client fund obligations

942,459

1,345,702

Total current liabilities

974,806

1,376,624

Deferred rent

14,621

14,243

Deferred income tax liabilities, net

401

308

Total liabilities

$
989,828

$
1,391,175

Stockholders’ equity:

Preferred stock, $0.001 par value, 5,000 authorized, no shares issued and outstanding at June 30, 2017 and December 31, 2017

$
—

$
—

Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2017 and December 31, 2017; 51,738 shares issued and outstanding at June 30, 2017 and 52,590 shares issued and outstanding at December 31, 2017

52

53

Additional paid-in capital

192,837

202,512

Accumulated deficit

(45,276)

(44,302)

Accumulated other comprehensive loss

—

(110)

Total stockholders’ equity

$
147,613

$
158,153

Total liabilities and stockholders’ equity

$
1,137,441

$
1,549,328

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Operations and Comprehensive Income ~~(Loss)~~

(in thousands, except per share data)

Three Months Ended

Six Months Ended

December 31,

December 31,


2016

2017

2016

2017

Revenues:

Recurring fees

$
65,347

$
81,292

$
127,267

$
158,586

Interest income on funds held for clients

731

1,783

1,448

3,400

Total recurring revenues

66,078

83,075

128,715

161,986

Implementation services and other

2,576

2,929

4,961

5,518

Total revenues

68,654

86,004

133,676

167,504

Cost of revenues:

Recurring revenues

20,716

25,638

39,819

49,729

Implementation services and other

9,667

11,202

18,923

22,070

Total cost of revenues

30,383

36,840

58,742

71,799

Gross profit

38,271

49,164

74,934

95,705

Operating expenses:

Sales and marketing

17,735

21,598

35,746

42,778

Research and development

7,222

9,274

14,523

18,169

General and administrative

14,957

18,159

28,815

34,110

Total operating expenses

39,914

49,031

79,084

95,057

Operating income (loss)

(1,643)

133

(4,150)

648

Other income

4

141

43

250

Income (loss) before income taxes

(1,639)

274

(4,107)

898

Income tax expense (benefit)

32

(157)

132

(76)

Net income (loss)

$
(1,671)

$
431

$
(4,239)

$
974

Other comprehensive loss, net of tax

Unrealized losses on securities, net of tax

—

(105)

—

(110)

Total other comprehensive loss, net of tax

—

(105)

—

(110)

Comprehensive income (loss)

$
(1,671)

$
326

$
(4,239)

$
864

Net income (loss) per share:

Basic

$
(0.03)

$
0.01

$
(0.08)

$
0.02

Diluted

$
(0.03)

$
0.01

$
(0.08)

$
0.02

Weighted-average shares used in computing net income (loss) per share:

Basic

51,384

52,502

51,308

52,197

Diluted

51,384

54,818

51,308

54,639


	Three Months Ended
	September 30,
	2020		2021
Revenues:
Recurring and other revenue	$	134,875	$	180,824
Interest income on funds held for clients		919		873
Total revenues		135,794		181,697
Cost of revenues		49,380		63,249
Gross profit		86,414		118,448
Operating expenses:
Sales and marketing		37,674		49,885
Research and development		18,647		23,076
General and administrative		26,644		35,235
Total operating expenses		82,965		108,196
Operating income		3,449		10,252
Other expense		(257)		(117)
Income before income taxes		3,192		10,135
Income tax benefit		(9,268)		(20,797)
Net income	$	12,460	$	30,932
Other comprehensive loss, net of tax		(223)		(75)
Comprehensive income	$	12,237	$	30,857

Net income per share:
Basic	$	0.23	$	0.56
Diluted	$	0.22	$	0.55

Weighted-average shares used in computing net income per share:
Basic		54,015		54,810
Diluted		56,050		56,506

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

(in thousands)

Stockholders’ Equity

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’


Shares

Amount

Capital

Deficit

Loss

Equity

Balances at June 30, 2017

51,738

$
52

$
192,837

$
(45,276)

$
—

$
147,613

Stock-based compensation

—

—

15,328

—

—

15,328

Stock options exercised

669

1

5,739

—

—

5,740

Issuance of common stock upon vesting of
    restricted stock units

414

—

—

—

—

—

Issuance of common stock under employee
    stock purchase plan

53

—

2,045

—

—

2,045

Net settlement for taxes and/or exercise
    price related to equity awards

(284)

—

(13,437)

—

—

(13,437)

Unrealized losses on securities, net of tax

—

—

—

—

(110)

(110)

Net income

—

—

—

974

—

974

Balances at December 31, 2017

52,590

$
53

$
202,512

$
(44,302)

$
(110)

$
158,153


	Three Months Ended September 30, 2020
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Earnings		Income		Equity
Balances at June 30, 2020	53,792	$	54	$	227,907	$	164,272	$	675	$	392,908
Stock-based compensation	—		—		15,046		—		—		15,046
Stock options exercised	88		—		529		—		—		529
Issuance of common stock upon vesting of restricted stock units	599		—		—		—		—		—
Net settlement for taxes and/or exercise price related to equity awards	(256)		—		(33,900)		—		—		(33,900)
Unrealized losses on securities, net of tax	—		—		—		—		(223)		(223)
Net income	—		—		—		12,460		—		12,460
Balances at September 30, 2020	54,223	$	54	$	209,582	$	176,732	$	452	$	386,820


	Three Months Ended September 30, 2021
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Earnings		Income (Loss)		Equity
Balances at June 30, 2021	54,594	$	55	$	241,718	$	235,091	$	66	$	476,930
Stock-based compensation	—		—		21,106		—		—		21,106
Stock options exercised	151		—		1,429		—		—		1,429
Issuance of common stock upon vesting of restricted stock units	524		—		—		—		—		—
Net settlement for taxes and/or exercise price related to equity awards	(250)		—		(62,749)		—		—		(62,749)
Unrealized losses on securities, net of tax	—		—		—		—		(75)		(75)
Net income	—		—		—		30,932		—		30,932
Balances at September 30, 2021	55,019	$	55	$	201,504	$	266,023	$	(9)	$	467,573

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Cash Flows

(in thousands)


	Three Months Ended
	September 30,
	2020		2021
Cash flows from operating activities:
Net income	$	12,460	$	30,932
Adjustments to reconcile net income to net cash used in operating activities:
Stock-based compensation expense		14,277		19,559
Depreciation and amortization expense		10,235		11,322
Deferred income tax benefit		(9,268)		(20,827)
Provision for credit losses		56		38
Net accretion of discounts and amortization of premiums on available-for-sale securities		133		90
Amortization of debt issuance costs		37		44
Other		31		27
Changes in operating assets and liabilities:
Accounts receivable		195		(173)
Deferred contract costs		(10,409)		(11,114)
Prepaid expenses and other		(2,144)		(9,807)
Accounts payable		1,611		1,567
Accrued expenses and other		(18,781)		(25,790)
Net cash used in operating activities		(1,567)		(4,132)
Cash flows from investing activities:
Purchases of available-for-sale securities		—		(135,849)
Proceeds from sales and maturities of available-for-sale securities		37,493		9,648
Capitalized internal-use software costs		(7,884)		(9,159)
Purchases of property and equipment		(2,045)		(3,220)
Acquisition of business, net of cash acquired		—		(59,581)
Net cash provided by (used in) investing activities		27,564		(198,161)
Cash flows from financing activities:
Net change in client fund obligations		51,671		1,425,782
Taxes paid related to net share settlement of equity awards		(33,402)		(60,809)
Payment of debt issuance costs		(9)		(9)
Net cash provided by financing activities		18,260		1,364,964
Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents		44,257		1,162,671
Cash, cash equivalents and funds held for clients' cash and cash equivalents—beginning of period		1,492,133		1,945,881
Cash, cash equivalents and funds held for clients' cash and cash equivalents—end of period	$	1,536,390	$	3,108,552
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Purchases of property and equipment and internal-use software, accrued but not paid	$	1,479	$	3,079
Liabilities assumed for acquisition	$	—	$	2,165
Supplemental Disclosure of Cash Flow Information
Cash paid for interest	$	311	$	63
Cash paid (refunds received) for income taxes	$	(119)	$	13
Reconciliation of cash, cash equivalents and funds held for clients' cash and cash equivalents to the Consolidated Balance Sheets
Cash and cash equivalents	$	221,514	$	66,431
Funds held for clients' cash and cash equivalents		1,314,876		3,042,121
Total cash, cash equivalents and funds held for clients' cash and cash equivalents	$	1,536,390	$	3,108,552

Six Months Ended

December 31,

2016

2017

Cash flows from operating activities:

Net income (loss)

$
(4,239)

$
974

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Stock-based compensation expense

12,448

14,424

Depreciation and amortization expense

9,103

13,438

Deferred income tax expense (benefit)

102

(93)

Provision for doubtful accounts

60

76

Net accretion of discounts and amortization of premiums on available-for-sale securities

—

(141)

Net realized losses on sales of available-for-sale securities

—

2

Loss on disposal of equipment

97

106

Changes in operating assets and liabilities:

Accounts receivable

(446)

(775)

Prepaid expenses and other

845

1,583

Accounts payable

46

(88)

Accrued expenses

(2,626)

(1,290)

Tenant improvement allowance

—

5,952

Net cash provided by operating activities

15,390

34,168

Cash flows from investing activities:

Purchases of available-for-sale securities from funds held for clients

—

(95,207)

Proceeds from sales and maturities of available-for-sale securities from funds held for clients

—

23,181

Net change in funds held for clients' cash and cash equivalents

147,151

(331,078)

Capitalized internal-use software costs

(6,279)

(7,146)

Purchases of property and equipment

(10,038)

(7,998)

Lease allowances used for tenant improvements

—

(5,952)

Net cash provided by (used in) investing activities

130,834

(424,200)

Cash flows from financing activities:

Net change in client fund obligations

(147,151)

403,243

Proceeds from employee stock purchase plan

1,823

2,045

Taxes paid related to net share settlement of equity awards

(5,135)

(7,697)

Net cash provided by (used in) financing activities

(150,463)

397,591

Net Change in Cash and Cash Equivalents

(4,239)

7,559

Cash and Cash Equivalents—Beginning of Period

86,496

103,468

Cash and Cash Equivalents—End of Period

$
82,257

$
111,027

Supplemental Disclosure of Non-Cash Investing and Financing Activities

Purchase of property and equipment and internal-use software, accrued but not paid

$
2,172

$
482

Supplemental Disclosure of Cash Flow Information

Cash paid for income taxes, net of refunds

$
26

$
60

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

PAYLOCITY HOLDING CORPORATION

Notes to the Unaudited Consolidated Financial Statements

(all amounts in thousands, except per share data)

(1) Organization and Description of Business

Paylocity Holding Corporation (the “Company”)~~, through its wholly owned subsidiary, Paylocity Corporation,~~ is a cloud-based provider of payroll and human capital management software ~~solutions for medium-sized organizations.~~solutions. Services are provided in a Software-as-a-Service (“SaaS”) delivery model utilizing the Company’s cloud-based platform. ~~Payroll services include collection, remittance and reporting~~The Company’s comprehensive product suite, comprised of payroll, ~~liabilities~~human capital management, workforce management, talent management, benefits, modern workforce solutions and analytics & insights, delivers a unified platform that allows clients to ~~the appropriate federal, state~~make strategic decisions while promoting a modern workplace and ~~local authorities.~~improving employee engagement.

(2) Summary of Significant Accounting Policies

(a) Basis of Presentation, Consolidation and Use of Estimates

These unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The unaudited consolidated financial statements include the accounts of the Company and its wholly owned ~~subsidiary.~~subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the allowance for doubtful accounts, internal-use software, valuation and useful lives of long-lived assets, definite-lived intangibles, goodwill, incurred but not reported medical and dental claims, stock-based compensation, valuation of deferred income tax assets and liabilities and the best estimate of selling price for revenue recognition purposes. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. Accounting estimates used in the preparation of these consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes.

(b) Interim Unaudited Consolidated Financial Information

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the Company’s financial position, results of operations, changes in stockholders’ equity and cash flows. The results of operations for ~~the~~ three ~~and six~~ months ended ~~December 31, 2017~~September 30, 2021 are not necessarily indicative of the results for the full year or the results for any future periods. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended June 30, ~~2017~~2021 included in the Company’s Annual Report on Form ~~10-K filed with the SEC on August 11, 2017.~~10-K.

Funds held for clients is primarily comprised of cash and cash equivalents invested in demand deposit accounts. Starting in July 2017, the Company also invested a portion of its funds held for clients in marketable securities.

Marketable securities classified as available-for-sale are recorded at fair value on the consolidated balance sheets. Unrealized gains and losses, net of applicable income taxes, are reported as other comprehensive income (loss) in the consolidated statements of operations and comprehensive income (loss). Interest on marketable securities included in

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~~funds held for clients is reported as interest income on funds held for clients on the consolidated statements of operations and comprehensive income (loss).~~

The Company reviews the composition of its portfolio for any available-for-sale security that has a fair value that falls below its amortized cost. If any security fits this criterion, the Company further evaluates whether other-than-temporary impairment exists by considering whether the Company has the intent and ability to retain the security for a period of time sufficient enough to allow for anticipated fair value recovery. The Company did not record any other-than-temporary impairment charges during the three or six months ended December 31, 2017.

~~(d)~~ Income Taxes

Income taxes are accounted for in accordance with ASC 740, Income Taxes,, using the asset and liability method. The Company’s provision for income taxes is based on the annual effective rate method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning

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strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their ~~net recorded~~net-recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

~~(e)~~ ~~Stock-Based Compensation~~

The Company recognizes all employee stock-based compensation as a cost in the financial statements. Equity-classified awards, including those under the 2014 Employee Stock Purchase Plan (“ESPP”), are measured at the grant date fair value of the award and expense is recognized, net of assumed forfeitures, on a straight-line basis over the requisite service period for each separately vesting portion of the award. The Company estimates grant date fair value using the Black-Scholes option-pricing model and periodically updates the assumed forfeiture rates for actual experience over the option vesting term or the term of the ESPP purchase period.

~~(f)~~ (d) Recently Issued Accounting Standards

~~In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~ (Topic 606) (“ASU 2014-09”). ASU 2014-09 supersedes a majority of existing revenue recognition guidance under US GAAP, and requires companies to recognize revenue when it transfers goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled. Companies may need to apply more judgment and estimation techniques or methods while recognizing revenue, which could result in additional disclosures to the financial statements. In addition, in March 2016, April 2016, May 2016 and December 2016 the FASB issued ASU 2016-08, ~~Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)~~ ~~(“ASU 2016-08”), ASU 2016-10,~~ ~~Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing~~ ~~(“ASU 2016-10”), ASU 2016-12,~~ ~~Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients~~ ~~(“ASU 2016-12”) and ASU 2016-20,~~ ~~Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers~~ (“ASU 2016-20”), respectively, to amend certain guidance in ASU 2014-09. Topic 606 allows for either a retrospective or cumulative effect transition method. ASU 2014-09 was originally effective for fiscal years beginning after December 15, 2016. In July 2015, the FASB approved a one-year deferral of ASU 2014-09 and all amendments to it, with a new effective date for fiscal years beginning after December 15, 2017 with early adoption permitted as of the original effective date.

The Company currently expects to adopt the new standard in its fiscal year beginning July 1, 2018 using the full retrospective method. While the impact the new revenue recognition standard will have on its consolidated financial statements and disclosures has not yet been fully assessed, the Company currently expects that there will be a material impact in the manner in which it treats certain costs of obtaining new contracts (i.e., selling and commission costs). The

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new standard will require the Company to defer these costs and amortize them versus current treatment of expensing these costs as incurred. The Company is continuing to evaluate all potential impacts as well as the changes required for systems, processes and internal controls to meet the new standard’s reporting and disclosure requirements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) which amends various aspects of existing guidance for leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease with terms greater than twelve months, along with additional qualitative and quantitative disclosures. ASU 2016-02 also requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the potential effects of these changes to its consolidated financial statements and expects to adopt this new standard in its fiscal year beginning July 1, 2019.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”) which modifies accounting for excess tax benefits and tax deficiencies, forfeitures, and employer tax withholding requirements. ASU 2016-09 also clarifies certain classifications on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company adopted this standard effective July 1, 2017. Due to the Company’s tax valuation allowance, the adoption of this standard did not have a material impact on its consolidated financial statements and disclosures. The Company will continue to estimate forfeitures at each reporting period, rather than electing an accounting policy change to record the impact of such forfeitures as they occur.

From time to time, new accounting pronouncements are issued by the ~~FASB~~Financial Accounting Standards Board or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of other recently issued standards that are not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption.

(3) Revenue

The Company derives its revenue from contracts predominantly from recurring and non-recurring service fees. While the majority of its agreements are generally cancellable by the client on 60 days’ notice or less, the Company also offers term agreements to its clients, which are generally two years in length. Recurring fees are derived from payroll, timekeeping, and HR-related cloud-based computing services. The majority of the Company’s recurring fees are satisfied over time as services are provided. The performance obligations related to payroll services are satisfied upon the processing of the client’s payroll with the fee charged and collected based on a per employee per payroll frequency fee. The performance obligations related to time and attendance services and HR related services are satisfied over time each month with the fee charged and collected based on a per employee per month fee. For subscription-based fees which can include payroll, time and attendance, and HR related services, the Company recognizes the applicable recurring fees over time each month with the fee charged and collected based on a per employee per month fee. Non-recurring service fees consist mainly of nonrefundable implementation fees, which involve setting the client up in, and loading data into, the Company’s cloud-based modules. These implementation activities are considered set-up activities. The Company has determined that the nonrefundable upfront fees provide certain clients with a material right to renew the contract.

Disaggregation of revenue

The following table disaggregates revenue by Recurring fees and Implementation services and other, which the Company believes depicts the nature, amount and timing of its revenue:


	Three Months Ended
	September 30,
	2020		2021
Recurring fees	$	129,692	$	174,697
Implementation services and other		5,183		6,127
Total revenues from contracts	$	134,875	$	180,824

Deferred revenue

The timing of revenue recognition for recurring revenue is consistent with the timing of invoicing as they occur simultaneously based on the client’s payroll frequency or by month for subscription-based fees. As such, the Company does not recognize contract assets or liabilities related to recurring revenue.

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The nonrefundable upfront fees related to implementation services are invoiced with the client’s first payroll period. The Company defers and amortizes these nonrefundable upfront fees generally over a period up to 24 months based on the type of contract. The following table summarizes the changes in deferred revenue (i.e. contract liability) related to these nonrefundable upfront fees as follows:


	Three Months Ended
	September 30,
	2020		2021
Balance at beginning of the period	$	8,434	$	8,734
Deferral of revenue		3,130		4,353
Revenue recognized		(3,894)		(4,370)
Balance at end of the period	$	7,670	$	8,717

Deferred revenue related to these nonrefundable upfront fees are recorded within Accrued expenses and Other long-term liabilities on the Unaudited Consolidated Balance Sheets. The Company expects to recognize these deferred revenue balances of $6,231 in fiscal 2022, $2,351 in fiscal 2023 and $135 in fiscal 2024 and thereafter.

Deferred contract costs

The Company defers certain selling and commission costs that meet the capitalization criteria under ASC 340-40. The Company also capitalizes certain costs to fulfill a contract related to its proprietary products if they are identifiable, generate or enhance resources used to satisfy future performance obligations and are expected to be recovered under ASC 340-40. Implementation fees are treated as nonrefundable upfront fees and the related implementation costs are required to be capitalized and amortized over the expected period of benefit, which is the period in which the Company expects to recover the costs and enhance its ability to satisfy future performance obligations.

The Company utilizes the portfolio approach to account for both the cost of obtaining a contract and the cost of fulfilling a contract. These capitalized costs are amortized over the expected period of benefit, which has been determined to be over 7 years based on the Company’s average client life and other qualitative factors, including rate of technological changes. The Company does not incur any additional costs to obtain or fulfill contracts upon renewal. The Company recognizes additional selling and commission costs and fulfillment costs when an existing client purchases additional services. These additional costs only relate to the additional services purchased and do not relate to the renewal of previous services.

The following tables present the deferred contract costs and the related amortization expense for these deferred contract costs:


	Three Months Ended September 30, 2020
	Beginning		Capitalized				Ending
	Balance		Costs		Amortization		Balance
Costs to obtain a new contract	$	113,575	$	11,641	$	(6,572)	$	118,644
Costs to fulfill a contract		44,468		7,361		(2,021)		49,808
Total	$	158,043	$	19,002	$	(8,593)	$	168,452


	Three Months Ended September 30, 2021
	Beginning		Capitalized				Ending
	Balance		Costs		Amortization		Balance
Costs to obtain a new contract	$	145,718	$	11,737	$	(8,233)	$	149,222
Costs to fulfill a contract		69,175		10,940		(3,330)		76,785
Total	$	214,893	$	22,677	$	(11,563)	$	226,007

Deferred contract costs are recorded within Deferred contract costs and Long-term deferred contract costs on the Unaudited Consolidated Balance Sheets. Amortization of deferred contract costs is recorded in Cost of revenues, Sales and marketing, and General and administrative in the Unaudited Consolidated Statements of Operations and Comprehensive Income.

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Remaining Performance Obligations

The balance of the Company’s remaining performance obligations related to minimum monthly fees on its term-based contracts was approximately $45,484 as of September 30, 2021, which will be generally recognized over the next 24 months. This balance excludes the value of unsatisfied performance obligations for contracts that have an original expected duration of one year or less and contracts for which the variable consideration is allocated entirely to wholly unsatisfied performance obligations.

(4) Business Combinations

On August 31, 2021, the Company entered into an Equity Purchase Agreement (the “Purchase Agreement”) with Blue Marble Payroll, LLC (“Blue Marble”) and its equity holders and acquired all of the issued and outstanding equity interests of Blue Marble for cash consideration of $60,309, subject to working capital and certain other customary purchase price adjustments. Blue Marble’s payroll platform enables U.S.-based companies to manage payroll for employees outside the U.S. in line with complex local and country-specific requirements across many countries. This acquisition enables the Company to better serve its clients in managing their international workforces through a unified solution to pay employees, automate processes and stay compliant with regulations in other countries.

An entity affiliated with Steven I. Sarowitz, the Chairman of the Board of Directors and the largest shareholder of the Company, was the largest equity holder of Blue Marble. The Board of Directors of the Company appointed the Audit Committee, which is comprised solely of directors who are independent of the management of Blue Marble, the Blue Marble equity holders and the Company, to evaluate, assess and negotiate on its behalf the terms and conditions in the Purchase Agreement. The Audit Committee and the disinterested directors of the Company’s Board of Directors unanimously approved the Purchase Agreement and transactions specified within it.

The Company accounts for business combinations in accordance with ASC 805, Business Combinations. The Company applied the acquisition method of accounting and recorded the assets acquired and liabilities assumed at their respective estimated fair values as of the date of acquisition with the excess consideration paid recorded as goodwill. The fair values of assets acquired and liabilities assumed are currently provisional and may change as the estimates and assumptions are subject to change over the measurement period as the Company continues to evaluate and analyze the transaction. The measurement period will end no later than one year from the acquisition date.

The preliminary allocation of the purchase price for Blue Marble is as follows:


	August 31, 2021
Proprietary technology	$	21,200
Client relationships		3,100
Trade names		1,200
Goodwill		34,372
Other assets acquired		2,602
Liabilities assumed		(2,165)
Total purchase price	$	60,309

The results from this acquisition have been included in the Company’s consolidated financial statements since the closing of the acquisition and are not material to the Company. Pro forma information was not presented because the effect of the acquisition was not material to the Company’s consolidated financial statements. The goodwill related to this transaction is primarily related to the assembled workforce and growth opportunities from the expansion of the Company’s product offerings. The goodwill associated with this acquisition is deductible for income tax purposes. Direct costs related to the acquisition were immaterial and recorded as General and administrative expenses as incurred.

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(5) Balance Sheet Information

The following tables provide details of selected consolidated balance sheet items:

Activity in the allowance for ~~doubtful~~credit losses related to accounts receivable was as follows:


Balance at June 30, 2017	$	266

Balance at June 30, 2021			$	800
Charged to expense		76		38
Write-offs		(85)		(44)
Balance at December 31, 2017	$	257
Balance at September 30, 2021			$	794

Capitalized internal-use software and accumulated amortization were as follows:


	June 30,		September 30,
	2021		2021
Capitalized internal-use software	$	150,922	$	160,751
Accumulated amortization		(105,904)		(112,032)
Capitalized internal-use software, net	$	45,018	$	48,719

June 30,

December 31,

2017

2017

Capitalized internal-use software

$
49,663

$
57,758

Accumulated amortization

(32,269)

(38,972)

Capitalized internal-use software, net

$
17,394

$
18,786

Amortization of capitalized internal-use software costs is included in Cost of ~~Revenues-Recurring Revenues~~revenues and amounted to ~~$1,950~~$5,386 and ~~$3,314~~$6,128 for the three months ended ~~December 31, 2016~~September 30, 2020 and ~~2017, respectively, and $3,634 and $6,703 for the six months ended December 31, 2016 and 2017,~~2021, respectively.

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Property and equipment, net consist of the following:


	June 30,		December 31,
	2017		2017

					June 30,		September 30,
					2021		2021
Office equipment	$	3,591	$	3,797	$	5,211	$	5,327
Computer equipment		24,411		27,567		45,420		50,055
Furniture and fixtures		7,547		8,821		13,104		13,350
Software		4,954		5,008		6,641		7,091
Leasehold improvements		21,426		29,324		46,814		47,191
Time clocks rented by clients		4,240		4,489		5,399		5,769
Total		66,169		79,006		122,589		128,783
Accumulated depreciation		(25,413)		(30,652)		(62,754)		(66,518)
Property and equipment, net	$	40,756	$	48,354	$	59,835	$	62,265

Depreciation expense amounted to ~~$2,504~~$4,005 and ~~$3,092~~$3,842 for the three months ended ~~December 31, 2016~~September 30, 2020 and ~~2017, respectively, and $4,707 and $6,017 for~~2021, respectively.

The following table summarizes changes in goodwill during the ~~six~~three months ended ~~December 31, 2016~~September 30, 2021:


	September 30,
	2021
Balance at June 30, 2021	$	33,650
Additions attributable to acquisition		34,372
Balance at September 30, 2021	$	68,022

Refer to Note 4 for further details on the current year acquisition.

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The Company’s amortizable intangible assets and ~~2017, respectively.~~estimated useful lives are as follows:


					Weighted
					average
	June 30,		September 30,		useful
	2021		2021		life (years)
Proprietary technology	$	6,129	$	27,329	6.6
Client relationships		19,200		22,300	7.8
Non-solicitation agreements		1,600		1,600	3.1
Trade names		440		1,640	5.0
Total		27,369		52,869
Accumulated amortization		(14,342)		(15,694)
Intangible assets, net	$	13,027	$	37,175

~~Intangible assets, net consist of the following:~~

Weighted

Average

June 30,

December 31,

Useful


2017

2017

Life

Client relationships

$
12,580

$
12,580

9 years

Non-solicitation agreements

360

360

2 - 3 years

Total

12,940

12,940

Accumulated amortization

(4,033)

(4,751)

Intangible assets, net

$
8,907

$
8,189

Amortization expense for acquired intangible assets was ~~$381~~$844 and ~~$359~~$1,352 for the three months ended ~~December 31, 2016~~September 30, 2020 and ~~2017, respectively, and $762 and $718 for the six months ended December 31, 2016 and 2017,~~2021, respectively.

Future amortization expense for acquired intangible assets as of September 30, 2021 is as ~~follows, as of December 31, 2017:~~follows:

Remainder of fiscal 2018

$
709

Fiscal 2019

1,398

Fiscal 2020

1,398

Fiscal 2021

1,398

Fiscal 2022

1,398

Thereafter

1,888

Total

$
8,189


Remainder of fiscal 2022	$	5,981
Fiscal 2023		7,808
Fiscal 2024		6,803
Fiscal 2025		5,748
Fiscal 2026		4,129
Thereafter		6,706
Total	$	37,175

The components of accrued expenses were as follows:


	June 30,		December 31,
	2017		2017

					June 30,		September 30,
					2021		2021
Accrued payroll and personnel costs	$	25,131	$	22,405	$	73,969	$	46,220
Operating lease liabilities						7,549		7,729
Deferred revenue						9,442		10,167
Other		5,170		6,723		12,149		16,901
Total accrued expenses	$	30,301	$	29,128	$	103,109	$	81,017

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~~(4)~~(6) Corporate Investments and Funds Held for Clients

Corporate investments and ~~Corporate Investments~~

~~Investments~~funds held for clients consist of the ~~following as~~following:


	June 30, 2021
			Gross		Gross
	Amortized		unrealized		unrealized
Type of Issue	cost		gains		losses		Fair value
Cash and cash equivalents	$	202,287	$	—	$	—	$	202,287
Funds held for clients' cash and cash equivalents		1,743,594		—		—		1,743,594
Available-for-sale securities:
Corporate bonds		13,390		70		—		13,460
Asset-backed securities		7,062		17		—		7,079
Total available-for-sale securities (1)		20,452		87		—		20,539
Total investments	$	1,966,333	$	87	$	—	$	1,966,420

(1)

Included within the fair value of total available-for-sale securities above is $4,456 of corporate investments and $16,083 of funds held for clients.

Table of ~~December 31, 2017:~~Contents


	September 30, 2021
			Gross		Gross
	Amortized		unrealized		unrealized
Type of Issue	cost		gains		losses		Fair value
Cash and cash equivalents	$	66,431	$	—	$	—	$	66,431
Funds held for clients' cash and cash equivalents		3,042,121		—		—		3,042,121
Available-for-sale securities:
Commercial paper		70,166		5		(1)		70,170
Corporate bonds		44,305		24		(26)		44,303
Asset-backed securities		7,836		5		(1)		7,840
Certificates of deposit		15,376		2		—		15,378
U.S government agency securities		7,000		—		(18)		6,982
Other		1,880		—		(3)		1,877
Total available-for-sale securities (2)		146,563		36		(49)		146,550
Total investments	$	3,255,115	$	36	$	(49)	$	3,255,102

(2)

Included within the fair value of total available-for-sale securities above is $3,151 of corporate investments and $143,399 of funds held for clients.

Gross

Gross

Amortized

unrealized

unrealized

Type of Issue

cost

gains

losses

Fair value
Funds held for clients' cash and cash equivalents

$
1,273,819

$
—

$
(5)

$
1,273,814
Available-for-sale securities:

Corporate bonds

34,323

5

(70)

34,258
Commercial paper

25,375

—

(13)

25,362
Asset-backed securities

12,295

—

(27)

12,268
Total available-for-sale securities

71,993

5

(110)

71,888
Investments

$
1,345,812

$
5

$
(115)

$
1,345,702

~~Investments are classified as Funds held for clients on the consolidated balance sheets. Funds~~Cash and cash equivalents and funds held for clients’ cash and cash equivalents ~~included~~include demand deposit accounts, ~~commercial paper and~~ money market funds and commercial paper at June 30, 2021 and September 30, 2021.

Classification of investments on the unaudited consolidated balance sheets is as ~~of December 31, 2017.~~follows:


	June 30,		September 30,
	2021		2021
Cash and cash equivalents	$	202,287	$	66,431
Corporate investments		4,456		3,151
Funds held for clients		1,759,677		3,185,520
Total investments	$	1,966,420	$	3,255,102

Available-for-sale securities that have been in an unrealized loss position for a period of less than 12 months as of ~~December 31, 2017~~September 30, 2021 had fair market ~~values~~value as follows:


	Gross
	unrealized
	losses		Fair value

					September 30, 2021
					Securities in an unrealized loss
					position for less than 12 months
					Gross
					unrealized		Fair
					losses		Value
Commercial paper					$	(1)	$	20,239
Corporate bonds	$	(70)	$	31,549		(26)		27,743
Commercial paper		(13)		25,362
Asset-backed securities		(27)		12,268		(1)		3,009
Total	$	(110)	$	69,179
U.S. government agency securities						(18)		6,982
Other						(3)		1,877
Total available-for-sale securities					$	(49)	$	59,850

~~As the Company started investing funds held for clients in~~There were 0 available-for-sale securities ~~during the six months ended December 31, 2017, no~~in an unrealized loss position at June 30, 2021. As a result, 0 securities have been in an unrealized loss position for more than 12 ~~months. The Company did not make any material reclassification adjustments out~~months as of accumulated other comprehensive loss for realized gains and losses on the sale of available-for-sale securities during the three or six months ended December 31, 2017. Gross realized gains and losses on the sale of available-for-sale securities were immaterial for both the three and six months ended December 31, 2017.September 30, 2021.

The Company regularly reviews the composition of its portfolio to determine the existence of ~~other-than-temporary-impairment (“OTTI”).~~credit impairment. The Company did ~~not~~0t recognize any ~~OTTI charges in accumulated other comprehensive loss~~credit impairment losses during the three ~~or six~~ months ended ~~December 31, 2017, nor does it believe that OTTI exists in its portfolio as of December 31, 2017. The Company plans to retain the~~September 30, 2020 or 2021. All securities in ~~an unrealized loss position for a period of time sufficient enough to recover their amortized cost basis or until their maturity date. The Company believes that~~ the ~~unrealized losses on these securities were not due to deterioration in credit risk. The securities in an unrealized loss position~~Company’s portfolio held an A-1 rating or better as of ~~December 31, 2017.~~September 30, 2021.

The Company did not make any material reclassification adjustments out of accumulated other comprehensive income for realized gains and losses on the sale of available-for-sale securities during the three months ended

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September 30, 2020 or 2021. There were 0 realized gains or losses on the sale of available-for-sale securities for the three months ended September 30, 2020 and 2021.

Expected maturities of available-for-sale securities at ~~December 31, 2017~~September 30, 2021 are as follows:


	Amortized
	cost		Fair value

					Amortized		Fair
					cost		value
One year or less	$	54,968	$	54,912	$	102,679	$	102,708
One year to two years		15,421		15,368		25,865		25,855
Two years to three years		1,604		1,608		9,958		9,941
Three years to five years						8,061		8,046
Total available-for-sale securities	$	71,993	$	71,888	$	146,563	$	146,550

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~~(5)~~(7) Fair Value Measurement

~~The Company applies the fair value measurement and disclosure provisions of ASC 820, Fair Value Measurements and Disclosures, and ASU 2011-04,~~ ~~Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS~~. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

●

Level 1—Quoted prices in active markets for identical assets and liabilities.

●

Level 2—Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

●

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company measures ~~any~~certain cash and cash equivalents, accounts receivable, accounts payable and client fund obligations at fair value on a recurring basis using Level 1 inputs. The Company considers the recorded value of these financial assets and liabilities to approximate the fair value of the respective assets and liabilities at June 30, ~~2017~~2021 and ~~December 31, 2017~~September 30, 2021 based upon the short-term nature of these assets and liabilities.

Marketable securities, consisting of securities classified as available-for-sale as well as certain cash equivalents, are recorded at fair value on a recurring basis using Level 2 inputs obtained from an independent pricing service. Available-for-sale securities include commercial paper, corporate bonds, asset-backed securities ~~corporate bonds~~ and ~~commercial paper.~~U.S. treasury securities. The independent pricing service utilizes a variety of inputs including benchmark yields, broker/dealer quoted prices, reported trades, issuer spreads as well as other available market data. The Company, on a sample basis, validates the pricing from the independent pricing service against another third-party pricing source for reasonableness. The Company has not adjusted any prices obtained by the independent pricing service, as it believes they are appropriately valued. There were no0 available-for-sale securities classified in Level 3 of the fair value hierarchy at ~~December 31, 2017, and the Company did not transfer assets between Levels during the six months ended December 31, 2017. The Company did not hold any marketable securities at~~ June 30, ~~2017.~~2021 or September 30, 2021.

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The fair value level for the ~~funds held for clients’~~Company’s cash and cash equivalents and available-for-sale securities ~~as of December 31, 2017~~ is as follows:


	Total		Level 1		Level 2		Level 3

									June 30, 2021
									Total		Level 1		Level 2		Level 3
Cash and cash equivalents									$	202,287	$	202,287	$	—	$	—
Funds held for clients' cash and cash equivalents	$	1,273,814	$	1,245,955	$	27,859	$	—		1,743,594		1,743,594		—		—
Available-for-sale securities:
Corporate bonds		34,258				34,258				13,460		—		13,460		—
Commercial paper		25,362				25,362
Asset-backed securities		12,268				12,268				7,079		—		7,079		—
Total available-for-sale securities		71,888		—		71,888		—		20,539		—		20,539		—
Investments	$	1,345,702	$	1,245,955	$	99,747	$	—
Total investments									$	1,966,420	$	1,945,881	$	20,539	$	—


	September 30, 2021
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	66,431	$	66,431	$	—	$	—
Funds held for clients' cash and cash equivalents		3,042,121		3,030,371		11,750		—
Available-for-sale securities:
Commercial paper		70,170		—		70,170		—
Corporate bonds		44,303		—		44,303		—
Asset-backed securities		7,840		—		7,840		—
Certificates of deposit		15,378		—		15,378		—
U.S government agency securities		6,982		—		6,982		—
Other		1,877		—		1,877		—
Total available-for-sale securities		146,550		—		146,550		—
Total investments	$	3,255,102	$	3,096,802	$	158,300	$	—

(8) Debt

In July 2019, the Company entered into a five-year revolving credit agreement with PNC Bank, National Association, and other lenders, which is secured by substantially all of the Company’s assets, subject to certain restrictions. The revolving credit agreement provides for a senior secured revolving credit facility (the “credit facility”) under which the Company may borrow up to $250,000, which may be increased to up to $375,000, subject to obtaining additional lender commitments and certain approvals and satisfying other requirements. The credit facility is scheduled to expire in July 2024. There were 0 borrowings under the credit facility at June 30, 2021 or September 30, 2021.

The proceeds of any borrowings are to be used to fund working capital, capital expenditures and general corporate purposes, including permitted acquisitions, permitted investments, permitted distributions and share repurchases. The Company may generally borrow, prepay and reborrow under the credit facility and terminate or reduce the lenders’ commitments at any time prior to revolving credit facility expiration without a premium or a penalty, other than customary “breakage” costs with respect to London Interbank Offered Rate (“LIBOR”) revolving loans.

Any borrowings under the credit facility will generally bear interest, at the Company’s option, at a rate per annum determined by reference to either the LIBOR (or a replacement index for the LIBOR rate) or an adjusted base rate, in each case plus an applicable margin ranging from 0.875% to 1.375% and 0.0% to 0.375%, respectively, based on the then-applicable net senior secured leverage ratio. Additionally, the Company is required to pay certain commitment, letter of credit fronting and letter of credit participation fees on available and/or undrawn portions of the credit facility.

Under the credit facility, the Company is required to comply with certain customary affirmative and negative covenants, including a requirement to maintain a maximum net total leverage ratio of not greater than 4.00 to 1.00, a maximum net senior secured leverage ratio of not greater than 3.50 to 1.00 and a minimum interest coverage ratio of not less than 3.00 to 1.00. As of September 30, 2021, the Company was in compliance with all of the aforementioned covenants.

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(9) Stock-Based Compensation

~~(6) Benefit Plans~~

~~(a)~~ ~~Equity Incentive Plan~~

The Company maintains a 2008 Equity Incentive Plan (the “2008 Plan”) and a 2014 Equity Incentive Plan (the “2014 Plan”) pursuant to which the Company has reserved shares of its common stock for issuance to its employees, directors and non-employee third parties. The 2014 Plan serves as the successor to the 2008 Plan and permits the granting of ~~options to purchase common~~restricted stock units and other equity incentives at the discretion of the compensation committee of the Company’s board of directors. NoNaN new awards have been or will be issued under the 2008 Plan since the effective date of the 2014 Plan. Outstanding awards under the 2008 Plan continue to be subject to the terms and conditions of the 2008 Plan. The number of shares of common stock reserved for issuance under the 2014 Plan ~~will~~may increase ~~automatically~~ each calendar year, continuing through and including January 1, 2024. The number of shares added each year ~~will~~may be equal to the lesser of (a) four and five tenths percent (4.5%) of the number of shares of common stock of the Company issued and outstanding on the immediately preceding December 31, or (b) an amount determined by the Company’s board of directors.

As of ~~December 31, 2017,~~September 30, 2021, the Company had ~~11,589~~12,053 shares allocated to the plans, of which ~~3,940~~2,052 shares were subject to outstanding options or awards. Generally, the Company issues previously unissued shares for the exercise of stock options or vesting of awards; however, shares previously subject to 2014 Plan grants or awards that are forfeited or net settled at exercise or release may be reissued to satisfy future issuances.

The following table summarizes changes in the number of shares available for grant under the Company’s equity incentive plans during the ~~six~~three months ended ~~December 31, 2017:~~September 30, 2021:


	Number of Shares
Available for grant at July 1, ~~2017~~2021	~~8,227~~	10,312
RSUs granted	~~(845)~~(523)
MSUs granted	(44)
Shares withheld in settlement of taxes and/or exercise price	~~284~~	250
Forfeitures	28	51
Shares removed	(45)
Available for grant at ~~December 31, 2017~~September 30, 2021	~~7,649~~	10,001

Shares removed represents forfeitures of shares and shares withheld in settlement of taxes and/or payment of exercise price related to grants made under the 2008 Plan. As noted above, no0 new awards will be issued under the 2008 Plan.

Stock-based compensation expense related to ~~stock options,~~ restricted stock units (“RSUs”), market share units (“MSUs”) and the Employee Stock Purchase Plan ~~(as described below)~~ is included in the following line items in the accompanying unaudited consolidated statements of operations and comprehensive ~~income (loss):~~income:


	Three Months Ended December 31,				Six Months Ended December 31,
	2016		2017		2016		2017
Cost of revenue – recurring	$	593	$	734	$	1,136	$	1,356
Cost of revenue – non-recurring		367		377		668		749

									Three Months Ended September 30,
									2020		2021
Cost of revenues									$	1,832	$	2,607
Sales and marketing		1,683		2,205		3,208		4,143		3,880		5,159
Research and development		870		945		1,664		1,816		2,230		3,702
General and administrative		3,122		3,557		5,772		6,360		6,335		8,091
Total stock-based compensation expense	$	6,635	$	7,818	$	12,448	$	14,424	$	14,277	$	19,559

In addition, the Company capitalized ~~$500~~$769 and ~~$471~~$1,547 of stock-based compensation expense in its capitalized internal-use software costs in the three months ended ~~December 31, 2016~~September 30, 2020 and ~~2017, respectively,~~2021, respectively.

In August 2020, the compensation committee of the Company’s board of directors approved the modification of the performance targets for vesting of the performance-based restricted stock units granted in fiscal 2020. The Company recorded $860 and ~~$872 and $904~~$1,243 in stock-based compensation expense during the ~~six~~three months ended ~~December 31, 2016~~September 30, 2020 and ~~2017, respectively.~~2021, respectively, related to these modified performance-based restricted stock units.

Under the 2008 and 2014 Plans, the exercise price of each option cannot be less than the fair value of a share of common stock on the grant date. The options typically vest ratably over a three or four year period and expire 10 years

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from the grant date. Stock-based compensation expense for the fair value of the options at their grant date is recognized ratably over the vesting schedule for each separately vesting portion of the award.

There were no0 stock options granted during the ~~six~~three months ended ~~December 31, 2016~~September 30, 2020 or ~~2017.~~2021. The table below presents stock option activity during the ~~six~~three months ended ~~December 31, 2017:~~September 30, 2021:

Outstanding Options






Weighted


Weighted

average

average

remaining

Aggregate

Number of

exercise

contractual

intrinsic

shares

price

term (years)

value

Balance at July 1, 2017

2,751

$
11.54

5.69

$
92,556

Options forfeited

(4)

$
17.00

Options exercised

(669)

$
8.58

Balance at December 31, 2017

2,078

$
12.48

5.52

$
72,068

Options exercisable at December 31, 2017

1,951

$
11.36

5.42

$
69,856

Options vested and expected to vest at December 31, 2017

2,072

$
12.43

5.52

$
71,981


	Outstanding Options
				Weighted
		Weighted		average
		average		remaining	Aggregate
	Number of	exercise		contractual	intrinsic
	shares	price		term (years)	value
Balance at July 1, 2021	765	$	16.06	2.4	$	133,550
Options exercised	(151)	$	9.46
Balance at September 30, 2021	614	$	17.69	2.3	$	161,112
Options vested and exercisable at September 30, 2021	614	$	17.69	2.3	$	161,112

The total intrinsic value of options exercised was ~~$1,648~~$11,408 and ~~$23,875~~$35,868 during the three months ended ~~December 31, 2016~~September 30, 2020 and 2017, respectively, and $5,539 and $27,255 during the six months ended December 31, 2016 and 2017, respectively. At December 31, 2017, there was $365 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.06 years.2021.

The Company ~~may also grant~~grants RSUs under the 2014 Plan with terms determined at the discretion of the compensation committee of the Company’s board of directors. RSUs generally vest over three or four years following the grant date. Certain RSU awards have time-based vesting conditions while other ~~RSU awards are~~RSUs vest based on the achievement of certain revenue ~~and~~growth and/or Adjusted EBITDA ~~targets in future fiscal years.~~ margin targets. For these performance-based RSUs, the Company recognizes stock-based compensation expense based upon the probable or actual achievement of these aforementioned performance metrics.

The following table represents restricted stock unit activity during the ~~six~~three months ended ~~December 31, 2017:~~September 30, 2021:


	Units	Weighted average grant date fair value
RSU balance at July 1, 2017	1,455	$	39.96

				Units	Weighted average grant date fair value
RSU balance at July 1, 2021				1,388	$	100.33
RSUs granted	845	$	45.72	523	$	250.22
RSUs vested	(414)	$	39.37	(524)	$	83.27
RSUs forfeited	(24)	$	41.41	(46)	$	135.51
RSU balance at December 31, 2017	1,862	$	42.68
RSUs expected to vest at December 31, 2017	1,605	$	42.48
RSU balance at September 30, 2021				1,341	$	164.71
RSUs expected to vest at September 30, 2021				1,226	$	162.92

At ~~December 31, 2017,~~September 30, 2021, there was ~~$40,457~~$148,712 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock units granted. That cost is expected to be recognized over a weighted average period of ~~1.94~~2.2 years.

~~(b)~~ ~~Employee Stock Purchase~~The Company also grants MSUs under the 2014 Plan

~~Under~~ with terms determined at the ~~Company’s Employee Stock Purchase Plan (“ESPP”),~~discretion of the ~~Company can grant stock purchase rights~~Committee. The actual number of MSUs that will be eligible to ~~all eligible employees during specific offering periods not to exceed twenty-seven months. Each offering period will begin~~vest is based on the ~~trading day closest~~achievement of a relative total shareholder return (“TSR”) target as compared to ~~May 16~~the TSR realized by each of the companies comprising the Russell 3000 Index over an approximately three-year period. The MSUs cliff-vest at the end of the TSR measurement period, and ~~November 16 of each year. Shares are purchased through employees’ payroll deductions,~~ up to ~~a maximum of 10% of employees’ compensation for each purchase period, at a purchase price equal to 85%~~200% of the lesser of the fair market value of the Company’s common stock at the first trading day of the applicable offering period or the purchase date. Participants may purchase up to $25 worth of common stock or 2 shares of common stock in any one year. The ESPP is considered compensatory and results in compensation expense.

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~~As of December 31, 2017, a total of 771 shares of common stock were reserved for future issuances under the ESPP. The~~target number of shares subject to each MSU are eligible to be earned.

Table of common stock reserved for issuance under the ESPP will increase automatically each calendar year, continuing through and including January 1, 2024. The number of shares added each year will be equal to the lesser of (a) 400, (b) seventy-five one hundredths percent (0.75%) of the number of shares of common stock of the Company issued and outstanding on the immediately preceding December 31, or (c) an amount determined by the Company’s board of directors.Contents

The ~~Company issued 53 shares upon the completion of its six-month offering period ending November 15, 2017. The Company recorded compensation expense attributable to the ESPP of $319 and $309 for~~following table represents market share unit activity during the three months ended ~~December 31, 2016 and 2017, respectively, and $663 and $648 for~~September 30, 2021:


	Units	Weighted average grant date fair value
MSU balance at July 1, 2021	58	$	178.04
MSUs granted	44	$	355.60
MSUs forfeited	(5)	$	178.04
MSU balance at September 30, 2021	97	$	257.87

The Company estimated the ~~six months ended December 31, 2016 and 2017, respectively, which is included in the summary of stock-based compensation expense above. The~~ grant date fair value of the ~~ESPP offering periods was estimated~~MSUs using a Monte Carlo simulation model that included the following ~~weighted average~~ assumptions:


	Three Months Ended
	September 30,
	2020		2021
Valuation assumptions:
Expected dividend yield	0	%	0	%
Expected volatility	52.0	%	47.5	%
Expected term (years)	3.04		3.04
Risk‑free interest rate	0.18	%	0.43	%

Six Months Ended

December 31,

2016

2017

Valuation assumptions:

Expected dividend yield

0
%

0
%

Expected volatility

38.9 - 53.4
%

28.3 - 39.1
%

Expected term (years)

0.5

0.5

Risk‑free interest rate

0.28 - 0.61
%

1.02 - 1.35
%

At September 30, 2021, there was $18,240 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested MSUs. That cost is expected to be recognized over a period of 2.6 years.

~~(c)~~ ~~401(k)~~

(10) Litigation

On November 16, 2020, a potential class action complaint was filed against the Company with the Circuit Court of Cook County alleging that the Company violated the Illinois Biometric Information Privacy Act. The complaint seeks statutory damages, attorney’s fees and other costs. This claim is still in its earliest stages and the Company is unable to estimate any reasonably possible loss, or range of loss, with respect to this matter. The Company intends to vigorously defend against this lawsuit.

From time to time, the Company is subject to litigation arising in the ordinary course of business. Many of these matters are covered in whole or in part by insurance. In the opinion of the Company’s management, the ultimate disposition of any matters currently outstanding or threatened will not have a material adverse effect on the Company’s financial position, results of operations, or liquidity. However, these matters are subject to inherent uncertainties and could materially impact the Company’s financial position, results of operations, or liquidity based on the final disposition of these matters.

(11) Income Taxes

On March 11, 2021, the President signed the American Rescue Plan Act, 2021 into law. The bill complements the provisions set forth in the Coronavirus Aid, Relief, and the Economic Security Act (the “CARES Act”) and the Consolidated Appropriations Act, 2021, which were signed into law on March 27, 2020, and December 27, 2020, respectively. The provisions of the legislation do not have a significant impact on the Company’s income taxes.

The ~~Company maintains a 401(k) plan with a matching~~Company’s quarterly provision ~~that covers all eligible employees.~~for income taxes is based on the annual effective rate method. The ~~Company matches 50%~~Company’s quarterly provision for income taxes also includes the tax impact of ~~employees’ contributions up to 8%~~certain unusual or infrequently occurring items, if any, including changes in judgment about valuation allowances and effects of ~~their gross pay. Contributions were $775~~changes in tax laws or rates, and ~~$995~~other discrete items in the interim period in which they occur.

The Company’s effective tax rate was (290.3)% and (205.2)% for the three months ended ~~December 31, 2016~~September 30, 2020 and ~~2017, respectively, and $1,677 and $2,106~~2021, respectively. The Company’s effective tax rate for the ~~six~~three months ended ~~December 31, 2016~~September 30, 2020 and ~~2017, respectively.~~September 30, 2021 was lower than the federal statutory rate of 21% primarily due to excess tax benefits from employee stock-

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based compensation and research and development tax credits, partially offset by an increase to the valuation allowance for the period ended September 30, 2021.

~~(7)~~(12) Net Income ~~(Loss)~~ Per Share

Basic net income ~~(loss)~~ per common share is computed using the ~~weighted‑average~~weighted-average number of common shares outstanding during the period. Diluted net income ~~(loss)~~ per share is computed using the ~~weighted‑average~~weighted-average number of common shares outstanding during the period and, if dilutive, potential common shares outstanding during the period. The Company’s potential common shares consist of the incremental common shares issuable upon the exercise of stock options, the release of restricted stock units and market share units, and the shares purchasable via the employee stock purchase plan as of the balance sheet date. The following table presents the calculation of basic and diluted net income ~~(loss)~~ per share:

Three Months Ended

Six Months Ended

December 31,

December 31,


2016

2017

2016

2017

Numerator:

Net income (loss)

$
(1,671)

$
431

$
(4,239)

$
974

Denominator:

Weighted-average shares used in computing net income (loss) per share:

Basic

51,384

52,502

51,308

52,197

Weighted-average effect of potentially dilutive shares:

Employee stock options and restricted stock units

—

2,316

—

2,442

Diluted

51,384

54,818

51,308

54,639

Net income (loss) per share:

Basic

$
(0.03)

$
0.01

$
(0.08)

$
0.02

Diluted

$
(0.03)

$
0.01

$
(0.08)

$
0.02


	Three Months Ended
	September 30,
	2020		2021
Numerator:
Net income	$	12,460	$	30,932

Denominator:
Weighted-average shares used in computing net income per share:
Basic		54,015		54,810
Weighted-average effect of potentially dilutive shares:
Employee stock options, restricted stock units, market share units and employee stock purchase plan shares		2,035		1,696
Diluted		56,050		56,506

Net income per share:
Basic	$	0.23	$	0.56
Diluted	$	0.22	$	0.55

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The following table summarizes the outstanding ~~employee stock options,~~ restricted stock units and ~~shares purchasable via the employee stock purchase plan~~market share units as of ~~the balance sheet date~~September 30, 2020 and 2021 that were excluded from the diluted per share calculation for the periods presented because to include them would have been ~~anti-dilutive:~~antidilutive:


	Three Months Ended		Six Months Ended
	December 31,		December 31,
	2016	2017	2016	2017
Employee stock options	3,262	—	3,262	—

					Three Months Ended
					September 30,
					2020	2021
Market share units					58	—
Restricted stock units	1,501	5	1,501	795	462	507
Employee stock purchase plan shares	21	15	21	15
Total	4,784	20	4,784	810	520	507

~~(8) Income Taxes~~

The Company’s quarterly provision for income taxes is based on the discrete effective tax rate method. The Company’s quarterly provision for income taxes also includes the tax impact of certain unusual or infrequently occurring items, if any, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.

The Company recorded income tax expense (benefit) of $32 and $(157) for the three months ended December 31, 2016 and 2017 respectively, and $132 and $(76) for the six months ended December 31, 2016 and 2017, respectively. The Company’s effective tax rates for the three and six months ended December 31, 2016 and 2017 differ from statutory rates primarily due to the existence of a valuation allowance recorded against the preponderance of the net deferred tax assets.

The Company reviews the likelihood that it will realize the benefit of its deferred tax assets and, therefore, the need for a valuation allowance on a quarterly basis. It established a valuation allowance on all of its net deferred tax assets except for deferred tax liabilities associated with indefinite-lived intangible assets during fiscal 2014, given that the Company determined that it was more likely than not that the Company would not recognize the benefits of its net operating loss carryforwards prior to their expiration. The Company has continued to carry the valuation allowance during fiscal 2017 and for the six months ended December 31, 2017. However, it is reasonably possible within this fiscal year that the Company may release all or a portion of its valuation allowance if results and other subjective evidence continue to improve such that the deferred tax assets become more likely than not to be realizable. ~~As of December 31, 2017, the Company had no unrecognized tax benefits.~~

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Act) was signed into law. Over the long term, the Company generally expects to benefit from the lower statutory rates provided by the Act and is currently assessing all other aspects relevant to the Company. The Company operates solely in the United States; therefore, the international provisions of the Act do not apply. In accordance with ASC 740, during the second quarter the Company modified its current federal statutory rate for the year to account for the rate change. The Company recorded a $156 income tax benefit attributable to the rate change effect on the deferred tax liability for indefinite-lived intangible assets.

In response to the Act, the SEC issued SAB 118 allowing registrants to record provisional amounts to the extent a company’s accounting for the Act is incomplete. Pursuant to disclosure under SAB 118, revaluation of deferred taxes as of December 22, 2017 is incomplete. Items recorded as provisional amounts include a revaluation of deferred tax assets as of June 30, 2017. The provisional amount computed was $3,404 of income tax expense. As the Company maintains a valuation allowance against all of its deferred taxes except for a deferred tax liability related to indefinite-lived intangible assets, this expense was offset by the valuation allowance. As of December 31, 2017, the Company is still analyzing the impact of the Act with respect to the appropriate period of reversal of deferred tax assets and liabilities, as well as additional limitations on the deductibility of executive compensation and on certain meals and entertainment expenses and the related impacts to the assessment of valuation allowance. The Company needs additional time to obtain, prepare, and analyze information related to the above mentioned items before the assessment of the impact of the Act can be completed. The Company expects to complete its accounting for the effects of the Act by the end of fiscal year 2018.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The statements included herein that are not based solely on historical facts are “forward looking statements.” Such forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. Our actual results could differ materially from those anticipated by us in these forward-looking statements as a result of various factors, including those discussed below and under ~~Part II, Item 1A: “Risk Factors.”~~“Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 filed with the SEC on August 6, 2021.

Overview

We are a cloud-based provider of payroll and human capital management ~~(or “HCM”~~(“HCM”) software ~~solutions for medium-sized organizations, which we define as those having between 20 and 1,000 employees.~~solutions. Our comprehensive ~~and easy-to-use solutions enable~~product suite delivers a unified platform to create a modern workplace for our clients through automation, data-driven insights and engagement. Our product suite enables professionals to ~~manage their workforces more effectively. Our solutions help drive~~make strategic decisions in the areas of payroll, human capital ~~decision-making~~management, workforce management, talent management, benefits, modern workforce solutions and ~~improve~~analytics & insights, all while promoting a modern workplace and improving employee ~~engagement by enhancing the human resource, payroll and finance capabilities of our clients.~~engagement.

Effective management of human capital is a core function in all organizations and requires a significant commitment of resources. Medium-sized organizations operating without the infrastructure, expertise or personnel of larger enterprises are uniquely pressured to manage their human capital effectively.

~~Our solutions were specifically designed to meet the payroll and HCM needs of medium-sized organizations.~~ We designed our cloud-based platform to provide a unified suite of ~~applications~~modules using a multi-tenant architecture. Our solutions are highly flexible and configurable and feature a modern, intuitive user experience. Our platform offers automated data integration with over ~~200~~400 related third-party systems, such as 401(k), benefits and insurance provider systems.

Our Paylocity Web Pay product is our core payroll solution and was the first of our current offerings introduced into the market. We believe payroll is the most critical system of record for medium-sized organizations and an essential gateway to other HCM functionality. We have invested in, and we intend to continue to invest in, research and development to expand our product offerings and advance our platform.

We believe there is a significant opportunity to grow our business by increasing our number of clients and we intend to invest in our business to achieve this purpose. We market and sell our solutions ~~primarily~~ through our direct sales force. We have increased our sales and marketing expenses as we have added sales representatives and related sales and marketing personnel. We intend to continue to grow our sales and marketing organization across new and existing geographic territories. In addition to growing our number of clients, we intend to grow our revenue over the long term by increasing the number and quality of products that clients purchase from us. To do so, we must continue to enhance and grow the number of solutions we offer to advance our platform.

We also believe that delivering a positive service experience is an essential element of our ability to sell our solutions and retain our clients. We seek to develop deep relationships with our clients through our unified service model, which has been designed to meet the service needs of ~~medium-sized~~mid-market organizations. We expect to continue to invest in and grow our implementation and client service organization as our client base grows.

~~We believe we have the opportunity~~In order to continue to grow our business over the long term, ~~and to do so,~~ we ~~have invested, and intend to~~will continue to invest, across our entire organization. These investments include increasing the number of personnel across all functional areas, along with improving our solutions and infrastructure to support our growth. The timing and amount of these investments vary based on the rate at which we add new clients, add new personnel and scale our application development and other activities. Many of these investments will occur in advance of experiencing any direct benefit from them, which will make it difficult to determine if we are effectively allocating our resources. We expect these investments to increase our costs on an absolute basis, but as we grow our number of clients and our related revenues, we anticipate that we will gain economies of scale and increased operating leverage. As a result, we expect our gross and operating margins will improve over the long term.

AsPaylocity Holding Corporation is a Delaware corporation, which was formed in November 2013. Our business operations are conducted by our ~~business has grown, we~~wholly owned subsidiaries.

COVID-19 Impact

The novel coronavirus disease (“COVID-19”) continues to impact the global economy. The duration and severity of the COVID-19 pandemic, and the long-term effects the pandemic will have ~~become increasingly subject to the risks arising from adverse changes in domestic~~on our clients and ~~global economic conditions. If~~ general economic conditions, ~~were~~remain uncertain and difficult to ~~deteriorate, including declines~~predict. Many of our prospective and existing clients’ businesses have been impacted by business closures and other restrictive orders, which has resulted in reduced employee headcount, temporary and permanent business closures, and/or delayed sales/starts. Even though we have seen improvements in the overall macroeconomic conditions, our business and financial performance may continue to be unfavorably impacted in

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~~private sector employment growth~~future periods by fluctuations in client employee counts, reduction in business confidence and ~~business productivity, increases~~activity, a decrease in payroll and HCM solutions spending by organizations, the ~~unemployment~~pace of the macroeconomic recovery or a continued low interest rate ~~and changes in interest rates, we may experience delays~~environment, among other factors. Refer to “Part I. Item 1A. Risk Factors” in our ~~sales cycles, increased pressure from prospective customers to offer discounts~~Annual Report on Form 10-K filed with the Securities and ~~increased pressure from existing customers to renew expiring recurring revenue agreements~~Exchange Commission on August 6, 2021 for ~~lower amounts. Our interest income on funds held for clients continues to be adversely impacted by historically low interest rates.~~

Our operating subsidiary Paylocity Corporation was incorporated in July 1997 as an Illinois corporation. In November 2013, we formed Paylocity Holding Corporation, a Delaware corporation, of which Paylocity Corporation is a wholly-owned subsidiary. Paylocity Holding Corporation had no operations priorrisks related to the ~~restructuring. All of~~COVID-19 pandemic and its impact on our business ~~operations, excluding interest earned on certain cash holdings~~ and ~~expenses associated with certain secondary stock offerings, have historically been, and are currently, conducted by Paylocity Corporation, and the~~ financial ~~results presented herein are entirely attributable to the results of its operations.~~performance.

Key Metrics

We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

~~Recurring~~ Revenue Growth

Our recurring revenue model and high annual revenue retention rates provide significant visibility into our future operating results and cash flow from operations. This visibility enables us to better manage and invest in our business. ~~Recurring revenue, which is comprised of recurring fees and interest income on funds held for clients,~~Total revenues increased from ~~$66.1~~$135.8 million for the three months ended ~~December 31, 2016~~September 30, 2020 to ~~$83.1~~$181.7 million for the three months ended ~~December 31, 2017,~~September 30, 2021, representing ~~a 26%~~an 34% year-over-year increase. ~~Recurring~~The increase in year-over-year revenue ~~increased from $128.7 million for~~growth was driven by the ~~six months ended December 31, 2016~~strong performance by our sales team and an overall improvement in macroeconomic conditions compared to ~~$162.0 million for~~ the ~~six months ended December 31, 2017, representing~~prior year. Our revenue growth in future periods may continue to be impacted by fluctuations in client employee counts, potential increases in client losses, a ~~26% year-over-year increase. Recurring revenue represented 96%~~continued low interest rate environment and ~~97% of total revenue during both~~ the ~~three months and six months ended December 31, 2016 and 2017, respectively.~~

~~Recurring Fees from New Clients~~

~~We define recurring fees from new clients as the percentage of year-to-date recurring fees from all clients on our solutions which had not been on or used any of our solutions for a full year as~~pace of the start of the current fiscal year. We believe recurring fees from new clients is an important metric to measure the expansion of our existing client base as well as the growth in our client base. Our percentage of recurring fees from new clients was 36% and 30% for the three months ended December 31, 2016 and 2017, respectively, and 34% and 29% for the six months ended December 31, 2016 and 2017, respectively.macroeconomic recovery, among other factors.

Adjusted ~~Gross Profit, Adjusted Recurring~~ Gross Profit and Adjusted EBITDA

We disclose Adjusted ~~Gross Profit, Adjusted Recurring~~ Gross Profit and Adjusted EBITDA because we use them to evaluate our performance, and we believe Adjusted ~~Gross Profit, Adjusted Recurring~~ Gross Profit and Adjusted EBITDA assist in the comparison of our performance across reporting periods by excluding certain items that we do not believe are indicative of our core operating performance. We believe these metrics are used in the financial community, and we present them to enhance investors’ understanding of our operating performance and cash flows.

Adjusted ~~Gross Profit, Adjusted Recurring~~ Gross Profit and Adjusted EBITDA are not measurements of financial performance under generally accepted accounting principles in the United States ~~or GAAP,~~(“GAAP”), and you should not consider Adjusted Gross Profit as an alternative to gross profit ~~Adjusted Recurring Gross Profit as an alternative to total recurring revenues,~~ or Adjusted EBITDA as an alternative to net income or cash provided by ~~(used in)~~ operating activities, in each case as determined in accordance with GAAP. In addition, our definition of Adjusted Gross Profit ~~Adjusted Recurring Gross Profit~~ and Adjusted EBITDA may be different than the definition utilized for similarly-titled measures used by other companies.

We define Adjusted Gross Profit as gross profit before amortization of capitalized internal-use software costs, stock-based compensation expense and employer payroll taxes related to stock releases and option exercises. We define

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Adjusted Recurring Gross Profit as total recurring revenues after cost of recurring revenues and before amortization of capitalized internal-use software costs, stock-based compensation expense and employer payroll taxes related to stock releases and option exercises. We define Adjusted EBITDA as net income ~~(loss)~~ before interest expense, income tax expense, ~~(benefit),~~ depreciation and amortization expense, stock-based compensation expense and employer payroll taxes related to stock releases and option ~~exercises.~~ exercises and other items as defined below.

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The table below sets forth our Adjusted ~~Gross Profit, Adjusted Recurring~~ Gross Profit and Adjusted EBITDA for the periods presented.

Three Months Ended

Six Months Ended

December 31,

December 31,


2016

2017

2016

2017

(in thousands)

(in thousands)

Adjusted Gross Profit

$
41,194

$
53,621

$
80,494

$
104,732

Adjusted Recurring Gross Profit

$
47,912

$
61,504

$
93,735

$
120,450

Adjusted EBITDA

$
9,870

$
15,245

$
17,841

$
29,837


	Three Months Ended
	September 30,
	2020		2021

	(in thousands)
Adjusted Gross Profit	$	94,203	$	128,115
Adjusted EBITDA	$	30,864	$	46,124

Three Months Ended

Six Months Ended

December 31,

December 31,


2016

2017

2016

2017

(in thousands)

(in thousands)

Reconciliation from Gross Profit to Adjusted Gross Profit









Gross profit

$
38,271

$
49,164

$
74,934

$
95,705

Amortization of capitalized internal-use software costs

1,950

3,314

3,634

6,703

Stock-based compensation expense and employer payroll taxes related to stock releases and option exercises

973

1,143

1,926

2,324

Adjusted Gross Profit

$
41,194

$
53,621

$
80,494

$
104,732


	Three Months Ended
	September 30,
	2020		2021

	(in thousands)
Reconciliation from Gross Profit to Adjusted Gross Profit
Gross profit	$	86,414	$	118,448
Amortization of capitalized internal-use software costs		5,386		6,128
Stock-based compensation expense and employer payroll taxes related to stock releases and option exercises		2,403		3,527
Other items (1)		—		12
Adjusted Gross Profit	$	94,203	$	128,115

Three Months Ended

Six Months Ended

December 31,

December 31,


2016

2017

2016

2017

(in thousands)

(in thousands)

Reconciliation from Total Recurring Revenues to Adjusted Recurring Gross Profit









Total recurring revenues

$
66,078

$
83,075

$
128,715

$
161,986

Cost of recurring revenues

20,716

25,638

39,819

49,729

Recurring gross profit

45,362

57,437

88,896

112,257

Amortization of capitalized internal-use software costs

1,950

3,314

3,634

6,703

Stock-based compensation expense and employer payroll taxes related to stock releases and option exercises

600

753

1,205

1,490

Adjusted Recurring Gross Profit

$
47,912

$
61,504

$
93,735

$
120,450


	Three Months Ended
	September 30,
	2020		2021

	(in thousands)
Reconciliation from Net Income to Adjusted EBITDA
Net income	$	12,460	$	30,932
Interest expense		340		108
Income tax benefit		(9,268)		(20,797)
Depreciation and amortization expense		10,235		11,322
EBITDA		13,767		21,565
Stock-based compensation expense and employer payroll taxes related to stock releases and option exercises		16,737		23,756
Other items (2)		360		803
Adjusted EBITDA	$	30,864	$	46,124

Three Months Ended

Six Months Ended

December 31,

December 31,


2016

2017

2016

2017

(in thousands)

(in thousands)

Reconciliation from Net Income (Loss) to Adjusted EBITDA









Net income (loss)

$
(1,671)

$
431

$
(4,239)

$
974

Income tax expense (benefit)

32

(157)

132

(76)

Depreciation and amortization expense

4,835

6,765

9,103

13,438

EBITDA

3,196

7,039

4,996

14,336

Stock-based compensation expense and employer payroll taxes related to stock releases and option exercises

6,674

8,206

12,845

15,501

Adjusted EBITDA

$
9,870

$
15,245

$
17,841

$
29,837

(1)	Represents nonrecurring acquisition-related costs.

(2)	Represents nonrecurring costs including acquisition-related and lease exit costs.

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Basis of Presentation

Revenues

Recurring ~~Fees~~and other revenue

We derive the majority of our revenues from recurring fees attributable to our cloud-based payroll and HCM software solutions. Recurring fees for each client generally include a base fee in addition to a fee based on the number of client employees and the number of products a client uses. We also charge fees attributable to our preparation of W-2 documents and annual required filings on behalf of our clients. ~~Over~~We charge implementation fees for professional services provided to implement our payroll and HCM solutions. Implementations of our payroll solutions typically require only one to eight weeks, depending on the ~~past three years,~~size and complexity of each client, at which point the new client’s payroll is first processed using our solution. We implement additional HCM products as requested by clients and leverage the data within our payroll solution to accelerate our implementation processes. Our average client size has ~~been on average~~continued to be over 100 employees.

We derive revenue from a client based on the solutions purchased by the client, the number of client employees as well as the amount, type and timing of services provided with respect to those client employees. As such, the number of client employees on our system is not a good indicator of our financial results in any period. Recurring ~~fees attributable to our cloud-based payroll~~ and ~~HCM solutions~~other

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revenue accounted for ~~95%~~approximately all of our total revenues during ~~both~~ the three ~~and six~~ months ended ~~December 31, 2016~~September 30, 2020 and ~~2017.~~2021 respectively.

~~The~~While the majority of our agreements with clients ~~do not have a specified term and~~ are generally cancellable by the client on 60 days’ notice or less, ~~notice.~~we also have term agreements which are generally two years in length. Our agreements do not include general rights of return and do not provide clients with the right to take possession of the software supporting the services being provided. We recognize recurring fees in the period in which services are provided and ~~when collection of~~the related performance obligations have been satisfied. We defer implementation fees ~~is reasonably assured and the amount of fees is fixed or determinable.~~related to our proprietary products over a period generally up to 24 months.

Interest Income on Funds Held for Clients

We earn interest income on funds held for clients. We collect funds for employee payroll payments and related taxes in advance of remittance to employees and taxing authorities. Prior to remittance to employees and taxing authorities, we earn interest on these funds through demand deposit accounts with financial institutions with which we have automated clearing house, or ACH, arrangements. We also earn interest by investing a portion of funds held for clients in highly liquid, investment-grade marketable securities.

~~Implementation Services and Other~~Cost of Revenues

Implementation services and other revenues primarily consist of implementation fees charged to new clients for professional services provided to implement and configure our payroll and HCM solutions. Implementations of our payroll solutions typically require only three to four weeks at which point the new client’s payroll is first run using our solution, our implementation services are deemed completed, and we recognize the related revenue. We implement additional HCM products as requested by clients and leverage the data within our payroll solution to accelerate our implementation processes. Implementation services and other revenues may fluctuate significantly from quarter to quarter based on the number of new clients, pricing and the product utilization.

Cost of ~~Revenues~~

~~Cost of Recurring Revenues~~

~~Cost of recurring~~ revenues ~~is generally expensed as incurred, and~~ includes costs to provide our payroll and other HCM solutions which primarily ~~consisting~~consists of employee-related expenses, including wages, stock-based compensation, bonuses and benefits, relating to the provision of ongoing client support and implementation activities, payroll tax filing, ~~and~~ distribution of printed checks and other ~~materials. These costs also include amortization of capitalized internal-use software costs,~~materials as well as delivery costs, ~~and~~ computing costs, ~~as well as~~and bank fees associated with client fund transfers. WeEmployee costs related to recurring support are generally expensed as incurred whereas such costs for implementation of our proprietary products are capitalized and amortized over a period of 7 years. Our cost of revenues is expected to increase in absolute dollars for the foreseeable future as we increase our client base. However, we expect to realize cost efficiencies over the long term as our business scales, resulting in improved operating leverage and increased margins.

We also capitalize a portion of our internal-use software costs, which are then all amortized as ~~a cost~~Cost of ~~recurring~~ revenues. We amortized ~~$2.0~~$5.4 million and ~~$3.3~~$6.1 million of capitalized internal-use software costs during the three months ended ~~December 31, 2016~~September 30, 2020 and ~~2017, respectively, and $3.6 million and $6.7 million of capitalized internal-use software costs during the six months ended December 31, 2016 and 2017,~~2021, respectively.

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~~Cost of Implementation Services and Other~~

Cost of implementation services and other consists primarily of employee-related expenses, including wages, stock-based compensation, bonuses and benefits involved in the implementation of our payroll and other HCM solutions for new clients. Implementation costs are generally fixed in the short-term and exceed associated implementation revenue charged to each client. We intend to grow our business through acquisition of new clients, and doing so will require increased personnel to implement our solutions. Therefore our cost of implementation services and other is expected to increase in absolute dollars for the foreseeable future.

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of employee-related expenses for our direct sales and marketing staff, including wages, commissions, stock-based compensation, bonuses, ~~and~~ benefits, marketing expenses and other related costs. ~~Commissions are primarily earned~~Our sales personnel earn commissions and ~~recognized in the month when implementation is complete and the client first utilizes a service and are typically paid within two months after the start of service. Bonuses paid to sales staff~~bonuses for attainment of certain performance criteria ~~are accrued in~~based on new sales throughout the fiscal ~~year in which they are earned~~year. We capitalize certain selling and ~~are subsequently paid annually in the first fiscal quarter~~commission costs related to new contracts or purchases of ~~the following year.~~additional services by our existing clients and amortize them over a period of 7 years.

We will seek to grow our number of clients for the foreseeable future, and therefore our sales and marketing expense is expected to continue to increase in absolute dollars as we grow our sales organization and expand our marketing activities.

Research and Development

Research and development expenses consist primarily of employee-related expenses for our research and development and product management ~~staff,~~teams, including wages, stock-based compensation, bonuses and benefits. Additional expenses include costs related to the development, maintenance, quality assurance and testing of new technologies and ongoing refinement of our existing solutions. Research and development expenses, other than internal-use software costs qualifying for capitalization, are expensed as incurred.

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We capitalize a portion of our development costs related to internal-use software. The timing of our capitalized development projects may affect the amount of development costs expensed in any given period. The table below sets forth the amounts of capitalized and expensed research and development expenses for the three ~~and six~~ months ended ~~December 31, 2016~~September 30, 2020 and ~~2017.~~2021.

Three Months Ended

Six Months Ended

December 31,

December 31,


2016

2017

2016

2017

(in thousands)

(in thousands)

Capitalized portion of research and development

$
3,842

$
4,121

$
7,151

$
8,095

Expensed portion of research and development

7,222

9,274

14,523

18,169

Total research and development

$
11,064

$
13,395

$
21,674

$
26,264


	Three Months Ended September 30,
	2020		2021

	(in thousands)
Capitalized portion of research and development	$	8,116	$	9,829
Expensed portion of research and development		18,647		23,076
Total research and development	$	26,763	$	32,905

We expect to grow our research and development efforts as we continue to broaden our product offerings and extend our technological leadership by investing in the development of new technologies and introducing them to new and existing clients. We expect research and development expenses to continue to increase in absolute dollars but to vary as a percentage of total revenue on a period-to-period basis.

General and Administrative

General and administrative expenses consist primarily of employee-related costs, including wages, stock-based compensation, bonuses and benefits for our ~~administrative,~~ finance and accounting, ~~and~~legal, information systems, human resources and other administrative departments. Additional expenses include consulting and professional fees, occupancy costs, insurance and other corporate expenses. We expect our general and administrative expenses to continue to increase in absolute dollars as our company continues to grow.

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Other Income (Expense)

Other income (expense) generally consists of interest income related to interest ~~received~~earned on our cash and cash equivalents and corporate investments, net of losses on disposal of property and ~~equipment.~~equipment and interest expense related to our revolving credit facility.

Results of Operations

The following table sets forth our statements of operations data for each of the periods indicated.

Three Months Ended

Six Months Ended

December 31,

December 31,



2016

2017

2016

2017

(in thousands)

(in thousands)

Consolidated Statements of Operations Data:









Revenues:









Recurring fees

$
65,347

$
81,292

$
127,267

$
158,586

Interest income on funds held for clients

731

1,783

1,448

3,400

Total recurring revenues

66,078

83,075

128,715

161,986

Implementation services and other

2,576

2,929

4,961

5,518

Total revenues

68,654

86,004

133,676

167,504

Cost of revenues:

Recurring revenues

20,716

25,638

39,819

49,729

Implementation services and other

9,667

11,202

18,923

22,070

Total cost of revenues

30,383

36,840

58,742

71,799

Gross profit

38,271

49,164

74,934

95,705

Operating expenses:

Sales and marketing

17,735

21,598

35,746

42,778

Research and development

7,222

9,274

14,523

18,169

General and administrative

14,957

18,159

28,815

34,110

Total operating expenses

39,914

49,031

79,084

95,057

Operating income (loss)

(1,643)

133

(4,150)

648

Other income

4

141

43

250

Income (loss) before income taxes

(1,639)

274

(4,107)

898

Income tax expense (benefit)

32

(157)

132

(76)

Net income (loss)

$
(1,671)

$
431

$
(4,239)

$
974


	Three Months Ended
	September 30,
	2020		2021

	(in thousands)
Consolidated Statements of Operations Data:
Revenues:
Recurring and other revenue	$	134,875	$	180,824
Interest income on funds held for clients		919		873
Total revenues		135,794		181,697
Cost of revenues		49,380		63,249
Gross profit		86,414		118,448
Operating expenses:
Sales and marketing		37,674		49,885
Research and development		18,647		23,076
General and administrative		26,644		35,235
Total operating expenses		82,965		108,196
Operating income		3,449		10,252
Other expense		(257)		(117)
Income before income taxes		3,192		10,135
Income tax benefit		(9,268)		(20,797)
Net income	$	12,460	$	30,932

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The following table sets forth our statements of operations data as a percentage of total revenues for each of the periods indicated.

Three Months Ended

Six Months Ended

December 31,

December 31,


2016

2017


2016

2017


Consolidated Statements of Operations Data:









Revenues:









Recurring fees

95
%
95
%

95
%
95
%

Interest income on funds held for clients

1
%
2
%

1
%
2
%

Total recurring revenues

96
%
97
%

96
%
97
%

Implementation services and other

4
%
3
%

4
%
3
%

Total revenues

100
%
100
%

100
%
100
%

Cost of revenues:









Recurring revenues

30
%
30
%

30
%
30
%

Implementation services and other

14
%
13
%

14
%
13
%

Total cost of revenues

44
%
43
%

44
%
43
%

Gross profit

56
%
57
%

56
%
57
%

Operating expenses:









Sales and marketing

26
%
25
%

26
%
25
%

Research and development

10
%
11
%

11
%
11
%

General and administrative

22
%
20
%

22
%
20
%

Total operating expenses

58
%
56
%

59
%
56
%

Operating income (loss)

(2)
%
1
%

(3)
%
1
%

Other income

0
%
0
%

0
%
0
%

Income (loss) before income taxes

(2)
%
1
%

(3)
%
1
%

Income tax expense (benefit)

0
%
0
%

0
%
0
%

Net income (loss)

(2)
%
1
%

(3)
%
1
%


	Three Months Ended
	September 30,
	2020		2021
Consolidated Statements of Operations Data:
Revenues:
Recurring and other revenue	99	%	100	%
Interest income on funds held for clients	1	%	0	%
Total revenues	100	%	100	%
Cost of revenues	36	%	35	%
Gross profit	64	%	65	%
Operating expenses:
Sales and marketing	28	%	27	%
Research and development	14	%	13	%
General and administrative	20	%	19	%
Total operating expenses	62	%	59	%
Operating income	2	%	6	%
Other expense	0	%	0	%
Income before income taxes	2	%	6	%
Income tax benefit	(7)	%	(11)	%
Net income	9	%	17	%

Comparison of Three Months Ended ~~December 31, 2016~~September 30, 2020 and ~~2017~~2021

Revenues

($ in thousands)

Three Months Ended

December 31,

Change


2016

2017

$

%

Recurring fees

$
65,347

$
81,292

$
15,945

24
%
Percentage of total revenues

95
%

95
%

Interest income on funds held for clients

$
731

$
1,783

$
1,052

144
%
Percentage of total revenues

1
%

2
%

Implementation services and other

$
2,576

$
2,929

$
353

14
%
Percentage of total revenues

4
%

3
%


	Three Months Ended
	September 30,						Change
	2020			2021			$		%
Recurring and other revenue	$	134,875		$	180,824		$	45,949	34	%
Percentage of total revenues		99	%		100	%
Interest income on funds held for clients	$	919		$	873		$	(46)	(5)	%
Percentage of total revenues		1	%		0	%

Recurring and other revenue

Recurring ~~Fees~~

~~Recurring fees~~and other revenue for the three months ended ~~December 31, 2017~~September 30, 2021 increased by ~~$15.9~~$45.9 million, or ~~24%~~34%, to ~~$81.3~~$180.8 million from ~~$65.3~~$134.9 million for ~~the~~ three months ended ~~December 31, 2016.~~September 30, 2020. Recurring ~~fees~~and other revenue increased primarily as a result of incremental revenues from new and existing ~~clients.~~clients due to the strong performance by our sales team and improved macroeconomic conditions compared to the prior fiscal year.

Interest Income on Funds Held for Clients

Interest income on funds held for clients for the three months ended ~~December 31, 2017 increased~~September 30, 2021 decreased by ~~$1.1 million, or 144% to $1.8 million~~5% from ~~$0.7 million for~~ the three months ended ~~December 31, 2016.~~September 30, 2020. Interest income on funds held for clients ~~increased primarily as a result of higher average~~continues to be impacted by the low interest rate environment due to the interest rate cuts by the Federal Reserve in response to the COVID-19 pandemic. The impact from the lower interest rates ~~increased~~was partially offset by higher average daily balances for funds held due to the addition of new clients to our client base and ~~interest income from investing a portion of~~increases in client employee counts on our ~~funds held for clients in marketable securities starting in July 2017.~~platform.

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Cost of Revenues

~~Implementation Services and Other~~($ in thousands)


	Three Months Ended
	September 30,						Change
	2020			2021			$		%
Cost of revenues	$	49,380		$	63,249		$	13,869	28	%
Percentage of total revenues		36	%		35	%
Gross margin		64	%		65	%

~~Implementation services and other revenue~~Cost of Revenues

Cost of revenues for the three months ended ~~December 31, 2017~~September 30, 2021 increased by ~~$0.4~~$13.9 million, or ~~14%~~28%, to ~~$2.9~~$63.2 million from ~~$2.6~~$49.4 million for the three months ended ~~December 31, 2016 primarily due to the changes in the number of new clients and product mix quarter over quarter.~~

September 30, 2020. Cost of ~~Revenues~~

Three Months Ended

December 31,

Change


2016

2017

$

%

Cost of recurring revenues

$
20,716

$
25,638

$
4,922

24
%
Percentage of recurring revenues

31
%

31
%





Recurring gross margin

69
%

69
%





Cost of implementation services and other

$
9,667

$
11,202

$
1,535

16
%
Percentage of implementation services and other

375
%

382
%





Implementation gross margin

(275)
%

(282)
%

~~Cost of Recurring Revenues~~

Cost of recurring revenues for the three months ended December 31, 2017 increased by $4.9 million, or 24%, to $25.6 million from $20.7 million for the three months ended December 31, 2016. Cost of recurring revenues increased primarily as a result of the continued growth of our business, in particular, ~~$1.9~~$8.3 million in additional employee-related costs resulting from additional personnel necessary to provide services to new and existing clients ~~$1.5~~and $4.0 million in additional delivery and other ~~processing-related fees and $1.4 million~~processing costs.

Operating Expenses

($ in ~~increased internal-use software amortization. Recurring gross margin remained consistent at 69% for the three months ended December 31, 2016 and 2017.~~thousands)

~~Cost of Implementation Services and Other~~

Cost of implementation services and other for the three months ended December 31, 2017 increased by $1.5 million, or 16%, to $11.2 million from $9.7 million for the three months ended December 31, 2016. The increase in cost of implementation services and other was primarily the result of $1.3 million of additional employee-related costs to implement our solutions for new and existing clients during the three months ended December 31, 2017.

~~Operating Expenses~~

Sales and Marketing

Three Months Ended

December 31,

Change


2016

2017

$

%

Sales and marketing

$
17,735

$
21,598

$
3,863

22
%
Percentage of total revenues

26
%

25
%


	Three Months Ended
	September 30,						Change
	2020			2021			$		%
Sales and marketing	$	37,674		$	49,885		$	12,211	32	%
Percentage of total revenues		28	%		27	%

Sales and marketing expenses for the three months ended ~~December 31, 2017~~September 30, 2021 increased by ~~$3.9~~$12.2 million, or ~~22%~~32%, to ~~$21.6~~$49.9 million from ~~$17.7~~$37.7 million for the three months ended ~~December 31, 2016.~~September 30, 2020. The increase in sales and marketing expense was primarily ~~the result of $2.8 million of~~due to additional employee-related costs, ~~from the expansion of~~including those incurred to expand our sales team, ~~(including management, sales engineers, direct sales, sales administration~~ and ~~sales lead generation support).~~an increase in overall spending on travel and entertainment as COVID-19 pandemic restrictions eased within the United States. The increase was also ~~attributable to $0.5 million in additional~~driven by higher stock-based compensation costs associated with our equity incentive plan.

~~Table of Contents~~

Research and Development

Three Months Ended

December 31,

Change


2016

2017

$

%

Research and development

$
7,222

$
9,274

$
2,052

28
%
Percentage of total revenues

10
%

11
%


	Three Months Ended
	September 30,						Change
	2020			2021			$		%
Research and development	$	18,647		$	23,076		$	4,429	24	%
Percentage of total revenues		14	%		13	%

Research and development expenses for the three months ended ~~December 31, 2017~~September 30, 2021 increased by ~~$2.1~~$4.4 million, or ~~28%~~24%, to ~~$9.3~~$23.1 million from ~~$7.2~~$18.6 million for the three months ended ~~December 31, 2016.~~September 30, 2020. The increase in research and development ~~expense~~expenses was primarily the result of ~~$2.1~~$3.7 million of additional employee-related costs related to additional development personnel.

General and Administrative


	Three Months Ended
	September 30,						Change
	2020			2021			$		%
General and administrative	$	26,644		$	35,235		$	8,591	32	%
Percentage of total revenues		20	%		19	%

Three Months Ended

December 31,

Change


2016

2017

$

%

General and administrative

$
14,957

$
18,159

$
3,202

21
%
Percentage of total revenues

22
%

20
%

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General and administrative expenses for the three months ended ~~December 31, 2017~~September 30, 2021 increased by ~~$3.2~~$8.6 million, or ~~21%~~32%, to ~~$18.2~~$35.2 million from ~~$15.0~~$26.6 million for the three months ended ~~December 31, 2016.~~September 30, 2020. The increase in general and administrative expense was primarily the result of ~~$1.4~~$3.1 million ofin additional 401(k) expense, additional employee-related costs ~~$0.9~~of $2.5 million and an increase of ~~increased occupancy costs incurred as a result of our requirement for additional office space and $0.4~~$1.8 million in ~~additional~~ stock-based compensation costs associated with our equity incentive plan.

Other Expense


	Three Months Ended
	September 30,						Change
	2020			2021			$		%
Other expense	$	(257)		$	(117)		$	140	(54)	%
Percentage of total revenues		0	%		0	%

Other ~~Income~~

Three Months Ended

December 31,

Change


2016

2017

$

%

Other income

$
4

$
141

$
137

*

Percentage of total revenues

0
%

0
%

*~~Not Meaningful~~

~~Other income~~expense did not materially change for the three months ended ~~December 31, 2017 was not materially different~~September 30, 2021 as compared to the three months ended ~~December 31, 2016.~~September 30, 2020.

Income ~~Tax Expense (Benefit)~~Taxes

Three Months Ended

December 31,

Change


2016

2017

$

%

Income tax expense (benefit)

$
32

$
(157)

$
(189)

*

Percentage of total revenues

0
%

0
%

*~~Not Meaningful~~

~~The difference in income~~Our effective tax ~~expense (benefit)~~rate was (290.3)% and (205.2)% for the three months ended ~~December 31, 2017 as compared to~~September 30, 2020 and 2021, respectively. Our effective tax rate for the three months ended ~~December 31, 2016~~September 30, 2020 and September 30, 2021 was lower than the federal statutory rate of 21% primarily due to ~~the revaluation of deferred taxes arising~~excess tax benefits from ~~the Tax Cuts and Jobs Act.~~

~~Table of Contents~~

~~Comparison of Six Months Ended December 31, 2016 and 2017~~

~~Revenues~~

Six Months Ended

December 31,

Change


2016

2017

$

%

Recurring fees

$
127,267

$
158,586

$
31,319

25
%
Percentage of total revenues

95
%

95
%

Interest income on funds held for clients

$
1,448

$
3,400

$
1,952

135
%
Percentage of total revenues

1
%

2
%

Implementation services and other

$
4,961

$
5,518

$
557

11
%
Percentage of total revenues

4
%

3
%

~~Recurring Fees~~

Recurring fees for the six months ended December 31, 2017 increased by $31.3 million, or 25%, to $158.6 million from $127.3 million for the six months ended December 31, 2016. Recurring fees increased primarily as a result of incremental revenues from new and existing clients.

~~Interest Income on Funds Held for Clients~~

Interest income on funds held for clients for the six months ended December 31, 2017 increased by $2.0 million, or 135% to $3.4 million from $1.4 million for the six months ended December 31, 2016. Interest income on funds held for clients increased primarily as a result of higher average interest rates, increased average daily balances for funds held due to the addition of new clients to our client base and interest income from investing a portion of our funds held for clients in marketable securities starting in July 2017.

~~Implementation Services and Other~~

Implementation services and other revenue for the six months ended December 31, 2017 increased by $0.6 million, or 11%, to $5.5 million from $5.0 million for the six months ended December 31, 2016 primarily due to the changes in the number of new clients and product mix period over period.

~~Cost of Revenues~~

Six Months Ended

December 31,

Change


2016

2017

$

%

Cost of recurring revenues

$
39,819

$
49,729

$
9,910

25
%
Percentage of recurring revenues

31
%

31
%

Recurring gross margin

69
%

69
%

Cost of implementation services and other

$
18,923

$
22,070

$
3,147

17
%
Percentage of implementation services and other

381
%

400
%





Implementation gross margin

(281)
%

(300)
%

~~Cost of Recurring Revenues~~

Cost of recurring revenues for the six months ended December 31, 2017 increased by $9.9 million, or 25%, to $49.7 million from $39.8 million for the six months ended December 31, 2016. Cost of recurring revenues increased primarily as a result of the continued growth of our business, in particular, $3.8 million in additional employee-related costs resulting from additional personnel necessary to provide services to new and existing clients, $3.1 million in increased internal-use software amortization and $2.7 million in delivery and other processing-related fees. Recurring gross margin remained consistent at 69% for the six months ended December 31, 2016 and 2017.

~~Table of Contents~~

~~Cost of Implementation Services and Other~~

Cost of implementation services and other for the six months ended December 31, 2017 increased by $3.1 million, or 17%, to $22.1 million from $18.9 million for the six months ended December 31, 2016. The increase in cost of implementation services and other was primarily the result of $2.6 million of additional employee-related costs to implement our solutions for new and existing clients during the six months ended December 31, 2017.

~~Operating Expenses~~

~~Sales and Marketing~~

Six Months Ended

December 31,

Change


2016

2017

$

%

Sales and marketing

$
35,746

$
42,778

$
7,032

20
%
Percentage of total revenues

26
%

25
%

Sales and marketing expenses for the six months ended December 31, 2017 increased by $7.0 million, or 20%, to $42.8 million from $35.7 million for the six months ended December 31, 2016. The increase in sales and marketing expense was primarily the result of $5.5 million of additional employee-related costs from the expansion of our sales team (including management, sales engineers, direct sales, sales administration and sales lead generation support). The increase was also attributable to $1.0 million in additionalemployee stock-based compensation ~~associated with our equity incentive plan.~~

~~Research~~ and ~~Development~~

Six Months Ended

December 31,

Change


2016

2017

$

%

Research and development

$
14,523

$
18,169

$
3,646

25
%
Percentage of total revenues

11
%

11
%

Research and development expenses for the six months ended December 31, 2017 increased by $3.6 million, or 25%, to $18.2 million from $14.5 million for the six months ended December 31, 2016. The increase in research and development ~~expense was primarily the result of $4.1 million of additional employee-related costs related to additional development personnel,~~tax credits, partially offset by ~~higher year-over-year capitalized internal-use software costs of $1.1 million.~~

~~General and Administrative~~

Six Months Ended

December 31,

Change


2016

2017

$

%

General and administrative

$
28,815

$
34,110

$
5,295

18
%
Percentage of total revenues

22
%

20
%

~~General and administrative expenses~~an increase to the valuation allowance for the ~~six months~~period ended December 31, 2017 increased by $5.3 million, or 18%, to $34.1 million from $28.8 million for the six months ended December 31, 2016. The increase in general and administrative expense was primarily the result of $2.1 million of additional employee-related costs, $2.0 million of increased occupancy costs incurred as a result of our requirement for additional office space and $0.6 million in additional stock-based compensation associated with our equity incentive plan.September 30, 2021.

~~Table of Contents~~

~~Other Income~~

Six Months Ended

December 31,

Change


2016

2017

$

%

Other income

$
43

$
250

$
207

*

Percentage of total revenues

0
%

0
%

*~~Not Meaningful~~

~~Other income for the six months ended December 31, 2017 was not materially different as compared to the six months ended December 31, 2016.~~

~~Income Tax Expense (Benefit)~~

Six Months Ended

December 31,

Change


2016

2017

$

%

Income tax expense (benefit)

$
132

$
(76)

$
(208)

*

Percentage of total revenues

0
%

0
%

*~~Not Meaningful~~

The difference in income tax expense (benefit) for the six months ended December 31, 2017 as compared to the six months ended December 31, 2016 was primarily due to the revaluation of deferred taxes arising from the Tax Cuts and Jobs Act.

~~Table of Contents~~

Quarterly Trends and Seasonality

Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, some of which are outside of our control. Our historical results should not be considered a reliable indicator of our future results of operations.

We experience fluctuations in revenues and related costs on a seasonal basis, which are primarily seen in our fiscal third quarter, which ends on March 31 of each year. Specifically, our recurring revenue is positively impacted in our fiscal third quarter as a result of our preparation of W-2 documents for our clients’ employees in advance of tax filing requirements. The seasonal fluctuations in revenues also positively impact gross profits during our fiscal third quarter. Our historical results for our fiscal third quarter should not be considered a reliable indicator of our future results of operations. Our interest income earned on funds held for clients is also positively impacted during our fiscal third quarter as a result of our increased collection of funds held for clients. Certain payroll taxes are primarily collected during our fiscal third quarter and subsequently remitted.

Implementation revenues are also typically higher during our fiscal third quarter as many of our new clients elect to implement our services following a calendar year-end. Implementation gross profit varies on a quarterly basis as costs are generally fixed in the near-term, while revenues vary based on the number of new client implementations.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results ~~might~~may differ from ~~these~~our estimates under different assumptions or conditions and, to the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. ~~We added a significant accounting policy related to the investment of funds held for clients in marketable securities starting~~

Accounting estimates used in the ~~first quarter~~preparation of ~~fiscal 2018. Refer to Note 2~~these consolidated financial statements change as new events occur, as mor experience is acquired, as additional information is obtained and as the operating environment changes.

Table of ~~the Notes to the Unaudited Consolidated Financial Statements for additional detail around these investments.~~ Contents

Our critical accounting policies and use of estimates are disclosed in our audited consolidated financial statements for the year ended June 30, ~~2017~~2021 included in our Annual Report on Form 10-K filed with the SEC on August ~~11, 2017.~~6, 2021.

Liquidity and Capital Resources

Our primary liquidity needs are related to the funding of general business requirements, including working capital requirements, research and development, and capital expenditures. As of ~~December 31, 2017,~~September 30, 2021, our principal ~~source~~sources of liquidity ~~was $111.0~~were $66.4 million of cash and cash ~~equivalents.~~equivalents and $3.2 million of total corporate investments. In July 2019, we entered into and currently maintain a five-year revolving credit agreement. This credit agreement provides for a $250.0 million senior revolving credit facility which may be increased up to $375.0 million. No amounts were drawn on the revolving credit facility as of September 30, 2021.

We invest portions of our excess cash and cash equivalents in highly liquid, investment-grade marketable securities. These investments consist of commercial paper, corporate debt issuances, asset-backed debt securities, certificates of deposit, U.S. government agency securities and other securities with credit quality ratings of A-1 or higher. As of September 30, 2021, we had not recognized any credit impairment losses related to our investment portfolio.

In order to grow our business, we intend to increase our personnel and related expenses and to make significant investments in our platform, data centers and general infrastructure. The timing and amount of these investments will vary based on our financial condition, the rate at which we ~~can~~ add new clients and new personnel and the scale of our ~~application~~module development, data ~~center~~centers and other activities. Many of these investments will occur in advance of our experiencing any direct benefit from them, which could negatively impact our liquidity and cash flows during any particular period and may make it difficult to determine if we are effectively allocating our resources. However, we expect to fund our operations, capital expenditures and other investments principally with cash flows from operations, and to the extent that our liquidity needs exceed our cash from operations, we would look to our cash on hand and ~~seek to establish~~corporate investments or utilize the borrowing capacity under our credit facility to satisfy those needs.

Our cash flows from investing and financing activities are influenced by the amount of funds held for clients which varies significantly from quarter to quarter. The balance of the funds we hold depends on our clients’ payroll calendar, and therefore, such balance changes from period to period in accordance with the timing of each payroll cycle. Funds held for clients ~~are primarily placed in demand deposit accounts with various financial institutions. We also invest~~

~~Table of Contents~~

~~a portion of the funds held for clients in highly liquid, investment-grade marketable securities. Funds held for clients are used for the repayment of~~and client fund ~~obligations.~~

~~We believe our current cash and cash equivalents and cash flow from operations~~obligations will ~~be sufficient to meet our working capital, capital expenditure and other investment requirements for at least the next 12 months.~~

~~The following table sets forth data regarding cash flows for the periods indicated:~~

Six Months Ended December 31,


2016

2017

Net cash provided by operating activities

$
15,390

$
34,168

Cash flows from investing activities:





Purchases of available-for-sale securities from funds held for clients

—

(95,207)

Proceeds from sales and maturities of available-for-sale securities from funds held for clients

—

23,181

Net change in funds held for clients' cash and cash equivalents

147,151

(331,078)

Capitalized internal-use software costs

(6,279)

(7,146)

Purchases of property and equipment

(10,038)

(7,998)

  Lease allowances used for tenant improvements

—

(5,952)

Net cash provided by (used in) investing activities

130,834

(424,200)

Cash flows from financing activities:





Net change in client fund obligations

(147,151)

403,243

Proceeds from employee stock purchase plan

1,823

2,045

Taxes paid related to net share settlement of equity awards

(5,135)

(7,697)

Net cash provided by (used in) financing activities

(150,463)

397,591

Net change in cash and cash equivalents

$
(4,239)

$
7,559

~~Operating Activities~~

Net cash provided by operating activities was $15.4 million and $34.2 million for the six months ended December 31, 2016 and 2017, respectively. The increase in net cash provided by operating activities from the six months ended December 31, 2016 to the six months ended December 31, 2017 was primarily due to improved operating results after adjusting for non-cash items including stock-based compensation expense and depreciation and amortization expense. The increase was also due to $6.0 million received for tenant improvement allowances.

~~Investing Activities~~

~~Net cash provided by (used in) investing activities was $130.8 million and $(424.2) million for the six months ended December 31, 2016 and 2017, respectively.~~

Changes in net cash provided by (used in) investing activities are significantly influenced by the amount of funds held for clients at the end of a reporting period. Changes in the amount of funds held for clientsvary substantially from period to period ~~will vary substantially~~ as a result of the timing of payroll and tax obligations due. Our payroll processing activities involve the movement of significant funds from accounts of employers to employees and relevant taxing authorities. ~~During fiscal 2017, we processed over $92 billion in payroll transactions.~~ Though we debit a client’s account prior to any disbursement on its behalf, there is a delay between our payment of amounts due to employees and taxing and other regulatory authorities and when the incoming funds from the client to cover these amounts payable actually clear into our operating accounts. We currently have agreements with ~~nine~~eleven banks major U.S. Banks to execute ACH and wire transfers to support our client payroll and tax services. We believe we have sufficient capacity under these ACH arrangements to handle ~~our transactions~~all transaction volumes for the foreseeable future. ~~Fluctuations in~~We primarily collect fees for our services via ACH transactions at the ~~net change in funds held~~same time we debit the client’s account for ~~clients’~~payroll and tax obligations and thus are able to reduce collectability and accounts receivable risks.

We believe our current cash and cash equivalents, ~~are also~~corporate investments, future cash flow from operations, and access to our credit facility will be sufficient to meet our ongoing working capital, capital expenditure and other liquidity requirements for at least the next 12 months, and thereafter, for the foreseeable future.

Table of Contents

The following table sets forth data regarding cash flows for the periods indicated:


	Three Months Ended
	September 30,
	2020		2021
Net cash used in operating activities	$	(1,567)	$	(4,132)
Cash flows from investing activities:
Purchases of available-for-sale securities		—		(135,849)
Proceeds from sales and maturities of available-for-sale securities		37,493		9,648
Capitalized internal-use software costs		(7,884)		(9,159)
Purchases of property and equipment		(2,045)		(3,220)
Acquisition of business, net of cash acquired		—		(59,581)
Net cash provided by (used in) investing activities		27,564		(198,161)
Cash flows from financing activities:
Net change in client fund obligations		51,671		1,425,782
Taxes paid related to net share settlement of equity awards		(33,402)		(60,809)
Payment of debt issuance costs		(9)		(9)
Net cash provided by financing activities		18,260		1,364,964
Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents	$	44,257	$	1,162,671

Operating Activities

Net cash used in operating activities was $1.6 million and $4.1 million for the three months ended September 30, 2020 and 2021, respectively. The increase in net cash used in operating activities from three months ended September 30, 2020 to the three months ended September 30, 2021 was primarily due to net changes in operating assets and liabilities, partially offset by improved operating results after adjusting for non-cash items including stock-based compensation expense, depreciation and amortization expense and deferred income tax benefit during the three months ended September 30, 2021.

Investing Activities

Net cash provided by (used in) investing activities was $27.6 million and ($198.2) million for the three months ended September 30, 2020 and 2021, respectively. The net cash used in investing activities is significantly impacted by the timing of purchases and sales and maturities of investments as we invest ~~a portion~~portions of ~~the~~excess corporate cash and funds held for clients in highly liquid, investment-grade marketable securities.

~~Excluding the net change in~~ The amount of funds held for ~~clients’~~clients invested will vary based on timing of client funds collected and payments due to client employees and taxing and other regulatory authorities.

The change in net cash provided by (used in) investing activities was primarily due to purchases of available-for-sale securities of $135.8 million, $59.6 million related to the acquisition of Blue Marble Payroll, LLC and ~~cash equivalents and purchases and~~a $27.8 million decrease in proceeds from sales and maturities of available-for-sale securities ~~from funds held for clients, our net cash used in investing activities was $16.3 million and $21.1 million for~~during the ~~six~~three months ended ~~December 31, 2016 and 2017, respectively. The change in~~

~~Table of Contents~~

net cash used in investing activities was primarily due to $6.0 million in lease allowances used for tenant improvements, partially offset by $2.0 million in fewer purchases of property and equipment during the six months ended December 31, 2017September 30, 2020 as compared to ~~December 31, 2016.~~the three months ended September 30, 2021.

Financing Activities

Net cash provided by ~~(used in)~~ financing activities was ~~$(150.5)~~$18.3 million and ~~$397.6~~$1,365.0 million for the ~~six~~three months ended ~~December 31, 2016~~September 30, 2020 and 2017, respectively. Excluding the net change in client fund obligations, net cash used in financing activities was $(3.3) million and $(5.7) million for the six months ended December 31, 2016 and 2017,2021, respectively. The change in net cash provided by ~~(used in)~~ financing activities ~~excluding the net change in client fund obligations,~~ was primarily the result of ~~higher~~an increase in client fund obligations of $1,374.1 million due to the timing of client funds collected and related remittance of those funds to client employees and taxing authorities, partially offset by $27.4 million in increased taxes paid related to net share settlement of equity ~~awards.~~awards during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

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Contractual Obligations and Commitments

Our principal commitments consist of operating lease obligations. The following table summarizes our contractual obligations at ~~December 31, 2017:~~September 30, 2021:


	Payment Due By Fiscal Period
			Less than 1						More than
	Total		Year		1-3 Years		3-5 Years		5 Years

											Payment Due By Fiscal Period
													Less than 1						More than
											Total		Year		1-3 Years		3-5 Years		5 Years
Operating lease obligations	$	114,062	$	7,799	$	17,737	$	17,475	$	71,051	$	89,019	$	10,313	$	19,919	$	18,550	$	40,237
Unconditional purchase obligations		1,827		1,382		445		—		—
	$	115,889	$	9,181	$	18,182	$	17,475	$	71,051
Purchase obligations												18,911		11,355		6,989		567		—
											$	107,930	$	21,668	$	26,908	$	19,117	$	40,237

Capital Expenditures

We expect to ~~increase~~continue to invest in capital spending as we continue to grow our business and expand and enhance our operating facilities, data centers and technical infrastructure. Future capital requirements will depend on many factors, including our rate of sales growth. In the event that our sales growth or other factors do not meet our expectations, we may eliminate or curtail capital projects in order to mitigate the impact on our use of cash. Capital expenditures were ~~$10.0~~$2.0 million and ~~$8.0~~$3.2 million for ~~the six~~three months ended ~~December 31, 2016~~September 30, 2020 and ~~2017,~~2021, respectively, exclusive of capitalized internal-use software costs of ~~$6.3~~$7.9 million and ~~$7.1~~$9.2 million for the same periods, respectively. ~~During the first two quarters of fiscal 2018, we also spent $6.0 million on capital expenditures for which we received reimbursement from tenant improvement allowances.~~

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that may be material to investors.

New Accounting Pronouncements

Refer to Note 2 of the Notes to the Unaudited Consolidated Financial Statements for a discussion of recently issued accounting standards.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We have operations ~~solely~~primarily in the United States and are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate and certain other exposures as well as risks relating to changes in the general economic conditions in the United States. As discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of operations, the novel coronavirus disease (“COVID-19”) pandemic has disrupted the global economy and financial markets and may unfavorably impact our future business and financial performance. Refer to “Part I. Item 1A. Risk Factors” on our Annual Report on Form 10-K filed with the SEC on August 6, 2021 for risks related to the COVID-19 pandemic.

We have not used, nor do we intend to use, derivatives to mitigate the impact of interest rate or other exposure or for trading or speculative purposes.

Interest Rate Risk

As of ~~December 31, 2017,~~September 30, 2021, we had cash and cash equivalents of ~~$111.0~~$66.4 million, corporate investments of $3.2 million and funds held for clients of ~~$1,345.7~~$3,185.5 million. We deposit our cash and cash equivalents and significant portions of our funds held for clients in demand deposit accounts with various financial institutions. ~~Starting in July 2017, we invested a portion~~We invest portions of our excess cash and cash equivalents and funds held for clients in marketable securities including commercial paper, corporate ~~bonds~~debt issuances, asset-backed debt securities, certificates of deposit, U.S. government agency securities and ~~asset-backed securities~~other which were classified as available-for-sale securities as of ~~December 31, 2017.~~September 30, 2021. Our investment policy is focused on generating higher yields from these investments while preserving liquidity and capital. However, as a result of our investing activities, we are exposed to changes in interest rates that may materially affect our financial statements.

In a falling rate environment, a decline in interest rates would decrease our interest income earned on both cash and cash equivalents and funds held for clients. An increase in the overall interest rate environment may cause the market value of ~~portions of~~ our ~~funds held for clients invested~~investments in fixed rate available-for-sale securities to decline. If we are forced to sell some or all of these securities at lower market values, we may incur investment losses. However, because we classify all marketable securities as available-for-sale, no gains or losses are recognized due to changes in interest rates until such securities are sold or decreases in fair value are deemed due to ~~be other-than-temporary.~~expected credit losses. We have not recorded any ~~other-than-temporary~~credit impairment losses on our portfolio to date.

Based upon a sensitivity model that measures market value changes caused by interest rate fluctuations, an immediate ~~25-basis~~100-basis point ~~increase~~change in interest rates would have ~~resulted in a decrease in~~had an immaterial effect on the market value of our available-for-sale securities ~~included in funds held for clients by $0.1 million~~ as of December 31, 2017. A 25-basis point decrease in interest rates would have resulted in a $0.1 million increase in the market value of our available-for-sale securities included in funds held for clients as of December 31, 2017.September 30, 2021. Fluctuations in the value of our available-for-sale securities caused by ~~a change~~changes in interest rates are recorded in other comprehensive income and are only realized if we sell the underlying securities.

Additionally, as described in Note 8 of the Notes to the Unaudited Consolidated Financial Statements we entered into a credit agreement that provides for a revolving credit facility (“credit facility”) in the aggregate amount of $250.0 million, which may be increased up to $375.0 million. Borrowings under the credit facility generally bear interest at a rate based upon the London Interbank Offered Rate (“LIBOR”) (or a replacement rate for LIBOR) or, at our sole option, an adjusted base rate plus an applicable margin based on our then-applicable net senior secured leverage ratio. As of September 30, 2021, there were no amounts drawn on the credit facility. To the extent that we draw additional amounts under the credit facility, we may be exposed to increased market risk from changes in the underlying index rates, which affects our interest expense.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of ~~December 31, 2017,~~September 30, 2021, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date.

Changes in Internal Control over Financial Reporting

There were no changes into our internal control over financial reporting during the ~~three month~~three-month period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in litigation related to claims arising from the ordinary course of our business. We believe that there are no claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse effect on us.

Item 1A. Risk ~~Factors.~~Factors

Our business, prospects, financial condition or operating results could be materially adversely affected by any of these risks, as well as other risks not currently known to us or that are currently considered immaterial. The trading priceThere have been no material changes in our risk factors disclosed in “Item 1A. Risk Factors” of our common stock could decline due to any of the risks and uncertainties described below, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this QuarterlyAnnual Report on Form ~~10-Q, including our consolidated financial statements and related notes.~~

~~Our quarterly operating results have fluctuated in~~10-K for the ~~past and may continue to fluctuate, causing the value of our common stock to decline substantially.~~

Our quarterly operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Moreover, our stock price might be based on expectations of future performance that are unrealistic or that we might not meet and, if our revenue or operating results fall below such expectations, the price of our common stock could decline substantially.

~~Our number of new clients typically increases more during our third fiscal quarter ending March 31 than during the rest of our~~ fiscal year primarily because many new clients prefer to start using our payroll and human capital management, or HCM, solutions at the beginning of a calendar year. In addition, client funds and year-end activities are traditionally higher during our third fiscal quarter. As a result of these factors, our total revenue and expenses have historically grown disproportionately during our third fiscal quarter as compared to other quarters.

~~In addition to other risk factors listed in this section, some of the important factors that may cause fluctuations in our quarterly operating results include:~~

~~The extent to which our products achieve or maintain market acceptance;~~

~~Our ability to introduce new products and enhancements and updates to our existing products on a timely basis;~~

~~Competitive pressures and the introduction of enhanced products and services from competitors;~~

~~Changes in client budgets and procurement policies;~~

~~The amount and timing of our investment in research and development activities and whether such investments are capitalized or expensed as incurred;~~

~~The number of our clients’ employees;~~

~~Timing of recognition of revenues and expenses;~~

~~Client renewal rates;~~

~~Seasonality in our business;~~

~~Technical difficulties with our products or interruptions in our services;~~

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~~Our ability to hire and retain qualified personnel;~~

~~A repeal of or changes to the laws and regulations related to the products and services which we offer;~~

~~Changes in accounting principles; and~~

~~Unforeseen legal expenses, including litigation and settlement costs.~~

The majority of our agreements with clients do not have a specified term and are generally cancellable by our clients upon 60 days’ or less notice. If a significant number of clients elected to terminate their agreements with us, our operating results and our business would be adversely affected.

In addition, a significant portion of our operating expenses are related to compensation and other items which are relatively fixed in the short-term, and we plan expenditures based in part on our expectations regarding future needs and opportunities. Accordingly, changes in our business or revenue shortfalls could decrease our gross and operating margins and could cause significant changes in our operating results from period to period. If this occurs, the trading price of our common stock could fall substantially, either suddenly or over time.

Our operating results for previous fiscal quarters are not necessarily indicative of our operating results for the full fiscal years or for any future periods. We believe that, due to the underlying factors for quarterly fluctuations, quarter-to-quarter comparisons of our operations are not necessarily meaningful and that such comparisons should not be relied upon as indications of future performance.

~~We have incurred losses in the past, and we may not be able to sustain profitability for the foreseeable future.~~

We incurred net losses of $7,110,000, $13,972,000 and $3,851,000 in fiscal 2014, fiscal 2015 and fiscal 2016, respectively. While we generated net income in fiscal 2017, it does not ensure that we will earn continued net income in future periods. We have been growing our number of clients rapidly, and as we do so, we incur significant sales and marketing, services and other related expenses. Our profitability will be significantly influenced by our ability to attain sufficient scale and productivity to achieve recurring revenues that are sufficient to support the incremental costs to obtain and support new clients. We intend for the foreseeable future to continue to focus predominately on adding new clients, and we cannot predict when we will achieve sustained profitability, if at all. We also expect to make other significant expenditures and investments in research and development to expand and improve our product offerings and technical infrastructure. In addition, we incur significant legal, accounting and other expenses in order to complyended June 30, 2021 filed with the rules and regulations to which we are subject to as a public company. These increased expenditures have made it harder for us to achieve and maintain profitability. We also may incur losses in the future for a number of other unforeseen reasons. Accordingly, we may incur losses in the foreseeable future.SEC on August 6, 2021.

~~Failure to manage our growth effectively could increase our expenses, decrease our revenue, and prevent us from implementing our business strategy.~~

We have been rapidly growing our revenue and number of clients, and we will seek to do the same for the foreseeable future. However, the growth in our number of clients puts significant strain on our business, requires significant capital expenditures and increases our operating expenses. To manage this growth effectively, we must attract, train, and retain a significant number of qualified sales, implementation, client service, software development, information technology and management personnel. We also must maintain and enhance our technology infrastructure and our financial and accounting systems and controls. If we fail to effectively manage our growth or we over-invest or under-invest in our business, our business and results of operations could suffer from the resultant weaknesses in our infrastructure, systems or controls. We could also suffer operational mistakes, a loss of business opportunities and employee losses. If our management is unable to effectively manage our growth, our expenses might increase more than expected, our revenue could decline or might grow more slowly than expected, and we might be unable to implement our business strategy.

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~~The markets in which we participate are highly competitive, and if we do not compete effectively, our operating results could be adversely affected.~~

The market for payroll and HCM solutions is fragmented, highly competitive and rapidly changing. Our competitors vary for each of our solutions, and include enterprise-focused software providers, such as Ultimate Software Group, Inc., Workday, Inc., SAP AG, Oracle Corporation and Ceridian Corporation, payroll service providers, such as Automatic Data Processing, Inc., Paychex, Inc., Paycom Software, Inc., Paycor, Inc. and other regional providers, and HCM point solutions, such as Cornerstone OnDemand, Inc.

Several of our competitors are larger, have greater name recognition, longer operating histories and significantly greater resources than we do. Many of these competitors are able to devote greater resources to the development, promotion and sale of their products and services. Furthermore, our current or potential competitors may be acquired by third parties with greater available resources and the ability to initiate or withstand substantial price competition. As a result, our competitors may be able to develop products and services better received by our markets or may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, regulations or client requirements.

In addition, current and potential competitors have established, and might in the future establish, partner or form other cooperative relationships with vendors of complementary products, technologies or services to enable them to offer new products and services, to compete more effectively or to increase the availability of their products in the marketplace. New competitors or relationships might emerge that have greater market share, a larger client base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources, and larger sales forces than we have, which could put us at a competitive disadvantage. In light of these advantages, current or potential clients might accept competitive offerings in lieu of purchasing our offerings. We expect intense competition to continue for these reasons, and such competition could negatively impact our sales, profitability or market share.

~~If we do not continue to innovate and deliver high-quality, technologically advanced products and services, we will not remain competitive and our revenue and operating results could suffer.~~

The market for our solutions is characterized by rapid technological advancements, changes in client requirements, frequent new product introductions and enhancements and changing industry standards. The life cycles of our products are difficult to estimate. Rapid technological changes and the introduction of new products and enhancements by new or existing competitors could undermine our current market position.

Our success depends in substantial part on our continuing ability to provide products and services that medium-sized organizations will find superior to our competitors’ offerings and will continue to use. We intend to continue to invest significant resources in research and development in order to enhance our existing products and services and introduce new high-quality products that clients will want. If we are unable to predict user preferences or industry changes, or if we are unable to modify our products and services on a timely basis or to effectively bring new products to market, our sales may suffer.

In addition, we may experience difficulties with software development, industry standards, design, or marketing that could delay or prevent our development, introduction or implementation of new solutions and enhancements. The introduction of new solutions by competitors, the emergence of new industry standards or the development of entirely new technologies to replace existing offerings could render our existing or future solutions obsolete.

We may not have sufficient resources to make the necessary investments in software development and we may experience difficulties that could delay or prevent the successful development, introduction or marketing of new products or enhancements. In addition, our products or enhancements may not meet the increasingly complex client requirements of the marketplace or achieve market acceptance at the rate we expect, or at all. Any failure by us to anticipate or respond adequately to technological advancements, client requirements and changing industry standards, or any significant delays in the development, introduction or availability of new products or enhancements, could undermine our current market position.

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If we are unable to release periodic updates on a timely basis to reflect changes in tax, benefit and other laws and regulations that our products help our clients address, the market acceptance of our products may be adversely affected and our revenues could decline.

Our solutions are affected by changes in tax, benefit and other laws and regulations and generally must be updated regularly to maintain their accuracy and competitiveness. Although we believe our SaaS platform provides us with flexibility to release updates in response to these changes, we cannot be certain that we will be able to make the necessary changes to our solutions and release updates on a timely basis, or at all. Failure to do so could have an adverse effect on the functionality and market acceptance of our solutions. Changes in tax, benefit and other laws and regulations could require us to make significant modifications to our products or delay or cease sales of certain products, which could result in reduced revenues or revenue growth and our incurring substantial expenses and write-offs.

~~Our business may be adversely impacted if the Patient Protection and Affordable Care Act, or the ACA, is repealed in its entirety or certain aspects of the ACA are repealed or changed.~~

The ACA remains subject to legislative efforts to repeal, modify or delay the implementation of all or certain aspects of the law. Generally, if the ACA is repealed or modified in whole or in part, or if implementation of certain aspects of the ACA is delayed, such repeal, modification or delay could adversely impact our existing and future business and operating results. For example, any such repeal, modification or delay could negatively impact the revenue we currently generate from our ACA Compliance solution as well as overall gross margins. While we expect continued challenges to the ACA, at this time we are unable to more precisely predict the full impact of any repeal, modification or delay in the implementation of the ACA.

~~Because of the way we recognize our revenue and our expenses over varying periods, changes in our business may not be immediately reflected in our financial statements.~~

We recognize our revenue as services are performed. The amount of revenue we recognize in any particular period is derived in significant part based on the number of employees of our clients served by our solutions. As a result, our revenue is dependent in part on the success of our clients. The effect on our revenue of significant changes in sales of our solutions or in our clients’ businesses may not be fully reflected in our results of operations until future periods.

We recognize our expenses over varying periods based on the nature of the expense. In particular, we recognize implementation costs and sales commissions as they are incurred even though we recognize revenue as we perform services over extended periods. When a client terminates its relationship with us, we may not have derived enough revenue from that client to cover associated implementation costs. As a result, we may report poor operating results due to higher implementation costs and sales commissions in a period in which we experience strong sales of our solutions. Alternatively, we may report better operating results due to lower implementation costs and sales commissions in a period in which we experience a slowdown in sales. As a result, our expenses fluctuate as a percentage of revenue, and changes in our business generally may not be immediately reflected in our results of operations.

If our security measures are breached or unauthorized access to client data or funds is otherwise obtained, our solutions may be perceived as not being secure, clients may reduce the use of or stop using our solutions and we may incur significant liabilities.

Our solutions involve the storage and transmission of our clients’ and their employees’ proprietary and confidential information. This information includes bank account numbers, tax return information, social security numbers, benefit information, retirement account information, payroll information and system passwords. In addition, we collect and maintain personal information on our own employees in the ordinary course of our business. Finally, our business involves the storage and transmission of funds from the accounts of our clients to their employees, taxing and regulatory authorities and others. As a result, unauthorized access or security breaches of our systems or the systems of our clients could result in the unauthorized disclosure of confidential information, theft, litigation, indemnity obligations and other significant liabilities. Because the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are employed, we may be unable to anticipate these techniques or to implement adequate preventative measures in advance. While we have security measures and controls in place to protect confidential information, prevent data loss, theft and other security breaches, including penetration tests of our systems by independent third parties, if our security measures are breached, our business could be substantially harmed and we

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could incur significant liabilities. Any such breach or unauthorized access could negatively affect our ability to attract new clients, cause existing clients to terminate their agreements with us, result in reputational damage and subject us to lawsuits, regulatory fines or other actions or liabilities which could materially and adversely affect our business and operating results.

There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim related to a breach or unauthorized access. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of operations.

~~If we fail to adequately expand our direct sales force with qualified and productive persons, we may not be able to grow our business effectively.~~

We primarily sell our products and implementation services through our direct sales force. To grow our business, we intend to focus on growing our client base for the foreseeable future. Our ability to add clients and to achieve revenue growth in the future will depend upon our ability to grow and develop our direct sales force and on their ability to productively sell our solutions. Identifying and recruiting qualified personnel and training them in the use of our software require significant time, expense and attention. The amount of time it takes for our sales representatives to be fully-trained and to become productive varies widely. In addition, if we hire sales representatives from competitors or other companies, their former employers may attempt to assert that these employees have breached their legal obligations, resulting in a diversion of our time and resources.

If our sales organization does not perform as expected, our revenues and revenue growth could suffer. In addition, if we are unable to hire, develop and retain talented sales personnel, if our sales force becomes less efficient as it grows or if new sales representatives are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to grow our client base and revenues and our sales and marketing expenses may increase.

~~If our referral network participants reduce their referrals to us, we may not be able to grow our client base or revenues in the future.~~

Referrals from third-party service providers, including 401(k) advisors, benefits administrators, insurance brokers, third-party administrators and HR consultants, represent a significant source of potential clients for our products and implementation services. For example, we estimate that approximately 30% of our new sales in fiscal 2017 were referred to us from our referral network participants. In most cases, our relationships with referral network participants are informal, although in some cases, we have formalized relationships where we are a recommended vendor for their client.

Participants in our referral network are generally under no contractual obligation to continue to refer business to us, and we do not intend to seek contractual relationships with these participants. In addition, these participants are generally not compensated for referring potential clients to us, and may choose to instead refer potential clients to our competitors. Our ability to achieve revenue growth in the future will depend, in part, upon continued referrals from our network.

There can be no assurance that we will be successful in maintaining, expanding or developing our referral network. If our relationships with participants in our referral network were to deteriorate or if any of our competitors enter into strategic relationships with our referral network participants, sales leads from these participants could be reduced or cease entirely. If we are not successful, we may lose sales opportunities and our revenues and profitability could suffer.

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~~If the market for cloud-based payroll and HCM solutions among medium-sized organizations develops more slowly than we expect or declines, our business could be adversely affected.~~

We believe that the market for cloud-based payroll and HCM solutions is not as mature among medium-sized organizations as the market for outsourced services or on-premise software and services. It is not certain that cloud-based solutions will achieve and sustain high levels of client demand and market acceptance. Our success will depend to a substantial extent on the widespread adoption by medium-sized organizations of cloud-based computing in general, and of payroll and other HCM applications in particular. It is difficult to predict client adoption rates and demand for our solutions, the future growth rate and size of the cloud-based market or the entry of competitive solutions. The expansion of the cloud-based market depends on a number of factors, including the cost, performance, and perceived value associated with cloud-based computing, as well as the ability of cloud-based solutions to address security and privacy concerns. If other cloud-based providers experience security incidents, loss of client data, disruptions in delivery or other problems, the market for cloud-based applications as a whole, including our solutions, may be negatively affected. If cloud-based payroll and HCM solutions do not achieve widespread adoption among medium-sized organizations, or there is a reduction in demand for cloud-based computing caused by a lack of client acceptance, technological challenges, weakening economic conditions, security or privacy concerns, competing technologies and products, decreases in corporate spending or otherwise, it could result in a loss of clients, decreased revenues and an adverse impact on our business.

We typically pay employees and may pay taxing authorities amounts due for a payroll period before a client’s electronic funds transfers are finally settled to our account. If client payments are rejected by banking institutions or otherwise fail to clear into our accounts, we may require additional sources of short-term liquidity and our operating results could be adversely affected.

Our payroll processing business involves the movement of significant funds from the account of a client to employees and relevant taxing authorities. For example, in fiscal 2017 we processed over $92 billion in payroll transactions. Though we debit a client’s account prior to any disbursement on its behalf, due to Automated Clearing House, or ACH, banking regulations, funds previously credited could be reversed under certain circumstances and timeframes after our payment of amounts due to employees and taxing and other regulatory authorities. There is therefore a risk that the employer’s funds will be insufficient to cover the amounts we have already paid on its behalf. While such shortage and accompanying financial exposure has only occurred in very limited instances in the past, should clients default on their payment obligations in the future, we might be required to advance substantial amounts of funds to cover such obligations. In such an event, we may be required to seek additional sources of short-term liquidity, which may not be available on reasonable terms, if at all, and our operating results and our liquidity could be adversely affected and our banking relationships could be harmed.

~~Adverse changes in economic or political conditions could adversely affect our operating results and our business.~~

Our recurring revenues are based in part on the number of our clients’ employees. As a result, we are subject to risks arising from adverse changes in economic and political conditions. The state of the economy and the rate of employment, which deteriorated in the recent broad recession, may deteriorate further in the future. If weakness in the economy continues or worsens, many clients may reduce their number of employees and delay or reduce technology purchases. This could also result in reductions in our revenues and sales of our products, longer sales cycles, increased price competition and clients’ purchasing fewer solutions than they have in the past. Any of these events would likely harm our business, results of operations, financial condition and cash flows from operations.

Trade, monetary and fiscal policies, and political and economic conditions may substantially change, and credit markets may experience periods of constriction and volatility. When there is a slowdown in the economy, employment levels and interest rates may decrease with a corresponding impact on our businesses. Clients may react to worsening conditions by reducing their spending on payroll and other HCM solutions or renegotiating their contracts with us. We have agreements with various large banks to execute ACH and wire transfers as part of our client payroll and tax services. While we have contingency plans in place for bank failures, a failure of one of our banking partners or a systemic shutdown of the banking industry could result in the loss of client funds or impede us from accessing and processing funds on our clients’ behalf, and could have an adverse impact on our business and liquidity.

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If the banks that currently provide ACH and wire transfers fail to properly transmit ACH or terminate their relationship with us or limit our ability to process funds or we are not able to increase our ACH capacity with our existing and new banks, our ability to process funds on behalf of our clients and our financial results and liquidity could be adversely affected.

We currently have agreements with nine banks to execute ACH and wire transfers to support our client payroll and tax services. If one or more of the banks fails to process ACH transfers on a timely basis, or at all, then our relationship with our clients could be harmed and we could be subject to claims by a client with respect to the failed transfers. In addition, these banks have no obligation to renew their agreements with us on commercially reasonable terms, if at all. If these banks terminate their relationships with us or restrict the dollar amounts of funds that they will process on behalf of our clients, their doing so may impede our ability to process funds and could have an adverse impact on our financial results and liquidity.

~~We depend on our senior management team and other key employees, and the loss of these persons or an inability to attract and retain highly skilled employees could adversely affect our business.~~

Our success depends largely upon the continued services of our key executive officers, including Steven R. Beauchamp, our Chief Executive Officer. We also rely on our leadership team in the areas of research and development, sales, services and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. While we have employment agreements with our executive officers, including Mr. Beauchamp, these employment agreements do not require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. The loss of one or more of our executive officers or key employees could have an adverse effect on our business.

If we are unable to recruit and retain highly-skilled product development and other technical persons, our ability to develop and support widely-accepted products could be impaired and our business could be harmed.

We believe that to grow our business and be successful, we must continue to develop products that are technologically-advanced, are highly integrable with third-party services, provide significant mobility capabilities and have pleasing and intuitive user experiences. To do so, we must attract and retain highly qualified personnel, particularly employees with high levels of experience in designing and developing software and Internet-related products and services. Competition for these personnel in the greater Chicago area and elsewhere is intense. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed. We follow a practice of hiring the best available candidates wherever located, but as we grow our business, the productivity of our product development and other research and development may be adversely affected. In addition, if we hire employees from competitors or other companies, their former employers may attempt to assert that these employees have breached their legal obligations, resulting in a diversion of our time and resources.

~~The sale and support of products and the performance of related services by us entail the risk of product or service liability claims, which could significantly affect our financial results.~~

Clients use our products in connection with the preparation and filing of tax returns and other regulatory reports. If any of our products contain errors that produce inaccurate results upon which users rely, or cause users to misfile or fail to file required information, we could be subject to liability claims from users. Our agreements with our clients typically contain provisions intended to limit our exposure to such claims, but such provisions may not be effective in limiting our exposure. Contractual limitations we use may not be enforceable and may not provide us with adequate protection against product liability claims in certain jurisdictions. A successful claim for product or service liability brought against us could result in substantial cost to us and divert management’s attention from our operations.

~~Privacy concerns and laws or other domestic regulations may reduce the effectiveness of our applications and adversely affect our business.~~

Our clients collect, use and store personal or identifying information regarding their employees and their family members in our solutions. Federal and state government bodies and agencies have adopted, are considering adopting, or may adopt laws and regulations regarding the collection, use, storage and disclosure of such personal information. The

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costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to our clients’ businesses may limit the use and adoption of our applications and reduce overall demand, or lead to significant fines, penalties or liabilities for any noncompliance with such privacy laws. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our solutions.

All of these legislative and regulatory initiatives may adversely affect our clients’ ability to process, handle, store, use and transmit demographic and personal information regarding their employees and family members, which could reduce demand for our solutions.

In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. If the processing of personal information were to be curtailed in this manner, our products would be less effective, which may reduce demand for our applications and adversely affect our business.

~~Our business could be adversely affected if we do not effectively implement our solutions or our clients are not satisfied with our implementation services.~~

Our ability to deliver our payroll and HCM solutions depends on our ability to effectively implement and to transition to, and train our clients on, our solutions. We do not recognize revenue from new clients until they process their first payroll. Further, the majority of our agreements with our clients are generally terminable by the clients on 60 days’ or less notice. If a client is not satisfied with our implementation services, the client could terminate its agreement with us before we have recovered our costs of implementation services, which would adversely affect our results of operations and cash flows. In addition, negative publicity related to our client relationships, regardless of its accuracy, may further damage our business by affecting our ability to compete for new business with current and prospective clients.

~~Our business could be affected if we are unable to accommodate increased demand for our implementation services resulting from growth in our business.~~

We may be unable to respond quickly enough to accommodate increased client demand for implementation services driven by our growth. The implementation process is the first substantive interaction with a new client. As a predicate to providing knowledgeable implementation services, we must have a sufficient number of personnel dedicated to that process. In order to ensure that we have sufficient employees to implement our solutions, we must closely coordinate hiring of personnel with our projected sales for a particular period. Because our sales cycle is typically only three to six weeks long, we may not be successful in coordinating hiring of implementation personnel to meet increased demand for our implementation services. Increased demand for implementation services without a corresponding staffing increase of qualified personnel could adversely affect the quality of services provided to new clients, and our business and our reputation could be harmed.

~~Any failure to offer high-quality client services may adversely affect our relationships with our clients and our financial results.~~

Once our applications are deployed, our clients depend on our client service organization to resolve issues relating to our solutions. The majority of our clients are medium-sized organizations with limited personnel and resources to address payroll and other HCM related issues. These clients rely on us more so than larger companies with greater internal resources and expertise. High-quality client services are important for the successful marketing and sale of our products and for the retention of existing clients. If we do not help our clients quickly resolve issues and provide effective ongoing support, our ability to sell additional products to existing clients would suffer and our reputation with existing or potential clients would be harmed.

In addition, our sales process is highly dependent on our applications and business reputation and on positive recommendations from our existing clients. Any failure to maintain high-quality client services, or a market perception that we do not maintain high-quality client services, could adversely affect our reputation, our ability to sell our solutions to existing and prospective clients, and our business, operating results and financial position.

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~~If we fail to manage our technical operations infrastructure, our existing clients may experience service outages and our new clients may experience delays in the deployment of our applications.~~

We have experienced significant growth in the number of users, transactions and data that our operations infrastructure supports. We seek to maintain sufficient excess capacity in our data center and other operations infrastructure to meet the needs of all of our clients. We also seek to maintain excess capacity to facilitate the rapid provision of new client deployments and the expansion of existing client deployments. In addition, we need to properly manage our technological operations infrastructure in order to support version control, changes in hardware and software parameters and the evolution of our applications. However, the provision of new hosting infrastructure requires significant lead time. We have experienced, and may in the future experience, website disruptions, outages and other performance problems. These problems may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks, fraud, spikes in client usage and denial of service issues. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. If we do not accurately predict our infrastructure requirements, our existing clients may experience service outages that may subject us to financial penalties, financial liabilities and client losses. If our operations infrastructure fails to keep pace with increased sales, clients may experience delays as we seek to obtain additional capacity, which could adversely affect our reputation and our revenues.

In addition, our ability to deliver our cloud-based applications depends on the development and maintenance of Internet infrastructure by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, bandwidth capacity, and security. Our services are designed to operate without interruption. However, we have experienced and expect that we will experience future interruptions and delays in services and availability from time to time. In the event of a catastrophic event with respect to one or more of our systems, we may experience an extended period of system unavailability, which could negatively impact our relationship with clients. To operate without interruption, both we and our clients must guard against:

~~Damage from fire, power loss, natural disasters and other force majeure events outside our control;~~

~~Communications failures;~~

~~Software and hardware errors, failures and crashes;~~

~~Security breaches, computer viruses, hacking, denial-of-service attacks and similar disruptive problems; and~~

~~Other potential interruptions.~~

We also rely on computer hardware purchased or leased and software licensed from third parties in order to offer our services. These licenses and hardware are generally commercially available on varying terms. However, it is possible that this hardware and software might not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware or software could result in delays in the provisioning of our services until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated.

Furthermore, our payroll application is essential to our clients’ timely payment of wages to their employees. Any interruption in our service may affect the availability, accuracy or timeliness of these programs and could damage our reputation, cause our clients to terminate their use of our application, require us to indemnify our clients against certain losses due to our own errors and prevent us from gaining additional business from current or future clients.

~~Any disruption in the operation of our data centers could adversely affect our business.~~

We host our solutions at a third-party facility in Franklin Park, Illinois and utilize another third-party facility in Kenosha, Wisconsin for backup and disaster recovery. We also may decide to employ additional offsite data centers in the future to accommodate growth.

Problems faced by our data center locations, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their clients,

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including us, could adversely affect the availability and processing of our solutions and related services and the experience of our clients. If our data centers are unable to keep up with our growing needs for capacity, this could have an adverse effect on our business and cause us to incur additional expense. In addition, any financial difficulties faced by our third-party data center’s operator or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict. Any changes in service levels at our third-party data center or any errors, defects, disruptions or other performance problems with our applications could adversely affect our reputation and may damage our clients’ stored files or result in lengthy interruptions in our services. Interruptions in our services might reduce our revenues, subject us to potential liability or other expenses or adversely affect our renewal rates.

In addition, while we own, control and have access to our servers and all of the components of our network that are located in our backup data centers, we do not control the operation of these facilities. The operators of our third party data center facilities have no obligations to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if the data center operators are acquired, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur costs and experience service interruption in doing so.

Our software might not operate properly, which could damage our reputation, give rise to claims against us, or divert application of our resources from other purposes, any of which could harm our business and operating results.

Our payroll and HCM software is complex and may contain or develop undetected defects or errors, particularly when first introduced or as new versions are released. Despite extensive testing, from time to time we have discovered defects or errors in our products. In addition, because changes in employer and legal requirements and practices relating to benefits are frequent, we discover defects and errors in our software and service processes in the normal course of business compared against these requirements and practices. Material performance problems or defects in our products and services might arise in the future, which could have an adverse impact on our business and client relationship and subject us to claims.

Moreover, software development is time-consuming, expensive and complex. Unforeseen difficulties can arise. We might encounter technical obstacles, and it is possible that we discover problems that prevent our products from operating properly. If they do not function reliably or fail to achieve client expectations in terms of performance, clients could cancel their agreements with us and/or assert liability claims against us. This could damage our reputation, impair our ability to attract or maintain clients and harm our results of operations.

Defects and errors and any failure by us to identify and address them could result in delays in product introductions and updates, loss of revenue or market share, liability to clients or others, failure to achieve market acceptance or expansion, diversion of development and other resources, injury to our reputation, and increased service and maintenance costs. Defects or errors in our product or service processes might discourage existing or potential clients from purchasing from us. Correction of defects or errors could prove to be impossible or impracticable. The costs incurred in correcting any defects or errors or in responding to resulting claims or liability might be substantial and could adversely affect our operating results.

Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption, or cause the information that we collect to be incomplete or contain inaccuracies that our clients, their employees and taxing and other regulatory authorities regard as significant. The costs incurred in correcting any errors or in responding to regulatory authorities or to resulting claims or liability might be substantial and could adversely affect our operating results.

We maintain insurance, but our insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover all claims made against us and defending a suit, regardless of its merit, could be costly and divert management’s attention.

Our clients might assert claims against us in the future alleging that they suffered damages due to a defect, error, or other failure of our product or service processes. A product liability claim and errors or omissions claim could subject us to significant legal defense costs and adverse publicity regardless of the merits or eventual outcome of such a claim.

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~~Client funds that we hold are subject to market, interest rate, credit and liquidity risks. The loss of these funds could have an adverse impact on our business.~~

We invest funds held for our clients in liquid, investment-grade marketable securities such as corporate bonds, commercial paper, and asset-backed securities, money market securities, and other cash equivalents. We follow an established client fund investment policy and set of guidelines to monitor and help mitigate our exposure to liquidity and credit risks. Nevertheless, our client fund assets are subject to general market, interest rate, credit, and liquidity risks. These risks may be exacerbated, individually or in unison, during periods of unusual financial market volatility. Any loss of or inability to access client funds could have an adverse impact on our cash position and results of operations and could require us to obtain additional sources of liquidity.

In addition, these funds are held in consolidated accounts in trust on behalf of our clients, and as a result the aggregate amounts in the accounts exceed the applicable federal deposit insurance limits. We believe that since such funds are deposited in trust on behalf of our clients, the Federal Deposit Insurance Corporation, or the FDIC, would treat those funds as if they had been deposited by each of the clients themselves and insure each client’s funds up to the applicable deposit insurance limits. If the FDIC were to take the position that it is not obligated to provide deposit insurance for our clients’ funds or if the reimbursement of these funds were delayed, our business and our clients could be materially harmed.

If we are required to collect sales and use taxes in additional jurisdictions, we might be subject to liability for past sales and our future sales may decrease. Adverse tax laws or regulations could be enacted or existing laws could be applied to us or our clients, which could increase the costs of our services and adversely impact our business.

The application of federal, state, and local tax laws to services provided electronically is evolving. New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time (possibly with retroactive effect), and could be applied solely or disproportionately to services provided over the Internet. These enactments could adversely affect our sales activity due to the inherent cost increase the taxes would represent and ultimately result in a negative impact on our operating results and cash flows.

In addition, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us (possibly with retroactive effect), which could require us or our clients to pay additional tax amounts, as well as require us or our clients to pay fines or penalties and interest for past amounts.

For example, we might lose sales or incur significant expenses if states successfully impose broader guidelines on state sales and use taxes. A successful assertion by one or more states requiring us to collect sales or other taxes on our software or provision of our services could result in substantial tax liabilities for past transactions and otherwise harm our business. Each state has different rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that change over time. We review these rules and regulations periodically and, when we believe we are subject to sales and use taxes in a particular state, we may voluntarily engage state tax authorities in order to determine how to comply with that state’s rules and regulations. We cannot assure you that we will not be subject to sales and use taxes or related penalties for past sales in states where we currently believe no such taxes are required.

Vendors of services, like us, are typically held responsible by taxing authorities for the collection and payment of any applicable sales and similar taxes. If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our services, we might be liable for past taxes in addition to taxes going forward. Liability for past taxes might also include substantial interest and penalty charges. Our clients typically pay us for applicable sales and similar taxes. Nevertheless, our clients might be reluctant to pay back taxes and might refuse responsibility for interest or penalties associated with those taxes. If we are required to collect and pay back taxes and the associated interest and penalties, and if our clients fail or refuse to reimburse us for all or a portion of these amounts, we will incur unplanned expenses that may be substantial. Moreover, imposition of such taxes on us going forward will effectively increase the cost of our services to our clients and might adversely affect our ability to retain existing clients or to gain new clients in the areas in which such taxes are imposed.

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~~We may experience negative or unforeseen tax consequences.~~

In December 2017, both houses of the U.S. Congress passed legislation, known as the Tax Cuts and Jobs Act of 2017, that was approved and signed into law. This legislation could have a material benefit or material adverse impact on our effective tax rate, tax expense and cash flow. We are in the process of evaluating the potential aggregate impact the enactment of this passed legislation will have on our financial condition, cash flows and results of operations. Any benefits associated with lower U.S. corporate tax rates could be reduced or offset by other tax changes adverse to our business or operations.

~~Any future litigation against us could be costly and time-consuming to defend.~~

We may become subject, from time to time, to legal proceedings and claims that arise in the ordinary course of business such as claims brought by our clients in connection with commercial disputes or employment claims made by our current or former employees. Litigation might result in substantial costs and may divert management’s attention and resources, which might seriously harm our business, overall financial condition, and operating results. Insurance might not cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims and might not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby harming our operating results and leading analysts or potential investors to lower their expectations of our performance, which could reduce the trading price of our stock.

~~Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.~~

Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our proprietary rights in our products and services. Our proprietary technologies are not covered by any patent or patent application. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our products may be unenforceable under the laws of certain jurisdictions and foreign countries.

We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our products and proprietary information. The confidentiality agreements on which we rely to protect certain technologies may be breached and may not be adequate to protect our proprietary technologies. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our solutions. In addition, we depend, in part, on technology of third parties licensed to us for our solutions, and the loss or inability to maintain these licenses or errors in the software we license could result in increased costs, reduced service levels or delayed sales of our solutions.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our solutions, impair the functionality of our solutions, delay introductions of new solutions, result in our substituting inferior or more costly technologies into our solutions, or injure our reputation. In addition, we may be required to license additional technology from third parties to develop and market new solutions, and we cannot assure you that we could license that technology on commercially reasonable terms, or at all. Although we do not expect that our inability to license this technology in the

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~~future would have a material adverse effect on our business or operating results, our inability to license this technology could adversely affect our ability to compete.~~

~~We may be sued by third parties for alleged infringement of their proprietary rights.~~

There is considerable patent and other intellectual property development activity in our industry. Our success depends, in part, upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time, third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. In the future, others may claim that our applications and underlying technology infringe or violate their intellectual property rights. However, we may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our services, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our clients or business partners or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications, or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

~~The use of open source software in our products and solutions may expose us to additional risks and harm our intellectual property rights.~~

Some of our products and solutions use or incorporate software that is subject to one or more open source licenses. Open source software is typically freely accessible, usable and modifiable. Certain open source software licenses require a user who intends to distribute the open source software as a component of the user’s software to disclose publicly part or all of the source code to the user’s software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on potentially unfavorable terms or at no cost.

The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts. Accordingly, there is a risk that those licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our solutions. In that event, we could be required to seek licenses from third parties in order to continue offering our products or solutions, to re-develop our products or solutions, to discontinue sales of our products or solutions, or to release our proprietary software code under the terms of an open source license, any of which could harm our business. Further, given the nature of open source software, it may be more likely that third parties might assert copyright and other intellectual property infringement claims against us based on our use of these open source software programs.

While we monitor the use of all open source software in our products, solutions, processes and technology and try to ensure that no open source software is used in such a way as to require us to disclose the source code to the related product or solution when we do not wish to do so, it is possible that such use may have inadvertently occurred in deploying our proprietary solutions. In addition, if a third-party software provider has incorporated certain types of open source software into software we license from such third party for our products and solutions without our knowledge, we could, under certain circumstances, be required to disclose the source code to our products and solutions. This could harm our intellectual property position and our business, results of operations and financial condition.

~~If third-party software used in our products is not adequately maintained or updated, our business could be materially adversely affected.~~

Our products utilize certain software of third-party software developers. For example, we license technology from bswift as part of our Paylocity Web Benefits solution. Although we believe that there are alternatives for these products, any significant interruption in the availability of such third-party software could have an adverse impact on our business unless and until we can replace the functionality provided by these products at a similar cost. Additionally, we rely, to a certain extent, upon such third parties’ abilities to enhance their current products, to develop new products on a timely and cost-effective basis and to respond to emerging industry standards and other technological changes. We may

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be unable to replace the functionality provided by the third-party software currently offered in conjunction with our products in the event that such software becomes obsolete or incompatible with future versions of our products or is otherwise not adequately maintained or updated.

~~Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our applications, and could have a negative impact on our business.~~

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our applications in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, resulting in reductions in the demand for Internet-based applications such as ours.

In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease of use, accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms” and similar malicious programs, and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet is adversely affected by these issues, demand for our applications could suffer.

Furthermore, the availability or performance of our applications could be adversely affected by a number of factors, including clients’ inability to access the Internet, the failure of our network or software systems, security breaches or variability in user traffic for our services. For example, our clients access our solutions through their Internet service providers. If a service provider fails to provide sufficient capacity to support our applications or otherwise experiences service outages, such failure could interrupt our clients’ access to our solutions, adversely affect their perception of our applications’ reliability and reduce our revenues. In addition to potential liability, if we experience interruptions in the availability of our applications, our reputation could be adversely affected and we could lose clients.

Regulatory requirements placed on our software and services could impose increased costs on us, delay or prevent our introduction of new products and services, and impair the function or value of our existing products and services.

Our products and services may become subject to increasing regulatory requirements, and as these requirements proliferate, we may be required to change or adapt our products and services to comply. Changing regulatory requirements might render our products and services obsolete or might block us from developing new products and services. This might in turn impose additional costs upon us to comply or to further develop our products and services. It might also make introduction of new products and services more costly or more time-consuming than we currently anticipate. It might even prevent introduction by us of new products or services or cause the continuation of our existing products or services to become more costly.

~~We might require additional capital to support business growth, and this capital might not be available.~~

We intend to continue to make investments to support our business growth and might require additional funds to respond to business challenges or opportunities, including the need to develop new products and services or enhance our existing services, enhance our operating infrastructure, and acquire complementary businesses and technologies. Accordingly, we might need to engage in equity or debt financings to secure additional funds. In addition, we will need to expand our ACH capacity as we grow our business.

If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing or ACH facility secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which might make it more difficult for us to obtain additional capital and to pursue business opportunities and to grow our business. In addition, we might not be able to obtain additional financing on terms favorable to us, if at all. If

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we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

~~Our services present the potential for embezzlement, identity theft, or other similar illegal behavior by our associates with respect to third parties.~~

Certain services offered by us involve collecting payroll information from individuals, and this frequently includes information about their checking accounts. Our services also involve the use and disclosure of personal and business information that could be used to impersonate third parties, commit identity theft, or otherwise gain access to their data or funds. If any of our associates take, convert, or misuse such funds, documents or data, we could be liable for damages, and our business reputation could be damaged or destroyed. Moreover, if we fail to adequately prevent third parties from accessing personal and/or business information and using that information to commit identity theft, we might face legal liabilities and other losses than can have a negative impact on our business.

We rely on a third-party shipping provider to deliver printed checks to our clients, and therefore our business could be negatively impacted by disruptions in the operations of this third-party provider.

We rely on third-party couriers such as the United Parcel Service, or UPS, to ship printed checks to our clients. Relying on UPS and other third-party couriers puts us at risk from disruptions in their operations, such as employee strikes, inclement weather and their ability to perform tasks on our behalf. If UPS or other third-party couriers fail to perform their tasks, we could incur liability or suffer damages to our reputation, or both. If we are forced to use other third-party couriers, our costs could increase and we may not be able to meet shipment deadlines. Moreover, we may not be able to obtain terms as favorable as those we currently use, which could further increase our costs. These circumstances may negatively impact our business, financial condition and results of operations.

~~Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.~~

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the Securities and Exchange Commission, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results including increased volatility, and could affect the reporting of transactions completed before the announcement of a change. Our accounting policies that have been or may be affected by changes in accounting principles include, but are not limited to, revenue recognition and accounting for leases.

We may acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our stockholders and otherwise disrupt our operations and adversely affect our operating results.

We may in the future seek to acquire or invest in other businesses or technologies. The pursuit of potential acquisitions or investments may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.

In addition, we have limited experience in acquiring other businesses. If we acquire additional businesses, we may not be able to integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:

~~Inability to integrate or benefit from acquired technologies or services in a profitable manner;~~

~~Unanticipated costs or liabilities associated with the acquisition;~~

~~Incurrence of acquisition-related costs;~~

~~Difficulty integrating the accounting systems, operations and personnel of the acquired business;~~

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~~Difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business;~~

Difficulty converting the clients of the acquired business onto our applications and contract terms, including disparities in the revenues, licensing, support or professional services model of the acquired company;

~~Diversion of management’s attention from other business concerns;~~

~~Adverse effects to our existing business relationships with business partners and clients as a result of the acquisition;~~

~~The potential loss of key employees;~~

~~Use of resources that are needed in other parts of our business; and~~

~~Use of substantial portions of our available cash to consummate the acquisition.~~

In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations.

Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations, our operating results, business and financial position may suffer.

~~Risks Related to Ownership of Our Common Stock~~

~~Insiders have substantial control over us, which may limit our stockholders’ ability to influence corporate matters and delay or prevent a third party from acquiring control over us.~~

As of February 2, 2018, our directors, executive officers and holders of more than 5% of our common stock, together with their respective affiliates, beneficially owned, in the aggregate, approximately 42.2% of our outstanding common stock. This significant concentration of ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. In addition, these stockholders will be able to exercise influence over all matters requiring stockholder approval, including the election of directors and approval of corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit the ability of our other stockholders to influence corporate matters and may have the effect of delaying or preventing a change in control, including a merger, consolidation, or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change in control would benefit our other stockholders.

~~Our stock price may be subject to wide fluctuations.~~

The trading price of our common stock could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include those discussed in this “Risk Factors” section of this Quarterly Report on Form 10-Q and others such as:

~~Our operating performance and the operating performance of similar companies;~~

~~Announcements by us or our competitors of acquisitions, business plans or commercial relationships;~~

~~Any major change in our board of directors or senior management;~~

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~~Publication of research reports or news stories about us, our competitors, or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;~~

~~The public’s reaction to our press releases, our other public announcements and our filings with the SEC;~~

~~Sales of our common stock by our directors, executive officers and affiliates;~~

~~Adverse market reaction to any indebtedness we may incur or securities we may issue in the future;~~

~~Short sales, hedging and other derivative transactions in our common stock;~~

~~Threatened or actual litigation; and~~

Other events or factors, including changes in general conditions in the United States and global economies or financial markets (including acts of God, war, incidents of terrorism, or other destabilizing events and the resulting responses to them).

In addition, the stock market in general and the market for Internet-related companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources, and harm our business, operating results, and financial condition.

~~We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.~~

We have not declared or paid dividends on our common stock in the past three fiscal years and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future, and the success of an investment in shares of our common stock will depend upon future appreciation in its value, if any. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders purchased their shares.

~~Future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.~~

As of February 2, 2018, we had an aggregate of 52,603,746 outstanding shares of common stock. The 17,362,750 shares sold in our initial public offering, follow-on offering and secondary offering can be freely sold in the public market without restriction. The remaining shares can be freely sold in the public market, subject in some cases to volume and other restrictions under Rule 144 and 701 under the Securities Act of 1933, as amended, and various agreements.

In addition, we have registered 15,092,927 shares of common stock that we have issued and may issue under our equity plans. These shares can be freely sold in the public market upon issuance, subject in some cases to volume and other restrictions under Rules 144 and 701 under the Securities Act, and various vesting agreements. In addition, some of our employees, including some of our executive officers, have entered into 10b5-1 trading plans regarding sales of shares of our common stock. These plans provide for sales to occur from time to time. If any of these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

Also, in the future, we may issue additional securities in connection with investments and acquisitions. The amount of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then outstanding stock. Due to these factors, sales of a substantial number of shares of our common stock in the

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public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

If we are unable to maintain effective internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and provide a management report on the internal controls over financial reporting. In addition, the Sarbanes-Oxley Act requires that our management report on the internal controls over financial reporting be attested to by our independent registered public accounting firm. If we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. Compliance with these public company requirements has made some activities more time-consuming, costly and complicated. If we identify material weaknesses in our internal controls over financial reporting, if we are unable to assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

~~We have incurred and will continue to incur significantly increased costs and devote substantial management time as a result of operating as a public company.~~

As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses. For example, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC and the NASDAQ Global Select Market including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Compliance with these requirements has increased our legal and financial compliance costs and has made some activities more time consuming and costly. In addition, our management and other personnel have been required to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we have incurred and will continue to incur significant expenses as well as devote substantial management effort toward ensuring ongoing compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. Although we have hired additional employees to comply with these requirements, we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge to comply with any regulatory changes.

~~If securities or industry analysts do not continue to publish research or publish unfavorable or misleading research about our business, our stock price and trading volume could decline.~~

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our stock or publishes unfavorable or misleading research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the market for our stock and demand for our stock could decrease, which could cause our stock price or trading volume to decline.

~~Anti-takeover provisions in our charter documents and Delaware law could discourage, delay, or prevent a change in control of our company and may affect the trading price of our common stock.~~

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law, which apply to us, may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the stockholder becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our amended and

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restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and bylaws:

~~Authorize the issuance of “blank check” convertible preferred stock that could be issued by our board of directors to thwart a takeover attempt;~~

Establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;

~~Require that directors only be removed from office for cause and only upon a supermajority stockholder vote;~~

~~Provide that vacancies on the board of directors, including newly-created directorships, may be filled only by a majority vote of directors then in office rather than by stockholders;~~

~~Prevent stockholders from calling special meetings; and~~

~~Prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders.~~

Our bylaws provide that the state and federal courts located within the state of Delaware are the sole and exclusive forums for certain legal actions involving the company or our directors, officers and employees.

On February 2, 2016, we amended our bylaws to designate the state and federal courts located within the state of Delaware as the sole and exclusive forums for claims arising derivatively, pursuant to the Delaware General Corporation Law or governed by the internal affairs doctrine. The choice of forum provision is expressly authorized by the Delaware General Corporation Law, which was amended so that companies would not have to litigate internal claims in more than one jurisdiction. If a court were to find the exclusive forum provision contained in our bylaws to be inapplicable or unenforceable, we may incur additional costs associated with resolving such extra-forum claims, which could adversely affect our business and financial condition. This bylaw provision, therefore, may dissuade or discourage claimants from initiating lawsuits or claims against us or our directors and officers in forums other than Delaware.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Sales of Unregistered Securities

Not applicable.

(b) Use of Proceeds

On March 24, 2014, we completed our initial public offering or IPO, of 8,101,750 shares of common stock, at a price of $17.00 per share, before underwriting discounts and commissions. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-193661), which was declared effective by the SEC on March 18, 2014. With the proceeds of the IPO, we repaid amounts outstanding under a note issued by us to Commerce Bank & Trust Company on March 9, 2011, which totaled $1.1 million, paid $9.4 million for the purchase of substantially all of the assets of BFKMS Inc. and paid $9.5 million for the purchase of substantially all of the assets of Synergy Payroll, LLC.

On December 17, 2014, we completed a follow-on offering of 4,960,000 shares of common stock at a price of $26.25 per share, before underwriting discounts and commissions. The offer and sale of all of the shares in the follow-on offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-200448) which was declared effective by the SEC on December 11, 2014. There have been no material changes in the planned use of proceeds from the follow-on as described in the final prospectus filed with the SEC pursuant to Rule 424(b) on December 12, 2014.

On September 30, 2015, we completed a secondary offering of 4,301,000 shares of common stock at a price of $29.75 per share, before underwriting discounts and commissions. The offer and sale of all of the shares in the secondary

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offering were registered under the Securities Act pursuant to a registration statement on Form S-3 (File No. 333-206941) which was declared effective by the SEC on September 25, 2015. The Company did not receive any proceeds from the sale of common stock, as all the shares were sold by shareholders of the Company.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The information required by this Item is set forth in the Index to Exhibits immediately following this page.

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INDEX TO EXHIBITS


Exhibit Nos.		Description
~~Exhibit Nos.~~		~~Description~~

3.1		First Amended and Restated Certificate of Incorporation (filed as Exhibit 3.2 of Paylocity Holding Corporation’s Form S-1 Registration Statement (Registration No. 333-193661)).

3.2		Amended and Restated Bylaws of Paylocity Holding Corporation (filed as Exhibit 3.2 of Paylocity Holding Corporation’s Annual Report on Form 10-K for the year ended June 30, 2017 (File No. 001-36348)).

10.1		Equity Purchase Agreement, dated as of August 31, 2021, among Paylocity Corporation, Blue Marble Payroll, LLC and the Equityholders party thereto (filed as Exhibit 10.1 of Paylocity Holding Corporation’s Current Report on Form 8-K on September 1, 2021 (File No. 001-36348)).*

31.1**		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-4 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2**		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-4 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1***		Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer.

32.2***		Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer.

101.INS**		XBRL Instance ~~Document.~~Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).

101.SCH**		XBRL Taxonomy Extension Schema Document.

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB**		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document.

104**		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

* Certain exhibits and schedules have been omitted in accordance with Regulation S-K Item 601(a)(5). The Company agrees to furnish to the SEC a copy of any omitted exhibits or schedules upon request of the SEC.

** Filed herewith

*** Furnished herewith

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SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


		PAYLOCITY HOLDING CORPORATION

Date:	~~February 9, 2018~~November 5, 2021	By:	/S/s/ Steven R. Beauchamp
		Name:	Steven R. Beauchamp
		Title:	Chief Executive Officer (Principal Executive Officer) and Director


Date:	~~February 9, 2018~~November 5, 2021	By:	/S/s/ Toby J. Williams
		Name:	Toby J. Williams
		Title:	Chief Financial Officer (Principal Financial Officer)


	Stockholders’ Equity
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Loss		Equity
Balances at June 30, 2017	51,738	$	52	$	192,837	$	(45,276)	$	—	$	147,613
Stock-based compensation	—		—		15,328		—		—		15,328
Stock options exercised	669		1		5,739		—		—		5,740
Issuance of common stock upon vesting of restricted stock units	414		—		—		—		—		—
Issuance of common stock under employee stock purchase plan	53		—		2,045		—		—		2,045
Net settlement for taxes and/or exercise price related to equity awards	(284)		—		(13,437)		—		—		(13,437)
Unrealized losses on securities, net of tax	—		—		—		—		(110)		(110)
Net income	—		—		—		974		—		974
Balances at December 31, 2017	52,590	$	53	$	202,512	$	(44,302)	$	(110)	$	158,153



					Weighted
					Average
	June 30,		December 31,		Useful
	2017		2017		Life
Client relationships	$	12,580	$	12,580	9 years
Non-solicitation agreements		360		360	2 - 3 years
Total		12,940		12,940
Accumulated amortization		(4,033)		(4,751)
Intangible assets, net	$	8,907	$	8,189


Remainder of fiscal 2018	$	709
Fiscal 2019		1,398
Fiscal 2020		1,398
Fiscal 2021		1,398
Fiscal 2022		1,398
Thereafter		1,888
Total	$	8,189


	Outstanding Options
				Weighted
		Weighted		average
		average		remaining	Aggregate
	Number of	exercise		contractual	intrinsic
	shares	price		term (years)	value
Balance at July 1, 2017	2,751	$	11.54	5.69	$	92,556
Options forfeited	(4)	$	17.00
Options exercised	(669)	$	8.58
Balance at December 31, 2017	2,078	$	12.48	5.52	$	72,068
Options exercisable at December 31, 2017	1,951	$	11.36	5.42	$	69,856
Options vested and expected to vest at December 31, 2017	2,072	$	12.43	5.52	$	71,981


	Three Months Ended
	December 31,						Change
	2016			2017			$		%
Recurring fees	$	65,347		$	81,292		$	15,945	24	%
Percentage of total revenues		95	%		95	%
Interest income on funds held for clients	$	731		$	1,783		$	1,052	144	%
Percentage of total revenues		1	%		2	%
Implementation services and other	$	2,576		$	2,929		$	353	14	%
Percentage of total revenues		4	%		3	%