UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q


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

For the quarterly period ended December 31, ~~2021~~2022


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

For the transition period from to

Commission file number 001-36348

PAYLOCITY HOLDING CORPORATION

(Exact name of registrant as specified in its charter)


Delaware						46-4066644
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification No.)


1400 American Lane Schaumburg, Illinois						60173
(Address of principal executive offices)						(Zip Code)

(847) 463-3200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

PCTY

The NASDAQ Global Select Market LLC

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

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

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

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

Emerging Growth Company

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~55,110,343~~55,769,718 shares of Common Stock, $0.001 par value per share, as of January ~~28, 2022.~~27, 2023.

Table o f of Contents

Paylocity Holding Corporation

Form 10-Q

For the Quarterly Period Ended December 31, ~~2021~~2022

TABLE OF CONTENTS

Table o f of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Balance Sheets

(in thousands, except per share data)


		June 30, 2021		December 31, 2021			June 30, 2022		December 31, 2022
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	202,287	$	84,104	Cash and cash equivalents	$	139,756	$	120,053
Corporate investments		4,456		—

Accounts receivable, net	Accounts receivable, net	6,267		9,830		Accounts receivable, net	15,754		24,540
Deferred contract costs	Deferred contract costs	44,230		50,294		Deferred contract costs	59,501		68,557
Prepaid expenses and other	Prepaid expenses and other	15,966		22,795		Prepaid expenses and other	28,896		30,175
Total current assets before funds held for clients	Total current assets before funds held for clients	273,206		167,023		Total current assets before funds held for clients	243,907		243,325
Funds held for clients	Funds held for clients	1,759,677		1,920,063		Funds held for clients	3,987,776		3,065,697
Total current assets	Total current assets	2,032,883		2,087,086		Total current assets	4,231,683		3,309,022
Capitalized internal-use software, net	Capitalized internal-use software, net	45,018		53,107		Capitalized internal-use software, net	61,985		71,083
Property and equipment, net	Property and equipment, net	59,835		62,425		Property and equipment, net	62,839		59,506
Operating lease right-of-use assets	Operating lease right-of-use assets	43,984		49,611		Operating lease right-of-use assets	49,210		46,604
Intangible assets, net	Intangible assets, net	13,027		35,175		Intangible assets, net	45,475		39,934
Goodwill	Goodwill	33,650		68,326		Goodwill	101,949		102,054
Long-term deferred contract costs	Long-term deferred contract costs	170,663		191,385		Long-term deferred contract costs	229,067		262,313
Long-term prepaid expenses and other		4,223		6,778
Long‑term prepaid expenses and other						Long‑term prepaid expenses and other	7,746		6,727
Deferred income tax assets	Deferred income tax assets	11,602		34,697		Deferred income tax assets	19,060		40,530
Total assets	Total assets	$	2,414,885	$	2,588,590	Total assets	$	4,809,014	$	3,937,773

Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	4,230	$	6,600	Accounts payable	$	8,374	$	7,611
Accrued expenses	Accrued expenses	103,109		79,507		Accrued expenses	124,384		115,795
Total current liabilities before client fund obligations	Total current liabilities before client fund obligations	107,339		86,107		Total current liabilities before client fund obligations	132,758		123,406
Client fund obligations	Client fund obligations	1,759,677		1,920,063		Client fund obligations	3,987,776		3,065,697
Total current liabilities	Total current liabilities	1,867,016		2,006,170		Total current liabilities	4,120,534		3,189,103

Long-term operating lease liabilities	Long-term operating lease liabilities	67,201		71,877		Long-term operating lease liabilities	69,119		65,353
Other long-term liabilities	Other long-term liabilities	1,958		2,069		Other long-term liabilities	3,681		3,333
Deferred income tax liabilities	Deferred income tax liabilities	1,780		1,781		Deferred income tax liabilities	2,217		2,217
Total liabilities	Total liabilities	$	1,937,955	$	2,081,897	Total liabilities	$	4,195,551	$	3,260,006
Stockholders’ equity:	Stockholders’ equity:					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
Preferred stock, $0.001 par value, 5,000 authorized, no shares issued and outstanding at June 30, 2022 and December 31, 2022						Preferred stock, $0.001 par value, 5,000 authorized, no shares issued and outstanding at June 30, 2022 and December 31, 2022	$	—	$	—
Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2022 and December 31, 2022; 55,190 shares issued and outstanding at June 30, 2022 and 55,768 shares issued and outstanding at December 31, 2022						Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2022 and December 31, 2022; 55,190 shares issued and outstanding at June 30, 2022 and 55,768 shares issued and outstanding at December 31, 2022	55		56
Additional paid-in capital	Additional paid-in capital	241,718		231,106		Additional paid-in capital	289,843		310,050
Retained earnings	Retained earnings	235,091		275,876		Retained earnings	325,868		371,820
Accumulated other comprehensive income (loss)		66		(344)
Accumulated other comprehensive loss						Accumulated other comprehensive loss	(2,303)		(4,159)
Total stockholders' equity	Total stockholders' equity	$	476,930	$	506,693	Total stockholders' equity	$	613,463	$	677,767
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	2,414,885	$	2,588,590	Total liabilities and stockholders’ equity	$	4,809,014	$	3,937,773

See accompanying notes to unaudited consolidated financial statements.

Table o f of Contents

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)


		Three Months Ended December 31,				Six Months Ended December 31,					Three Months Ended December 31,				Six Months Ended December 31,
		2020		2021		2020		2021			2021		2022		2021		2022
Revenues:	Revenues:									Revenues:
Recurring and other revenue	Recurring and other revenue	$	145,393	$	195,041	$	280,268	$	375,865	Recurring and other revenue	$	195,041	$	256,434	$	375,865	$	501,840
Interest income on funds held for clients	Interest income on funds held for clients	936		996		1,855		1,869		Interest income on funds held for clients	996		16,574		1,869		24,448
Total revenues	Total revenues	146,329		196,037		282,123		377,734		Total revenues	196,037		273,008		377,734		526,288
Cost of revenues	Cost of revenues	53,542		70,821		102,922		134,070		Cost of revenues	70,821		90,076		134,070		174,619
Gross profit	Gross profit	92,787		125,216		179,201		243,664		Gross profit	125,216		182,932		243,664		351,669
Operating expenses:	Operating expenses:									Operating expenses:
Sales and marketing	Sales and marketing	37,775		52,219		75,449		102,104		Sales and marketing	52,219		75,694		102,104		146,757
Research and development	Research and development	19,338		25,278		37,985		48,354		Research and development	25,278		41,029		48,354		81,122
General and administrative	General and administrative	29,323		39,581		55,967		74,816		General and administrative	39,581		48,001		74,816		98,493
Total operating expenses	Total operating expenses	86,436		117,078		169,401		225,274		Total operating expenses	117,078		164,724		225,274		326,372
Operating income	Operating income	6,351		8,138		9,800		18,390		Operating income	8,138		18,208		18,390		25,297
Other expense	Other expense	(379)		(372)		(636)		(489)		Other expense	(372)		(5)		(489)		(168)
Income before income taxes	Income before income taxes	5,972		7,766		9,164		17,901		Income before income taxes	7,766		18,203		17,901		25,129
Income tax benefit		(3,670)		(2,087)		(12,938)		(22,884)
Income tax expense (benefit)										Income tax expense (benefit)	(2,087)		2,603		(22,884)		(20,823)
Net income	Net income	$	9,642	$	9,853	$	22,102	$	40,785	Net income	$	9,853	$	15,600	$	40,785	$	45,952
Other comprehensive loss, net of tax		(187)		(335)		(410)		(410)
Other comprehensive income (loss), net of tax										Other comprehensive income (loss), net of tax	(335)		516		(410)		(1,856)
Comprehensive income	Comprehensive income	$	9,455	$	9,518	$	21,692	$	40,375	Comprehensive income	$	9,518	$	16,116	$	40,375	$	44,096

Net income per share:	Net income per share:									Net income per share:
Basic	Basic	$	0.18	$	0.18	$	0.41	$	0.74	Basic	$	0.18	$	0.28	$	0.74	$	0.83
Diluted	Diluted	$	0.17	$	0.17	$	0.39	$	0.72	Diluted	$	0.17	$	0.28	$	0.72	$	0.81

Weighted-average shares used in computing net income per share:	Weighted-average shares used in computing net income per share:									Weighted-average shares used in computing net income per share:
Basic	Basic	54,305		55,067		54,160		54,938		Basic	55,067		55,721		54,938		55,587
Diluted	Diluted	56,343		56,468		56,122		56,486		Diluted	56,468		56,474		56,486		56,559

See accompanying notes to unaudited consolidated financial statements.

Table o f of Contents

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

(in thousands)


		Three Months Ended December 31, 2020																		Three Months Ended December 31, 2021
		Common Stock			Additional Paid-in Capital				Retained Earnings			Accumulated Other Comprehensive Income				Total Stockholders’ Equity				Common Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
		Shares	Amount								Shares								Amount
Balances at September 30, 2020		54,223	$	54			$	209,582						$	176,732			$	452		$	386,820
Balances at September 30, 2021																			Balances at September 30, 2021	55,019			$	55		$	201,504		$	266,023		$	(9)		$	467,573
Stock-based compensation	Stock-based compensation	—	—		17,187				—			—				17,187			Stock-based compensation	—			—		28,122			—			—			28,122
Stock options exercised	Stock options exercised	146	—		1,403				—			—				1,403			Stock options exercised	44			—		383			—			—			383
Issuance of common stock upon vesting of restricted stock units	Issuance of common stock upon vesting of restricted stock units	9	—		—				—			—				—			Issuance of common stock upon vesting of restricted stock units	12			—		—			—			—			—
Issuance of common stock under employee stock purchase plan	Issuance of common stock under employee stock purchase plan	60	—		6,100				—			—				6,100			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	Net settlement for taxes and/or exercise price related to equity awards	(68)	—		(12,747)				—			—				(12,747)			Net settlement for taxes and/or exercise price related to equity awards	(23)			—		(6,119)			—			—			(6,119)
Unrealized losses on securities, net of tax	Unrealized losses on securities, net of tax	—	—		—				—			(188)				(188)			Unrealized losses on securities, net of tax	—			—		—			—			(335)			(335)
Currency translation adjustments		—	—		—				—			1				1

Net income	Net income	—	—		—				9,642			—				9,642			Net income	—			—		—			9,853			—			9,853
Balances at December 31, 2020		54,370	$	54	$	221,525			$	186,374		$	265			$	408,218
Balances at December 31, 2021																			Balances at December 31, 2021	55,105			$	55	$	231,106		$	275,876		$	(344)		$	506,693

Three Months Ended December 31, 2021
Common Stock Additional
Paid-in
Capital Retained
Earnings Accumulated Other Comprehensive Loss Total
Stockholders’
Equity
Shares 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																		Three Months Ended December 31, 2022
		Common Stock			Additional Paid-in Capital				Retained Earnings			Accumulated Other Comprehensive Income				Total Stockholders’ Equity				Common Stock					Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
		Shares	Amount								Shares								Amount
Balances at June 30, 2020		53,792	$	54			$	227,907						$	164,272			$	675		$	392,908
Balances at September 30, 2022																			Balances at September 30, 2022	55,664			56			259,245		356,220		(4,675)		$	610,846
Stock-based compensation	Stock-based compensation	—	—		32,233				—			—				32,233			Stock-based compensation	—			—		47,653		—		—		47,653
Stock options exercised	Stock options exercised	234	—		1,932				—			—				1,932			Stock options exercised	7			—		109		—		—		109
Issuance of common stock upon vesting of restricted stock units	Issuance of common stock upon vesting of restricted stock units	608	—		—				—			—				—			Issuance of common stock upon vesting of restricted stock units	60			—		—		—		—		—
Issuance of common stock under employee stock purchase plan	Issuance of common stock under employee stock purchase plan	60	—		6,100				—			—				6,100			Issuance of common stock under employee stock purchase plan	61			—		8,450		—		—		8,450
Net settlement for taxes and/or exercise price related to equity awards	Net settlement for taxes and/or exercise price related to equity awards	(324)	—		(46,647)				—			—				(46,647)			Net settlement for taxes and/or exercise price related to equity awards	(24)			—		(5,407)		—		—		(5,407)
Unrealized losses on securities, net of tax		—	—		—				—			(411)				(411)
Currency translation adjustments		—	—		—				—			1				1
Unrealized gains on securities, net of tax																			Unrealized gains on securities, net of tax	—			—		—		—		516		516

Net income	Net income	—	—		—				22,102			—				22,102			Net income	—			—		—		15,600		—		15,600
Balances at December 31, 2020		54,370	$	54	$	221,525			$	186,374		$	265			$	408,218
Balances at December 31, 2022																			Balances at December 31, 2022	55,768			$	56	$	310,050	$	371,820	$	(4,159)	$	677,767


	Six Months Ended December 31, 2021
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	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, 2022
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Shares	Amount
Balances at June 30, 2022	55,190	$	55	$	289,843	$	325,868	$	(2,303)	$	613,463
Stock-based compensation	—	—		91,124		—		—		91,124
Stock options exercised	242	—		2,941		—		—		2,941
Issuance of common stock upon vesting of restricted stock units	609	1		(1)		—		—		—
Issuance of common stock upon employee stock purchase plan	61	—		8,450		—		—		8,450
Net settlement for taxes and/or exercise price related to equity awards	(334)	—		(82,307)		—		—		(82,307)
Unrealized losses on securities, net of tax	—	—		—		—		(1,856)		(1,856)

Net income	—	—		—		45,952		—		45,952
Balances at December 31, 2022	55,768	$	56	$	310,050	$	371,820	$	(4,159)	$	677,767

See accompanying notes to the unaudited consolidated financial statements.

Table o f of Contents

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Cash Flows

(in thousands)

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


	Six Months Ended December 31,
	2021		2022
Cash flows from operating activities:
Net income	$	40,785	$	45,952
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense	45,802		83,364
Depreciation and amortization expense	23,383		29,094
Deferred income tax benefit	(22,952)		(20,856)
Provision for credit losses	103		602
Net accretion of discounts and amortization of premiums on available-for-sale securities	221		(2,039)
Amortization of debt issuance costs	90		157
Other	247		1,253
Changes in operating assets and liabilities:
Accounts receivable	(916)		(9,377)
Deferred contract costs	(26,786)		(40,638)
Prepaid expenses and other	(10,008)		616
Accounts payable	1,403		(392)
Accrued expenses and other	(24,514)		(8,979)
Net cash provided by operating activities	26,858		78,757
Cash flows from investing activities:
Purchases of available-for-sale securities	(190,000)		(296,060)
Proceeds from sales and maturities of available-for-sale securities	60,391		190,253
Capitalized internal-use software costs	(17,966)		(19,740)
Purchases of property and equipment	(10,528)		(6,663)
Acquisitions of businesses, net of cash acquired	(60,234)		—
Other investing activities	—		29
Net cash used in investing activities	(218,337)		(132,181)
Cash flows from financing activities:
Net change in client fund obligations	160,325		(922,079)



Proceeds from employee stock purchase plan	7,216		8,450
Taxes paid related to net share settlement of equity awards	(67,109)		(79,369)
Payment of debt issuance costs	(41)		(864)
Net cash provided by (used in) financing activities	100,391		(993,862)
Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents	(91,088)		(1,047,286)
Cash, cash equivalents and funds held for clients' cash and cash equivalents—beginning of period	1,945,881		3,793,453
Cash, cash equivalents and funds held for clients' cash and cash equivalents—end of period	$	1,854,793	$	2,746,167
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Purchases of property and equipment, accrued but not paid	$	125	$	—
Liabilities assumed for acquisitions	$	1,874	$	117
Supplemental Disclosure of Cash Flow Information
Cash paid for interest	$	126	$	157
Refunds received for income taxes	$	(115)	$	(158)
Reconciliation of cash, cash equivalents and funds held for clients' cash and cash equivalents to the Consolidated Balance Sheets
Cash and cash equivalents	$	84,104	$	120,053
Funds held for clients' cash and cash equivalents	1,770,689		2,626,114
Total cash, cash equivalents and funds held for clients' cash and cash equivalents	$	1,854,793	$	2,746,167

See accompanying notes to unaudited consolidated financial statements.

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PAYLOCITY HOLDING CORPORATION

Notes to the Unaudited Consolidated Financial Statements

(all amounts in thousands, except per share data)

(1) Organization and Description of Business

Paylocity Holding Corporation (the “Company”) is a cloud-based provider of ~~payroll and~~ human capital management and payroll software ~~solutions.~~solutions that deliver a comprehensive platform for the modern workforce. Services are provided in a Software-as-a-Service (“SaaS”) delivery ~~model utilizing the Company’s cloud-based platform.~~model. 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 while promoting a modern workplace~~helps businesses attract and ~~improving employee engagement.~~retain talent, build culture and connection with their employees, and streamline and automate HR and payroll processes.

(2) Summary of Significant Accounting Policies

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

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

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. Accounting estimates used in the preparation of these consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes.

(b) Interim Unaudited Consolidated Financial Information

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the Company’s financial position, results of operations, changes in stockholders’ equity and cash flows. The results of operations for the three and six months ended December 31, ~~2021~~2022 are not necessarily indicative of the results for the full year or the results for any future periods. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended June 30, ~~2021~~2022 included in the Company’s Annual Report on Form 10-K.

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

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

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(d) Recently Issued Accounting Standards

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

(3) Revenue

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

Disaggregation of revenue

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


		Three Months Ended December 31,				Six Months Ended December 31,					Three Months Ended December 31,				Six Months Ended December 31,
		2020		2021		2020		2021			2021		2022		2021		2022
Recurring fees	Recurring fees	$	140,461	$	188,159	$	270,153	$	362,856	Recurring fees	$	188,159	$	247,522	$	362,856	$	484,341
Implementation services and other	Implementation services and other	4,932		6,882		10,115		13,009		Implementation services and other	6,882		8,912		13,009		17,499
Total revenues from contracts	Total revenues from contracts	$	145,393	$	195,041	$	280,268	$	375,865	Total revenues from contracts	$	195,041	$	256,434	$	375,865	$	501,840

Deferred revenue

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

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


		Three Months Ended December 31,				Six Months Ended December 31,					Three Months Ended December 31,				Six Months Ended December 31,
		2020		2021		2020		2021			2021		2022		2021		2022
Balance at beginning of the period	Balance at beginning of the period	$	7,670	$	8,717	$	8,434	$	8,734	Balance at beginning of the period	$	8,717	$	14,195	$	8,734	$	12,233
Deferral of revenue	Deferral of revenue	2,860		5,407		5,990		9,760		Deferral of revenue	5,407		12,002		9,760		20,234
Revenue recognized	Revenue recognized	(3,465)		(4,783)		(7,359)		(9,153)		Revenue recognized	(4,783)		(6,460)		(9,153)		(12,730)
Balance at end of the period	Balance at end of the period	$	7,065	$	9,341	$	7,065	$	9,341	Balance at end of the period	$	9,341	$	19,737	$	9,341	$	19,737

Deferred revenue related to these nonrefundable upfront fees are recorded within Accrued expenses and Other long-term liabilities on the Unaudited Consolidated Balance Sheets. The Company expects to recognize these deferred revenue balances of ~~$5,502 in fiscal 2022, $3,351~~$12,680 in fiscal 2023, ~~and $488~~$6,102 in fiscal 2024 and $955 in fiscal 2025 and thereafter.

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Deferred contract costs

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

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

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


		Three Months Ended December 31, 2020									Three Months Ended December 31, 2021
		Beginning Balance		Capitalized Costs		Amortization		Ending Balance			Beginning Balance		Capitalized Costs		Amortization		Ending Balance
Costs to obtain a new contract	Costs to obtain a new contract	$	118,644	$	14,071	$	(6,898)	$	125,817	Costs to obtain a new contract	$	149,222	$	14,929	$	(8,587)	$	155,564
Costs to fulfill a contract	Costs to fulfill a contract	49,808		8,143		(2,294)		55,657		Costs to fulfill a contract	76,785		13,100		(3,770)		86,115
Total	Total	$	168,452	$	22,214	$	(9,192)	$	181,474	Total	$	226,007	$	28,029	$	(12,357)	$	241,679


		Three Months Ended December 31, 2021									Three Months Ended December 31, 2022
		Beginning Balance		Capitalized Costs		Amortization		Ending Balance			Beginning Balance		Capitalized Costs		Amortization		Ending Balance
Costs to obtain a new contract	Costs to obtain a new contract	$	149,222	$	14,929	$	(8,587)	$	155,564	Costs to obtain a new contract	$	191,088	$	20,310	$	(10,845)	$	200,553
Costs to fulfill a contract	Costs to fulfill a contract	76,785		13,100		(3,770)		86,115		Costs to fulfill a contract	117,524		18,803		(6,010)		130,317
Total	Total	$	226,007	$	28,029	$	(12,357)	$	241,679	Total	$	308,612	$	39,113	$	(16,855)	$	330,870


		Six Months Ended December 31, 2020									Six Months Ended December 31, 2021
		Beginning Balance		Capitalized Costs		Amortization		Ending Balance			Beginning Balance		Capitalized Costs		Amortization		Ending Balance
Costs to obtain a new contract	Costs to obtain a new contract	$	113,575	$	25,711	$	(13,469)	$	125,817	Costs to obtain a new contract	$	145,718	$	26,666	$	(16,820)	$	155,564
Costs to fulfill a contract	Costs to fulfill a contract	44,468		15,504		(4,315)		55,657		Costs to fulfill a contract	69,175		24,040		(7,100)		86,115
Total	Total	$	158,043	$	41,215	$	(17,784)	$	181,474	Total	$	214,893	$	50,706	$	(23,920)	$	241,679


		Six Months Ended December 31, 2021									Six Months Ended December 31, 2022
		Beginning Balance		Capitalized Costs		Amortization		Ending Balance			Beginning Balance		Capitalized Costs		Amortization		Ending Balance
Costs to obtain a new contract	Costs to obtain a new contract	$	145,718	$	26,666	$	(16,820)	$	155,564	Costs to obtain a new contract	$	182,543	$	39,222	$	(21,212)	$	200,553
Costs to fulfill a contract	Costs to fulfill a contract	69,175		24,040		(7,100)		86,115		Costs to fulfill a contract	106,025		35,665		(11,373)		130,317
Total	Total	$	214,893	$	50,706	$	(23,920)	$	241,679	Total	$	288,568	$	74,887	$	(32,585)	$	330,870

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

~~Table~~o f ~~Contents~~

Remaining Performance Obligations

The balance of the Company’s remaining performance obligations related to minimum monthly fees on its term-based contracts was approximately ~~$43,248~~$53,940 as of December 31, ~~2021,~~2022, which will be generally recognized over the next 24

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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)(4) Business Combinations

On ~~August 31, 2021,~~January 18, 2022, the Company ~~entered into an Equity Purchase Agreement (the “Purchase Agreement”) with Blue Marble Payroll, LLC (“Blue Marble”) and its equity holders and~~ acquired all of the ~~issued and~~shares outstanding ~~equity interests~~ of ~~Blue Marble~~Cloudsnap, Inc., ("Cloudsnap") through a merger 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~~$50,002, which was paid upon closing. Cloudsnap is a provider of a flexible, low-code solution for ~~employees outside the U.S. in line with complex local and country-specific requirements across many countries.~~integrating disparate business applications. This ~~acquisition~~transaction enables the Company to ~~better serve its clients in managing their international workforces through a unified solution~~deliver modern integrations and seamless data sharing between critical systems more efficiently and effectively, while helping to ~~pay employees,~~unify and automate business processes across clients' HR, finance, benefits, and ~~stay compliant with regulations in~~ other ~~countries.~~systems.

~~An entity affiliated with Steven I. Sarowitz, the Chairman~~The allocation of the ~~Board of Directors and~~purchase price for Cloudsnap is as follows:


	January 18, 2022
Proprietary technology	$	15,800
Goodwill	33,628
Other assets acquired	3,398
Liabilities assumed	(2,824)
Total purchase price	$	50,002

The Company did not record any material purchase accounting adjustments for Cloudsnap during the largest shareholder of the Company, was the largest equity holder of Blue Marble. The Board of Directors of the Company appointed the Audit Committee, which is comprised solely of directors who are independent of the management of Blue Marble, the Blue Marble equity holders and the Company, to evaluate, assess and negotiate on its behalf the terms and conditions in the Purchase Agreement. The Audit Committee and the disinterested directors of the Company’s Board of Directors unanimously approved the Purchase Agreement and transactions specified within it.

six months ended December 31, 2022. The Company accounts for business combinations in accordance with ASC 805, Business Combinations. The Company applied the acquisition method of accounting and recorded the assets acquired and liabilities assumed at their respective estimated fair values as of the date of the acquisition with the excess consideration paid recorded as goodwill. The fair values of assets acquired and liabilities assumed are currently provisional and may change as the estimates and assumptions are subject to change over the measurement period as the Company continues to evaluate and analyze the transaction. The measurement period will end no later than one year from the acquisition date.

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


	~~August 31, 2021~~
~~Proprietary technology~~	$	~~21,200~~
~~Client relationships~~	~~3,100~~
~~Trade names~~	~~1,200~~
~~Goodwill~~	~~34,676~~
~~Other assets acquired~~	~~2,659~~
~~Liabilities assumed~~	~~(1,874)~~
~~Total purchase price~~	$	~~60,961~~

The results from this acquisition have been included in the Company’s consolidated financial statements since the closing of the acquisition and are not material to the Company. Pro forma information ~~was~~is not presented because the ~~effect~~effects of the acquisition ~~was~~are not material to the Company’s consolidated financial statements. The goodwill related to this ~~transaction~~acquisition is primarily ~~related~~attributable to the assembled workforce and growth opportunities from the expansion and enhancement 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~~were expensed as incurred as General and ~~administrative expenses as incurred.~~administrative.

~~Table~~o f ~~Contents~~

(5) Balance Sheet Information

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

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


Balance at June 30, 2021		$	800
Balance at June 30, 2022				Balance at June 30, 2022	$	841
Charged to expense	Charged to expense	103		Charged to expense	602
Write-offs	Write-offs	(97)		Write-offs	(130)
Balance at December 31, 2021		$	806
Balance at December 31, 2022				Balance at December 31, 2022	$	1,313

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


		June 30, 2021		December 31, 2021			June 30, 2022		December 31, 2022
Capitalized internal-use software	Capitalized internal-use software	$	150,922	$	171,226	Capitalized internal-use software	$	193,156	$	216,774
Accumulated amortization	Accumulated amortization	(105,904)		(118,119)		Accumulated amortization	(131,171)		(145,691)
Capitalized internal-use software, net	Capitalized internal-use software, net	$	45,018	$	53,107	Capitalized internal-use software, net	$	61,985	$	71,083

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Amortization of capitalized internal-use software costs is primarily included in Cost of revenues and amounted to ~~$5,882~~$6,087 and ~~$6,087~~$7,478 for the three months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively, and ~~$11,268~~$12,215 and ~~$12,215~~$14,520 for the six months ended December 31, ~~2020~~2021 and ~~2021.~~2022, respectively.

~~Property~~The major classes of property and equipment, net ~~consist of the following:~~were as follows:


		June 30, 2021		December 31, 2021			June 30, 2022		December 31, 2022
Office equipment	Office equipment	$	5,211	$	5,709	Office equipment	$	4,365	$	4,367
Computer equipment	Computer equipment	45,420		50,883		Computer equipment	55,495		54,065
Furniture and fixtures	Furniture and fixtures	13,104		12,791		Furniture and fixtures	12,791		12,790
Software	Software	6,641		7,494		Software	8,785		9,808
Leasehold improvements	Leasehold improvements	46,814		47,192		Leasehold improvements	47,521		47,723
Time clocks rented by clients	Time clocks rented by clients	5,399		6,039		Time clocks rented by clients	6,711		7,463
Total	Total	122,589		130,108		Total	135,668		136,216
Accumulated depreciation	Accumulated depreciation	(62,754)		(67,683)		Accumulated depreciation	(72,829)		(76,710)
Property and equipment, net	Property and equipment, net	$	59,835	$	62,425	Property and equipment, net	$	62,839	$	59,506

Depreciation expense amounted to ~~$4,014~~$3,974 and ~~$3,974~~$4,579 for the three months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively, and ~~$8,019~~$7,816 and ~~$7,816~~$9,033 for the six months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively.

The following table summarizes changes in goodwill during the six months ended December 31, ~~2021:~~2022:

December 31,
2021
Balance at June 30, 2021 $ 33,650
Additions attributable to acquisition 34,676
Balance at December 31, 2021 $ 68,326


	December 31, 2022
Balance at June 30, 2022	$	101,949
Measurement period adjustments	105
Balance at December 31, 2022	$	102,054

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

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acquisition activity.

The Company’s amortizable intangible assets and estimated useful lives ~~are~~were as follows:


		June 30, 2021		December 31, 2021		Weighted average useful life (years)		June 30, 2022		December 31, 2022		Weighted average useful life (years)
Proprietary technology	Proprietary technology	$	6,129	$	27,329	6.6	Proprietary technology	$	43,129	$	43,129	6.0
Client relationships	Client relationships	19,200		22,300		7.8	Client relationships	22,200		22,200		7.8
Non-solicitation agreements	Non-solicitation agreements	1,600		1,600		3.1	Non-solicitation agreements	1,600		1,600		3.1
Trade names	Trade names	440		1,640		5.0	Trade names	1,640		1,640		5.0
Total	Total	27,369		52,869			Total	68,569		68,569
Accumulated amortization	Accumulated amortization	(14,342)		(17,694)			Accumulated amortization	(23,094)		(28,635)
Intangible assets, net	Intangible assets, net	$	13,027	$	35,175		Intangible assets, net	$	45,475	$	39,934

Amortization expense for acquired intangible assets was ~~$940~~$2,000 and ~~$2,000~~$2,770 for the three months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively, and ~~$1,784~~$3,352 and ~~$3,352~~$5,541 for the six months ended December 31, ~~2020~~2021 and ~~2021 respectively.~~2022, respectively, and is included in Cost of revenues and General and administrative.

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Future amortization expense for acquired intangible assets as of December 31, ~~2021~~2022 is as follows:


Remainder of fiscal ~~2022~~2023	$	~~3,981~~
~~Fiscal 2023~~	~~7,808~~5,407
Fiscal 2024	~~6,803~~9,943
Fiscal 2025	~~5,748~~8,888
Fiscal 2026	~~4,129~~7,269
Fiscal 2027	4,893
Thereafter	~~6,706~~3,534
Total	$	~~35,175~~39,934

The components of accrued expenses were as follows:


		June 30, 2021		December 31, 2021			June 30, 2022		December 31, 2022
Accrued payroll and personnel costs	Accrued payroll and personnel costs	$	73,969	$	46,764	Accrued payroll and personnel costs	$	84,897	$	62,092
Operating lease liabilities	Operating lease liabilities	7,549		6,450		Operating lease liabilities	8,399		8,507
Deferred revenue	Deferred revenue	9,442		11,792		Deferred revenue	13,548		23,538
Other	Other	12,149		14,501		Other	17,540		21,658
Total accrued expenses	Total accrued expenses	$	103,109	$	79,507	Total accrued expenses	$	124,384	$	115,795

(6) Corporate Investments and Funds Held for Clients

Corporate investments and funds held for clients ~~consist~~consisted of the following:


		June 30, 2021									June 30, 2022
Type of Issue	Type of Issue	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Type of Issue	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Cash and cash equivalents	Cash and cash equivalents	$	202,287	$	—	$	—	$	202,287	Cash and cash equivalents	$	139,756	$	—	$	—	$	139,756
Funds held for clients' cash and cash equivalents	Funds held for clients' cash and cash equivalents	1,743,594		—		—		1,743,594		Funds held for clients' cash and cash equivalents	3,653,699		—		(2)		3,653,697
Available-for-sale securities:	Available-for-sale securities:									Available-for-sale securities:
Commercial paper										Commercial paper	58,166		—		(126)		58,040
Corporate bonds	Corporate bonds	13,390		70		—		13,460		Corporate bonds	59,568		—		(1,715)		57,853
Asset-backed securities	Asset-backed securities	7,062		17		—		7,079		Asset-backed securities	9,843		2		(141)		9,704
Total available-for-sale securities (1)		20,452		87		—		20,539
Certificates of deposit										Certificates of deposit	31,879		—		(43)		31,836
U.S. treasury securities										U.S. treasury securities	167,566		12		(591)		166,987
U.S government agency securities										U.S government agency securities	8,000		—		(451)		7,549
Other										Other	2,181		—		(71)		2,110
Total available-for-sale securities										Total available-for-sale securities	337,203		14		(3,138)		334,079
Total investments	Total investments	$	1,966,333	$	87	$	—	$	1,966,420	Total investments	$	4,130,658	$	14	$	(3,140)	$	4,127,532

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			~~(1)~~			~~Included within the fair value of total available-for-sale securities above is $4,456 of corporate investments and $16,083 of funds held for clients.~~


	December 31, 2022
Type of Issue	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Cash and cash equivalents	$	120,053	$	—	$	—	$	120,053
Funds held for clients' cash and cash equivalents	2,626,112		3		(1)		2,626,114
Available-for-sale securities:
Commercial paper	97,440		48		(65)		97,423
Corporate bonds	78,757		25		(2,005)		76,777
Asset-backed securities	27,984		17		(333)		27,668
Certificates of deposit	40,449		27		(14)		40,462
U.S. treasury securities	187,671		59		(2,480)		185,250
U.S government agency securities	8,000		—		(601)		7,399
Other	4,730		—		(126)		4,604
Total available-for-sale securities	445,031		176		(5,624)		439,583
Total investments	$	3,191,196	$	179	$	(5,625)	$	3,185,750

December 31, 2021
Type of Issue Amortized
cost Gross
unrealized
gains Gross
unrealized
losses Fair 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.~~

All available-for-sale securities were included in Funds held for clients at June 30, 2022 and December 31, 2022

Cash and cash equivalents and funds held for clients’ cash and cash equivalents ~~include~~included demand deposit accounts, money market funds, ~~and~~ commercial paper and certificates of deposit at June 30, ~~2021~~2022 and December 31, ~~2021.~~2022.

Classification of investments on the ~~unaudited consolidated balance sheets is~~Unaudited Consolidated Balance Sheets was as follows:


		June 30, 2021		December 31, 2021			June 30, 2022		December 31, 2022
Cash and cash equivalents	Cash and cash equivalents	$	202,287	$	84,104	Cash and cash equivalents	$	139,756	$	120,053
Corporate investments		4,456		—

Funds held for clients	Funds held for clients	1,759,677		1,920,063		Funds held for clients	3,987,776		3,065,697

Total investments	Total investments	$	1,966,420	$	2,004,167	Total investments	$	4,127,532	$	3,185,750

Available-for-sale securities that ~~have~~had been in an unrealized loss position for a period of less and greater than 12 months as of June 30, 2022 and December 31, ~~2021~~2022 had fair market value as follows:


		December 31, 2021					June 30, 2022
		Securities in an unrealized loss position for less than 12 months					Securities in an unrealized loss position for less than 12 months				Securities in an unrealized loss position for greater than 12 months				Total
		Gross unrealized losses		Fair Value			Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value
Commercial paper	Commercial paper	$	(16)	$	35,463	Commercial paper	$	(126)	$	53,756	$	—	$	—	$	(126)	$	53,756
Corporate bonds	Corporate bonds	(286)		42,587		Corporate bonds	(1,715)		57,853		—		—		(1,715)		57,853
Asset-backed securities	Asset-backed securities	(26)		9,664		Asset-backed securities	(141)		7,354		—		—		(141)		7,354
Certificates of deposit	Certificates of deposit	(7)		15,243		Certificates of deposit	(43)		27,086		—		—		(43)		27,086
U.S. treasury securities	U.S. treasury securities	(19)		4,023		U.S. treasury securities	(591)		129,943		—		—		(591)		129,943
U.S. government agency securities	U.S. government agency securities	(101)		6,899		U.S. government agency securities	(451)		7,549		—		—		(451)		7,549
Other	Other	(15)		2,809		Other	(71)		2,110		—		—		(71)		2,110
Total available-for-sale securities	Total available-for-sale securities	$	(470)	$	116,688	Total available-for-sale securities	$	(3,138)	$	285,651	$	—	$	—	$	(3,138)	$	285,651

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There were no available-for-sale securities in an unrealized loss position at June 30, 2021. As a result, no securities have been in an unrealized loss position for more than 12 months as of December 31, 2021.


	December 31, 2022
	Securities in an unrealized loss position for less than 12 months				Securities in an unrealized loss position for greater than 12 months				Total
	Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value
Commercial paper	$	(65)	$	29,451	$	—	$	—	$	(65)	$	29,451
Corporate bonds	(758)		29,428		(1,247)		35,274		(2,005)		64,702
Asset-backed securities	(193)		15,405		(140)		3,379		(333)		18,784
Certificates of deposit	(14)		3,886		—		—		(14)		3,886
U.S. treasury securities	(2,382)		146,060		(98)		3,920		(2,480)		149,980
U.S. government agency securities	(36)		965		(565)		6,434		(601)		7,399
Other	(49)		2,871		(77)		1,732		(126)		4,603
Total available-for-sale securities	$	(3,497)	$	228,066	$	(2,127)	$	50,739	$	(5,624)	$	278,805

The Company regularly reviews the composition of its portfolio to determine the existence of credit impairment. The Company did not recognize any credit impairment losses during the three or six months ended December 31, ~~2020~~2021 or ~~2021.~~2022. All securities in the Company’s portfolio held an A-1 rating or better as of December 31, ~~2021.~~2022.

The Company did not make any material reclassification adjustments out of accumulated other comprehensive income for realized gains and losses on the sale of available-for-sale securities during the three or six months ended December 31, ~~2020~~2021 or ~~2021.~~2022. There were no realized gains or losses on the sale of available-for-sale securities for the three or six months ended December 31, ~~2020~~2021 or ~~2021.~~2022.

Expected maturities of available-for-sale securities at December 31, ~~2021 are~~2022 were as follows:


		Amortized cost		Fair value			Amortized cost		Fair value
One year or less	One year or less	$	94,906	$	94,867	One year or less	$	259,823	$	258,853
One year to two years	One year to two years	33,284		33,124		One year to two years	90,033		87,491
Two years to three years	Two years to three years	16,637		16,437		Two years to three years	93,175		91,459
Three years to five years	Three years to five years	5,013		4,946		Three years to five years	2,000		1,780
Total available-for-sale securities	Total available-for-sale securities	$	149,840	$	149,374	Total available-for-sale securities	$	445,031	$	439,583

(7) Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

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

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

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

The Company measures certain cash and cash equivalents, accounts receivable, accounts payable and client fund obligations at fair value on a recurring basis using Level 1 inputs. The Company considers the recorded value of these

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financial assets and liabilities to approximate the fair value of the respective assets and liabilities at June 30, ~~2021~~2022 and December 31, ~~2021~~2022 based upon the short-term nature of these assets and liabilities.

Marketable securities, consisting of securities classified as available-for-sale as well as certain cash equivalents, are recorded at fair value on a recurring basis using Level 2 inputs obtained from an independent pricing service. Available-for-sale securities include commercial paper, corporate bonds, asset-backed securities, ~~certificate~~certificates 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 no available-for-sale securities classified in Level 3 of the fair value hierarchy at June 30, ~~2021~~2022 or December 31, ~~2021.~~

~~Table~~o f ~~Contents~~

2022.

The fair value level for the Company’s cash and cash equivalents and available-for-sale securities iswas as follows:


		June 30, 2021									June 30, 2022
		Total		Level 1		Level 2		Level 3			Total		Level 1		Level 2		Level 3
Cash and cash equivalents	Cash and cash equivalents	$	202,287	$	202,287	$	—	$	—	Cash and cash equivalents	$	139,756	$	139,756	$	—	$	—
Funds held for clients' cash and cash equivalents	Funds held for clients' cash and cash equivalents	1,743,594		1,743,594		—		—		Funds held for clients' cash and cash equivalents	3,653,697		3,640,427		13,270		—
Available-for-sale securities:	Available-for-sale securities:									Available-for-sale securities:
Commercial paper										Commercial paper	58,040		—		58,040		—
Corporate bonds	Corporate bonds	13,460		—		13,460		—		Corporate bonds	57,853		—		57,853		—
Asset-backed securities	Asset-backed securities	7,079		—		7,079		—		Asset-backed securities	9,704		—		9,704		—
Certificates of deposit										Certificates of deposit	31,836		—		31,836		—
U.S. treasury securities										U.S. treasury securities	166,987		—		166,987		—
U.S government agency securities										U.S government agency securities	7,549		—		7,549		—
Other										Other	2,110		—		2,110		—
Total available-for-sale securities	Total available-for-sale securities	20,539		—		20,539		—		Total available-for-sale securities	334,079		—		334,079		—
Total investments	Total investments	$	1,966,420	$	1,945,881	$	20,539	$	—	Total investments	$	4,127,532	$	3,780,183	$	347,349	$	—


		December 31, 2021									December 31, 2022
		Total		Level 1		Level 2		Level 3			Total		Level 1		Level 2		Level 3
Cash and cash equivalents	Cash and cash equivalents	$	84,104	$	84,104	$	—	$	—	Cash and cash equivalents	$	120,053	$	120,053	$	—	$	—
Funds held for clients' cash and cash equivalents	Funds held for clients' cash and cash equivalents	1,770,689		1,770,289		400		—		Funds held for clients' cash and cash equivalents	2,626,114		2,607,468		18,646		—
Available-for-sale securities:	Available-for-sale securities:									Available-for-sale securities:
Commercial paper	Commercial paper	62,227		—		62,227		—		Commercial paper	97,423		—		97,423		—
Corporate bonds	Corporate bonds	42,587		—		42,587		—		Corporate bonds	76,777		—		76,777		—
Asset-backed securities	Asset-backed securities	10,336		—		10,336		—		Asset-backed securities	27,668		—		27,668		—
Certificates of deposit	Certificates of deposit	20,493		—		20,493		—		Certificates of deposit	40,462		—		40,462		—
U.S. treasury securities	U.S. treasury securities	4,023		—		4,023		—		U.S. treasury securities	185,250		—		185,250		—
U.S government agency securities	U.S government agency securities	6,899		—		6,899		—		U.S government agency securities	7,399		—		7,399		—
Other	Other	2,809		—		2,809		—		Other	4,604		—		4,604		—
Total available-for-sale securities	Total available-for-sale securities	149,374		—		149,374		—		Total available-for-sale securities	439,583		—		439,583		—
Total investments	Total investments	$	2,004,167	$	1,854,393	$	149,774	$	—	Total investments	$	3,185,750	$	2,727,521	$	458,229	$	—

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

The Company records assets acquired and liabilities assumed in business combinations at fair value. Refer to Note 4 for further details on the fair value measurements of certain assets and liabilities recorded at fair value on a non-recurring basis.

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(8) Debt

In July 2019, the Company entered into a~~five-year~~ revolving credit agreement with PNC Bank, National Association, and other lenders, which is secured by substantially all of the Company’s assets, subject to certain restrictions. ~~The revolving~~In August 2022, the Company entered into a first amendment to the aforementioned credit agreement ~~provides for a senior secured~~to increase the borrowing capacity of our revolving credit facility ~~(the “credit facility”~~("credit facility") ~~under which the Company may borrow up~~ to ~~$250,000,~~$550,000, which may be increased to up to ~~$375,000,~~$825,000, subject to obtaining additional lender commitments and certain approvals and satisfying other requirements. The amended credit ~~facility is scheduled to expire in July 2024. There were no borrowings under~~agreement extends the maturity date of the credit facility to August 2027 and replaces the interest rate based on London Interbank Offered Rate with an interest rate based on secured overnight financing rate ("SOFR"). The Company had no borrowings at June 30, ~~2021~~2022 or December 31, ~~2021.~~2022.

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

Any borrowings under the credit facility will generally bear interest, at the Company’s option, at a rate per annum determined by reference to either the ~~LIBOR (or a replacement index for~~Term SOFR rate plus the ~~LIBOR rate)~~SOFR Adjustment or an adjusted base rate, in each case plus an applicable margin ranging from 0.875% to ~~1.375%~~1.500% and 0.0% to ~~0.375%~~0.500%, respectively, based on the then-applicable net ~~senior secured~~total leverage ratio. Additionally, the Company is required to pay certain commitment, letter of credit fronting and letter of credit participation fees on available and/or undrawn portions of the credit facility.

~~Under the credit facility, the~~The Company is required to comply with certain customary affirmative and negative covenants, including a requirement to maintain a maximum net total leverage ratio of not greater than 4.00 to 1.00, (with a ~~maximum net senior secured leverage ratio of not greater than 3.50~~step up to 4.50 to 1.00 for the 4 consecutive fiscal quarters following a fiscal quarter in which certain permitted acquisitions are consummated), and a minimum interest coverage ratio of not less than ~~3.00~~2.00 to 1.00. As of December 31, ~~2021,~~2022, the Company was in compliance with all of the aforementioned covenants.

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(9) Stock-Based Compensation

The Company maintains a 2008 Equity Incentive Plan (the “2008 Plan”) and a 2014 Equity Incentive Plan (the “2014 Plan”) pursuant to which the Company has reserved shares of its common stock for issuance to its employees, directors and non-employee third parties. The 2014 Plan serves as the successor to the 2008 Plan and permits the granting of restricted stock units and other equity incentives at the discretion of the compensation committee of the Company’s board of directors. No 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.

As of December 31, ~~2021,~~2022, the Company had ~~12,006~~13,784 shares allocated to the plans, of which ~~2,023~~1,841 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.

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The following table summarizes changes in the number of shares available for grant under the Company’s equity incentive plans during the six months ended December 31, ~~2021:~~2022:


			Number of Shares
Available for grant at July 1, ~~2021~~2022			~~10,312~~12,393

RSUs granted			~~(577)~~(730)
MSUs granted			~~(48)~~(81)
Shares withheld in settlement of taxes and/or exercise price			~~273~~334
Forfeitures			8295
Shares removed			~~(59)~~(68)
Available for grant at December 31, ~~2021~~2022			~~9,983~~11,943

Shares removed represents forfeitures of shares and shares withheld in settlement of taxes and/or payment of exercise price related to grants made under the 2008 Plan. As noted above, no new awards will be issued under the 2008 Plan.

Stock-based compensation expense related to 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,					Three Months Ended December 31,				Six Months Ended December 31,
		2020		2021		2020		2021			2021		2022		2021		2022
Cost of revenues	Cost of revenues	$	1,969	$	3,317	$	3,801	$	5,924	Cost of revenues	$	3,317	$	5,232	$	5,924	$	9,273
Sales and marketing	Sales and marketing	3,965		5,716		7,845		10,875		Sales and marketing	5,716		10,795		10,875		20,354
Research and development	Research and development	2,738		5,406		4,968		9,108		Research and development	5,406		11,292		9,108		20,094
General and administrative	General and administrative	7,987		11,804		14,322		19,895		General and administrative	11,804		16,232		19,895		33,643
Total stock-based compensation expense	Total stock-based compensation expense	$	16,659	$	26,243	$	30,936	$	45,802	Total stock-based compensation expense	$	26,243	$	43,551	$	45,802	$	83,364

In addition, the Company capitalized ~~$528~~$1,879 and ~~$1,879~~$3,154 of stock-based compensation expense in its capitalized internal-use software costs in the three months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively, and ~~$1,297~~$3,426 and ~~$3,426~~$6,096 during the six months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively.

In August 2020, the compensation committee of the Company’s board of directors approved the modification of the performance targets for vesting of the performance-based restricted stock units granted in fiscal 2020. The Company recorded $1,924 and $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.

~~Table~~o f ~~Contents~~

There were no stock options granted during the six months ended December 31, ~~2021.~~2022. The table below presents stock option activity during the six months ended December 31, ~~2021:~~2022:

Outstanding Options
Number of
shares Weighted
average
exercise
price Weighted
average
remaining
contractual
term (years) Aggregate
intrinsic
value
Balance 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


	Outstanding Options
	Number of shares	Weighted average exercise price		Weighted average remaining contractual term (years)	Aggregate intrinsic value
Option balance at July 1, 2022	548	$	18.34	1.6	$	85,515
Options exercised	(242)	$	12.18
Option balance at December 31, 2022	306	$	23.21	1.6	$	52,348
Options vested and exercisable at December 31, 2022	306	$	23.21	1.6	$	52,348

The total intrinsic value of options exercised was ~~$25,869~~$11,759 and ~~$11,759~~$1,484 during the three months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively, and ~~$37,277~~$47,627 and ~~$47,627~~$49,627 during the six months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively.

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~~date and have time-based vesting ~~conditions while other RSUs vest based on the achievement~~conditions.

Table of certain revenue growth and/or Adjusted EBITDA margin targets. For these performance-based RSUs, the Company recognizes stock-based compensation expense based upon the probable or actual achievement of these aforementioned performance metrics.Contents

The following table represents restricted stock unit activity during the six months ended December 31, ~~2021:~~2022:


		Units	Weighted average grant date fair value			Units	Weighted average grant date fair value
RSU balance at July 1, 2021		1,388	$	100.33
RSU balance at July 1, 2022					RSU balance at July 1, 2022	1,327	$	168.44
RSUs granted	RSUs granted	577	$	253.08	RSUs granted	730	$	261.90
RSUs vested	RSUs vested	(536)	$	84.52	RSUs vested	(609)	$	148.90
RSUs forfeited	RSUs forfeited	(77)	$	151.56	RSUs forfeited	(92)	$	138.11
RSU balance at December 31, 2021		1,352	$	169.28
RSU balance at December 31, 2022					RSU balance at December 31, 2022	1,356	$	228.70

At December 31, ~~2021,~~2022, there was ~~$134,813~~$173,117 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~~1.9 years.

The Company also grants MSUs under the 2014 Plan with terms determined at the discretion of the ~~Committee.~~compensation committee of the Company's board of directors. 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-year~~three-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.

The following table represents market share unit activity during the six months ended December 31, ~~2021:~~2022:

Units Weighted
average
grant date
fair value
MSU 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

~~Table~~o f ~~Contents~~


	Units	Weighted average grant date fair value
MSU balance at July 1, 2022	101	$	263.83
MSUs granted	81	$	388.25
MSUs forfeited	(3)	$	355.60
MSU balance at December 31, 2022	179	$	318.97

The Company estimated the grant date fair value of the MSUs using a Monte Carlo simulation model that included the following assumptions:


		Six Months Ended December 31,				Six Months Ended December 31,
		2020		2021		2021	2022
Valuation assumptions:	Valuation assumptions:				Valuation assumptions:
Expected dividend yield	Expected dividend yield	—%		—%	Expected dividend yield	—%	—%
Expected volatility	Expected volatility	52.0	%	47.4 - 47.5%	Expected volatility	47.4 - 47.5%	51.0 - 52.7%
Expected term (years)	Expected term (years)	3.04		2.92 - 3.04	Expected term (years)	2.92 - 3.04	2.75 - 3.04
Risk‑free interest rate	Risk‑free interest rate	0.18%		0.43 - 0.47%	Risk‑free interest rate	0.43 - 0.47%	3.11 - 4.01%

At December 31, ~~2021,~~2022, there was ~~$17,832~~$32,898 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested MSUs. That cost is expected to be recognized over a period of 2.4 years.

(10) Litigation

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

From time to time, the Company is subject to litigation arising in the ordinary course of business. Many of these matters are covered in whole or in part by insurance. In the opinion of the Company’s management, the ultimate disposition of any matters currently outstanding or threatened will not have a material adverse effect on the Company’s

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financial position, results of operations, or liquidity. However, these matters are subject to inherent uncertainties and could materially impact the Company’s financial position, results of operations, or liquidity based on the final disposition of these matters.

(11) Income Taxes

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

On August 16, 2022, the Inflation Reduction Act (the "IRA") was signed into law and contains a number of tax related provisions. The Company is in the process of evaluating the IRA but does not expect it to have a material impact on the Company's consolidated financial statements.

The Company’s effective tax rate was ~~(61.5)~~(26.9)% and ~~(26.9)%~~14.3% for the three months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively. The Company’s effective tax rate for the three months ended December 31, ~~2020~~2021 was lower than the federal statutory rate of 21% primarily due to excess tax benefits from employee stock-based compensation. The Company's effective tax rate for the three months ended December 31, 2022 was lower than the federal statutory rate of 21% primarily due to a decrease to the valuation allowance, partially offset by non-deductible stock-based compensation under Internal Revenue Code Section 162(m).

The Company's effective tax rate was (127.8)% and (82.9)% for the six months ended December 31, 2021 and 2022, respectively. The Company's effective tax rate for the six months ended December 31, 2021 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. The Company's effective tax rate for the ~~three months ended December 31, 2021 was lower than the federal statutory rate of 21% primarily due to excess tax benefits from employee stock-based compensation.~~

~~The Company's effective tax rate was (141.2)% and (127.8)% for the~~ six months ended December 31, ~~2020 and 2021, respectively. The Company's effective tax rate for the six months ended December 31, 2020, and December 31, 2021~~2022 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~~and a decrease in the valuation allowance.

(12) Net Income Per Share

Basic net income per common share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares outstanding during the period and, if dilutive, potential common shares outstanding during the period. The Company’s potential common shares consist of the incremental common shares issuable upon the exercise of stock options,

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the release of restricted stock units and market share units ~~and the shares purchasable via the employee stock purchase plan~~ as of the balance sheet date. The following table presents the calculation of basic and diluted net income per share:


		Three Months Ended December 31,				Six Months Ended December 31,					Three Months Ended December 31,				Six Months Ended December 31,
		2020		2021		2020		2021			2021		2022		2021		2022
Numerator:	Numerator:									Numerator:
Net income	Net income	$	9,642	$	9,853	$	22,102	$	40,785	Net income	$	9,853	$	15,600	$	40,785	$	45,952

Denominator:	Denominator:									Denominator:
Weighted-average shares used in computing net income per share:	Weighted-average shares used in computing net income per share:									Weighted-average shares used in computing net income per share:
Basic	Basic	54,305		55,067		54,160		54,938		Basic	55,067		55,721		54,938		55,587
Weighted-average effect of potentially dilutive shares:	Weighted-average effect of potentially dilutive shares:									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
Employee stock options, restricted stock units and market share units										Employee stock options, restricted stock units and market share units	1,401		753		1,548		972
Diluted	Diluted	56,343		56,468		56,122		56,486		Diluted	56,468		56,474		56,486		56,559

Net income per share:	Net income per share:									Net income per share:
Basic	Basic	$	0.18	$	0.18	$	0.41	$	0.74	Basic	$	0.18	$	0.28	$	0.74	$	0.83
Diluted	Diluted	$	0.17	$	0.17	$	0.39	$	0.72	Diluted	$	0.17	$	0.28	$	0.72	$	0.81

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The following table summarizes the outstanding restricted stock units and market share units as of December 31, ~~2020~~2021 and ~~2021~~2022 that were excluded from the diluted per share calculation for the periods presented because to include them would have been antidilutive:

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

~~(13) Subsequent Events~~

On January 18, 2022, the Company acquired all of the shares outstanding of Cloudsnap, Inc., ("Cloudsnap") through a merger for cash consideration of $50,000, subject to customary purchase price adjustments. Cloudsnap is a provider of a flexible, low-code solution for integrating disparate business applications. This transaction enables the Company to deliver modern integrations and seamless data sharing between critical systems more efficiently and effectively, while helping to unify and automate business processes across clients' HR, finance, benefits, and other systems. The Company will account for the acquisition as a business combination in accordance with ASC 805: Business Combinations using the acquisition method of accounting and recognize assets and liabilities at fair value as of the date of acquisition. The results from this acquisition will not have a material impact to the Company's consolidated financial statements.

~~In January 2022, the Company borrowed $50,000 under its revolving credit facility in connection with its acquisition of Cloudsnap.~~


	Three Months Ended December 31,		Six Months Ended December 31,
	2021	2022	2021	2022
Market share units	31	57	31	60
Restricted stock units	45	616	46	601
Total	76	673	77	661

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

The statements included herein that are not based solely on historical facts are “forward looking statements.” Such forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. Our actual results could differ materially from those anticipated by us in these forward-looking statements as a result of various factors, including ~~those~~items discussed below and ~~under~~impacts from the novel coronavirus disease (COVID-19) as discussed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2021~~2022 filed with the SEC on August ~~6, 2021.~~5, 2022.

Overview

We are a leading cloud-based provider of ~~payroll and~~ human capital management, ~~(“HCM”)~~or HCM, and payroll software ~~solutions.~~solutions that deliver a comprehensive platform for the modern workforce. Our ~~comprehensive~~HCM and payroll platform offers an intuitive, easy-to-use product suite ~~delivers a unified platform to create a modern workplace for our clients through automation, data-driven insights~~that helps businesses attract and ~~engagement. Our product suite enables professionals to make strategic decisions in the areas~~retain talent, build culture and connection with their employees, and streamline and automate HR and payroll processes.

Effective management of ~~payroll,~~ human capital ~~management, workforce management, talent management, benefits, modern workforce~~is a core function in all organizations and requires a significant commitment of resources. Our cloud-based software solutions, ~~and analytics & insights, all while promoting a modern workplace and improving employee engagement.~~

~~We designed~~combined with our ~~cloud-based platform to provide a~~ unified ~~suite of modules using a multi-tenant architecture. Our solutions~~database architecture, are highly flexible and configurable and feature a modern, intuitive user experience. Our platform offers automated data integration with ~~over 400 related~~hundreds of third-party partner systems, such as 401(k), benefits and insurance provider systems. We ~~have invested in, and we intend~~plan to continue to invest in research and development efforts that will allow us to ~~expand~~offer a broader selection of products to new and existing clients focused on experiences that solve our ~~product offerings and advance our platform.~~clients’ challenges.

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

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

~~In order~~We will continue to invest across our entire organization as we continue to grow our business over the long ~~term, we will continue to invest, across our entire organization.~~term. 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~~and 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.

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

~~COVID-19 Impact~~

The novel coronavirus disease (“COVID-19”) continues to impact the global economy. The duration and severity of the COVID-19 pandemic, and the long-term effects the pandemic will have on our clients and general economic conditions, remain uncertain and difficult to predict. Many of our prospective and existing clients’ businesses have been impacted by business closures and other restrictive orders, which has resulted in reduced employee headcount, temporary and permanent business closures, and/or delayed sales/starts. Even though we have seen improvements in the overall macroeconomic conditions, our business and financial performance may continue to be unfavorably impacted in future periods by fluctuations in client employee counts, reduction in business confidence and activity, a decrease in payroll and HCM solutions spending by organizations, the pace of the macroeconomic recovery or a continued low interest rate environment, among other factors. Refer to “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K filed with

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~~the Securities and Exchange Commission on August 6, 2021 for risks related to the COVID-19 pandemic and its impact on our business and financial performance.~~

Key Metrics

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

Revenue Growth

Our recurring revenue model and high annual revenue retention rates provide significant visibility into our future operating results and cash flow from operations. This visibility enables us to better manage and invest in our business. Total revenues increased from ~~$146.3 million for the three months ended December 31, 2020 to~~ $196.0 million for the three months ended December 31, 2021 to $273.0 million for the three months ended December 31, 2022, representing a ~~34%~~39% year-over-year increase. Total revenues increased from ~~$282.1 million for the six months ended December 31, 2020 to~~ $377.7 million for the six months ended December 31, 2021 to $526.3 million for the six months ended December 31, 2022,

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representing a ~~34%~~39% year-over-year increase. The increase in year-over-year revenue growth was driven by the strong performance by our sales team and ~~an overall improvement~~also increases in ~~macroeconomic conditions~~client workforce levels and growth in interest income on funds held for clients attributable to rising interest rates and higher average daily balances for funds held for clients due to new clients and increases in client workforce levels as compared to the prior fiscal year. Our ~~Our~~ revenue growth in future periods may ~~continue to~~ be impacted by fluctuations in client employee counts, potential increases in client losses, a ~~continued low~~changing interest rate environment, uncertainties around market and ~~the pace of the macroeconomic recovery,~~economic conditions including inflation risk, among other factors.

Adjusted Gross Profit and Adjusted EBITDA

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

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

We define Adjusted Gross Profit as gross profit before amortization of capitalized internal-use software costs, amortization of certain acquired intangibles, stock-based compensation expense and employer payroll taxes related to stock releases and option ~~exercises.~~exercises, and other items as defined below. We define Adjusted EBITDA as net income before interest expense, income tax expense (benefit), depreciation and amortization expense, stock-based compensation expense and employer payroll taxes related to stock releases and option exercises and other items as defined below.

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


		Three Months Ended December 31,				Six Months Ended December 31,					Three Months Ended December 31,				Six Months Ended December 31,
		2020		2021		2020		2021			2021		2022		2021		2022

		(in thousands)				(in thousands)					(in thousands)				(in thousands)
Adjusted Gross Profit	Adjusted Gross Profit	$	100,671	$	134,666	$	194,874	$	262,781	Adjusted Gross Profit	$	134,666	$	197,573	$	262,781	$	380,270
Adjusted EBITDA	Adjusted EBITDA	34,970		46,615		65,834		92,739		Adjusted EBITDA	46,615		77,352		92,739		143,975


	Three Months Ended December 31,				Six Months Ended December 31,
	2021		2022		2021		2022

	(in thousands)				(in thousands)
Reconciliation from Gross Profit to Adjusted Gross Profit
Gross profit	$	125,216	$	182,932	$	243,664	$	351,669
Amortization of capitalized internal-use software costs	6,087		7,478		12,215		14,520
Amortization of certain acquired intangibles	—		1,853		—		3,707
Stock-based compensation expense and employer payroll taxes related to stock releases and option exercises	3,327		5,310		6,854		10,355
Other items (1)	36		—		48		19
Adjusted Gross Profit	$	134,666	$	197,573	$	262,781	$	380,270

2021

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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,					Three Months Ended December 31,				Six Months Ended December 31,
		2020		2021		2020		2021			2021		2022		2021		2022

		(in thousands)				(in thousands)					(in thousands)				(in thousands)
Reconciliation from Net income to Adjusted EBITDA	Reconciliation from Net income to Adjusted EBITDA									Reconciliation from Net income to Adjusted EBITDA
Net income	Net income	$	9,642	$	9,853	$	22,102	$	40,785	Net income	$	9,853	$	15,600	$	40,785	$	45,952
Interest expense	Interest expense	351		110		691		218		Interest expense	110		190		218		377
Income tax benefit		(3,670)		(2,087)		(12,938)		(22,884)
Income tax expense (benefit)										Income tax expense (benefit)	(2,087)		2,603		(22,884)		(20,823)
Depreciation and amortization expense	Depreciation and amortization expense	10,836		12,061		21,071		23,383		Depreciation and amortization expense	12,061		14,827		23,383		29,094
EBITDA	EBITDA	17,159		19,937		30,926		41,502		EBITDA	19,937		33,220		41,502		54,600
Stock-based compensation expense and employer payroll taxes related to stock releases and option exercises	Stock-based compensation expense and employer payroll taxes related to stock releases and option exercises	17,086		26,470		33,823		50,226		Stock-based compensation expense and employer payroll taxes related to stock releases and option exercises	26,470		43,981		50,226		88,959
Other items (2)	Other items (2)	725		208		1,085		1,011		Other items (2)	208		151		1,011		416
Adjusted EBITDA	Adjusted EBITDA	$	34,970	$	46,615	$	65,834	$	92,739	Adjusted EBITDA	$	46,615	$	77,352	$	92,739	$	143,975

(1)Represents nonrecurring acquisition-related costs.

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

Basis of Presentation

Revenues

Recurring and other revenue

We derive the majority of our revenues from recurring fees attributable to our cloud-based ~~payroll~~HCM and ~~HCM~~payroll software solutions. Recurring fees for each client generally include a base fee in addition to a fee based on the number of client employees and the number of products a client uses. We also charge fees attributable to our preparation of W-2 documents and annual required filings on behalf of our clients. We charge implementation fees for professional services provided to implement our ~~payroll~~HCM and ~~HCM~~payroll solutions. Implementations of our payroll solutions typically require ~~only~~ one to eight 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.

~~We derive revenue from a client based on the solutions purchased by the client, the~~The number of client employees on our platform and the mix of products purchased by a client as well as the ~~amount, type and~~ timing of services provided with respect to those client ~~employees.~~employees can vary each period. As such, the number of client employees on our system is not a good indicator of our financial results in any given period. Recurring and other revenue accounted for 99% and 94% of our total revenues ~~during both~~for the three months ended December 31, 2021 and 2022, respectively, and 99% and 95% for the six months ended December 31, ~~2020~~2021 and ~~2021.~~

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2022, respectively.

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

Interest Income on Funds Held for Clients

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

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Cost of Revenues

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

We also capitalize a portion of our internal-use software costs, which are then ~~all~~primarily amortized as Cost of revenues. We amortized ~~$5.9~~$6.1 million and ~~$6.1~~$7.5 million of capitalized internal-use software costs during the three months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively, ~~and $11.3 million~~ and $12.2 million and $14.5 million of capitalized ~~internal-used~~internal-use software costs during the six months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively.

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of employee-related expenses for our direct sales and marketing staff, including wages, commissions, stock-based compensation, bonuses, 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 will seek to grow our number of clients for the foreseeable future, and therefore our sales and marketing expense is expected to continue to increase in absolute dollars as we grow our sales organization and expand our marketing activities.

Research and Development

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

We capitalize a portion of our development costs related to internal-use software. The timing of our capitalized development projects may affect the amount of development costs expensed in any given period. The table below sets forth

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the amounts of capitalized and expensed research and development expenses for the three and six months ended December 31, ~~2020~~2021 and ~~2021.~~2022.


		Three Months Ended December 31,				Six Months Ended December 31,					Three Months Ended December 31,				Six Months Ended December 31,
		2020		2021		2020		2021			2021		2022		2021		2022

		(in thousands)				(in thousands)					(in thousands)				(in thousands)
Capitalized portion of research and development	Capitalized portion of research and development	$	7,274	$	10,475	$	15,390	$	20,304	Capitalized portion of research and development	$	10,475	$	11,868	$	20,304	$	23,618
Expensed portion of research and development	Expensed portion of research and development	19,338		25,278		37,985		48,354		Expensed portion of research and development	25,278		41,029		48,354		81,122
Total research and development	Total research and development	$	26,612	$	35,753	$	53,375	$	68,658	Total research and development	$	35,753	$	52,897	$	68,658	$	104,740

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

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General and Administrative

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

Other Income (Expense)

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

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Results of Operations

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


		Three Months Ended December 31,				Six Months Ended December 31,					Three Months Ended December 31,				Six Months Ended December 31,
		2020		2021		2020		2021			2021		2022		2021		2022

		(in thousands)				(in thousands)					(in thousands)				(in thousands)
Consolidated Statements of Operations Data:	Consolidated Statements of Operations Data:									Consolidated Statements of Operations Data:
Revenues:	Revenues:									Revenues:
Recurring and other revenue	Recurring and other revenue	$	145,393	$	195,041	$	280,268	$	375,865	Recurring and other revenue	$	195,041	$	256,434	$	375,865	$	501,840
Interest income on funds held for clients	Interest income on funds held for clients	936		996		1,855		1,869		Interest income on funds held for clients	996		16,574		1,869		24,448
Total revenues	Total revenues	146,329		196,037		282,123		377,734		Total revenues	196,037		273,008		377,734		526,288
Cost of revenues	Cost of revenues	53,542		70,821		102,922		134,070		Cost of revenues	70,821		90,076		134,070		174,619
Gross profit	Gross profit	92,787		125,216		179,201		243,664		Gross profit	125,216		182,932		243,664		351,669
Operating expenses:	Operating expenses:									Operating expenses:
Sales and marketing	Sales and marketing	37,775		52,219		75,449		102,104		Sales and marketing	52,219		75,694		102,104		146,757
Research and development	Research and development	19,338		25,278		37,985		48,354		Research and development	25,278		41,029		48,354		81,122
General and administrative	General and administrative	29,323		39,581		55,967		74,816		General and administrative	39,581		48,001		74,816		98,493
Total operating expenses	Total operating expenses	86,436		117,078		169,401		225,274		Total operating expenses	117,078		164,724		225,274		326,372
Operating income	Operating income	6,351		8,138		9,800		18,390		Operating income	8,138		18,208		18,390		25,297
Other expense	Other expense	(379)		(372)		(636)		(489)		Other expense	(372)		(5)		(489)		(168)
Income before income taxes	Income before income taxes	5,972		7,766		9,164		17,901		Income before income taxes	7,766		18,203		17,901		25,129
Income tax benefit		(3,670)		(2,087)		(12,938)		(22,884)
Income tax expense (benefit)										Income tax expense (benefit)	(2,087)		2,603		(22,884)		(20,823)
Net income	Net income	$	9,642	$	9,853	$	22,102	$	40,785	Net income	$	9,853	$	15,600	$	40,785	$	45,952

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


		Three Months Ended December 31,				Six Months Ended December 31,					Three Months Ended December 31,				Six Months Ended December 31,
		2020		2021		2020		2021			2021		2022		2021		2022
Consolidated Statements of Operations Data:	Consolidated Statements of Operations Data:									Consolidated Statements of Operations Data:
Revenues:	Revenues:									Revenues:
Recurring and other revenue	Recurring and other revenue	99	%	99	%	99	%	99	%	Recurring and other revenue	99	%	94	%	99	%	95	%
Interest income on funds held for clients	Interest income on funds held for clients	1	%	1	%	1	%	1	%	Interest income on funds held for clients	1	%	6	%	1	%	5	%
Total revenues	Total revenues	100	%	100	%	100	%	100	%	Total revenues	100	%	100	%	100	%	100	%
Cost of revenues	Cost of revenues	37	%	36	%	36	%	35	%	Cost of revenues	36	%	33	%	35	%	33	%
Gross profit	Gross profit	63	%	64	%	64	%	65	%	Gross profit	64	%	67	%	65	%	67	%
Operating expenses:	Operating expenses:									Operating expenses:
Sales and marketing	Sales and marketing	26	%	27	%	27	%	27	%	Sales and marketing	27	%	28	%	27	%	28	%
Research and development	Research and development	13	%	13	%	14	%	12	%	Research and development	13	%	15	%	12	%	15	%
General and administrative	General and administrative	20	%	20	%	20	%	20	%	General and administrative	20	%	17	%	20	%	19	%
Total operating expenses	Total operating expenses	59	%	60	%	61	%	59	%	Total operating expenses	60	%	60	%	59	%	62	%
Operating income	Operating income	4	%	4	%	3	%	6	%	Operating income	4	%	7	%	6	%	5	%
Other expense	Other expense	0	%	0	%	0	%	0	%	Other expense	0	%	0	%	0	%	0	%
Income before income taxes	Income before income taxes	4	%	4	%	3	%	6	%	Income before income taxes	4	%	7	%	6	%	5	%
Income tax benefit		(3)	%	(1)	%	(5)	%	(6)	%
Income tax expense (benefit)										Income tax expense (benefit)	(1)	%	1	%	(6)	%	(4)	%
Net income	Net income	7	%	5	%	8	%	12	%	Net income	5	%	6	%	12	%	9	%

Comparison of Three Months Ended December 31, ~~2020~~2021 and ~~2021~~2022

Revenues

($ in thousands)


		Three Months Ended December 31,						Change					Three Months Ended December 31,						Change
		2020			2021			$		%			2021			2022			$		%
Recurring and other revenue	Recurring and other revenue	$	145,393		$	195,041		$	49,648	34	%	Recurring and other revenue	$	195,041		$	256,434		$	61,393	31	%
Percentage of total revenues	Percentage of total revenues	99		%	99		%					Percentage of total revenues	99		%	94		%
Interest income on funds held for clients	Interest income on funds held for clients	$	936		$	996		$	60	6	%	Interest income on funds held for clients	$	996		$	16,574		$	15,578	1,564	%
Percentage of total revenues	Percentage of total revenues	1		%	1		%					Percentage of total revenues	1		%	6		%

Recurring and ~~other revenue~~Other Revenue

Recurring and other revenue for the three months ended December 31, ~~2021~~2022 increased by ~~$49.6~~$61.4 million, or ~~34%~~31%, to ~~$195.0~~$256.4 million from ~~$145.4~~$195.0 million for three months ended December 31, ~~2020.~~2021. Recurring and other revenue increased primarily as a result of incremental revenues from new and existing clients due to the strong performance by our sales team and ~~improved macroeconomic conditions~~also increases in client workforce levels as compared to the prior fiscal year.

Interest Income on Funds Held for Clients

Interest income on funds held for clients for the three months ended December 31, ~~2021~~2022 increased by 6%$15.6 million, or 1,564%, to $16.6 million from $1.0 million for the three months ended December 31, ~~2020.~~2021. Interest income on funds held for clients ~~continues to be impacted by the low interest rate environment~~increased primarily due to ~~the interest rate cuts by the Federal Reserve in response to the COVID-19 pandemic. The impact from the lower~~higher interest rates ~~was partially offset by~~and higher average daily balances for funds held due to the addition of new clients to our client base and also increases in client ~~employee counts on our platform.~~workforce levels as compared to the prior fiscal year.

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Cost of Revenues

($ in thousands)


		Three Months Ended December 31,					Change					Three Months Ended December 31,						Change
		2020		2021			$		%			2021			2022			$		%
Cost of revenues	Cost of revenues	$	53,542	$	70,821		$	17,279	32	%	Cost of revenues	$	70,821		$	90,076		$	19,255	27	%
Percentage of total revenues	Percentage of total revenues	37%		36		%					Percentage of total revenues	36		%	33		%
Gross margin	Gross margin	63%		64		%					Gross margin	64		%	67		%

Cost of Revenues

Cost of revenues for the three months ended December 31, ~~2021~~2022 increased by ~~$17.3~~$19.3 million, or ~~32%~~27%, to ~~$70.8~~$90.1 million from ~~$53.5~~$70.8 million for the three months ended December 31, ~~2020.~~2021. Cost of revenues increased primarily as a result of the continued growth of our business, in particular, ~~$10.9~~$9.6 million in additional employee-related costs resulting from additional personnel necessary to provide services to new and existing clients, ~~$4.8~~$4.7 million in additional delivery and other processing costs, ~~and $1.3~~$1.9 million ofin additional stock-based compensation ~~associated with our equity incentive plan.~~expense and $1.9 million in amortization of certain acquired intangible assets.

Operating Expenses

($ in thousands)

Sales and Marketing


		Three Months Ended December 31,						Change					Three Months Ended December 31,						Change
		2020			2021			$		%			2021			2022			$		%
Sales and marketing	Sales and marketing	$	37,775		$	52,219		$	14,444	38	%	Sales and marketing	$	52,219		$	75,694		$	23,475	45	%
Percentage of total revenues	Percentage of total revenues	26		%	27		%					Percentage of total revenues	27		%	28		%

Sales and marketing expenses for the three months ended December 31, ~~2021~~2022 increased by ~~$14.4~~$23.5 million, or ~~38%~~45%, to ~~$52.2~~$75.7 million from ~~$37.8~~$52.2 million for the three months ended December 31, ~~2020.~~2021. The increase in sales and marketing expense was primarily due to ~~$9.4~~$14.5 million of additional employee-related costs, including those incurred to expand our sales ~~team, and an increase in overall spending on travel and entertainment as COVID-19 pandemic restrictions eased within the United States.~~team. The increase was also driven by ~~$2.4 million in additional marketing lead generation costs and $1.8~~$5.1 million of additional stock-based compensation costs associated with our equity incentive ~~plan.~~plan and $2.3 million in additional marketing lead generation costs.

Research and Development


		Three Months Ended December 31,						Change					Three Months Ended December 31,						Change
		2020			2021			$		%			2021			2022			$		%
Research and development	Research and development	$	19,338		$	25,278		$	5,940	31	%	Research and development	$	25,278		$	41,029		$	15,751	62	%
Percentage of total revenues	Percentage of total revenues	13		%	13		%					Percentage of total revenues	13		%	15		%

Research and development expenses for the three months ended December 31, ~~2021~~2022 increased by ~~$5.9~~$15.8 million, or ~~31%~~62%, to ~~$25.3~~$41.0 million from ~~$19.3~~$25.3 million for the three months ended December 31, ~~2020.~~2021. The increase in research and development expenses was primarily due to ~~$4.4~~$10.5 million of additional employee-related costs related to additional development personnel and ~~$2.7~~$5.9 million of additional stock-based compensation costs associated with our equity incentive plan, partially offset by $1.0 million in higher period-over-period capitalized internal-use software ~~costs of $1.6 million.~~costs.

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General and Administrative


		Three Months Ended December 31,						Change					Three Months Ended December 31,						Change
		2020			2021			$		%			2021			2022			$		%
General and administrative	General and administrative	$	29,323		$	39,581		$	10,258	35	%	General and administrative	$	39,581		$	48,001		$	8,420	21	%
Percentage of total revenues	Percentage of total revenues	20		%	20		%					Percentage of total revenues	20		%	17		%

General and administrative expenses for the three months ended December 31, ~~2021~~2022 increased by ~~$10.3~~$8.4 million, or ~~35%~~21%, to ~~$39.6~~$48.0 million from ~~$29.3~~$39.6 million for the three months ended December 31, ~~2020.~~2021. The increase in general and administrative expense was primarily ~~the result of $3.8~~due to $4.4 million of additional stock-based compensation costs associated with our equity incentive plan ~~$2.6 million in additional 401(k) expense~~ and ~~$2.4~~$3.3 million in additional employee-related costs.

Other Expense


		Three Months Ended December 31,						Change					Three Months Ended December 31,						Change
		2020			2021			$		%			2021			2022			$		%
Other expense	Other expense	$	(379)		$	(372)		$	7	(2)	%	Other expense	$	(372)		$	(5)		$	367	*
Percentage of total revenues	Percentage of total revenues	0		%	0		%					Percentage of total revenues	0		%	0		%

*Not Meaningful

Other expense did not materially change for the three months ended December 31, ~~2021~~2022 as compared to the three months ended December 31, ~~2020.~~2021.

Income Taxes

Our effective tax rate was ~~(61.5)~~(26.9)% and ~~(26.9)%~~14.3% for the three months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively. Our effective tax rate for the three months ended 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. Our effective tax rate for the three months ended December 31, 2021 was lower than the federal statutory rate of 21% primarily due to excess tax benefits from employee stock-based compensation. Our effective tax rate for the three months ended December 31, 2022 was lower than the federal statutory rate of 21% primarily due to a decrease to the valuation allowance, partially offset by non-deductible stock-based compensation under Internal Revenue Code Section 162(m).

Comparison of Six Months Ended December 31, ~~2020~~2021 and ~~2021~~2022

Revenues

($ in thousands)


		Six Months Ended December 31,						Change					Six Months Ended December 31,						Change
		2020			2021			$		%			2021			2022			$		%
Recurring and other revenue	Recurring and other revenue	$	280,268		$	375,865		$	95,597	34	%	Recurring and other revenue	$	375,865		$	501,840		$	125,975	34	%
Percentage of total revenues	Percentage of total revenues	99		%	99		%					Percentage of total revenues	99		%	95		%
Interest income on funds held for clients	Interest income on funds held for clients	$	1,855		$	1,869		$	14	1	%	Interest income on funds held for clients	$	1,869		$	24,448		$	22,579	1,208	%
Percentage of total revenues	Percentage of total revenues	1		%	1		%					Percentage of total revenues	1		%	5		%

Recurring and ~~other revenue~~Other Revenue

Recurring and other revenue for the six months ended December 31, ~~2021~~2022 increased by ~~$95.6~~$126.0 million, or 34%, to ~~$375.9~~$501.8 million from ~~$280.3~~$375.9 million for six months ended December 31, ~~2020.~~2021. Recurring and other revenue increased primarily as a result of incremental revenues from new and existing clients due to the strong performance by our sales team and ~~improved macroeconomic conditions~~also increases in client workforce levels as compared to the prior fiscal year.

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Interest Income on Funds Held for Clients

Interest income on funds held for clients for the six months ended December 31, ~~2021~~2022 increased by 1%$22.6 million, or 1,208%, to $24.4 million from $1.9 million for the six months ended December 31, ~~2020.~~2021. Interest income on funds held for clients ~~continues to be impacted by the low interest rate environment~~increased primarily due to ~~the interest rate cuts by the Federal Reserve in response to the COVID-19 pandemic. The~~

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~~impact from the lower~~higher interest rates ~~was partially offset by~~and higher average daily balances for funds held due to the addition of new clients to our client base and also increases in client ~~employee counts on our platform.~~workforce levels as compared to the prior fiscal year.

Cost of Revenues

($ in thousands)

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 %


	Six Months Ended December 31,						Change
	2021			2022			$		%
Cost of revenues	$	134,070		$	174,619		$	40,549	30	%
Percentage of total revenues	35		%	33		%
Gross margin	65		%	67		%

Cost of Revenues

Cost of revenues for the six months ended December 31, ~~2021~~2022 increased by ~~$31.1~~$40.5 million, or 30%, to ~~$134.1~~$174.6 million from ~~$102.9~~$134.1 million for the six months ended December 31, ~~2020.~~2021. Cost of revenues increased primarily as a result of the continued growth of our business, in particular, ~~$19.2~~$21.1 million in additional employee-related costs resulting from additional personnel necessary to provide services to new and existing clients, ~~$8.8~~$10.3 million ~~related to~~in additional delivery and other processing costs, $3.7 million in amortization of certain acquired intangible assets and ~~$2.1~~$3.3 million ofin additional stock-based compensation costs associated with our equity incentive plan.

Operating Expenses

($ in thousands)

Sales and Marketing


		Six Months Ended December 31,						Change					Six Months Ended December 31,						Change
		2020			2021			$		%			2021			2022			$		%
Sales and marketing	Sales and marketing	$	75,449		$	102,104		$	26,655	35	%	Sales and marketing	$	102,104		$	146,757		$	44,653	44	%
Percentage of total revenues	Percentage of total revenues	27		%	27		%					Percentage of total revenues	27		%	28		%

Sales and marketing expenses for the six months ended December 31, ~~2021~~2022 increased by ~~$26.7~~$44.7 million, or ~~35%~~44%, to ~~$102.1~~$146.8 million from ~~$75.4~~$102.1 million for the six months ended December 31, ~~2020.~~2021. The increase in sales and marketing expense was primarily ~~attributable~~due to ~~$17.4~~$27.8 million inof additional employee-related costs, including those incurred to expand our sales ~~team, and an increase in overall spending on travel and entertainment as COVID-19 pandemic restrictions eased within the United States.~~team. The increase was also driven by ~~$3.3 million in additional marketing lead generation costs and $3.0~~$9.5 million of additional stock-based compensation costs associated with our equity incentive ~~plan.~~plan and $4.8 million in additional marketing lead generation costs.

Research and Development


		Six Months Ended December 31,						Change					Six Months Ended December 31,						Change
		2020			2021			$		%			2021			2022			$		%
Research and development	Research and development	$	37,985		$	48,354		$	10,369	27	%	Research and development	$	48,354		$	81,122		$	32,768	68	%
Percentage of total revenues	Percentage of total revenues	14		%	12		%					Percentage of total revenues	12		%	15		%

Research and development expenses for the six months ended December 31, ~~2021~~2022 increased by ~~$10.4~~$32.8 million, or ~~27%~~68%, to ~~$48.4~~$81.1 million from ~~$38.0~~$48.4 million for the six months ended December 31, ~~2020.~~2021. The increase in research and development expenses was primarily ~~the result of $8.2~~due to $21.8 million of additional employee-related costs related to additional development personnel and ~~$4.1~~$11.0 million of additional stock-based compensation costs associated with our equity incentive plan, partially offset by $1.4 million in higher period-over-period capitalized internal-use software ~~costs of $2.3 million.~~costs.

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General and Administrative


		Six Months Ended December 31,						Change					Six Months Ended December 31,						Change
		2020			2021			$		%			2021			2022			$		%
General and administrative	General and administrative	$	55,967		$	74,816		$	18,849	34	%	General and administrative	$	74,816		$	98,493		$	23,677	32	%
Percentage of total revenues	Percentage of total revenues	20		%	20		%					Percentage of total revenues	20		%	19		%

General and administrative expenses for the six months ended December 31, ~~2021~~2022 increased by ~~$18.8~~$23.7 million, or ~~34%~~32%, to ~~$74.8~~$98.5 million from ~~$56.0~~$74.8 million for the six months ended December 31, ~~2020.~~2021. The increase in general and administrative expense was primarily ~~of $5.8 million in additional 401(k) expense, $5.6~~due to $13.7 million of additional stock-based compensation costs associated with our equity incentive plan and ~~$4.9~~$8.4 million in additional employee-related costs.

Other Expense


		Six Months Ended December 31,						Change					Six Months Ended December 31,						Change
		2020			2021			$		%			2021			2022			$		%
Other expense	Other expense	$	(636)		$	(489)		$	147	(23)	%	Other expense	$	(489)		$	(168)		$	321	*
Percentage of total revenues	Percentage of total revenues	0		%	0		%					Percentage of total revenues	0		%	0		%

*Not Meaningful

Other expense did not materially change for the six months ended December 31, ~~2021 did not materially change~~2022 as compared to the six months ended December 31, ~~2020.~~2021.

Income Taxes

Our effective tax rate was ~~(141.2)~~(127.8)% and ~~(127.8)~~(82.9)% for the six months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively. Our effective tax rate for the six months ended ~~December 31, 2020 and~~ December 31, 2021 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 in the valuation allowance. Our effective tax rate for the six months ended December 31, 2022 was lower than the federal statutory rate of 21% primarily due to excess tax benefits from employee stock-based compensation, state and local income taxes, and a decrease in the valuation allowance.

Quarterly Trends and Seasonality

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

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

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions and, to the extent that there are differences between our estimates and

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actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

Accounting estimates used in the preparation of these consolidated financial statements change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes.

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Our critical accounting policies and use of estimates are disclosed in our audited consolidated financial statements for the year ended June 30, ~~2021~~2022 included in our Annual Report on Form 10-K filed with the SEC on August ~~6, 2021.~~5, 2022.

Liquidity and Capital Resources

Our primary liquidity needs are related to the funding of general business requirements, including working capital requirements, research and development, and capital expenditures. As of December 31, ~~2021,~~2022, our principal source of liquidity was ~~$84.1~~$120.1 million of cash and cash equivalents. In August 2022, we amended the credit agreement entered 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~~to increase the borrowing capacity under our revolving credit facility to $550.0 million, which may be increased up to ~~$375.0~~$825.0 million. No amounts were drawn on the revolving credit facility as of December 31, ~~2021, but, in January 2022, we borrowed $50.0 million in connection with our acquisition of Cloudsnap, Inc.~~2022. Refer to Note 138 of the Notes to the Unaudited Consolidated Financial Statements for additional detail on ~~this acquisition.~~the amended credit agreement.

We may invest portions of our excess cash and cash equivalents in highly liquid, investment-grade marketable securities. These investments may consist of commercial paper, corporate debt issuances, asset-backed debt securities, certificates of deposit, U.S. treasury securities, U.S. government agency securities and other securities with credit quality ratings of A-1 or higher. As of December 31, ~~2021,~~2022, we ~~had~~did not ~~recognized~~have any ~~credit impairment losses related to our investment portfolio.~~corporate investments.

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

Funds held for clients and client fund obligations will vary substantially from period to period as a result of the timing of payroll and tax obligations due. Our payroll processing activities involve the movement of significant funds from accounts of employers to employees and relevant taxing authorities. Though we debit a client’s account prior to any disbursement on its behalf, there is a delay between our payment of amounts due to employees and taxing and other regulatory authorities and when the incoming funds from the client to cover these amounts payable actually clear into our operating accounts. We currently have agreements with eleven major U.S. banks to execute ACH and wire transfers to support our client payroll and tax services. We believe we have sufficient capacity under these ACH arrangements to handle all transaction volumes for the foreseeable future. We primarily collect fees for our services via ACH transactions at the same time we debit the client’s account for payroll and tax obligations and thus are able to reduce collectability and accounts receivable risks.

We believe our current cash and cash equivalents, 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.

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


		Six Months Ended December 31,					Six Months Ended December 31,
		2020		2021			2021		2022
Net cash provided by operating activities	Net cash provided by operating activities	$	19,672	$	26,858	Net cash provided by operating activities	$	26,858	$	78,757
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchases of available-for-sale securities	Purchases of available-for-sale securities	—		(190,000)		Purchases of available-for-sale securities	(190,000)		(296,060)
Proceeds from sales and maturities of available-for-sale securities	Proceeds from sales and maturities of available-for-sale securities	58,996		60,391		Proceeds from sales and maturities of available-for-sale securities	60,391		190,253
Capitalized internal-use software costs	Capitalized internal-use software costs	(14,832)		(17,966)		Capitalized internal-use software costs	(17,966)		(19,740)
Purchases of property and equipment	Purchases of property and equipment	(6,045)		(10,528)		Purchases of property and equipment	(10,528)		(6,663)
Acquisition of business, net of cash acquired		(14,992)		(60,234)
Net cash provided by (used in) investing activities		23,127		(218,337)
Acquisitions of businesses, net of cash acquired						Acquisitions of businesses, net of cash acquired	(60,234)		—
Other investing activities						Other investing activities	—		29
Net cash used in investing activities						Net cash used in investing activities	(218,337)		(132,181)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Net change in client fund obligations	Net change in client fund obligations	876,982		160,325		Net change in client fund obligations	160,325		(922,079)

Proceeds from employee stock purchase plan	Proceeds from employee stock purchase plan	6,100		7,216		Proceeds from employee stock purchase plan	7,216		8,450
Taxes paid related to net share settlement of equity awards	Taxes paid related to net share settlement of equity awards	(44,749)		(67,109)		Taxes paid related to net share settlement of equity awards	(67,109)		(79,369)
Payment of debt issuance costs	Payment of debt issuance costs	(17)		(41)		Payment of debt issuance costs	(41)		(864)
Net cash provided by financing activities		838,316		100,391
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	100,391		(993,862)
Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents	Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents	881,115		(91,088)		Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents	$	(91,088)	$	(1,047,286)

Operating Activities

Net cash provided by operating activities was ~~$19.7~~$26.9 million and ~~$26.9~~$78.8 million for the six months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively. The ~~increase~~change in net cash provided by operating activities from the six months ended December 31, ~~2020~~2021 to the six months ended December 31, ~~2021~~2022 was primarily due to 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~~accompanied by net changes in operating assets and liabilities during the six months ended December 31, ~~2021~~2022 as compared to the six months ended December 31, ~~2020.~~2021.

Investing Activities

Net cash ~~provided by (used in)~~used in investing activities was ~~$23.1~~$218.3 million and ~~$(218.3)~~$132.2 million for the six months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively. The net cash ~~provided by (used in)~~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.

The ~~decrease~~change in net cash ~~provided by (used in)~~used in investing activities was primarily due to ~~purchases~~$129.9 million in additional proceeds from the sales and maturities of available-for-sale securities ~~of $190.0 million~~ and a ~~$45.2~~$60.2 million ~~increase~~decrease in amounts paid for acquisitions, net of cash acquired, partially offset by $106.1 million in additional purchases of available-for-sale securities during the six months ended December 31, ~~2021~~2022 as compared to the six months ended December 31, ~~2020.~~2021.

Financing Activities

Net cash provided by (used in) financing activities was ~~$838.3~~$100.4 million and ~~$100.4~~$(993.9) million for the six months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively. The ~~decrease~~change in net cash provided by (used in) financing activities was primarily the result of a decrease in the change in client fund obligations of ~~$716.7~~$1,082.4 million due to the timing of client funds collected and related remittance of those funds to client employees and taxing authorities ~~and $22.4 million in increased taxes paid related to net share settlement of equity awards~~ during the six months ended December 31, ~~2021~~2022 as compared to the six months ended December 31, ~~2020.~~2021.

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Contractual Obligations and Commitments

~~Our~~At December 31, 2022, our principal commitments ~~consist~~consisted of $86.0 million in operating lease ~~obligations. The following table summarizes our contractual~~ obligations, ~~at December 31, 2021:~~

Payment Due By Fiscal Period
Total Less than 1
Year 1-3 Years 3-5 Years More than
5 Years
Operating 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
of which $10.9 million is due in the next twelve months. We also had $59.3 million in purchase obligations, of which $30.2 million is due in the next twelve months.

Capital Expenditures

We expect to continue to invest in capital spending as we continue to grow our business and expand and enhance our operating facilities, data centers and technical infrastructure. Future capital requirements will depend on many factors, including our rate of sales growth. In the event that our sales growth or other factors do not meet our expectations, we may eliminate or curtail capital projects in order to mitigate the impact on our use of cash. Capital expenditures were ~~$6.0~~$10.5 million and ~~$10.5~~$6.7 million for the six months ended December 31, ~~2020~~2021 and ~~2021,~~2022, respectively, exclusive of capitalized internal-use software costs of ~~$14.8~~$18.0 million and ~~$18.0~~$19.7 million for the same periods, respectively.

~~Off-Balance Sheet Arrangements~~

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

New Accounting Pronouncements

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

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We have operations primarily in the United States and are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate and certain other exposures ~~as well as~~including risks relating to changes in the general economic conditions in the United States. As discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of operations, the novel coronavirus disease (“COVID-19”) pandemic has disrupted the global economy and financial markets and may unfavorably impact our future business and financial performance. Refer to “Part I. Item 1A. Risk Factors” on our Annual Report on Form 10-K filed with the SEC on August ~~6, 2021~~5, 2022 for risks related to our business as well as risks related to the COVID-19 pandemic.

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

Interest Rate Risk

As of December 31, ~~2021,~~2022, we had cash and cash equivalents of ~~$84.1~~$120.1 million and funds held for clients of ~~$1,920~~$3,065.7 million. We did not hold corporate investments on our balance sheet as of December 31, ~~2021.~~2022. 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 other which were classified as available-for-sale securities as of December 31, ~~2021.~~2022. Our investment policy is focused on generating higher yields from these investments while preserving liquidity and capital. However, as a result of our investing activities, we are exposed to changes in interest rates that may materially affect our financial statements.

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

Based upon a sensitivity model that measures market value changes caused by interest rate fluctuations, an immediate 100-basis point ~~change~~increase in interest rates would have ~~had an immaterial effect on~~resulted in a decrease in the market value of our available-for-sale securities by $4.1 million as of December 31, ~~2021.~~2022. An immediate 100-basis point decrease in interest rates would have resulted in an increase in the market value of our available-for-sale securities by $4.1 million as of December 31, 2022. 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.

Additionally, as described in Note 8 of the Notes to the Unaudited Consolidated Financial Statements, we entered into a first amendment to our credit agreement that provides for a revolving credit facility (“credit facility”) in the aggregate amount of ~~$250.0~~$550.0 million, which may be increased up to ~~$375.0~~$825.0 million. Borrowings under the credit facility generally bear interest at a rate based upon the ~~London Interbank Offered~~Term Secured Overnight Financing Rate (“~~LIBOR”~~SOFR”) ~~(or a replacement rate for LIBOR)~~plus the SOFR Adjustment or ~~at our sole option,~~ an adjusted base rate plus an applicable margin based on our then-applicable net ~~senior secured~~total leverage ratio. As of December 31, ~~2021~~2022, there were no amounts drawn on the credit facility. To the extent that we draw additional amounts under the credit facility, we may be exposed to increased market risk from changes in the underlying index rates, which affects our interest expense.

Inflation Risk

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

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Our management, with the participation of our ~~Chief~~Co-Chief Executive ~~Officer~~Officers and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, ~~2021,~~2022, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our ~~Chief~~Co-Chief Executive ~~Officer~~Officers and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date.

Changes in Internal Control over Financial Reporting

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

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes in our risk factors disclosed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2021~~2022 filed with the SEC on August ~~6, 2021.~~5, 2022.

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

(a)Sales of Unregistered Securities

Not applicable.

(b)Use of Proceeds

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

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

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

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

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INDEX TO EXHIBITS


Exhibit Nos.						Description

3.1						Second Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 of Paylocity Holding Corporation’s Current Report on Form 8-K on December 3, 2021 (Registration No. 001-36348)).

3.2						Second Amended and Restated Bylaws of Paylocity Holding Corporation (filed as Exhibit 3.2 of Paylocity Holding Corporation’s Current Report on Form 8-K on December 3, 2021 (File No. 001-36348)).

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

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

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

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

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

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

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

101.INS**						Inline 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**						Inline XBRL Taxonomy Extension Schema Document.

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

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

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

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

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

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

** Filed herewith

*** Furnished herewith

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SIGNATURES

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


		PAYLOCITY HOLDING CORPORATION

Date:	February ~~4, 2022~~3, 2023	By:	/s/ Steven R. Beauchamp
		Name:	Steven R. Beauchamp
		Title:	~~Chief~~Co-Chief Executive Officer (Principal Executive Officer) and Director

Date:	February ~~4, 2022~~3, 2023	By:	/s/ Toby J. Williams
		Name:	Toby J. Williams
		Title:	President, Co-Chief Executive Officer (Principal Executive Officer) and Director

Date:	February 3, 2023	By:	/s/ Ryan Glenn
		Name:	Ryan Glenn
		Title:	Chief Financial Officer and Treasurer (Principal Financial Officer)


			Page

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Unaudited Consolidated Balance Sheets			2

Unaudited Consolidated Statements of Operations and Comprehensive Income			3

Unaudited Consolidated Statement of Changes in Stockholders’ Equity			4

Unaudited Consolidated Statements of Cash Flows			5

Notes to the Unaudited Consolidated Financial Statements			6

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			1920

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			33

ITEM 4. CONTROLS AND PROCEDURES			34

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS			35

ITEM 1A. RISK FACTORS			35

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			35

ITEM 3. DEFAULTS UPON SENIOR SECURITIES			35

ITEM 4. MINE SAFETY DISCLOSURES			35

ITEM 5. OTHER INFORMATION			35

ITEM 6. EXHIBITS			35

SIGNATURES			37


	Outstanding Options
	Number of shares	Weighted average exercise price		Weighted average remaining contractual term (years)	Aggregate intrinsic value
Balance 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


	Units	Weighted average grant date fair value
MSU 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


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