Form 10-Q
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| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
2020☐o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
PAYLOCITY HOLDING CORPORATION
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Delaware |
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(State or other jurisdiction of incorporation or organization) |
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(847)
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $0.001 per share |
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| The NASDAQ Global Select Market LLC | ||||||||||
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Large Accelerated Filer |
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Non-Accelerated Filer |
| Smaller Reporting Company |
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| Emerging Growth Company |
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28, 2022.
Paylocity Holding Corporation
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June 30, December 31, 2020 2020 Assets Current assets: Cash and cash equivalents $ 250,851 $ 218,696 Corporate investments 34,556 13,637 Accounts receivable, net 4,923 6,118 Deferred contract costs 32,332 37,447 Prepaid expenses and other 13,188 15,633 Total current assets before funds held for clients 335,850 291,531 Funds held for clients 1,327,304 2,204,286 Total current assets 1,663,154 2,495,817 Capitalized internal-use software, net 36,501 40,623 Property and equipment, net 66,737 64,066 Operating lease right-of-use assets 48,658 45,429 Intangible assets, net 13,360 15,083 Goodwill 21,655 33,184 Long-term deferred contract costs 125,711 144,027 Long‑term prepaid expenses and other 4,917 3,218 Deferred income tax assets 4,955 9,516 Total assets $ 1,985,648 $ 2,850,963 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,755 $ 2,771 Accrued expenses 79,881 64,204 Total current liabilities before client fund obligations 81,636 66,975 Client fund obligations 1,327,304 2,204,286 Total current liabilities 1,408,940 2,271,261 Long-term debt 100,000 100,000 Long-term operating lease liabilities 73,299 69,672 Other long-term liabilities 1,747 1,812 Deferred income tax liabilities 8,754 — Total liabilities $ 1,592,740 $ 2,442,745 Stockholders’ equity: Preferred stock, $0.001 par value, 5,000 authorized, 0 shares issued and outstanding at June 30, 2020 and December 31, 2020 $ — $ — Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2020 and December 31, 2020; 53,792 shares issued and outstanding at June 30, 2020 and 54,370 shares issued and outstanding at December 31, 2020 54 54 Additional paid-in capital 227,907 221,525 Retained earnings 164,272 186,374 Accumulated other comprehensive income 675 265 Total stockholders' equity $ 392,908 $ 408,218 Total liabilities and stockholders’ equity $ 1,985,648 $ 2,850,963 Three Months Ended Six Months Ended December 31, December 31, 2019 2020 2019 2020 Revenues: Recurring and other revenue $ 127,980 $ 145,393 $ 249,853 $ 280,268 Interest income on funds held for clients 4,394 936 9,241 1,855 Total revenues 132,374 146,329 259,094 282,123 Cost of revenues 45,424 53,542 88,054 102,922 Gross profit 86,950 92,787 171,040 179,201 Operating expenses: Sales and marketing 37,293 37,775 74,250 75,449 Research and development 15,410 19,338 29,804 37,985 General and administrative 28,133 29,323 54,872 55,967 Total operating expenses 80,836 86,436 158,926 169,401 Operating income 6,114 6,351 12,114 9,800 Other income (expense) 285 (379) 759 (636) Income before income taxes 6,399 5,972 12,873 9,164 Income tax expense (benefit) 932 (3,670) (6,500) (12,938) Net income $ 5,467 $ 9,642 $ 19,373 $ 22,102 Other comprehensive loss, net of tax (36) (187) (32) (410) Comprehensive income $ 5,431 $ 9,455 $ 19,341 $ 21,692 Net income per share: Basic $ 0.10 $ 0.18 $ 0.36 $ 0.41 Diluted $ 0.10 $ 0.17 $ 0.35 $ 0.39 Weighted-average shares used in computing net income per share: Basic 53,542 54,305 53,415 54,160 Diluted 55,826 56,343 55,692 56,122 Three Months Ended December 31, 2019 Accumulated Additional Other Total Common Stock Paid-in Retained Comprehensive Stockholders’ Shares Amount Capital Earnings Income Equity Balances at September 30, 2019 53,511 $ 54 $ 195,566 $ 113,723 $ 116 $ 309,459 Stock-based compensation — — 13,422 — — 13,422 Stock options exercised 15 — 269 — — 269 Issuance of common stock upon vesting of restricted stock units 11 — — — — — Issuance of common stock under employee stock purchase plan 45 — 3,961 — — 3,961 Net settlement for taxes and/or exercise price related to equity awards (9) — (978) — — (978) Unrealized losses on securities, net of tax — — — — (36) (36) Net income — — — 5,467 — 5,467 Balances at December 31, 2019 53,573 $ 54 $ 212,240 $ 119,190 $ 80 $ 331,564 Three Months Ended December 31, 2020 Accumulated Additional Other Total Common Stock Paid-in Retained Comprehensive Stockholders’ Shares Amount Capital Earnings Income Equity Balances at September 30, 2020 54,223 $ 54 $ 209,582 $ 176,732 $ 452 $ 386,820 Stock-based compensation — — 17,187 — — 17,187 Stock options exercised 146 — 1,403 — — 1,403 Issuance of common stock upon vesting of restricted stock units 9 — — — — — Issuance of common stock under employee stock purchase plan 60 — 6,100 — — 6,100 Net settlement for taxes and/or exercise price related to equity awards (68) — (12,747) — — (12,747) Unrealized losses on securities, net of tax — — — — (188) (188) Currency translation adjustments — — — — 1 1 Net income — — — 9,642 — 9,642 Balances at December 31, 2020 54,370 $ 54 $ 221,525 $ 186,374 $ 265 $ 408,218 Six Months Ended December 31, 2019 Accumulated Additional Other Total Common Stock Paid-in Retained Comprehensive Stockholders’ Shares Amount Capital Earnings Income Equity Balances at June 30, 2019 53,075 $ 53 $ 207,982 $ 99,817 $ 112 $ 307,964 Stock-based compensation — — 26,140 — — 26,140 Stock options exercised 23 — 389 — — 389 Issuance of common stock upon vesting of restricted stock units 688 1 (1) — — — Issuance of common stock under employee stock purchase plan 45 — 3,961 — — 3,961 Net settlement for taxes and/or exercise price related to equity awards (258) — (26,231) — — (26,231) Unrealized losses on securities, net of tax — — — — (32) (32) Net income — — — 19,373 — 19,373 Balances at December 31, 2019 53,573 $ 54 $ 212,240 $ 119,190 $ 80 $ 331,564 Six Months Ended December 31, 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 — — 32,233 — — 32,233 Stock options exercised 234 — 1,932 — — 1,932 Issuance of common stock upon vesting of restricted stock units 608 — — — — — Issuance of common stock under employee stock purchase plan 60 — 6,100 — — 6,100 Net settlement for taxes and/or exercise price related to equity awards (324) — (46,647) — — (46,647) Unrealized losses on securities, net of tax — — — — (411) (411) Currency translation adjustments — — — — 1 1 Net income — — — 22,102 — 22,102 Balances at December 31, 2020 54,370 $ 54 $ 221,525 $ 186,374 $ 265 $ 408,218 Six Months Ended December 31, 2019 2020 Cash flows from operating activities: Net income $ 19,373 $ 22,102 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation expense 24,832 30,936 Depreciation and amortization expense 18,261 21,071 Deferred income tax benefit (6,500) (12,940) Provision for credit losses 63 98 Net accretion of discounts and amortization of premiums on available-for-sale securities (1,052) 255 Amortization of debt issuance costs 73 83 Other 250 515 Changes in operating assets and liabilities: Accounts receivable (53) (1,287) Deferred contract costs (22,434) (23,431) Prepaid expenses and other 773 (3,388) Accounts payable 261 1,070 Accrued expenses and other 2,231 (15,412) Net cash provided by operating activities 36,078 19,672 Cash flows from investing activities: Purchases of available-for-sale securities and other (253,950) — Proceeds from sales and maturities of available-for-sale securities 124,780 58,996 Capitalized internal-use software costs (12,139) (14,832) Purchases of property and equipment (12,398) (6,045) Acquisition of business, net of cash acquired — (14,992) Net cash provided by (used in) investing activities (153,707) 23,127 Cash flows from financing activities: Net change in client fund obligations 450,825 876,982 Proceeds from employee stock purchase plan 3,961 6,100 Taxes paid related to net share settlement of equity awards (25,954) (44,749) Payment of debt issuance costs (675) (17) Net cash provided by financing activities 428,157 838,316 Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents 310,528 881,115 Cash, cash equivalents and funds held for clients' cash and cash equivalents—beginning of period 1,426,143 1,492,133 Cash, cash equivalents and funds held for clients' cash and cash equivalents—end of period $ 1,736,671 $ 2,373,248 Supplemental Disclosure of Non-Cash Investing and Financing Activities Liabilities assumed for acquisition $ — $ 281 Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 53 $ 584 Cash paid (refunds received) for income taxes $ 19 $ (110) Reconciliation of cash, cash equivalents and funds held for clients' cash and cash equivalents to the Unaudited Consolidated Balance Sheets Cash and cash equivalents $ 75,900 $ 218,696 Funds held for clients' cash and cash equivalents 1,660,771 2,154,552 Total cash, cash equivalents and funds held for clients' cash and cash equivalents $ 1,736,671 $ 2,373,248 improving employee engagement. (a) Basis of Presentation, Consolidation and Use of Estimates changes. (b) Interim Unaudited Consolidated Financial Information (c) Income Taxes 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 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 amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. 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. Three Months Ended Six Months Ended December 31, December 31, 2019 2020 2019 2020 Recurring fees $ 123,562 $ 140,461 $ 241,339 $ 270,153 Implementation services and other 4,418 4,932 8,514 10,115 Total revenues from contracts $ 127,980 $ 145,393 $ 249,853 $ 280,268 Three Months Ended Six Months Ended December 31, December 31, 2019 2020 2019 2020 Balance at beginning of the period $ 6,580 $ 7,670 $ 6,289 $ 8,434 Deferral of revenue 3,172 2,860 6,243 5,990 Revenue recognized (2,899) (3,465) (5,679) (7,359) Balance at end of the period $ 6,853 $ 7,065 $ 6,853 $ 7,065 The following tables present the deferred contract costs and the related amortization expense for these deferred contract costs: Three Months Ended December 31, 2019 Beginning Capitalized Ending Balance Costs Amortization Balance Costs to obtain a new contract $ 86,688 $ 11,401 $ (5,241) $ 92,848 Costs to fulfill a contract 26,398 7,499 (1,212) 32,685 Total $ 113,086 $ 18,900 $ (6,453) $ 125,533 Three Months Ended December 31, 2020 Beginning Capitalized Ending Balance Costs Amortization Balance Costs to obtain a new contract $ 118,644 $ 14,071 $ (6,898) $ 125,817 Costs to fulfill a contract 49,808 8,143 (2,294) 55,657 Total $ 168,452 $ 22,214 $ (9,192) $ 181,474 Six Months Ended December 31, 2019 Beginning Capitalized Ending Balance Costs Amortization Balance Costs to obtain a new contract $ 82,103 $ 20,886 $ (10,141) $ 92,848 Costs to fulfill a contract 20,996 13,865 (2,176) 32,685 Total $ 103,099 $ 34,751 $ (12,317) $ 125,533 Six Months Ended December 31, 2020 Beginning Capitalized Ending Balance Costs Amortization Balance Costs to obtain a new contract $ 113,575 $ 25,711 $ (13,469) $ 125,817 Costs to fulfill a contract 44,468 15,504 (4,315) 55,657 Total $ 158,043 $ 41,215 $ (17,784) $ 181,474 transactions specified within it. Balance at June 30, 2020 617 Charged to expense 98 Write-offs (54) Balance at December 31, 2020 $ 661 June 30, December 31, 2020 2020 Capitalized internal-use software $ 119,178 $ 134,568 Accumulated amortization (82,677) (93,945) Capitalized internal-use software, net $ 36,501 $ 40,623 2021. June 30, December 31, 2020 2020 Office equipment $ 4,619 $ 4,859 Computer equipment 42,936 45,942 Furniture and fixtures 12,723 13,138 Software 6,609 6,627 Leasehold improvements 46,192 46,508 Time clocks rented by clients 4,967 4,722 Total 118,046 121,796 Accumulated depreciation (51,309) (57,730) Property and equipment, net $ 66,737 $ 64,066 The following table summarizes changes in goodwill during the six months ended December 31, Balance at June 30, 2020 $ 21,655 Additions attributable to current year acquisition 11,529 Balance at December 31, 2020 $ 33,184 2021: June 30, December 31, Useful 2020 2020 Life Client relationships $ 19,200 $ 19,200 5 - 9 years Proprietary technology 2,962 6,129 5 years Non-solicitation agreements 1,350 1,600 2 - 4 years Trade name 350 440 5 years Total 23,862 27,369 Accumulated amortization (10,502) (12,286) Intangible assets, net $ 13,360 $ 15,083 Remainder of fiscal 2021 $ 2,056 Fiscal 2022 4,093 Fiscal 2023 3,919 Fiscal 2024 2,914 Fiscal 2025 1,860 Thereafter 241 Total $ 15,083 June 30, December 31, 2020 2020 Accrued payroll and personnel costs $ 53,284 $ 36,428 Operating lease liabilities 8,083 7,774 Deferred revenue 8,777 9,090 Other 9,737 10,912 Total accrued expenses $ 79,881 $ 64,204 June 30, 2020 Gross Gross Amortized unrealized unrealized Type of Issue cost gains losses Fair value Cash and cash equivalents $ 250,851 $ — $ — $ 250,851 Funds held for clients' cash and cash equivalents 1,241,282 — — 1,241,282 Available-for-sale securities: Commercial paper 6,643 6 — 6,649 Corporate bonds 44,343 414 — 44,757 Asset-backed securities 49,978 424 — 50,402 U.S. treasury securities 21,302 67 — 21,369 Total available-for-sale securities (1) 122,266 911 — 123,177 Total investments $ 1,614,399 $ 911 $ — $ 1,615,310 December 31, 2020 Gross Gross Amortized unrealized unrealized Type of Issue cost gains losses Fair value Cash and cash equivalents $ 218,696 $ — $ — $ 218,696 Funds held for clients' cash and cash equivalents 2,154,552 — — 2,154,552 Available-for-sale securities: Corporate bonds 33,157 188 — 33,345 Asset-backed securities 29,858 168 — 30,026 Total available-for-sale securities (2) 63,015 356 — 63,371 Total investments $ 2,436,263 $ 356 $ — $ 2,436,619 2021. The Company did 2020 or 2021. 2021. June 30, 2020 Total Level 1 Level 2 Level 3 Cash and cash equivalents $ 250,851 $ 250,851 $ — $ — Funds held for clients' cash and cash equivalents 1,241,282 1,241,282 — — Available-for-sale securities: Commercial paper 6,649 — 6,649 — Corporate bonds 44,757 — 44,757 — Asset-backed securities 50,402 — 50,402 — U.S. treasury securities 21,369 — 21,369 — Total available-for-sale securities 123,177 — 123,177 — Total investments $ 1,615,310 $ 1,492,133 $ 123,177 $ — December 31, 2020 Total Level 1 Level 2 Level 3 Cash and cash equivalents $ 218,696 $ 218,696 $ — $ — Funds held for clients' cash and cash equivalents 2,154,552 2,154,552 — — Available-for-sale securities: Corporate bonds 33,345 — 33,345 — Asset-backed securities 30,026 — 30,026 — Total available-for-sale securities 63,371 — 63,371 — Total investments $ 2,436,619 $ 2,373,248 $ 63,371 $ — (8) Debt facility at June 30, 2021 or December 31, 2021. As of December 31, Number of Available for grant at July 1, RSUs granted MSUs granted Shares withheld in settlement of taxes and/or exercise price Forfeitures Shares removed Available for grant at December 31, Three Months Ended December 31, Six Months Ended December 31, 2019 2020 2019 2020 Cost of revenues $ 1,446 $ 1,969 $ 2,695 $ 3,801 Sales and marketing 3,379 3,965 7,347 7,845 Research and development 1,768 2,738 3,046 4,968 General and administrative 6,177 7,987 11,744 14,322 Total stock-based compensation expense $ 12,770 $ 16,659 $ 24,832 $ 30,936 There were Outstanding Options Weighted Weighted average average remaining Aggregate Number of exercise contractual intrinsic shares price term (years) value Balance at July 1, 2020 1,255 $ 12.43 2.96 $ 167,406 Options exercised (234) $ 8.27 Balance at December 31, 2020 1,021 $ 13.38 2.54 $ 196,538 Options vested and exercisable at December 31, 2020 1,021 $ 13.38 2.54 $ 196,538 2021: The Company 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 RSUs vest based on the achievement of certain revenue growth and/or Adjusted EBITDA margin Units Weighted RSU balance at July 1, 2020 1,626 $ 73.96 RSUs granted 481 $ 133.78 RSUs vested (608) $ 64.74 RSUs forfeited (60) $ 83.53 RSU balance at December 31, 2020 1,439 $ 99.82 RSUs expected to vest at December 31, 2020 1,367 $ 100.27 2021: The Company also grants MSUs under the 2014 Plan with terms determined at the discretion of the Committee. At December 31, 2021 was lower than the federal statutory rate of 21% primarily due to excess tax benefits from employee stock-based compensation. Three Months Ended Six Months Ended December 31, December 31, 2019 2020 2019 2020 Numerator: Net income $ 5,467 $ 9,642 $ 19,373 $ 22,102 Denominator: Weighted-average shares used in computing net income per share: Basic 53,542 54,305 53,415 54,160 Weighted-average effect of potentially dilutive shares: Employee stock options, restricted stock units, market share units and employee stock purchase plan shares 2,284 2,038 2,277 1,962 Diluted 55,826 56,343 55,692 56,122 Net income per share: Basic $ 0.10 $ 0.18 $ 0.36 $ 0.41 Diluted $ 0.10 $ 0.17 $ 0.35 $ 0.39 Three Months Ended Six Months Ended December 31, December 31, 2019 2020 2019 2020 Restricted stock units 3 14 687 19 Employee stock purchase plan shares 15 — 17 — Total 18 14 704 19 6, 2021. COVID-19 Impact 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. Total revenues increased from 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 Adjusted EBITDA as net income before interest expense, income tax expense, depreciation and amortization expense, stock-based compensation expense and employer payroll taxes related to stock releases and option exercises and other items as defined below. Three Months Ended Six Months Ended December 31, December 31, 2019 2020 2019 2020 (in thousands) (in thousands) Reconciliation from Gross Profit to Adjusted Gross Profit Gross profit $ 86,950 $ 92,787 $ 171,040 $ 179,201 Amortization of capitalized internal-use software costs 4,690 5,882 9,147 11,268 Stock-based compensation expense and employer payroll taxes related to stock releases and option exercises 1,465 2,002 3,197 4,405 Adjusted Gross Profit $ 93,105 $ 100,671 $ 183,384 $ 194,874 Three Months Ended Six Months Ended December 31, December 31, 2019 2020 2019 2020 (in thousands) (in thousands) Reconciliation from Net Income to Adjusted EBITDA Net income $ 5,467 $ 9,642 $ 19,373 $ 22,102 Interest expense 103 351 188 691 Income tax expense (benefit) 932 (3,670) (6,500) (12,938) Depreciation and amortization expense 9,328 10,836 18,261 21,071 EBITDA 15,830 17,159 31,322 30,926 Stock-based compensation expense and employer payroll taxes related to stock releases and option exercises 12,829 17,086 26,858 33,823 Other items* 1,606 725 2,562 1,085 Adjusted EBITDA $ 30,265 $ 34,970 $ 60,742 $ 65,834 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 and other revenue accounted for 2021. 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. Three Months Ended Six Months Ended December 31, December 31, 2019 2020 2019 2020 (in thousands) (in thousands) Capitalized portion of research and development $ 6,674 $ 7,274 $ 13,280 $ 15,390 Expensed portion of research and development 15,410 19,338 29,804 37,985 Total research and development $ 22,084 $ 26,612 $ 43,084 $ 53,375 2021. Results of Operations Three Months Ended Six Months Ended December 31, December 31, 2019 2020 2019 2020 (in thousands) (in thousands) Consolidated Statements of Operations Data: Revenues: Recurring and other revenue $ 127,980 $ 145,393 $ 249,853 $ 280,268 Interest income on funds held for clients 4,394 936 9,241 1,855 Total revenues 132,374 146,329 259,094 282,123 Cost of revenues 45,424 53,542 88,054 102,922 Gross profit 86,950 92,787 171,040 179,201 Operating expenses: Sales and marketing 37,293 37,775 74,250 75,449 Research and development 15,410 19,338 29,804 37,985 General and administrative 28,133 29,323 54,872 55,967 Total operating expenses 80,836 86,436 158,926 169,401 Operating income 6,114 6,351 12,114 9,800 Other income (expense) 285 (379) 759 (636) Income before income taxes 6,399 5,972 12,873 9,164 Income tax expense (benefit) 932 (3,670) (6,500) (12,938) Net income $ 5,467 $ 9,642 $ 19,373 $ 22,102 Three Months Ended Six Months Ended December 31, December 31, 2019 2020 2019 2020 Consolidated Statements of Operations Data: Revenues: Recurring and other revenue 97 % 99 % 96 % 99 % Interest income on funds held for clients 3 % 1 % 4 % 1 % Total revenues 100 % 100 % 100 % 100 % Cost of revenues 34 % 37 % 34 % 36 % Gross profit 66 % 63 % 66 % 64 % Operating expenses: Sales and marketing 28 % 26 % 29 % 27 % Research and development 12 % 13 % 11 % 14 % General and administrative 21 % 20 % 21 % 20 % Total operating expenses 61 % 59 % 61 % 61 % Operating income 5 % 4 % 5 % 3 % Other income (expense) 0 % 0 % 0 % 0 % Income before income taxes 5 % 4 % 5 % 3 % Income tax expense (benefit) 1 % (3) % (2) % (5) % Net income 4 % 7 % 7 % 8 % Three Months Ended December 31, Change 2019 2020 $ % Recurring and other revenue $ 127,980 $ 145,393 $ 17,413 14 % Percentage of total revenues 97 % 99 % Interest income on funds held for clients $ 4,394 $ 936 $ (3,458) (79) % Percentage of total revenues 3 % 1 % strong performance by our sales team and improved macroeconomic conditions as compared to the prior fiscal year. base and increases in client employee counts on our platform. Three Months Ended December 31, Change 2019 2020 $ % Cost of revenues $ 45,424 $ 53,542 $ 8,118 18 % Percentage of total revenue 34 % 37 % Gross margin 66 % 63 % additional delivery and other processing costs and $1.3 million of stock-based compensation associated with our equity incentive plan. Three Months Ended December 31, Change 2019 2020 $ % Sales and marketing $ 37,293 $ 37,775 $ 482 1 % Percentage of total revenues 28 % 26 % Sales and marketing expenses for the three months ended December 31, entertainment as COVID-19 pandemic restrictions eased within the United States. The increase was also driven by $2.4 million in additional marketing lead generation costs and $1.8 million of additional stock-based compensation costs associated with our equity incentive plan. Three Months Ended December 31, Change 2019 2020 $ % Research and development $ 15,410 $ 19,338 $ 3,928 25 % Percentage of total revenues 12 % 13 % personnel and $2.7 million of additional stock-based compensation costs associated with our equity incentive plan, partially offset by higher period-over-period capitalized internal-use software costs of $1.6 million. Three Months Ended December 31, Change 2019 2020 $ % General and administrative $ 28,133 $ 29,323 $ 1,190 4 % Percentage of total revenues 21 % 20 % Three Months Ended December 31, Change 2019 2020 $ % Other income (expense) $ 285 $ (379) $ (664) (233) % Percentage of total revenues 0 % 0 % Expense 2020. Comparison of Six Months Ended December 31, 2021 Six Months Ended December 31, Change 2019 2020 $ % Recurring and other revenue $ 249,853 $ 280,268 $ 30,415 12 % Percentage of total revenues 96 % 99 % Interest income on funds held for clients $ 9,241 $ 1,855 $ (7,386) (80) % Percentage of total revenues 4 % 1 % strong performance by our sales team and improved macroeconomic conditions compared to the prior fiscal year. base and increases in client employee counts on our platform. Six Months Ended December 31, Change 2019 2020 $ % Cost of revenues $ 88,054 $ 102,922 $ 14,868 17 % Percentage of total revenue 34 % 36 % Gross margin 66 % 64 % Six Months Ended December 31, Change 2019 2020 $ % Sales and marketing $ 74,250 $ 75,449 $ 1,199 2 % Percentage of total revenues 29 % 27 % Sales and marketing expenses for the six months ended December 31, entertainment as COVID-19 pandemic restrictions eased within the United States. The increase was also driven by $3.3 million in additional marketing lead generation costs and $3.0 million of additional stock-based compensation costs associated with our equity incentive plan. Six Months Ended December 31, Change 2019 2020 $ % Research and development $ 29,804 $ 37,985 $ 8,181 27 % Percentage of total revenues 11 % 14 % Six Months Ended December 31, Change 2019 2020 $ % General and administrative $ 54,872 $ 55,967 $ 1,095 2 % Percentage of total revenues 21 % 20 % costs. Six Months Ended December 31, Change 2019 2020 $ % Other income (expense) $ 759 $ (636) $ (1,395) (184) % Percentage of total revenues 0 % 0 % Expense 2020. allowance. 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. changes. filed with the SEC on August 6, 2021. this acquisition. 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 Six Months Ended December 31, 2019 2020 Net cash provided by operating activities $ 36,078 $ 19,672 Cash flows from investing activities: Purchases of available-for-sale securities and other (253,950) — Proceeds from sales and maturities of available-for-sale securities 124,780 58,996 Capitalized internal-use software costs (12,139) (14,832) Purchases of property and equipment (12,398) (6,045) Acquisition of business, net of cash acquired — (14,992) Net cash provided by (used in) investing activities (153,707) 23,127 Cash flows from financing activities: Net change in client fund obligations 450,825 876,982 Proceeds from employee stock purchase plan 3,961 6,100 Taxes paid related to net share settlement of equity awards (25,954) (44,749) Payment of debt issuance costs (675) (17) Net cash provided by financing activities 428,157 838,316 Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents $ 310,528 $ 881,115 Investing Activities 2020. 2020. Payment Due By Fiscal Period Less than 1 More than Total Year 1-3 Years 3-5 Years 5 Years Long-term debt obligations* $ 103,949 $ 1,039 $ 2,079 $ 100,831 $ — Operating lease obligations 94,102 10,532 18,711 18,571 46,288 Unconditional purchase obligations 16,110 9,462 4,912 1,736 — $ 214,161 $ 21,033 $ 25,702 $ 121,138 $ 46,288 2021: New Accounting Pronouncements Refer to Note 2 of the Notes to the Unaudited Consolidated Financial Statements for a discussion of recently issued accounting standards. 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 Inflation Risk INDEX TO EXHIBITS Exhibit Nos. Description 101.INS* XBRL Instance 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). PAYLOCITY HOLDING CORPORATION Date: February /s/ Steven R. Beauchamp Steven R. Beauchamp Chief Executive Officer (Principal Executive Officer) and Director /s/ Toby J. Williams Toby J. Williams Chief Financial Officer (Principal Financial Officer)June 30,
2021December 31,
2021Assets Current assets: Cash and cash equivalents $ 202,287 $ 84,104 Corporate investments 4,456 — Accounts receivable, net 6,267 9,830 Deferred contract costs 44,230 50,294 Prepaid expenses and other 15,966 22,795 Total current assets before funds held for clients 273,206 167,023 Funds held for clients 1,759,677 1,920,063 Total current assets 2,032,883 2,087,086 Capitalized internal-use software, net 45,018 53,107 Property and equipment, net 59,835 62,425 Operating lease right-of-use assets 43,984 49,611 Intangible assets, net 13,027 35,175 Goodwill 33,650 68,326 Long-term deferred contract costs 170,663 191,385 Long-term prepaid expenses and other 4,223 6,778 Deferred income tax assets 11,602 34,697 Total assets $ 2,414,885 $ 2,588,590 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 4,230 $ 6,600 Accrued expenses 103,109 79,507 Total current liabilities before client fund obligations 107,339 86,107 Client fund obligations 1,759,677 1,920,063 Total current liabilities 1,867,016 2,006,170 Long-term operating lease liabilities 67,201 71,877 Other long-term liabilities 1,958 2,069 Deferred income tax liabilities 1,780 1,781 Total liabilities $ 1,937,955 $ 2,081,897 Stockholders’ equity: Preferred stock, $0.001 par value, 5,000 authorized, no shares issued and outstanding at June 30, 2021 and December 31, 2021 $ — $ — Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2021 and December 31, 2021; 54,594 shares issued and outstanding at June 30, 2021 and 55,105 shares issued and outstanding at December 31, 2021 55 55 Additional paid-in capital 241,718 231,106 Retained earnings 235,091 275,876 Accumulated other comprehensive income (loss) 66 (344) Total stockholders' equity $ 476,930 $ 506,693 Total liabilities and stockholders’ equity $ 2,414,885 $ 2,588,590 Three Months Ended
December 31,Six Months Ended
December 31,2020 2021 2020 2021 Revenues: Recurring and other revenue $ 145,393 $ 195,041 $ 280,268 $ 375,865 Interest income on funds held for clients 936 996 1,855 1,869 Total revenues 146,329 196,037 282,123 377,734 Cost of revenues 53,542 70,821 102,922 134,070 Gross profit 92,787 125,216 179,201 243,664 Operating expenses: Sales and marketing 37,775 52,219 75,449 102,104 Research and development 19,338 25,278 37,985 48,354 General and administrative 29,323 39,581 55,967 74,816 Total operating expenses 86,436 117,078 169,401 225,274 Operating income 6,351 8,138 9,800 18,390 Other expense (379) (372) (636) (489) Income before income taxes 5,972 7,766 9,164 17,901 Income tax benefit (3,670) (2,087) (12,938) (22,884) Net income $ 9,642 $ 9,853 $ 22,102 $ 40,785 Other comprehensive loss, net of tax (187) (335) (410) (410) Comprehensive income $ 9,455 $ 9,518 $ 21,692 $ 40,375 Net income per share: Basic $ 0.18 $ 0.18 $ 0.41 $ 0.74 Diluted $ 0.17 $ 0.17 $ 0.39 $ 0.72 Weighted-average shares used in computing net income per share: Basic 54,305 55,067 54,160 54,938 Diluted 56,343 56,468 56,122 56,486 Three Months Ended December 31, 2020 Common Stock Additional
Paid-in
CapitalRetained
EarningsAccumulated Other Comprehensive Income Total
Stockholders’
EquityShares Amount Balances at September 30, 2020 54,223 $ 54 $ 209,582 $ 176,732 $ 452 $ 386,820 Stock-based compensation — — 17,187 — — 17,187 Stock options exercised 146 — 1,403 — — 1,403 Issuance of common stock upon vesting of restricted stock units 9 — — — — — Issuance of common stock under employee stock purchase plan 60 — 6,100 — — 6,100 Net settlement for taxes and/or exercise price related to equity awards (68) — (12,747) — — (12,747) Unrealized losses on securities, net of tax — — — — (188) (188) Currency translation adjustments — — — — 1 1 Net income — — — 9,642 — 9,642 Balances at December 31, 2020 54,370 $ 54 $ 221,525 $ 186,374 $ 265 $ 408,218 Three Months Ended December 31, 2021 Common Stock Additional
Paid-in
CapitalRetained
EarningsAccumulated Other Comprehensive Loss Total
Stockholders’
EquityShares Amount Balances at September 30, 2021 55,019 $ 55 $ 201,504 $ 266,023 $ (9) $ 467,573 Stock-based compensation — — 28,122 — — 28,122 Stock options exercised 44 — 383 — — 383 Issuance of common stock upon vesting of restricted stock units 12 — — — — — Issuance of common stock upon employee stock purchase plan 53 — 7,216 — — 7,216 Net settlement for taxes and/or exercise price related to equity awards (23) — (6,119) — — (6,119) Unrealized losses on securities, net of tax — — — — (335) (335) Net income — — — 9,853 — 9,853 Balances at December 31, 2021 55,105 $ 55 $ 231,106 $ 275,876 $ (344) $ 506,693 Six Months Ended December 31, 2020 Common Stock Additional
Paid-in
CapitalRetained
EarningsAccumulated Other Comprehensive Income Total
Stockholders’
EquityShares Amount Balances at June 30, 2020 53,792 $ 54 $ 227,907 $ 164,272 $ 675 $ 392,908 Stock-based compensation — — 32,233 — — 32,233 Stock options exercised 234 — 1,932 — — 1,932 Issuance of common stock upon vesting of restricted stock units 608 — — — — — Issuance of common stock under employee stock purchase plan 60 — 6,100 — — 6,100 Net settlement for taxes and/or exercise price related to equity awards (324) — (46,647) — — (46,647) Unrealized losses on securities, net of tax — — — — (411) (411) Currency translation adjustments — — — — 1 1 Net income — — — 22,102 — 22,102 Balances at December 31, 2020 54,370 $ 54 $ 221,525 $ 186,374 $ 265 $ 408,218 Six Months Ended December 31, 2021 Common Stock Additional
Paid-in
CapitalRetained
EarningsAccumulated Other Comprehensive Income (Loss) Total
Stockholders’
EquityShares Amount Balances at June 30, 2021 54,594 $ 55 $ 241,718 $ 235,091 $ 66 $ 476,930 Stock-based compensation — — 49,228 — — 49,228 Stock options exercised 195 — 1,812 — — 1,812 Issuance of common stock upon vesting of restricted stock units 536 — — — — — Issuance of common stock under employee stock purchase plan 53 — 7,216 — — 7,216 Net settlement for taxes and/or exercise price related to equity awards (273) — (68,868) — — (68,868) Unrealized losses on securities, net of tax — — — — (410) (410) Net income — — — 40,785 — 40,785 Balances at December 31, 2021 55,105 $ 55 $ 231,106 $ 275,876 $ (344) $ 506,693 Six Months Ended
December 31,2020 2021 Cash flows from operating activities: Net income $ 22,102 $ 40,785 Adjustments to reconcile net income to net cash provided by operating activities Stock-based compensation expense 30,936 45,802 Depreciation and amortization expense 21,071 23,383 Deferred income tax benefit (12,940) (22,952) Provision for credit losses 98 103 Net accretion of discounts and amortization of premiums on available-for-sale securities 255 221 Amortization of debt issuance costs 83 90 Other 515 247 Changes in operating assets and liabilities: Accounts receivable (1,287) (916) Deferred contract costs (23,431) (26,786) Prepaid expenses and other (3,388) (10,008) Accounts payable 1,070 1,403 Accrued expenses and other (15,412) (24,514) Net cash provided by operating activities 19,672 26,858 Cash flows from investing activities: Purchases of available-for-sale securities — (190,000) Proceeds from sales and maturities of available-for-sale securities 58,996 60,391 Capitalized internal-use software costs (14,832) (17,966) Purchases of property and equipment (6,045) (10,528) Acquisition of business, net of cash acquired (14,992) (60,234) Net cash provided by (used in) investing activities 23,127 (218,337) Cash flows from financing activities: Net change in client fund obligations 876,982 160,325 Proceeds from employee stock purchase plan 6,100 7,216 Taxes paid related to net share settlement of equity awards (44,749) (67,109) Payment of debt issuance costs (17) (41) Net cash provided by financing activities 838,316 100,391 Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents 881,115 (91,088) 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 $ 2,373,248 $ 1,854,793 Supplemental Disclosure of Non-Cash Investing and Financing Activities Purchases of property and equipment, accrued but not paid $ — $ 125 Liabilities assumed for acquisition $ 281 $ 1,874 Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 584 $ 126 Refunds received for income taxes $ (110) $ (115) Reconciliation of cash, cash equivalents and funds held for clients' cash and cash equivalents to the Consolidated Balance Sheets Cash and cash equivalents $ 218,696 $ 84,104 Funds held for clients' cash and cash equivalents 2,154,552 1,770,689 Total cash, cash equivalents and funds held for clients' cash and cash equivalents $ 2,373,248 $ 1,854,793 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. The Company’s comprehensive product suite, comprised of payroll, human capital management, workforce management, talent management, benefits, modern workforce solutions and analytics & insights, delivers a unified platform that allows clients to make strategic decisions in the areas of payroll, core HR, workforce management, talentwhile promoting a modern workplace and benefits.including the impact from the outbreak of the novel coronavirus disease (“COVID-19”), 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 andis acquired, as additional information is acquired,obtained and as the operating environment evolves, including the ongoing impact of COVID-19.orand six months ended December 31, 20202021 are not necessarily indicative of the results for the full year or the results for any future periods. The impact of the COVID-19 pandemic will not be fully known or reflected in the Company’s results of operations and overall financial performance until future periods. Refer to “Part I. Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K filed with the SEC on August 7, 2020 for risks related to the COVID-19 pandemic and its impact on the Company’s business and financial performance. 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, 20202021 included in the Company’s Annual Report on Form 10-K.6Recently Adopted Accounting StandardsIn June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial instruments held at amortized cost, including trade receivables. Under ASU 2016-13, the Company assesses its allowance for credit losses on accounts receivable by taking into consideration current economic conditions, reasonable and supportable forecasts, as well as past experience including historical write-off trends and client-specific circumstances. The new standard also eliminated the concept of other-than-temporary impairment and requires expected credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The Company adopted this standard effective July 1, 2020, using a modified retrospective approach, and the adoption did not have a material impact on the Company’s financial statements.In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends the requirements for fair value measurement disclosures. ASU 2018-13 removes, modifies or adds certain disclosure requirements under GAAP. The Company adopted this standard on July 1, 2020, and removed or modified disclosure requirements retrospectively to all periods presented, whereas any new requirements are being applied prospectively from the adoption date. The adoption of this standard did not have a material impact on the Company’s financial statements.In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”) which provides guidance to reduce complexity in certain areas of accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and simplifies various aspects of the current guidance to promote consistent application of the standard among reporting entities. The Company adopted ASU 2019-12 on July 1, 2020, and the adoption of this standard did not have a material impact on the Company’s financial statements.(e) Recently Issued Accounting StandardsFASBFinancial 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.hasoffers term arrangements,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, the7 Implementation fees are deferred and amortized generally over a period up to 24 months.Three Months Ended
December 31,Six Months Ended
December 31,2020 2021 2020 2021 Recurring fees $ 140,461 $ 188,159 $ 270,153 $ 362,856 Implementation services and other 4,932 6,882 10,115 13,009 Total revenues from contracts $ 145,393 $ 195,041 $ 280,268 $ 375,865 Three Months Ended
December 31,Six Months Ended
December 31,2020 2021 2020 2021 Balance at beginning of the period $ 7,670 $ 8,717 $ 8,434 $ 8,734 Deferral of revenue 2,860 5,407 5,990 9,760 Revenue recognized (3,465) (4,783) (7,359) (9,153) Balance at end of the period $ 7,065 $ 9,341 $ 7,065 $ 9,341 $3,942 in fiscal 2021, $2,680$5,502 in fiscal 2022, and $443$3,351 in fiscal 2023 and $488 in fiscal 2024 and thereafter.8Three Months Ended December 31, 2020 Beginning
BalanceCapitalized
CostsAmortization Ending
BalanceCosts to obtain a new contract $ 118,644 $ 14,071 $ (6,898) $ 125,817 Costs to fulfill a contract 49,808 8,143 (2,294) 55,657 Total $ 168,452 $ 22,214 $ (9,192) $ 181,474 Three Months Ended December 31, 2021 Beginning
BalanceCapitalized
CostsAmortization Ending
BalanceCosts to obtain a new contract $ 149,222 $ 14,929 $ (8,587) $ 155,564 Costs to fulfill a contract 76,785 13,100 (3,770) 86,115 Total $ 226,007 $ 28,029 $ (12,357) $ 241,679 Six Months Ended December 31, 2020 Beginning
BalanceCapitalized
CostsAmortization Ending
BalanceCosts to obtain a new contract $ 113,575 $ 25,711 $ (13,469) $ 125,817 Costs to fulfill a contract 44,468 15,504 (4,315) 55,657 Total $ 158,043 $ 41,215 $ (17,784) $ 181,474 Six Months Ended December 31, 2021 Beginning
BalanceCapitalized
CostsAmortization Ending
BalanceCosts to obtain a new contract $ 145,718 $ 26,666 $ (16,820) $ 155,564 Costs to fulfill a contract 69,175 24,040 (7,100) 86,115 Total $ 214,893 $ 50,706 $ (23,920) $ 241,679 $42,920$43,248 as of December 31, 2020,2021, 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)In November 2020,sharesissued and outstanding equity interests of Samepage Labs Inc. (“Samepage”)Blue Marble for cash consideration of $60,961, subject to 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 merger for purchase price considerationunified solution to pay employees, automate processes and stay compliant with regulations in other countries.$15,018,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 was paidis 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 cash upon closing. Samepage offers digital collaboration tools including task management, file sharing, real-time collaborationthe Purchase Agreement. The Audit Committee and more. This transaction expandsthe disinterested directors of the Company’s product functionality in these areasBoard of Directors unanimously approved the Purchase Agreement and demonstrates its commitment to building a modern workforce suite of solutions that meet the needs of HR teams and employees.recorded the acquisition usingapplied the acquisition method of accounting and recognizedrecorded the assets acquired and liabilities assumed at their respective estimated fair valuevalues as of the date of acquisition with the excess consideration paid recorded toas goodwill. The preliminary allocation of purchase price included approximately $11,529 of goodwill, $3,167 of proprietary technology and other immaterial assets and9liabilities. 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 additional information is received. The primary areas that are subjectthe Company continues to change are intangible assetsevaluate and deferred taxes.analyze the transaction. The measurement period will end no later than one year from the acquisition date.August 31, 2021 Proprietary technology $ 21,200 Client relationships 3,100 Trade names 1,200 Goodwill 34,676 Other assets acquired 2,659 Liabilities assumed (1,874) Total purchase price $ 60,961 acquisition.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 not deductible for income tax purposes. Direct costs related to the acquisition were immaterial and recorded as General and administrative expenses as incurred.In April 2020, the Company acquired all of the shares outstanding of VidGrid Inc. (“VidGrid”). During the six months ended December 31, 2020, the Company completed its purchase accounting for this acquisition and did not record any changes to the preliminary purchase price allocation. Refer to Note 6 of the audited consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2020 for additional details on the acquisition of VidGrid.Tableof ContentsBalance at June 30, 2021 $ 800 Charged to expense 103 Write-offs (97) Balance at December 31, 2021 $ 806 June 30,
2021December 31,
2021Capitalized internal-use software $ 150,922 $ 171,226 Accumulated amortization (105,904) (118,119) Capitalized internal-use software, net $ 45,018 $ 53,107 $4,690$5,882 and $5,882$6,087 for the three months ended December 31, 20192020 and 2020,2021, respectively, and $9,147$11,268 and $11,268$12,215 for the six months ended December 31, 20192020 and 2020, respectively.June 30,
2021December 31,
2021Office equipment $ 5,211 $ 5,709 Computer equipment 45,420 50,883 Furniture and fixtures 13,104 12,791 Software 6,641 7,494 Leasehold improvements 46,814 47,192 Time clocks rented by clients 5,399 6,039 Total 122,589 130,108 Accumulated depreciation (62,754) (67,683) Property and equipment, net $ 59,835 $ 62,425 $4,076$4,014 and $4,014$3,974 for the three months ended December 31, 20192020 and 2020,2021, respectively, and $7,989$8,019 and $8,019$7,816 for the six months ended December 31, 20192020 and 2020,2021, respectively.102020:December 31,
2021Balance at June 30, 2021 $ 33,650 Additions attributable to acquisition 34,676 Balance at December 31, 2021 $ 68,326 June 30,
2021December 31,
2021Weighted
average
useful
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) (17,694) Intangible assets, net $ 13,027 $ 35,175 $562$940 and $940$2,000 for the three months ended December 31, 20192020 and 2020,2021, respectively, and $1,125$1,784 and $1,784$3,352 for the six months ended December 31, 20192020 and 2020,2021 respectively.20202021 is as follows:Remainder of fiscal 2022 $ 3,981 Fiscal 2023 7,808 Fiscal 2024 6,803 Fiscal 2025 5,748 Fiscal 2026 4,129 Thereafter 6,706 Total $ 35,175 11June 30,
2021December 31,
2021Accrued payroll and personnel costs $ 73,969 $ 46,764 Operating lease liabilities 7,549 6,450 Deferred revenue 9,442 11,792 Other 12,149 14,501 Total accrued expenses $ 103,109 $ 79,507 June 30, 2021 Type of Issue Amortized
costGross
unrealized
gainsGross
unrealized
lossesFair 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 Tableof Contents(1)(1) Included within the fair value of total available-for-sale securities above is $37,155$4,456 of corporate investments and $86,022$16,083 of funds held for clients.December 31, 2021 Type of Issue Amortized
costGross
unrealized
gainsGross
unrealized
lossesFair value Cash and cash equivalents $ 84,104 $ — $ — $ 84,104 Funds held for clients' cash and cash equivalents 1,770,689 — — 1,770,689 Available-for-sale securities: Commercial paper 62,240 3 (16) 62,227 Corporate bonds 42,873 — (286) 42,587 Asset-backed securities 10,361 1 (26) 10,336 Certificates of deposit 20,500 — (7) 20,493 U.S treasury securities 4,042 — (19) 4,023 U.S government agency securities 7,000 — (101) 6,899 Other 2,824 — (15) 2,809 Total available-for-sale securities (2) 149,840 4 (470) 149,374 Total investments $ 2,004,633 $ 4 $ (470) $ 2,004,167 (2) All available-for-sale securities are included in funds held for clients. (2)Included within the fair value of total available-for-sale securities above is $13,637 of corporate investments and $49,734 of funds held for clients.and money market funds and commercial paper at June 30, 20202021 and December 31, 2020. All of the Company’s available-for-sale securities had expected maturities of one year or less at December 31, 2020.June 30, 2021 December 31, 2021 Cash and cash equivalents $ 202,287 $ 84,104 Corporate investments 4,456 — Funds held for clients 1,759,677 1,920,063 Total investments $ 1,966,420 $ 2,004,167 December 31, 2021 Securities in an unrealized loss
position for less than 12 monthsGross
unrealized
lossesFair
ValueCommercial paper $ (16) $ 35,463 Corporate bonds (286) 42,587 Asset-backed securities (26) 9,664 Certificates of deposit (7) 15,243 U.S. treasury securities (19) 4,023 U.S. government agency securities (101) 6,899 Other (15) 2,809 Total available-for-sale securities $ (470) $ 116,688 0no available-for-sale securities in an unrealized loss position at June 30, 2020 or2021. As a result, no securities have been in an unrealized loss position for more than 12 months as of December 31, 2020. 2021.2020.2020 or 2021. All securities in the Company’s portfolio held an A-1 rating or better as of December 31, 2020.120tnot 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 or six months ended December 31, 20192020 or 2020. Gross2021. There were no realized gains andor losses on the sale of available-for-sale securities were immaterial for boththe three andor six months ended December 31, 2019 and 2020.Amortized
costFair
valueOne year or less $ 94,906 $ 94,867 One year to two years 33,284 33,124 Two years to three years 16,637 16,437 Three years to five years 5,013 4,946 Total available-for-sale securities $ 149,840 $ 149,374 •●Level 1—Quoted prices in active markets for identical assets and liabilities.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.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.20202021 and December 31, 20202021 based upon the short-term nature of these assets and liabilities.andcertificate of deposit, U.S. treasury securities, U.S. government agency and other 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 0no available-for-sale securities classified in Level 3 of the fair value hierarchy at June 30, 20202021 or December 31, 2020.13June 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 1,743,594 1,743,594 — — Available-for-sale securities: Corporate bonds 13,460 — 13,460 — Asset-backed securities 7,079 — 7,079 — Total available-for-sale securities 20,539 — 20,539 — Total investments $ 1,966,420 $ 1,945,881 $ 20,539 $ — December 31, 2021 Total Level 1 Level 2 Level 3 Cash and cash equivalents $ 84,104 $ 84,104 $ — $ — Funds held for clients' cash and cash equivalents 1,770,689 1,770,289 400 — Available-for-sale securities: Commercial paper 62,227 — 62,227 — Corporate bonds 42,587 — 42,587 — Asset-backed securities 10,336 — 10,336 — Certificates of deposit 20,493 — 20,493 — U.S. treasury securities 4,023 — 4,023 — U.S government agency securities 6,899 — 6,899 — Other 2,809 — 2,809 — Total available-for-sale securities 149,374 — 149,374 — Total investments $ 2,004,167 $ 1,854,393 $ 149,774 $ — The Company determined that the carrying value of long-term debt under its revolving credit facility approximates fair value, which is classified as Level 2, because interest rates associated with the borrowings reflect market rates.five-yearfive-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 matureexpire in July 2024. As of December 31, 2020, the Company had $100,000 inThere were no borrowings outstanding under the credit facility.2020,2021, the Company was in compliance with all of the aforementioned covenants.NaNNo 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 may increase each calendar year, continuing through and including January 1, 2024. The number of shares added each year 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.142020,2021, the Company had 11,79812,006 shares allocated to the plans, of which 2,5182,023 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.2020:
Shares202010,312 9,519(577)(481)(48)(58)273 32482 60(59)(84)20209,983 9,2800no new awards will be issued under the 2008 Plan. stock options, restricted stock units (“RSUs”), market share units (“MSUs”) and the Employee Stock Purchase Plan is included in the following line items in the accompanying unaudited consolidated statements of operations and comprehensive income:Three Months Ended December 31, Six Months Ended December 31, 2020 2021 2020 2021 Cost of revenues $ 1,969 $ 3,317 $ 3,801 $ 5,924 Sales and marketing 3,965 5,716 7,845 10,875 Research and development 2,738 5,406 4,968 9,108 General and administrative 7,987 11,804 14,322 19,895 Total stock-based compensation expense $ 16,659 $ 26,243 $ 30,936 $ 45,802 $652$528 and $528$1,879 of stock-based compensation expense in its capitalized internal-use software costs in the three months ended December 31, 20192020 and 2020,2021, respectively, and $1,308$1,297 and $1,297$3,426 during the six months ended December 31, 20192020 and 2020,2021, respectively. the Company’s board of directors approved the Company’s fiscal 2021 annual operating plan to reflect the operating and financial impacts of the COVID-19 pandemic. In connection and alignment with the board’s approval of the updated operating plan, 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 $1,924 and $2,784$1,815 in stock-based compensation expense during the three months ended December 31, 2020 and 2021, respectively, and $2,784 and $3,058 during the six months ended December 31, 2020 and 2021, respectively, related to these modified performance-based restricted stock units.0no stock options granted during the six months ended December 31, 2019 or 2020.2021. The table below presents stock option activity during the six months ended December 31, 2020:Outstanding Options Number of
sharesWeighted
average
exercise
priceWeighted
average
remaining
contractual
term (years)Aggregate
intrinsic
valueBalance at July 1, 2021 765 $ 16.06 2.4 $ 133,550 Options exercised (195) $ 9.34 Balance at December 31, 2021 570 $ 18.35 2.1 $ 124,198 Options vested and exercisable at December 31, 2021 570 $ 18.35 2.1 $ 124,198 $1,409$25,869 and $25,869$11,759 during the three months ended December 31, 20192020 and 2020,2021, respectively, and $2,080$37,277 and $37,277$47,627 during the six months ended December 31, 20192020 and 2020,2021, respectively.targets in future fiscal years.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.2020:
average
grant date
fair valueUnits Weighted
average
grant date
fair valueRSU balance at July 1, 2021 1,388 $ 100.33 RSUs granted 577 $ 253.08 RSUs vested (536) $ 84.52 RSUs forfeited (77) $ 151.56 RSU balance at December 31, 2021 1,352 $ 169.28 2020,2021, there was $82,345$134,813 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 2.0 years. 1.97 years. In August 2020, the Company granted approximately 58 MSUs with a grant date fair value of $178.04. The actual number of MSUs that will be eligible to vest is based on the achievement of a relative total shareholder return (“TSR”) target as compared to the TSR realized by each of the companies comprising the Russell 3000 Index over an approximately three-yearthree-year period. The MSUs cliff-vest at the end of the TSR measurement period, and up to 200% of the target number of shares subject to each MSU are eligible to be earned.Units Weighted
average
grant date
fair valueMSU balance at July 1, 2021 58 $ 178.04 MSUs granted 48 $ 361.02 MSUs forfeited (5) $ 178.04 MSU balance at December 31, 2021 101 $ 263.83 Expected dividend yield0%Expected volatility52.0%Expected term (years)3.04Risk‑free interest rate0.18%16Six Months Ended
December 31,2020 2021 Valuation assumptions: Expected dividend yield —% —% Expected volatility 52.0 % 47.4 - 47.5% Expected term (years) 3.04 2.92 - 3.04 Risk‑free interest rate 0.18% 0.43 - 0.47% 2020,2021, there was $7,904$17,832 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested MSUs. That cost is expected to be recognized over a period of 2.662.4 years.This claim is still in its earliest stages and theThe Company is unable to estimate any reasonably possible loss, or range of loss, with respect to this matter.matter at this time. The Company intends to vigorously defend against this lawsuit.On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law. Additional COVID-19 legislation was included in the Consolidated Appropriations Act, 2021, which was signed into law on December 27, 2020. While the Company continues to analyze the relevant provisions of the CARES Act and subsequent Appropriations Act, it does not expect the provisions of the legislation to have a significant impact on the Company’s income taxes.14.6%(61.5)% and (61.5)(26.9)% for the three months ended December 31, 20192020 and 2020,2021, respectively. The Company’s effective tax rate for the three months ended December 31, 2019 and December 31, 2020 was lower than the federal statutory rate of 21% primarily due to excess tax benefits from employee stock-based compensation and state and local income taxes, partially offset by an increase to the valuation allowance inallowance. The Company's effective tax rate for the periodthree months ended December 31, 2020.Company’sCompany's effective tax rate was (50.5)(141.2)% and (141.2)(127.8)% for the six months ended December 31, 20192020 and 2020,2021, respectively. The Company’sCompany's effective tax rate for the six months ended December 31, 20192020, and December 31, 20202021 was lower than the federal statutory rate of 21% primarily due to excess tax benefits from employee stock-based compensation and state and local income taxes, partially offset by an increase to the valuation allowance in the period ended December 31, 2020.17Three Months Ended
December 31,Six Months Ended
December 31,2020 2021 2020 2021 Numerator: Net income $ 9,642 $ 9,853 $ 22,102 $ 40,785 Denominator: Weighted-average shares used in computing net income per share: Basic 54,305 55,067 54,160 54,938 Weighted-average effect of potentially dilutive shares: Employee stock options, restricted stock units, market share units and employee stock purchase plan shares 2,038 1,401 1,962 1,548 Diluted 56,343 56,468 56,122 56,486 Net income per share: Basic $ 0.18 $ 0.18 $ 0.41 $ 0.74 Diluted $ 0.17 $ 0.17 $ 0.39 $ 0.72 employee stock purchase plan sharesmarket share units as of the balance sheet dateDecember 31, 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:Three Months Ended
December 31,Six Months Ended
December 31,2020 2021 2020 2021 Market share units 14 31 19 31 Restricted stock units — 45 — 46 Total 14 76 19 77 20202021 filed with the SEC on August 7, 2020.solutions for medium-sized organizations, which we define as those having between 10 and 1,000 employees.solutions. Our comprehensive and easy-to-use solutions enable our clients to manage their workforces more effectively. Our 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 make strategic decisions in the areas of payroll, core HR,human capital management, workforce management, talent management, benefits, modern workforce solutions and benefits,analytics & insights, all while promoting a modern workplace and improving employee engagement.Effective management of human capital is a core function in all organizations and requires a significant commitment of resources. Our solutions were specifically designed to meet the payroll and HCM needs of medium-sized organizations. Our payroll solution 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 functionalities. 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 we have the opportunityand to do so we have invested, and intend towill 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.excluding interest earned on certain cash holdings and expenses associated with certain secondary stock offerings, have historically been, and are currently, conducted by itsour wholly owned subsidiaries, and the financial results presented herein are entirely attributable to the results of its operations.19stay-at-home, business closureclosures and other restrictive orders, which has resulted in reduced employee headcount, temporary and permanent business closures, and/or delayed sales/starts. OurEven though we have seen improvements in the overall macroeconomic conditions, our business and financial performance may continue to be unfavorably impacted in future periods if a significant number of our clients are unable to continue as viable businesses or reduce headcount, there is aby fluctuations in client employee counts, reduction in business confidence and activity, a decrease in government and consumer spending, a decrease in payroll and HCM solutions spending by medium-sized organizations, a decrease in growth in the overall marketpace of the macroeconomic recovery or a further decline ofcontinued low interest rates,rate environment, among other factors. Therefore, we expect COVID-19 to continue to have an unfavorable impact on the growth in both Recurring and other revenue and Interest income on funds held for clients in future periods for so long as such conditions persist. Refer to “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K filed with7, 20206, 2021 for risks related to the COVID-19 pandemic and its impact on our business and financial performance.$132.4 million for the three months ended December 31, 2019 to $146.3 million for the three months ended December 31, 2020 to $196.0 million for the three months ended December 31, 2021, representing an 11%a 34% year-over-year increase. Total revenues increased from $259.1 million for the six months ended December 31, 2019 to $282.1 million for the six months ended December 31, 2020 representing a 9% year-over-year increase. Our total revenue growth duringto $377.7 million for the three and six months ended December 31, 20202021, representing a 34% year-over-year increase. The increase in year-over-year revenue growth was impacteddriven by the ongoing effects fromstrong performance by our sales team and an overall improvement in macroeconomic conditions compared to the COVID-19 pandemic. We expect COVID-19 to continue to unfavorably impact ourprior year. Our revenue growth rates in future periods as we anticipate lowermay continue to be impacted by fluctuations in client employee counts, potential increases in client losses, a continued low interest rate environment and a decrease in the growthpace of the overall market,macroeconomic recovery, among other factors.20Three Months Ended
December 31,Six Months Ended
December 31,2020 2021 2020 2021 (in thousands) (in thousands) Adjusted Gross Profit $ 100,671 $ 134,666 $ 194,874 $ 262,781 Adjusted EBITDA 34,970 46,615 65,834 92,739 Three Months Ended
December 31,Six Months Ended
December 31,2020 2021 2020 2021 (in thousands) (in thousands) Reconciliation from Gross Profit to Adjusted Gross Profit Gross profit $ 92,787 $ 125,216 $ 179,201 $ 243,664 Amortization of capitalized internal-use software costs 5,882 6,087 11,268 12,215 Stock-based compensation expense and employer payroll taxes related to stock releases and option exercises 2,002 3,327 4,405 6,854 Other items (1) — 36 — 48 Adjusted Gross Profit $ 100,671 $ 134,666 $ 194,874 $ 262,781 Three Months Ended
December 31,Six Months Ended
December 31,2020 2021 2020 2021 (in thousands) (in thousands) Reconciliation from Net income to Adjusted EBITDA Net income $ 9,642 $ 9,853 $ 22,102 $ 40,785 Interest expense 351 110 691 218 Income tax benefit (3,670) (2,087) (12,938) (22,884) Depreciation and amortization expense 10,836 12,061 21,071 23,383 EBITDA 17,159 19,937 30,926 41,502 Stock-based compensation expense and employer payroll taxes related to stock releases and option exercises 17,086 26,470 33,823 50,226 Other items (2) 725 208 1,085 1,011 Adjusted EBITDA $ 34,970 $ 46,615 $ 65,834 $ 92,739 (1)Represents nonrecurring acquisition-related costs.(2)*Represents nonrecurring costs including acquisition-related and lease exit costs. Also includes the settlement of a certain legal matter and related litigation costs of $1.6 million and $2.0 million for the three and six months ended December 31, 2019, respectively.Represents nonrecurring costs including acquisition-related costs and lease exit activity.threeone to foureight weeks, depending on the 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 continued to be over 100 employees.2197% and 99% of our total revenues during both the three months ended December 31, 2019 and 2020 respectively, and 96% and 99% of our total revenues during the six months ended December 31, 20192020 and 2020, respectively.forrelated 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.$4.7$5.9 million and $5.9$6.1 million of capitalized internal-use software costs during the three months ended December 31, 20192020 and 2020,2021, respectively, and $9.1 million and $11.3 million and $12.2 million of capitalized internal-useinternal-used software costs during the six months ended December 31, 20192020 and 2020,2021, respectively.and benefits, marketing expenses and other related costs. Our sales personnel earn commissions and bonuses for attainment of certain performance criteria based on new sales throughout the fiscal year. We capitalize certain selling and commission costs related to new contracts or purchases of additional services by our existing clients and amortize them over a period of 7 years. We pay commissions the following month after the start of service or contract signing, and bonuses for attainment of certain annual performance criteria are subsequently paid annually in the first fiscal quarter of the following year.staff,teams, including wages, stock-based compensation, bonuses and benefits.2220192020 and 2020.Three Months Ended
December 31,Six Months Ended
December 31,2020 2021 2020 2021 (in thousands) (in thousands) Capitalized portion of research and development $ 7,274 $ 10,475 $ 15,390 $ 20,304 Expensed portion of research and development 19,338 25,278 37,985 48,354 Total research and development $ 26,612 $ 35,753 $ 53,375 $ 68,658 administrative, finance and accounting, andlegal, 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.Three Months Ended
December 31,Six Months Ended
December 31,2020 2021 2020 2021 (in thousands) (in thousands) Consolidated Statements of Operations Data: Revenues: Recurring and other revenue $ 145,393 $ 195,041 $ 280,268 $ 375,865 Interest income on funds held for clients 936 996 1,855 1,869 Total revenues 146,329 196,037 282,123 377,734 Cost of revenues 53,542 70,821 102,922 134,070 Gross profit 92,787 125,216 179,201 243,664 Operating expenses: Sales and marketing 37,775 52,219 75,449 102,104 Research and development 19,338 25,278 37,985 48,354 General and administrative 29,323 39,581 55,967 74,816 Total operating expenses 86,436 117,078 169,401 225,274 Operating income 6,351 8,138 9,800 18,390 Other expense (379) (372) (636) (489) Income before income taxes 5,972 7,766 9,164 17,901 Income tax benefit (3,670) (2,087) (12,938) (22,884) Net income $ 9,642 $ 9,853 $ 22,102 $ 40,785 Tableof Contents24Three Months Ended
December 31,Six Months Ended
December 31,2020 2021 2020 2021 Consolidated Statements of Operations Data: Revenues: Recurring and other revenue 99 % 99 % 99 % 99 % Interest income on funds held for clients 1 % 1 % 1 % 1 % Total revenues 100 % 100 % 100 % 100 % Cost of revenues 37 % 36 % 36 % 35 % Gross profit 63 % 64 % 64 % 65 % Operating expenses: Sales and marketing 26 % 27 % 27 % 27 % Research and development 13 % 13 % 14 % 12 % General and administrative 20 % 20 % 20 % 20 % Total operating expenses 59 % 60 % 61 % 59 % Operating income 4 % 4 % 3 % 6 % Other expense 0 % 0 % 0 % 0 % Income before income taxes 4 % 4 % 3 % 6 % Income tax benefit (3) % (1) % (5) % (6) % Net income 7 % 5 % 8 % 12 % Three Months Ended
December 31,Change 2020 2021 $ % Recurring and other revenue $ 145,393 $ 195,041 $ 49,648 34 % Percentage of total revenues 99 % 99 % Interest income on funds held for clients $ 936 $ 996 $ 60 6 % Percentage of total revenues 1 % 1 % 20202021 increased by $17.4$49.6 million, or 14%34%, to $145.4$195.0 million from $128.0$145.4 million for three months ended December 31, 2019.2020. Recurring and other revenue increased primarily as a result of incremental revenues from new and existing clients partially offset by a reduction in client employee counts on our platform due to the ongoing impact from COVID-19.2020 decreased2021 increased by $3.5 million, or 79%, to $0.9 million6% from $4.4 million for the three months ended December 31, 2019.2020. Interest income on funds held for clients decreased primarily as a result of lower averagecontinues to be impacted by the low interest ratesrate environment due to the interest rate cuts by the Federal Reserve in response to the COVID-19 pandemic. The impact from the reduction inlower interest rates was partially offset by higher average daily balances for funds held due to the addition of new clients to our client base.Three Months Ended
December 31,Change 2020 2021 $ % Cost of revenues $ 53,542 $ 70,821 $ 17,279 32 % Percentage of total revenues 37% 36 % Gross margin 63% 64 % 20202021 increased by $8.1$17.3 million, or 18%32%, to $53.5$70.8 million from $45.4$53.5 million for the three months ended December 31, 2019.2020. Cost of revenues increased primarily as a result of the continued growth of our business, in particular, $5.0$10.9 million in additional employee-related costs resulting from additional personnel necessary to provide services to new and existing clients, and $1.2$4.8 million in increased internal-use software amortization. Gross margin decreased from 66% for the three months ended December 31, 2019 to 63% for the three months ended December 31, 2020.25Three Months Ended
December 31,Change 2020 2021 $ % Sales and marketing $ 37,775 $ 52,219 $ 14,444 38 % Percentage of total revenues 26 % 27 % 20202021 increased by $0.5$14.4 million, or 1%38%, to $37.8$52.2 million from $37.3$37.8 million for the three months ended.ended December 31, 2020. The increase in sales and marketing expense was primarily the resultdue to $9.4 million of additional employee-related costs, including those incurred to expand our sales team, partially offset by reducedand an increase in overall spending on travel and entertainment.Three Months Ended
December 31,Change 2020 2021 $ % Research and development $ 19,338 $ 25,278 $ 5,940 31 % Percentage of total revenues 13 % 13 % 20202021 increased by $3.9$5.9 million, or 25%31%, to $19.3$25.3 million from $15.4$19.3 million for the three months ended December 31, 2019.2020. The increase in research and development expenses was primarily the result of $3.6due to $4.4 million of additional employee-related costs related to additional development personnel.Three Months Ended
December 31,Change 2020 2021 $ % General and administrative $ 29,323 $ 39,581 $ 10,258 35 % Percentage of total revenues 20 % 20 % 20202021 increased by $1.2$10.3 million, or 4%35%, to $29.3$39.6 million from $28.1$29.3 million for the three months ended December 31, 2019.2020. The increase in general and administrative expense was primarily the result of an increase in$3.8 million of additional stock-based compensation costs associated with our equity incentive plan, of $1.8$2.6 million partially offset by a decrease in discretionaryadditional 401(k) expense and $2.4 million in additional employee-related costs.Income (Expense)Three Months Ended
December 31,Change 2020 2021 $ % Other expense $ (379) $ (372) $ 7 (2) % Percentage of total revenues 0 % 0 % income (expense)expense did not materially change for the three months ended December 31, 20202021 as compared to the three months ended December 31, 2019.14.6%(61.5)% and (61.5)(26.9)% for the three months ended December 31, 20192020 and December 31, 2020,2021, respectively. Our effective tax rate for the three months ended December 31, 2019 and December 31, 2020 was lower than the federal statutory rate of 21% primarily due to excess tax benefits from employee stock-based compensation, and state and local income taxes, partially offset by an increase to the valuation allowance inallowance. Our effective tax rate for the periodthree months ended December 31, 2020.2620192020 and 2020Six Months Ended
December 31,Change 2020 2021 $ % Recurring and other revenue $ 280,268 $ 375,865 $ 95,597 34 % Percentage of total revenues 99 % 99 % Interest income on funds held for clients $ 1,855 $ 1,869 $ 14 1 % Percentage of total revenues 1 % 1 % 20202021 increased by $30.4$95.6 million, or 12%34%, to $375.9 million from $280.3 million from $249.9 million for the six months ended December 31, 2019.2020. Recurring and other revenue increased primarily as a result of incremental revenues from new and existing clients partially offset by a reduction in client employee counts on our platform due to the ongoing impact from COVID-19.2020 decreased2021 increased by $7.4 million, or 80% to $1.9 million1% from $9.2 million for the six months ended December 31, 2019.2020. Interest income on funds held for clients decreased primarily as a result of lower averagecontinues to be impacted by the low interest ratesrate environment due to the interest rate cuts by the Federal Reserve in response to the COVID-19 pandemic. Thereduction inlower interest rates was partially offset by higher average daily balances for funds held due to the addition of new clients to our client base.Six Months Ended
December 31,Change 2020 2021 $ % Cost of revenues $ 102,922 $ 134,070 $ 31,148 30 % Percentage of total revenues 36% 35 % Gross margin 64% 65 % 20202021 increased by $14.9$31.1 million, or 17%30%, to $102.9$134.1 million from $88.1$102.9 million for the six months ended December 31, 2019.2020. Cost of revenues increased primarily as a result of the continued growth of our business, in particular, $10.3$19.2 million in additional employee-related costs resulting from additional personnel necessary to provide services to new and existing clients, $8.8 million related to delivery and other processing costs and $2.1 million in increased internal-use software amortization and $1.1 million inof additional stock-based compensation costs associated with our equity incentive plan. Gross margin decreased from 66% to 64% for the six months ended December 31, 2019 and 2020, respectively.27Six Months Ended
December 31,Change 2020 2021 $ % Sales and marketing $ 75,449 $ 102,104 $ 26,655 35 % Percentage of total revenues 27 % 27 % 20202021 increased by $1.2$26.7 million, or 2%35%, to $75.4$102.1 million from $74.3$75.4 million for the six months ended December 31, 2019.2020. The increase in sales and marketing expense was primarily the result ofattributable to $17.4 million in additional employee-related costs, including those incurred to expand our sales team, partially offset by reducedand an increase in overall spending on travel and entertainment.Six Months Ended
December 31,Change 2020 2021 $ % Research and development $ 37,985 $ 48,354 $ 10,369 27 % Percentage of total revenues 14 % 12 % 20202021 increased by $8.2$10.4 million, or 27%, to $38.0$48.4 million from $29.8$38.0 million for the six months ended December 31, 2019.2020. The increase in research and development expenses was primarily the result of $7.9$8.2 million of additional employee-related costs related to additional development personnel and $1.9$4.1 million of additional stock-based compensation costs associated with our equity incentive plan, partially offset by higher period-over-period capitalized internal-use software costs of $2.1$2.3 million.Six Months Ended
December 31,Change 2020 2021 $ % General and administrative $ 55,967 $ 74,816 $ 18,849 34 % Percentage of total revenues 20 % 20 % 20202021 increased by $1.1$18.8 million, or 2%34%, to $56.0$74.8 million from $54.9$56.0 million for the six months ended December 31, 2019.2020. The increase in general and administrative expense was primarily the result of $2.6$5.8 million in additional 401(k) expense, $5.6 million of additional stock-based compensation associated with our equity incentive plan and $0.9$4.9 million of increased occupancy costs, partially offset by a decrease in discretionaryadditional employee-related costs.Income (Expense)Six Months Ended
December 31,Change 2020 2021 $ % Other expense $ (636) $ (489) $ 147 (23) % Percentage of total revenues 0 % 0 % incomeexpense for the six months ended December 31, 2020 decreased by $1.4 million2021 did not materially change as compared to the six months ended December 31, 2019. The decrease in other income (expense) was primarily due to lower interest income earned on our cash and cash equivalents and corporate investments and increased interest expense related to our revolving credit facility.(50.5)(141.2)% and (141.2)(127.8)% for the six months ended December 31, 20192020 and December 31, 2020,2021, respectively. Our effective tax rate for the six months ended December 31, 20192020 and December 31, 20202021 was lower than the federal statutory rate of 21% primarily due to excess tax benefits from employee stock-based compensation and state and local income taxes, partially offset by an increase to the valuation allowance in the period ended December 31, 2020.28In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic which has caused a global slowdown of economic activity that we believe will continue to unfavorably impact our business operations and financial conditions. The duration and severity of the COVID-19 pandemic, and the effect the pandemic will have on our clients and general economic conditions, remains uncertain and difficult to predict. may change as new events occur, as more experience andis acquired, as additional information is acquired,obtained and as the operating environment evolves including the ongoing impact of COVID-19. Refer to “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K filed with the SEC on August 7, 2020 for risks related to the COVID-19 pandemic on its business and financial performance.20202021 included in our Annual Report on Form 10-K2020,2021, our principal sourcessource of liquidity were $218.7was $84.1 million of cash and cash equivalents and $13.6 million of total corporate investments.equivalents. 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. In fiscal 2020, we borrowed $100.0 million under thisNo amounts were drawn on the revolving credit facility which remained outstanding as of December 31, 2020. Although2021, but, in January 2022, we currently do not have any anticipated need for this additional liquidity, we utilized the borrowing capacity underborrowed $50.0 million in connection with our credit agreement in order to provide enhanced financial flexibility due to uncertain market conditions arising from COVID-19.acquisition of Cloudsnap, Inc. Refer to Note 813 of the Notes to the Unaudited Consolidated Financial Statements for additional detail on the credit agreement.corporate debt issuancescertificates of deposit, U.S. treasury securities, U.S. government agency securities and U.S. Treasuryother securities with credit quality ratings of A-1 or higher. As of December 31, 2020,2021, we had not recognized any credit impairment losses related to our investment portfolio.activities, as well as the extent and duration of COVID-19 on the macro-economic environment.activities. Many of these investments will occur in advance of our experiencing any direct benefit from29and corporate investments or further utilize the remaining borrowing capacity under our credit facility to satisfy those needs. 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.Six Months Ended
December 31,2020 2021 Net cash provided by operating activities $ 19,672 $ 26,858 Cash flows from investing activities: Purchases of available-for-sale securities — (190,000) Proceeds from sales and maturities of available-for-sale securities 58,996 60,391 Capitalized internal-use software costs (14,832) (17,966) Purchases of property and equipment (6,045) (10,528) Acquisition of business, net of cash acquired (14,992) (60,234) Net cash provided by (used in) investing activities 23,127 (218,337) Cash flows from financing activities: Net change in client fund obligations 876,982 160,325 Proceeds from employee stock purchase plan 6,100 7,216 Taxes paid related to net share settlement of equity awards (44,749) (67,109) Payment of debt issuance costs (17) (41) Net cash provided by financing activities 838,316 100,391 Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents 881,115 (91,088) $36.1$19.7 million and $19.7$26.9 million for the six months ended December 31, 20192020 and 2020,2021, respectively. The decreaseincrease in net cash provided by operating activities from the six months ended December 31, 20192020 to the six months ended December 31, 20202021 was primarily due to net changes in operating assets and liabilities, mostly driven by changes in accrued expenses related to higher payout of sales incentives and prepaid expenses and other, partially offset by improved operating results after adjusting for non-cash items including stock-based compensation expense, depreciation and amortization expense and deferred income tax benefit, partially offset by net changes in operating assets and liabilities during the six months ended December 31, 2021 as compared to the six months ended December 31, 2020.30$(153.7)$23.1 million and $23.1$(218.3) million for the six months ended December 31, 20192020 and 2020,2021, respectively. The net cash used inprovided by (used in) investing activities is significantly impacted by the timing of purchases and sales and maturities of investments as we invest portions of excess corporate cash and funds held for clients in highly liquid, investment-grade marketable securities. The amount of funds held for clients invested will vary based on timing of client funds collected and payments due to client employees and taxing and other regulatory authorities.changedecrease in net cash provided by (used in) investing activities was primarily due to decreases in purchases of available-for-sale securities of $254.0$190.0 million and purchasesa $45.2 million increase in amounts paid for acquisitions, net of property and equipment of $6.4 million, partially offset by the decrease in proceeds from sales and maturities of available-for-sale securities of $65.8 million and $15.0 million in costs related to the acquisition of Samepage Labs Inc. during thecash acquired during the six months ended December 31, 20202021 as compared to the six months ended December 31, 2019.$428.2$838.3 million and $838.3$100.4 million for the six months ended December 31, 20192020 and 2020,2021, respectively. The changedecrease in net cash provided by financing activities was primarily the result of an increasea decrease in the change in client fund obligations of $426.2$716.7 million due to the timing of client funds collected and related remittance of those funds to client employees and taxing authorities partially offset by $18.8and $22.4 million in increased taxes paid related to net share settlement of equity awards during the six months ended December 31, 20202021 as compared to the six months ended December 31, 2019.2020:*Represents the contractual maturity of and estimated interest payments on borrowings under our revolving credit facility. Interest was calculated using the interest rate in effect as of December 31, 2020.Payment Due By Fiscal Period Total Less than 1
Year1-3 Years 3-5 Years More than
5 YearsOperating lease obligations $ 92,985 $ 8,977 $ 18,781 $ 19,063 $ 46,164 Purchase obligations 18,740 12,708 5,466 566 — $ 111,725 $ 21,685 $ 24,247 $ 19,629 $ 46,164 growth and the ongoing impact from COVID-19.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 $12.4$6.0 million and $6.0$10.5 million for the six months ended December 31, 20192020 and 2020,2021, respectively, exclusive of capitalized internal-use software costs of $12.1$14.8 million and $14.8$18.0 million for the same periods, respectively.31significantly disrupted the global economy and financial markets and we believe it willmay 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 7, 20206, 2021 for risks related to the COVID-19 pandemic.2020,2021, we had cash and cash equivalents of $218.7 million, corporate investments of $13.6$84.1 million and funds held for clients of $2,204.3$1,920 million. We did not hold corporate investments on our balance sheet as of December 31, 2021. We deposit our cash and cash equivalents and significant portions of our funds held for clients in demand deposit accounts with various financial institutions. We invest portions of our excess cash and cash equivalents and funds held for clients in marketable securities including commercial paper, corporate debt issuances, asset-backed debt securities, certificates of deposit, U.S. government agency securities and corporate debt issuances,other which were classified as available-for-sale securities as of December 31, 2020.2021. 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.2020.2021. Fluctuations in the value of our available-for-sale securities caused by changes in interest rates are recorded in other comprehensive income and are only realized if we sell the underlying securities. will 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 December 31, 2020,2021, there were no amounts drawn on the credit facility. To the extent that we had $100.0 million in borrowings outstandingdraw additional amounts under the credit facility. Because interest rates applicablefacility, we may be exposed to the credit facility are variable, we are exposed toincreased market risk from changes in the underlying index rates, which affects our interest expense. A hypothetical increase of 100 basis points in interest rates would not have had a significant impact on our results of operations.322020,2021, 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.33(a)(a) Sales of Unregistered Securities(b)(b) Use of ProceedsOn 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 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.3431.1*5, 2021By:By:Name:Name:Title:Title:Date:By:Date:February 5, 2021By:Name:Name:Title:Title: