Paylocity
Annual Report 2017

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2017 OR oTRANSITION 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- 36348PAYLOCITY HOLDING CORPORATION(Exact name of registrant as specified in its charter) Delaware 46-4066644(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification Number) 3850 N. Wilke RoadArlington Heights, Illinois 60004(Address of principal executive offices and 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 Name of each exchange on which registeredCommon Stock, par value $0.001 per share The NASDAQ Global Select Market LLC Securities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ 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 forsuch shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuantto Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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☐ (Do not check if a smaller reporting company)Smaller reporting company☐ Emerging growth company☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accountingstandards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ The aggregate market value of voting stock held by non-affiliates of the registrant as of December 31, 2016, the last day of registrant’s most recently completed second fiscal quarter, was$774.8 million (based on the closing price for shares of the registrant’s common stock as reported by the NASDAQ Global Select Market for the last business day prior to that date).As of August 4, 2017, there were 51,750,086 shares of the registrant’s common stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the Proxy Statement relating to the registrant’s 2018 annualmeeting of stockholders, which shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates. Table of ContentsPAYLOCITY HOLDING CORPORATIONForm 10-KFor the Year Ended June 30, 2017TABLE OF CONTENTS PagePART I Item 1. Business1Item 1A. Risk Factors14Item 1B. Unresolved Staff Comments33Item 2. Properties33Item 3. Legal Proceedings33Item 4. Mine Safety Disclosures33 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities34Item 6. Selected Financial Data37Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations40Item 7A. Quantitative and Qualitative Disclosures About Market Risk57Item 8. Financial Statements and Supplementary Data57Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure57Item 9A. Controls and Procedures57Item 9B. Other Information58 PART III Item 10. Directors, Executive Officers and Corporate Governance59Item 11. Executive Compensation59Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters59Item 13. Certain Relationships and Related Transactions and Director Independence59Item 14. Principal Accountant Fees and Services59 PART IV Item 15. Exhibits and Financial Statement Schedules60Item 16. Form 10-K Summary60Signatures 61 Table of Contents PART 1 Forward Looking Statements Except for the historical financial information contained herein, the matters discussed in this report on Form 10-K (aswell as documents incorporated herein by reference) may be considered “forward-looking” statements within the meaningof Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, asamended. All statements, other than statements of historical fact, are statements that could be deemed forward-lookingstatements, including, but not limited to, statements regarding our future financial position, business strategy and plans andobjectives of management for future operations. When used in this Annual Report, the words “believe,” “may,” “could,”“will,” “estimate,” “continue,” “intend,” “expect,” “anticipate,” “plan,” “project” and similar expressions are intended toidentify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about futureevents and financial trends that we believe may affect our financial condition, results of operations, business strategy,short-term and long-term business operations and objectives, and financial needs. These forward-looking statements aresubject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in theforward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, thosediscussed in this report, and in particular, the risks discussed under Part 1, Item 1A:”Risk Factors” and those discussed inother documents we file with the Securities and Exchange Commission. Except as required by law, we do not intend toupdate these forward-looking statements publicly or to update the reasons actual results could differ materially from thoseanticipated in these forward-looking statements, even if new information becomes available in the future. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in thisreport and in the documents incorporated in this report may not occur and actual results could differ materially andadversely from those anticipated or implied in the forward-looking statements. Accordingly, readers are cautioned not toplace undue reliance on such forward-looking statements. Item 1. Business. Overview We are a cloud-based provider of payroll and human capital management, or HCM, software solutions for medium-sized organizations, which we define as those having between 20 and 1,000 employees. Our comprehensive and easy-to-usesolutions enable our clients to manage their workforces more effectively. As of June 30, 2017, we served approximately14,550 clients across the U.S., which on average had over 100 employees. Our solutions help drive strategic human capitaldecision-making and improve employee engagement by enhancing the human resource, payroll and finance capabilities ofour clients. Our multi-tenant software platform is highly configurable and includes a unified suite of payroll and HCMapplications, such as time and labor tracking, benefits and talent management. Our solutions have been organicallydeveloped from our core payroll solution, which we believe is the most critical system of record for medium-sizedorganizations and an essential gateway to other HCM functionality. Our payroll and HCM applications use a unifieddatabase and provide robust on-demand reporting and analytics. Our platform provides intuitive self-service functionality foremployees and managers combined with seamless integration across all our solutions. We supplement our comprehensivesoftware platform with an integrated implementation and client service organization, all of which are designed to meet theneeds of medium-sized organizations. Effective management of human capital is a core function in all organizations and requires a significantcommitment of resources. Organizations are faced with complex and ever-changing requirements, including diverse federal,state and local regulations across multiple jurisdictions. In addition, the workplace operating environment is rapidlychanging as employees increasingly become mobile, work remotely and expect an end user experience similar to that ofconsumer-oriented Internet applications. Medium-sized organizations operating without the infrastructure,1 Table of Contentsexpertise or personnel of larger enterprises are uniquely pressured in this complex and dynamic environment. Existingsolutions offered by third-party payroll service providers can have limited capabilities and configurability while enterprise-focused software vendors can be expensive and time-consuming to implement and manage. We believe that medium-sizedorganizations are better served by solutions designed to meet their unique needs. Our solutions provide the following key benefits to our clients: ·Comprehensive cloud-based platform optimized to meet the payroll and HCM needs of medium-sizedorganizations; ·Modern, intuitive user experience and self-service capabilities that significantly increase employeeengagement; ·Flexible and configurable platform that aligns with business processes and centralizes payroll and HCM data; ·Software as a service, or SaaS, delivery model that reduces total cost of ownership for our clients; and ·Seamless data integration with our extensive partner ecosystem that saves time and expense and reduces the riskof errors. We market and sell our products primarily through our direct sales force. We generate sales leads through a varietyof focused marketing initiatives and from our extensive referral network of 401(k) advisors, benefits administrators, insurancebrokers, third-party administrators and HR consultants. We derive revenue from a client based on the solutions purchased bythe client, the number of client employees and the amount, type and timing of services provided with respect to those clientemployees. Our annual revenue retention rate was greater than 92% in each of the fiscal years 2015, 2016 and 2017. Ourtotal revenues increased from $152.7 million in fiscal 2015 to $230.7 million in fiscal 2016, representing a 51% year-over-year increase and to $300.0 million in fiscal 2017, representing a 30% year-over-year increase. Our recurring revenuesincreased from $144.1 million in fiscal 2015 to $220.1 million in fiscal 2016, representing a 53% year-over-year increase,and to $288.4 million in fiscal 2017, representing a 31% year-over-year increase. Although we do not have long-termcontracts with our clients and our agreements with clients are generally terminable on 60 days’ or less notice, our recurringrevenue model provides significant visibility into our future operating results. Industry Background Effective management of human capital is a core function for all organizations and requires a significantcommitment of resources. Identifying, acquiring and retaining talent is a priority at all levels of an organization. In today’sincreasingly complex business and regulatory environment, organizations are being pressured to manage critical payroll andHCM functions more effectively, automate manual processes and decrease their operating costs. Complex and Dynamic Tax and Regulatory Environment The tax and regulatory environment in the United States is complex and dynamic. Organizations are subject to amyriad of tax, benefit, workers compensation, healthcare and other rules, regulations and reporting obligations. In addition toU.S. federal taxing and regulatory authorities, there are more than 10,000 state and local tax codes in the United States.Further, federal, state and local government agencies continually enact and amend the rules, regulations and reportingrequirements with which organizations must comply. Growing Demand for Mobility and Enhanced User Experience Connectivity and mobility are enabling employees to spend less time in traditional office environments and moretime working remotely. This trend increases the demand for advanced and intuitive solutions that improve collaboration andfoster employee engagement, such as remote self-service access to payroll and timesheet reporting, HR2 Table of Contentsand benefits portals and other talent management applications. Given the prominence of consumer-oriented Internetapplications, employees expect the user experience and accessibility of internal systems to be similar to those of the latestInternet applications, such as LinkedIn, Amazon and Facebook. Medium-Sized Organizations Face Unique Challenges Medium-sized organizations functioning without the infrastructure, expertise or personnel of larger enterprises areuniquely pressured in the current complex and dynamic environment. Employees in these medium-sized organizations oftenperform multiple job functions, and many medium-sized organizations have limited financial, technical and other resourcesneeded to effectively manage their critical business requirements and to build and maintain the systems required to do so. Large Market Opportunity for Payroll and HCM Solutions According to market analyses published by International Data Corporation, or IDC, titled Worldwide and U.S.Human Capital Management Applications 2015-2019 Forecast (June 2015) and U.S. Payroll Outsourcing Services Forecast,2015-2019 (November 2015), the U.S. market for HCM applications and payroll outsourcing services is estimated to be $26billion in 2017. The market opportunity is driven by the importance of payroll and HCM solutions to the successfulmanagement of organizations. To estimate our addressable market, we focus our analysis on the number of U.S. medium-sized organizations andthe number of their employees. According to the U.S. Census Bureau, there were over 610,000 firms with 20 to 999employees in the U.S. in 2014, employing over 43 million persons. We estimate that if clients were to buy our entire suite ofexisting solutions at list prices, they would spend approximately $285 per employee annually. Based on this analysis, webelieve our current target addressable market is approximately $12 billion. Our existing clients do not typically buy ourentire suite of solutions, and as we continue to expand our product offerings, we believe that we have an opportunity toincrease the amount clients spend on payroll and HCM solutions per employee and to expand our addressable market. Organizations Are Increasingly Transitioning to SaaS Solutions SaaS solutions are easier and more affordable to implement and operate than those offered by traditional softwareproviders. SaaS solutions also enable software updates with greater frequency and without new hardware investments,enabling organizations to better react to changes in their environments. Many organizations are transitioning to SaaSsolutions for front-office business applications such as salesforce management. Similarly, we believe organizations areadopting back-office SaaS applications, such as payroll and HCM, with increasing frequency. According to a market analysispublished by IDC, titled Worldwide SaaS and Cloud Software 2015-2019 Forecast and 2014 Vendor Shares (August 2015),the U.S. SaaS market is estimated to be $54 billion in 2017 and is projected to grow at a 17% compound annual growth ratefrom 2014 to 2019. Limitations of Existing Solutions We believe that existing payroll and HCM solutions have limitations that cause them to underserve the uniqueneeds of medium-sized organizations. Existing payroll and HCM solutions include: ·Traditional Payroll Service Providers. Traditional payroll service providers are primarily focused on deliveryof a variety of payroll processing services, insurance products and HR business process outsourcing solutions.Many of these solutions offer limited capabilities and integration beyond traditional payroll processing. Thelack of a unified and configurable payroll and HCM suite can diminish the effectiveness of a system, detractfrom user experience and limit integration with other solutions. In addition, we believe that certain traditionalpayroll service providers often do not provide a high-quality client service experience. 3 Table of Contents·Enterprise-Focused Payroll and HCM Software Vendors. Enterprise-focused software vendors offer solutionsand services that are designed for the complex needs and structures of large enterprises. As a result, theirsolutions can be expensive, complex and time-consuming to implement, operate and maintain. ·HCM Point Solution Providers. Many HCM point solutions lack integrated payroll functionality. Theimplementation and management of multiple point solutions and the reliance on multiple service organizationscan be challenging and expensive for medium-sized organizations. ·Manual Processes for Payroll and HCM Functions. Manual payroll and HCM processes require increased HR,payroll and finance personnel involvement, resulting in higher costs, slower processing and greater risks of dataentry errors. Given the challenges medium-sized organizations face operating in complex and dynamic environments and thelimited ability of traditional offerings to address these challenges, we believe there is a significant market opportunity for acomprehensive, unified SaaS solution designed to serve the payroll and HCM needs of medium-sized organizations. Segment Information Our chief operating decision maker reviews our financial results in total when evaluating financial performance andfor purposes of allocating resources. We have thus determined that we operate in a single cloud-based software solutionreporting segment. Our Solution We are a cloud-based provider of payroll and HCM software solutions for medium-sized organizations. Oursolutions enable medium-sized organizations to more efficiently manage payroll and human capital in their complex anddynamic operating environments. As of June 30, 2017, we served approximately 14,550 clients across the U.S., which onaverage had over 100 employees. The key benefits of our solution include the following: ·Comprehensive Platform Optimized for Medium-Sized Organizations. Our solutions empower finance and HRprofessionals in medium-sized organizations to drive strategic human capital decisions by providing enterprise-grade payroll and HCM applications, including robust reporting and analytics. Our unified platform fullyautomates payroll and HCM processes, enabling our clients to focus on core business activities. Our solutionshelp our clients attract, retain and manage their employees within a single, comprehensive system. ·Modern, Intuitive User Experience. Our intuitive, easy-to-use interface is based on current technology andautomatically adapts to users’ devices, including mobile platforms, thereby significantly increasingaccessibility of our solutions and decreasing the need for training. Our platform’s self-service functionality andperformance management applications provide employees with an engaging experience. Our performancemanagement applications include peer-to-peer employee recognition and social employee profiles that create areward and recognition environment resulting in greater employee engagement. ·Flexible and Configurable Platform. We design our solutions to be flexible and configurable, allowing ourclients to match their use of our software with their specific business processes and workflows. Our platform hasbeen organically developed from a common code base, data structure and user interface, providing a consistentuser experience with powerful features that are easily adaptable to our clients’ needs. Our systems centralizepayroll and HCM data, minimizing inconsistent and incomplete information that can be produced when usingmultiple databases. ·Highly-Attractive SaaS Solution for Medium-Sized Organizations. Our solutions are cloud-based and offeredon a subscription basis, making them easier and more affordable to implement, operate and update4 Table of Contentsand enabling our clients to focus less on their IT infrastructure and more on their core businesses. Our cloud-based software can be operated by a single administrator without the support of an in-house informationtechnology department. Our multi-tenant and modern architecture allows for frequent software enhancementsthereby enabling our clients to react to a rapidly changing and complex operating environment. Our cloud-based platform enables our clients to scale their businesses without having to acquire additional hardware or toresolve the integration challenges that often result from traditional outsourcing solutions. ·Seamless Integration with Extensive Ecosystem of Partners. Our platform offers our clients automated dataintegration with over 200 related third-party partner systems, such as 401(k), benefits and insurance providersystems. This integration reduces the complexity and risk of error of manual data transfers and saves time for ourclients and their employees. We integrate data with these related systems through a secure connection, whichsignificantly decreases the risk of unauthorized third-party access and other security breaches. Our direct andautomated data transmission improves the accuracy of data and facilitates data collection in our partners’systems. We believe having automated data integration with a payroll and HCM provider like us differentiatesour partners’ product offerings, strengthening their competitive positioning in their own markets. Our Strategy We intend to strengthen and extend our position as a provider of cloud-based payroll and HCM software solutionsto medium-sized organizations. Key elements of our strategy include: ·Grow Our Client Base. We believe that our current client base represents only a small portion of the medium-sized organizations that could benefit from our solutions. While we served approximately 14,550 clients acrossthe U.S. as of June 30, 2017, there were over 610,000 firms with 20 to 999 employees in the U.S., employingmore than 43 million persons, according to the U.S. Census Bureau in 2014. In order to acquire new clients, weplan to continue to grow our sales organization aggressively across all U.S. geographies. ·Expand Our Product Offerings. We believe that our leadership position is in significant part the result of ourinvestment and innovation in our product offerings designed for medium-sized organizations. Therefore, weplan to increase investment in software development to continue to advance our platform and expand ourproduct offerings. For example, in fiscal 2017, we released Web Expense and Paylocity Recruiting, whichsimplify and automate employee expense management and recruitment tasks. ·Increase Average Revenue Per Client. Our average revenue per client has consistently increased in each of thelast three years as we have broadened our product offerings. We plan to further grow average revenue per clientby selling a broader selection of products to new and existing clients. ·Extend Technological Leadership. We believe that our organically developed cloud-based multi-tenantsoftware platform, combined with our unified database architecture, enhances the experience and usability ofour products, providing what we believe to be a competitive advantage over alternative solutions. Our modern,intuitive user interface utilizes features found on many popular consumer Internet sites, enabling users to useour solutions with limited training. We plan to continue our technology innovation, as we have done with ourmobile applications, social features and analytics capabilities. ·Further Develop Our Referral Network. We have developed a strong network of referral participants, such as401(k) advisors, benefits administrators, insurance brokers, third-party administrators and HR consultants thatrecommend our solutions and provide referrals. We believe that our platform’s automated data integration withover 200 related third-party partner systems is valuable to our referral participants, as they are able to accesspayroll and HR data through a single system which decreases complexity and cost and complements their ownproduct offerings. We plan to increase integration with third-party providers and expand our referral network togrow our client base and lower our client acquisition costs.5 Table of Contents Our Products Our cloud-based platform features a suite of unified payroll and HCM applications. Our solutions are highlyconfigurable and easy to use, implement, update and maintain. Payroll (Web Pay) Paylocity Web Pay is designed to provide enterprise-grade payroll processing and administration from a convenientcloud-based platform. Key features of Web Pay include: FeatureFunctionalityConfigurable Templates· Combination of standard and modifiable templates powered by highly-flexible drag-and-drop technology· Standard templates such as new hire, job change, leave of absence and terminationtemplates· Enables users to configure user interface to efficiently align toorganizations’ business processes· Ability to require additional data, add default values and insert new custom fieldsincreases accuracy and consistency of data across the platformCustom Checklists· Allows users to track critical steps in hiring and other processes· Triggers reports and notification emails to track critical steps and informs users whentasks are completeAdvanced Reporting· Easy-to-use, powerful reporting dashboard enables users to design and create ad- hocreports or rely on over 100 standard reports· Ability to generate a variety of pre-process reports via report library and report writer · Real-time report generation, including the ability to automatically schedule reports to run on a user-defined frequency · Point-in-time reporting, including comparative analysis over multiple periods, allowing users to view data from any time in historyData Integration · Ability to set up multiple data integrations with a wide array of benefits andretirement plan providers 6 Table of ContentsCore HR (Web HR) Paylocity Web HR provides a set of core HR capabilities designed to improve HR compliance, enhance reportingcapabilities and reduce the amount of time necessary to manage employee information. Key features of Web HR include: FeatureFunctionalityEmployee Record Management· Manage payroll deductions for employee benefit plans such as health and 401(k)· Automated employee time-off requests· Track employee skills, events, education and prior employment· Store employee documentation electronically· Record and track company property issued to employees· Ability to add custom fields to track additional employee related informationHR Compliance· Automate I-9 work authorization set-up, tracking and monitoring · Proactively manage employee policy acknowledgement and signature collection foritems such as employee handbooks · Assign and track interactive online courses for compliance and other policy needsincluding sexual harassment training and cybersecurity awareness · Manage ACA Compliance activities · Facilitate Equal Employment Opportunity (EEO) assessment and filing · View relevant industry and regulatory updates with a focus on helping employeesunderstand the potential compliance impact to their businessHR Reporting· Interactive employee organizational chart· Family Medical Leave Act (FMLA) tracking· EEO reporting· Occupational Safety & Health Administration (OSHA) tracking· Consolidated Omnibus Budget Reconciliation Act (COBRA) tracking· VETS 100/100A reporting· Workers’ compensation tracking and reporting· I-9 verification· Provides a year end dashboard to manage IRS deadlinesHR Insight and Analytics· Provides a dashboard view into critical HR metrics such as headcount,employee turnover and potential at-risk employees· Users can choose between different types of graphical display or exportthe information to spreadsheets or other documents· Retention dashboard assists employers in identifying and taking action on at-riskemployees to improve employee retention· Compliance and reporting Self-Service Portals· Full online and mobile access through virtually any device having Internet access topayroll, HR and benefits information· Provides the ability for administrators to communicate company news andpolicy changes, such as handbook revisions, and to post documents and createcustom web pages to communicate with employees· Provides a single view for managers where they can approve employee changes andrequests, manage outstanding tasks and easily access employee information· Improves communication among managers and HR and payroll andfinance departments 7 Table of ContentsTalent Management Paylocity’s Talent suite is designed to bring ease and convenience to the employee performance appraisal processand to give employees the opportunity to participate in their performance review and be more engaged in their professionaldevelopment. Employee reviews and appraisals throughout the organization are stored and analyzed in a single system. Keyfeatures of Talent include: Feature FunctionalityReviews· Provides the ability for employees and managers to complete online reviews, addcomments and sign off on completed reviews· Includes automated workflow at each step of the review process with ability for HRadministrators to review and provide feedback prior to final approval360° Feedback· Provides the ability to access feedback from employees across the organization toreceive input on employee performance and accomplishments· Enables year-round or point-in-time 360° feedbackGoals Management· Manages employee goals and appraisals in a single place to reduce the time requiredto navigate between screens· Allows specific goals to be displayed on the performance review for increasedemployee focus and development· Assigns goals specific to employees based on skill level and other factorsImpressions· Provides employees the ability to recognize each other and provideimmediate feedback · Impression leaderboard is visible to everyone in the organization providingrecognition for top performersRecruiting· Auto-fill of resume information to save time and effort in the candidate’s applicationprocess· Tracking of applicants through the workflow in order to reduce time spent on therecruiting and talent acquisition process and so that users quickly know the status ofany prospects at critical stages in the process· Repository of applicant information and feedback for future reference and sourcingOnboarding· Mobile responsive design and attractive, intuitive interface, engaging new hires inthe process· Robust events management capabilities, empowering administrators to proactivelymanage the onboarding process· High level of customization, allowing administrators to tailor tasks and overallexperience for new hires· Withholding forms wizard, simplifying the process of completing important tax-related paperwork· Ability to add customized content including welcome message, documents, videosand other company specific informationJournals· Captures and tracks ongoing discussions with employees to support performanceappraisals 8 Table of ContentsTime & Labor (Web Time and Web Expense) Paylocity Web Time is a time and attendance solution designed to automate manual processes, improveproductivity and help organizations control labor costs. Key features of Web Time include:Feature FunctionalityTask Management· Scheduling management· Time and attendance tracking, including overtime, rounding rules, payroll policies,labor allocation and time-off accruals · Tracks tardiness, absenteeism, and misuse of break or meal periodsMultiple Hardware Options· Functions with a wide variety of biometric and bar code hardware options to trackemployees’ time Mobile Functionality· Ability for employees to punch in and out from their mobile devices · Enables employees to view upcoming work schedules or request time-offfrom anywhere · Geo-fencing capabilities that allow managers to set parameters for wherepunches may occur Paylocity Web Expense is an expense management tool designed to streamline and automate the expensemanagement process by eliminating manual steps involved in filing, approving, and reimbursing expenses. Key features ofWeb Expense include:Feature FunctionalitySimplified Workflow · File and submit expenses in an intuitive and unified module· Capture and submit receipts from a mobile device · Approve expense reports quickly and easily· Receive notifications throughout the entire reimbursement processMonitoring · Access expense history · Generate and analyze spend reportsAutomated Reporting · Automatically create general ledger entriesBenefits (Web Benefits) Paylocity Web Benefits and Paylocity Enterprise Benefits, Powered by bswift are benefit management solutions thatintegrate with insurance carrier systems to provide automated administrative processes and allow users to choose benefitelections and make life event changes online, summarize benefit elections and perform other similar benefit-related tasks.These solutions also enable premium reconciliation, management of voluntary benefits and advanced reporting. Both WebBenefits and Paylocity Enterprise Benefits integrate seamlessly with Paylocity’s Web Pay. Key features of Web Benefitsinclude: FeatureFunctionalityAnnual Enrollment· Easy to follow and customizable enrollment process for employees· Allows modeling of payroll deductions and changes for life events· Customizable enrollment portal content (text, links, documents, logos)Administrative Efficiency· Can develop enrollment reminders through announcements, enrollment rules,and eligibility groups· Reporting on employee enrollment status and enrollment summary· Electronic Data Interchange (EDI) support for insurance carriers Implementation and Client Services Delivering our clients a positive experience is an essential element of our ability to sell our solutions and retain ourclients. We provide our clients with a single point of contact supplemented by teams with deep technical and subject9 Table of Contentsmatter expertise. The single point of contact allows our account managers to better understand our clients’ needs, which webelieve strengthens our client relationships. Implementation and Training Services Our clients are medium-sized organizations that are typically migrating to our platform from a competitive solutionor are adopting an online payroll and HCM solution for the first time. These organizations often have limited internalresources and generally rely on us to implement our solutions. We typically implement our Paylocity Web Pay product within only three to four weeks and any additionalproducts thereafter, as requested by the client. Each client is guided through the implementation process by knowledgeableconsultants for all implementation matters. We believe our ability to rapidly implement our solutions is principally due tothe combination of our emphasis on engagement with the client, our standardized methodology, our cloud-based architectureand our highly-configurable, easy-to-use products. We offer our clients the opportunity to participate in formal training designed to increase their ability to furtherutilize the functionality of our products within their organizations. Our training courses are designed to enable selectedemployees of our clients to develop expertise in our solutions and act as a first-level support resource for their colleagues. In order to ensure client satisfaction, a team of client service representatives conducts a comprehensive audit of aclient’s account after the client has completed the implementation process. Thereafter, the client is transitioned to our clientservice team. Client Service Our client service model is designed to serve the needs of medium-sized organizations and to build loyalty bydeveloping strong relationships with our clients. We strive to achieve high revenue retention, in part, by delivering high-quality service. Our revenue retention was greater than 92% in each of fiscal 2015, 2016 and 2017. Each client is assigned an account management team that serves as the central point of contact for any questions orsupport needs. We believe this approach enhances our client service by providing each client with a single person whounderstands the client’s business, responds quickly and is accountable for the client experience. Our account managers aresupplemented by teams with deep technical and subject matter expertise who help to expediently and effectively addressclient needs. We also proactively solicit client feedback through ongoing surveys from which we receive actionablefeedback that we use to enhance our client service processes. Tax and Regulatory Services Our software contains a rules engine designed to make accurate tax calculations that is continually updated tosupport all pertinent legislative changes across all U.S. jurisdictions. Our tax filing service provides a variety of solutions toour clients including processing payroll tax deposits, preparing and filing quarterly and annual tax returns and amendmentsand resolving client tax notices. Clients As of June 30, 2017, we provided our solutions to approximately 14,550 clients in all U.S states. The rate at whichwe add clients is highly variable period-to-period and highly seasonal as many clients switch solutions during the firstcalendar quarter of each year. Although many clients have multiple divisions, segments or locations, we only count suchclients once for these purposes. Our clients include for-profit and non-profit organizations across industries including business services, financialservices, healthcare, manufacturing, restaurants, retail, technology and others. For each of the three years endedJune 30, 2015, 2016 and 2017, no client accounted for more than 1% of our revenues.10 Table of Contents Sales and Marketing We market and sell our products and services primarily through our direct sales force. Our direct sales force includessales representatives who have defined geographic territories throughout the U.S. We seek to hire experienced salesrepresentatives wherever they are located, and believe we have room to grow the number of sales representatives in each ofour territories. The sales cycle begins with a sales lead generated by the sales representative through our third-party referralnetwork, a client referral, our telemarketing team, our external website, e-mail marketing or territory- based activities.Through one or more on-site visits, phone-based sales calls, or web demonstrations, sales representatives perform in-depthanalysis of prospective clients’ needs and demonstrate our solutions. We employ sophisticated software to track, classify andmanage our sales representatives’ pipeline of potential clients. We support our sales force with a marketing program thatincludes seminars and webinars, email marketing, social media marketing, broker events and web marketing. Referral Network As a core element of our business strategy, we have developed a referral network of third-party service providers,including 401(k) advisors, benefits administrators, insurance brokers, third-party administrators and HR consultants, thatrecommend our solutions and provide referrals. Our referral network has become an increasingly important component of oursales process, and in fiscal 2017, approximately 30% of our new client revenue originated by referrals from participants inour referral network. We believe participants in our referral network refer potential clients to us because we do not provide services thatcompete with their own and because we offer third parties the ability to integrate their systems with our platform. Unlikeother payroll and HCM solution providers who also provide retirement plans, health insurance and other products andservices competitive with the offerings of the participants in our referral network, we focus only on our core business ofproviding cloud-based payroll and HCM solutions. In some cases, we have formalized relationships in which we are arecommended vendor of these participants. In other cases, our relationships are informal. We typically do not compensatethese participants for referrals. Partner Ecosystem We have developed a partner ecosystem of third-party systems, such as 401(k), benefits and insurance providersystems, with whom we provide automated data integration for our clients. These third-party providers require certainfinancial information from their clients in order to efficiently provide their respective services. After securing authorizationfrom the client, we exchange payroll data with these providers. In turn, these third-party providers supply data to us, whichallows us to deliver comprehensive benefit management services to our clients. We believe our ability to integrate oursystems with those of these partners adds value to our mutual clients and to our partners. We have also developed our solutions to integrate with a variety of other systems used by our clients, such asaccounting, point of sale, banking, expense management, recruiting, background screening and skills assessment solutions.We believe our clients benefit from an integrated and seamless solution. Technology We offer our solutions on a cloud-based platform that leverages a unified database architecture and a common codebase that we organically developed. Clients do not need to install our software in their data centers and can access oursolutions through any mobile device or web browser with Internet access. ·Multi-Tenant Architecture. Our software solutions were designed with a multi-tenant architecture. Thisarchitecture gives us an advantage over many disparate traditional systems, which are less flexible and requirelonger and more costly development and upgrade cycles.11 Table of Contents ·Mobile Focused. We employ mobile-centric principles in our solution design and development. We believethat the increasing mobility of employees heightens the importance of access to our solutions through mobiledevices, including smart phones and tablets. Our mobile experience provides our clients and their employeeswith access to our solutions through virtually any device having Internet access. We bring the flexibility of asecure, cloud-based solution to users without the need to access a traditional desktop or laptop computer. ·Security. We maintain comprehensive security programs designed to ensure the security and integrity of clientand employee data, protect against security threats or data breaches and prevent unauthorized access. Weregulate and limit all access to servers and networks at our data centers. Our systems are monitored for irregularor suspicious activity, and we have dedicated internal staff perform security assessments for each release. Oursystems undergo regular penetration testing and source code reviews by an independent third-party securityfirm. We host our solutions at a third-party facility in Franklin Park, Illinois and utilize another third-party facility inKenosha, Wisconsin for backup and disaster recovery. We supply the hardware infrastructure and are responsible for theongoing maintenance of our equipment at all data center locations. Competition The market for payroll and HCM solutions is fragmented, highly competitive and rapidly changing. Our competitorsvary for each of our solutions and include enterprise-focused software providers, such as Ultimate Software Group, Inc.,Workday, Inc., SAP AG, Oracle Corporation and Ceridian Corporation; payroll service providers, such as Automatic DataProcessing, Inc., Paychex, Inc., Paycom Software, Inc., Paycor, Inc. and other regional providers; and HCM point solutionsproviders, such as Cornerstone OnDemand, Inc. We believe the principal competitive factors on which we compete in our market include the following: ·Focus on medium-sized organizations; ·Breadth and depth of product functionality; ·Configurability and ease of use of our solutions; ·Modern, intuitive user experience; ·Benefits of a cloud-based technology platform; ·Ability to innovate and respond to client needs rapidly; ·Domain expertise in payroll and HCM; ·Quality of implementation and client service; ·Ease of implementation; ·Real-time web-based payroll processing; and ·Integration with a wide variety of third-party applications and systems. 12 Table of ContentsWe believe that we compete favorably on these factors within the medium-sized organization market. We believeour ability to remain competitive will largely depend on the success of our continued investment in sales and marketing,research and development and implementation and client services. Research and Development We invest heavily in research and development to continuously introduce new applications, technologies, featuresand functionality. We are organized in small product-centric teams that utilize an agile development methodology. We focusour efforts on developing new applications and core technologies and on further enhancing the usability, functionality,reliability, performance and flexibility of existing applications. Research and development costs, including research and development costs that were capitalized, were $24.7million, $36.3 million and $44.5 million for the years ended June 30, 2015, 2016 and 2017, respectively. Our research anddevelopment personnel are principally located at our headquarters, although we seek to hire highly experienced personnelwherever they are located. Intellectual Property Our success is dependent, in part, on our ability to protect our proprietary technology and other intellectual propertyrights. We rely on a combination of trade secrets, copyrights and trademarks, as well as contractual protections to establishand protect our intellectual property rights. We require our employees, consultants and other third parties to enter intoconfidentiality and proprietary rights agreements and control access to software, documentation and other proprietaryinformation. Although we rely on laws respecting intellectual property rights, including trade secret, copyright andtrademark laws, as well as contractual protections to establish and protect our intellectual property rights, we believe thatfactors such as the technological and creative skills of our personnel, creation of new modules, features and functionality andfrequent enhancements to our applications are more essential to establishing and maintaining our technology leadershipposition. Despite our efforts to protect our proprietary technology and our intellectual property rights, unauthorized partiesmay attempt to misappropriate our rights or to copy or obtain and use our proprietary technology to develop applicationswith the same functionality as our applications. Policing unauthorized use of our technology and intellectual property rightsis very difficult. We expect that providers of payroll and HCM solutions such as ours may be subject to third-party infringementclaims as the market and the number of competitors grows, and the functionality of applications in different industrysegments overlaps. Any of these or other third parties might make a claim of infringement against us at any time. Employees As of June 30, 2017, we had approximately 2,115 full-time employees, of which 725 were in client services andoperations, 480 were in client implementation, 450 were in sales and marketing, 300 were in research and development and160 were in general and administrative. None of our employees is represented by a union or is party to a collectivebargaining agreement, and we have not experienced any work stoppages. We believe we have good relations with ouremployees and that our employee-focused culture benefits our clients and supports our growth. Our management team iscommitted to maintaining and improving our culture even as we grow rapidly. Available Information Our Internet address is www.paylocity.com and our investor relations website is located athttp://investors.paylocity.com. We make available free of charge on our investor relations website under the heading“Financials” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K andamendments to those reports as soon as reasonably practicable after such materials are electronically filed with (or furnishedto) the SEC. Information contained on our websites is not incorporated by reference into this Annual Report on Form 10-K. Inaddition, the public may read and copy materials we file with the SEC at the SEC’s Public Reference13 Table of ContentsRoom at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the PublicReference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site, www.sec.gov, thatincludes filings of and information about issuers that file electronically with the SEC. Item 1A. Risk Factors. Our business, prospects, financial condition or operating results could be materially adversely affected by any ofthese risks, as well as other risks not currently known to us or that are currently considered immaterial. The trading price ofour common stock could decline due to any of the risks and uncertainties described below, and you may lose all or part ofyour investment. In assessing these risks, you should also refer to the other information contained in this Annual Report onForm 10-K, including our consolidated financial statements and related notes. We have incurred losses in the past, and we may not be able to sustain profitability for the foreseeable future. We have incurred net losses from time to time. We incurred net losses of $7,110,000, $13,972,000 and$3,851,000 in fiscal 2014, fiscal 2015 and fiscal 2016, respectively. While we have generated net income in fiscal 2017, itdoes not ensure that we will earn continued net income in future periods. We have been growing our number of clientsrapidly, and as we do so, we incur significant sales and marketing, services and other related expenses. Our profitability willbe significantly influenced by our ability to attain sufficient scale and productivity to achieve recurring revenues that aresufficient to support the incremental costs to obtain and support new clients. We intend for the foreseeable future to continueto focus predominately on adding new clients, and we cannot predict when we will achieve sustained profitability, if at all.We also expect to make other significant expenditures and investments in research and development to expand and improveour product offerings and technical infrastructure. In addition, as a public company, we have incurred significant legal,accounting and other expenses. These increased expenditures have made it harder for us to achieve and maintainprofitability. We also may incur losses in the future for a number of other unforeseen reasons. Accordingly, we may incurlosses in the foreseeable future. Our quarterly operating results have fluctuated in the past and may continue to fluctuate, causing the value of our commonstock to decline substantially. Our quarterly operating results may fluctuate due to a variety of factors, many of which are outside of our control. Asa result, comparing our operating results on a period-to-period basis may not be meaningful. Moreover, our stock price mightbe based on expectations of future performance that are unrealistic or that we might not meet and, if our revenue or operatingresults fall below such expectations, the price of our common stock could decline substantially. Our number of new clients typically increases more during our third fiscal quarter ending March 31 than during therest of our fiscal year, primarily because many new clients prefer to start using our payroll and human capital management, orHCM, solutions at the beginning of a calendar year. In addition, client funds and year-end activities are traditionally higherduring our third fiscal quarter. As a result of these factors, our total revenue and expenses have historically growndisproportionately during our third fiscal quarter as compared to other quarters. In addition to other risk factors listed in this section, some of the important factors that may cause fluctuations in ourquarterly operating results include: ·The extent to which our products achieve or maintain market acceptance; ·Our ability to introduce new products and enhancements and updates to our existing products on a timelybasis; ·Competitive pressures and the introduction of enhanced products and services from competitors; ·Changes in client budgets and procurement policies; 14 Table of Contents·The amount and timing of our investment in research and development activities and whether suchinvestments are capitalized or expensed as incurred; ·The number of our clients’ employees; ·Timing of recognition of revenues and expenses; ·Client renewal rates; ·Seasonality in our business; ·Technical difficulties with our products or interruptions in our services; ·Our ability to hire and retain qualified personnel; ·A repeal of or changes to the laws and regulations related to the products and services which we offer; ·Changes in accounting principles; and ·Unforeseen legal expenses, including litigation and settlement costs. We do not have long-term agreements with clients, and our standard agreements with clients are generallyterminable by our clients upon 60 or fewer days’ notice. If a significant number of clients elected to terminate theiragreements with us, our operating results and our business would be adversely affected. In addition, a significant portion of our operating expenses are related to compensation and other items which arerelatively fixed in the short-term, and we plan expenditures based in part on our expectations regarding future needs andopportunities. Accordingly, changes in our business or revenue shortfalls could decrease our gross and operating margins andcould cause significant changes in our operating results from period to period. If this occurs, the trading price of our commonstock could fall substantially, either suddenly or over time. Our operating results for previous fiscal quarters are not necessarily indicative of our operating results for the fullfiscal years or for any future periods. We believe that, due to the underlying factors for quarterly fluctuations, quarter-to-quarter comparisons of our operations are not necessarily meaningful and that such comparisons should not be relied upon asindications of future performance. Failure to manage our growth effectively could increase our expenses, decrease our revenue, and prevent us fromimplementing our business strategy. We have been rapidly growing our revenue and number of clients, and we will seek to do the same for theforeseeable future. However, the growth in our number of clients puts significant strain on our business, requires significantcapital expenditures and increases our operating expenses. To manage this growth effectively, we must attract, train, andretain a significant number of qualified sales, implementation, client service, software development, information technologyand management personnel. We also must maintain and enhance our technology infrastructure and our financial andaccounting systems and controls. If we fail to effectively manage our growth or we over-invest or under-invest in ourbusiness, our business and results of operations could suffer from the resultant weaknesses in our infrastructure, systems orcontrols. We could also suffer operational mistakes, a loss of business opportunities and employee losses. If our managementis unable to effectively manage our growth, our expenses might increase more than expected, our revenue could decline ormight grow more slowly than expected, and we might be unable to implement our business strategy. 15 Table of ContentsThe markets in which we participate are highly competitive, and if we do not compete effectively, our operating resultscould be adversely affected. The market for payroll and HCM solutions is fragmented, highly competitive and rapidly changing. Our competitorsvary for each of our solutions, and include enterprise-focused software providers, such as Ultimate Software Group, Inc.,Workday, Inc., SAP AG, Oracle Corporation and Ceridian Corporation, payroll service providers, such as Automatic DataProcessing, Inc., Paychex, Inc., Paycom Software, Inc., Paycor, Inc. and other regional providers, and HCM point solutions,such as Cornerstone OnDemand, Inc. Several of our competitors are larger, have greater name recognition, longer operating histories and significantlygreater resources than we do. Many of these competitors are able to devote greater resources to the development, promotionand sale of their products and services. Furthermore, our current or potential competitors may be acquired by third partieswith greater available resources and the ability to initiate or withstand substantial price competition. As a result, ourcompetitors may be able to develop products and services better received by our markets or may be able to respond morequickly and effectively than we can to new or changing opportunities, technologies, regulations or client requirements. In addition, current and potential competitors have established, and might in the future establish, partner or formother cooperative relationships with vendors of complementary products, technologies or services to enable them to offernew products and services, to compete more effectively or to increase the availability of their products in the marketplace.New competitors or relationships might emerge that have greater market share, a larger client base, more widely adoptedproprietary technologies, greater marketing expertise, greater financial resources, and larger sales forces than we have, whichcould put us at a competitive disadvantage. In light of these advantages, current or potential clients might acceptcompetitive offerings in lieu of purchasing our offerings. We expect intense competition to continue for these reasons, andsuch competition could negatively impact our sales, profitability or market share. If we do not continue to innovate and deliver high-quality, technologically advanced products and services, we will notremain competitive and our revenue and operating results could suffer. The market for our solutions is characterized by rapid technological advancements, changes in client requirements,frequent new product introductions and enhancements and changing industry standards. The life cycles of our products aredifficult to estimate. Rapid technological changes and the introduction of new products and enhancements by new orexisting competitors could undermine our current market position. Our success depends in substantial part on our continuing ability to provide products and services that medium-sized organizations will find superior to our competitors’ offerings and will continue to use. We intend to continue to investsignificant resources in research and development in order to enhance our existing products and services and introduce newhigh-quality products that clients will want. If we are unable to predict user preferences or industry changes, or if we areunable to modify our products and services on a timely basis or to effectively bring new products to market, our sales maysuffer. In addition, we may experience difficulties with software development, industry standards, design, or marketing thatcould delay or prevent our development, introduction or implementation of new solutions and enhancements. Theintroduction of new solutions by competitors, the emergence of new industry standards or the development of entirely newtechnologies to replace existing offerings could render our existing or future solutions obsolete. We may not have sufficient resources to make the necessary investments in software development and we mayexperience difficulties that could delay or prevent the successful development, introduction or marketing of new products orenhancements. In addition, our products or enhancements may not meet the increasingly complex client requirements of themarketplace or achieve market acceptance at the rate we expect, or at all. Any failure by us to anticipate or respondadequately to technological advancements, client requirements and changing industry standards, or any significant delays inthe development, introduction or availability of new products or enhancements, could undermine our current marketposition. 16 Table of ContentsIf we are unable to release periodic updates on a timely basis to reflect changes in tax, benefit and other laws andregulations that our products help our clients address, the market acceptance of our products may be adversely affectedand our revenues could decline. Our solutions are affected by changes in tax, benefit and other laws and regulations and generally must be updatedregularly to maintain their accuracy and competitiveness. Although we believe our SaaS platform provides us with flexibilityto release updates in response to these changes, we cannot be certain that we will be able to make the necessary changes toour solutions and release updates on a timely basis, or at all. Failure to do so could have an adverse effect on thefunctionality and market acceptance of our solutions. Changes in tax, benefit and other laws and regulations could require usto make significant modifications to our products or delay or cease sales of certain products, which could result in reducedrevenues or revenue growth and our incurring substantial expenses and write-offs. Our business may be adversely impacted if the Patient Protection and Affordable Care Act (the “ACA”) is repealed in itsentirety or certain aspects of the ACA are repealed or changed. The ACA remains subject to legislative efforts to repeal, modify or delay the implementation of all or certain aspectsof the law. Generally, if the ACA is repealed or modified in whole or in part, or if implementation of certain aspects of theACA is delayed, such repeal, modification or delay could adversely impact our existing and future business and operatingresults. For example, any such repeal, modification or delay could negatively impact the revenue we currently generate fromour ACA Compliance solution, overall gross margins, and require us to write-down capitalized internal-use softwaredevelopment costs related to ACA products. While we expect continued challenges to the ACA, at this time we are unable tomore precisely predict the full impact of any repeal, modification or delay in the implementation of the ACA. Because of the way we recognize our revenue and our expenses over varying periods, changes in our business may not beimmediately reflected in our financial statements. We recognize our revenue as services are performed. The amount of revenue we recognize in any particular period isderived in significant part based on the number of employees of our clients served by our solutions. As a result, our revenueis dependent in part on the success of our clients. The effect on our revenue of significant changes in sales of our solutions orin our clients’ businesses may not be fully reflected in our results of operations until future periods. We recognize our expenses over varying periods based on the nature of the expense. In particular, we recognizeimplementation costs and sales commissions as they are incurred even though we recognize revenue as we perform servicesover extended periods. When a client terminates its relationship with us, we may not have derived enough revenue from thatclient to cover associated implementation costs. As a result, we may report poor operating results due to higherimplementation costs and sales commissions in a period in which we experience strong sales of our solutions. Alternatively,we may report better operating results due to lower implementation costs and sales commissions in a period in which weexperience a slowdown in sales. As a result, our expenses fluctuate as a percentage of revenue, and changes in our businessgenerally may not be immediately reflected in our results of operations. If our security measures are breached or unauthorized access to client data or funds is otherwise obtained, our solutionsmay be perceived as not being secure, clients may reduce the use of or stop using our solutions and we may incursignificant liabilities. Our solutions involve the storage and transmission of our clients’ and their employees’ proprietary and confidentialinformation. This information includes bank account numbers, tax return information, social security numbers, benefitinformation, retirement account information, payroll information and system passwords. In addition, we collect and maintainpersonal information on our own employees in the ordinary course of our business. Finally, our business involves the storageand transmission of funds from the accounts of our clients to their employees, taxing and regulatory authorities and others.As a result, unauthorized access or security breaches of our systems or the systems of our clients could result in theunauthorized disclosure of confidential information, theft, litigation, indemnity obligations and other significant liabilities.Because the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are notidentified until they are employed, we may be unable to anticipate these techniques or to17 Table of Contentsimplement adequate preventative measures in advance. While we have security measures and controls in place to protectconfidential information, prevent data loss, theft and other security breaches, including penetration tests of our systems byindependent third parties, if our security measures are breached, our business could be substantially harmed and we couldincur significant liabilities. Any such breach or unauthorized access could negatively affect our ability to attract new clients,cause existing clients to terminate their agreements with us, result in reputational damage and subject us to lawsuits,regulatory fines or other actions or liabilities which could materially and adversely affect our business and operating results. There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate orwould otherwise protect us from any such liabilities or damages with respect to any particular claim related to a breach orunauthorized access. We also cannot be sure that our existing general liability insurance coverage and coverage for errors oromissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or morelarge claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more largeclaims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, includingpremium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect onour business, financial condition and results of operations. If we fail to adequately expand our direct sales force with qualified and productive persons, we may not be able to growour business effectively. We primarily sell our products and implementation services through our direct sales force. To grow our business, weintend to focus on growing our client base for the foreseeable future. Our ability to add clients and to achieve revenue growthin the future will depend upon our ability to grow and develop our direct sales force and on their ability to productively sellour solutions. Identifying and recruiting qualified personnel and training them in the use of our software require significanttime, expense and attention. The amount of time it takes for our sales representatives to be fully-trained and to becomeproductive varies widely. In addition, if we hire sales representatives from competitors or other companies, their formeremployers may attempt to assert that these employees have breached their legal obligations, resulting in a diversion of ourtime and resources. If our sales organization does not perform as expected, our revenues and revenue growth could suffer. In addition, ifwe are unable to hire, develop and retain talented sales personnel, if our sales force becomes less efficient as it grows or if newsales representatives are unable to achieve desired productivity levels in a reasonable period of time, we may not be able togrow our client base and revenues and our sales and marketing expenses may increase. If our referral network participants reduce their referrals to us, we may not be able to grow our client base or revenues inthe future. Referrals from third-party service providers, including 401(k) advisors, benefits administrators, insurance brokers,third-party administrators and HR consultants, represent a significant source of potential clients for our products andimplementation services. For example, we estimate that approximately 30% of our new sales in fiscal 2017 were referred to usfrom our referral network participants. In most cases, our relationships with referral network participants are informal,although in some cases, we have formalized relationships where we are a recommended vendor for their client. Participants in our referral network are generally under no contractual obligation to continue to refer business to us,and we do not intend to seek contractual relationships with these participants. In addition, these participants are generallynot compensated for referring potential clients to us, and may choose to instead refer potential clients to our competitors. Ourability to achieve revenue growth in the future will depend, in part, upon continued referrals from our network. There can be no assurance that we will be successful in maintaining, expanding or developing our referral network.If our relationships with participants in our referral network were to deteriorate or if any of our competitors enter into strategicrelationships with our referral network participants, sales leads from these participants could be18 Table of Contentsreduced or cease entirely. If we are not successful, we may lose sales opportunities and our revenues and profitability couldsuffer. If the market for cloud-based payroll and HCM solutions among medium-sized organizations develops more slowly thanwe expect or declines, our business could be adversely affected. We believe that the market for cloud-based payroll and HCM solutions is not as mature among medium-sizedorganizations as the market for outsourced services or on-premise software and services. It is not certain that cloud-basedsolutions will achieve and sustain high levels of client demand and market acceptance. Our success will depend to asubstantial extent on the widespread adoption by medium-sized organizations of cloud-based computing in general, and ofpayroll and other HCM applications in particular. It is difficult to predict client adoption rates and demand for our solutions,the future growth rate and size of the cloud-based market or the entry of competitive solutions. The expansion of the cloud-based market depends on a number of factors, including the cost, performance, and perceived value associated with cloud-based computing, as well as the ability of cloud-based solutions to address security and privacy concerns. If other cloud-based providers experience security incidents, loss of client data, disruptions in delivery or other problems, the market forcloud-based applications as a whole, including our solutions, may be negatively affected. If cloud-based payroll and HCMsolutions do not achieve widespread adoption among medium-sized organizations, or there is a reduction in demand forcloud-based computing caused by a lack of client acceptance, technological challenges, weakening economic conditions,security or privacy concerns, competing technologies and products, decreases in corporate spending or otherwise, it couldresult in a loss of clients, decreased revenues and an adverse impact on our business. We typically pay employees and may pay taxing authorities amounts due for a payroll period before a client’s electronicfunds transfers are finally settled to our account. If client payments are rejected by banking institutions or otherwise fail toclear into our accounts, we may require additional sources of short-term liquidity and our operating results could beadversely affected. Our payroll processing business involves the movement of significant funds from the account of a client toemployees and relevant taxing authorities. For example, in fiscal 2017 we processed over $92 billion in payroll transactions.Though we debit a client’s account prior to any disbursement on its behalf, due to Automated Clearing House, or ACH,banking regulations, funds previously credited could be reversed under certain circumstances and timeframes after ourpayment of amounts due to employees and taxing and other regulatory authorities. There is therefore a risk that theemployer’s funds will be insufficient to cover the amounts we have already paid on its behalf. While such shortage andaccompanying financial exposure has only occurred in very limited instances in the past, should clients default on theirpayment obligations in the future, we might be required to advance substantial amounts of funds to cover such obligations.In such an event, we may be required to seek additional sources of short-term liquidity, which may not be available onreasonable terms, if at all, and our operating results and our liquidity could be adversely affected and our bankingrelationships could be harmed. Adverse changes in economic or political conditions could adversely affect our operating results and our business. Our recurring revenues are based in part on the number of our clients’ employees. As a result, we are subject to risksarising from adverse changes in economic and political conditions. The state of the economy and the rate of employment,which deteriorated in the recent broad recession, may deteriorate further in the future. If weakness in the economy continuesor worsens, many clients may reduce their number of employees and delay or reduce technology purchases. This could alsoresult in reductions in our revenues and sales of our products, longer sales cycles, increased price competition and clients’purchasing fewer solutions than they have in the past. Any of these events would likely harm our business, results ofoperations, financial condition and cash flows from operations. Trade, monetary and fiscal policies, and political and economic conditions may substantially change, and creditmarkets may experience periods of constriction and volatility. For example, United Kingdom’s decision to leave theEuropean Union has created global economic uncertainty, which, in turn, could depress the demand for our services. Whenthere is a slowdown in the economy, employment levels and interest rates may decrease with a corresponding impact on ourbusinesses. Clients may react to worsening conditions by reducing their spending on payroll and other19 Table of ContentsHCM solutions or renegotiating their contracts with us. We have agreements with various large banks to execute ACH andwire transfers as part of our client payroll and tax services. While we have contingency plans in place for bank failures, afailure of one of our banking partners or a systemic shutdown of the banking industry could result in the loss of client fundsor impede us from accessing and processing funds on our clients’ behalf, and could have an adverse impact on our businessand liquidity. If the banks that currently provide ACH and wire transfers fail to properly transmit ACH or terminate their relationshipwith us or limit our ability to process funds or we are not able to increase our ACH capacity with our existing and newbanks, our ability to process funds on behalf of our clients and our financial results and liquidity could be adverselyaffected. We currently have agreements with nine banks to execute ACH and wire transfers to support our client payroll andtax services. If one or more of the banks fails to process ACH transfers on a timely basis, or at all, then our relationship withour clients could be harmed and we could be subject to claims by a client with respect to the failed transfers. In addition,these banks have no obligation to renew their agreements with us on commercially reasonable terms, if at all. If these banksterminate their relationships with us or restrict the dollar amounts of funds that they will process on behalf of our clients, theirdoing so may impede our ability to process funds and could have an adverse impact on our financial results and liquidity. We depend on our senior management team and other key employees, and the loss of these persons or an inability to attractand retain highly skilled employees could adversely affect our business. Our success depends largely upon the continued services of our key executive officers, including Steven R.Beauchamp, our President and Chief Executive Officer and acting Chief Financial Officer. We also rely on our leadershipteam in the areas of research and development, sales, services and general and administrative functions. From time to time,there may be changes in our executive management team resulting from the hiring or departure of executives, which coulddisrupt our business. While we have employment agreements with certain of our executive officers, includingMr. Beauchamp, these employment agreements do not require them to continue to work for us for any specified period and,therefore, they could terminate their employment with us at any time. The loss of one or more of our executive officers or keyemployees could have an adverse effect on our business. If we are unable to recruit and retain highly-skilled product development and other technical persons, our ability todevelop and support widely-accepted products could be impaired and our business could be harmed. We believe that to grow our business and be successful, we must continue to develop products that aretechnologically-advanced, are highly integrable with third-party services, provide significant mobility capabilities and havepleasing and intuitive user experiences. To do so, we must attract and retain highly qualified personnel, particularlyemployees with high levels of experience in designing and developing software and Internet-related products and services.Competition for these personnel in the greater Chicago area and elsewhere is intense. If we fail to attract new personnel or failto retain and motivate our current personnel, our business and future growth prospects could be severely harmed. We follow apractice of hiring the best available candidates wherever located, but as we grow our business, the productivity of ourproduct development and other research and development may be adversely affected. In addition, if we hire employees fromcompetitors or other companies, their former employers may attempt to assert that these employees have breached their legalobligations, resulting in a diversion of our time and resources. The sale and support of products and the performance of related services by us entail the risk of product or service liabilityclaims, which could significantly affect our financial results. Clients use our products in connection with the preparation and filing of tax returns and other regulatory reports. Ifany of our products contain errors that produce inaccurate results upon which users rely, or cause users to misfile or fail to filerequired information, we could be subject to liability claims from users. Our agreements with our clients typically containprovisions intended to limit our exposure to such claims, but such provisions may not be effective in limiting our exposure.Contractual limitations we use may not be enforceable and may not provide us with20 Table of Contentsadequate protection against product liability claims in certain jurisdictions. A successful claim for product or service liabilitybrought against us could result in substantial cost to us and divert management’s attention from our operations. Privacy concerns and laws or other domestic regulations may reduce the effectiveness of our applications and adverselyaffect our business. Our clients collect, use and store personal or identifying information regarding their employees and their familymembers in our solutions. Federal and state government bodies and agencies have adopted, are considering adopting, or mayadopt laws and regulations regarding the collection, use, storage and disclosure of such personal information. The costs ofcompliance with, and other burdens imposed by, such laws and regulations that are applicable to our clients’ businesses maylimit the use and adoption of our applications and reduce overall demand, or lead to significant fines, penalties or liabilitiesfor any noncompliance with such privacy laws. Even the perception of privacy concerns, whether or not valid, may inhibitmarket adoption of our solutions. All of these legislative and regulatory initiatives may adversely affect our clients’ ability to process, handle, store,use and transmit demographic and personal information regarding their employees and family members, which could reducedemand for our solutions. In addition to government activity, privacy advocacy groups and the technology and other industries areconsidering various new, additional or different self-regulatory standards that may place additional burdens on us. If theprocessing of personal information were to be curtailed in this manner, our products would be less effective, which mayreduce demand for our applications and adversely affect our business. Our business could be adversely affected if we do not effectively implement our solutions or our clients are not satisfiedwith our implementation services. Our ability to deliver our payroll and HCM solutions depends on our ability to effectively implement and totransition to, and train our clients on, our solutions. We do not recognize revenue from new clients until they process theirfirst payroll. Further, our agreements with our clients are generally terminable by the clients on 60 days’ or less notice. If aclient is not satisfied with our implementation services, the client could terminate its agreement with us before we haverecovered our costs of implementation services, which would adversely affect our results of operations and cash flows. Inaddition, negative publicity related to our client relationships, regardless of its accuracy, may further damage our business byaffecting our ability to compete for new business with current and prospective clients. Our business could be affected if we are unable to accommodate increased demand for our implementation servicesresulting from growth in our business. We may be unable to respond quickly enough to accommodate increased client demand for implementation servicesdriven by our growth. The implementation process is the first substantive interaction with a new client. As a predicate toproviding knowledgeable implementation services, we must have a sufficient number of personnel dedicated to that process.In order to ensure that we have sufficient employees to implement our solutions, we must closely coordinate hiring ofpersonnel with our projected sales for a particular period. Because our sales cycle is typically only three to six weeks long,we may not be successful in coordinating hiring of implementation personnel to meet increased demand for ourimplementation services. Increased demand for implementation services without a corresponding staffing increase ofqualified personnel could adversely affect the quality of services provided to new clients, and our business and ourreputation could be harmed. Any failure to offer high-quality client services may adversely affect our relationships with our clients and our financialresults. Once our applications are deployed, our clients depend on our client service organization to resolve issues relatingto our solutions. Our clients are medium-sized organizations with limited personnel and resources to address payroll andother HCM related issues. These clients rely on us more so than larger companies with greater internal resources andexpertise. High-quality client services are important for the successful marketing and sale of our products21 Table of Contentsand for the retention of existing clients. If we do not help our clients quickly resolve issues and provide effective ongoingsupport, our ability to sell additional products to existing clients would suffer and our reputation with existing or potentialclients would be harmed. In addition, our sales process is highly dependent on our applications and business reputation and on positiverecommendations from our existing clients. Any failure to maintain high-quality client services, or a market perception thatwe do not maintain high-quality client services, could adversely affect our reputation, our ability to sell our solutions toexisting and prospective clients, and our business, operating results and financial position. If we fail to manage our technical operations infrastructure, our existing clients may experience service outages and ournew clients may experience delays in the deployment of our applications. We have experienced significant growth in the number of users, transactions and data that our operationsinfrastructure supports. We seek to maintain sufficient excess capacity in our data center and other operations infrastructureto meet the needs of all of our clients. We also seek to maintain excess capacity to facilitate the rapid provision of new clientdeployments and the expansion of existing client deployments. In addition, we need to properly manage our technologicaloperations infrastructure in order to support version control, changes in hardware and software parameters and the evolutionof our applications. However, the provision of new hosting infrastructure requires significant lead time. We haveexperienced, and may in the future experience, website disruptions, outages and other performance problems. These problemsmay be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks,fraud, spikes in client usage and denial of service issues. In some instances, we may not be able to identify the cause or causesof these performance problems within an acceptable period of time. If we do not accurately predict our infrastructurerequirements, our existing clients may experience service outages that may subject us to financial penalties, financialliabilities and client losses. If our operations infrastructure fails to keep pace with increased sales, clients may experiencedelays as we seek to obtain additional capacity, which could adversely affect our reputation and our revenues. In addition, our ability to deliver our cloud-based applications depends on the development and maintenance ofInternet infrastructure by third parties. This includes maintenance of a reliable network backbone with the necessary speed,data capacity, bandwidth capacity, and security. Our services are designed to operate without interruption. However, we haveexperienced and expect that we will experience future interruptions and delays in services and availability from time to time.In the event of a catastrophic event with respect to one or more of our systems, we may experience an extended period ofsystem unavailability, which could negatively impact our relationship with clients. To operate without interruption, both weand our clients must guard against: ·Damage from fire, power loss, natural disasters and other force majeure events outside our control; ·Communications failures; ·Software and hardware errors, failures and crashes; ·Security breaches, computer viruses, hacking, denial-of-service attacks and similar disruptive problems;and ·Other potential interruptions. We also rely on computer hardware purchased or leased and software licensed from third parties in order to offer ourservices. These licenses and hardware are generally commercially available on varying terms. However, it is possible that thishardware and software might not continue to be available on commercially reasonable terms, or at all. Any loss of the right touse any of this hardware or software could result in delays in the provisioning of our services until equivalent technology iseither developed by us, or, if available, is identified, obtained and integrated. Furthermore, our payroll application is essential to our clients’ timely payment of wages to their employees. Anyinterruption in our service may affect the availability, accuracy or timeliness of these programs and could damage22 Table of Contentsour reputation, cause our clients to terminate their use of our application, require us to indemnify our clients against certainlosses due to our own errors and prevent us from gaining additional business from current or future clients. Any disruption in the operation of our data centers could adversely affect our business. We host our solutions at a third-party facility in Franklin Park, Illinois and utilize another third-party facility inKenosha, Wisconsin for backup and disaster recovery. We also may decide to employ additional offsite data centers in thefuture to accommodate growth. Problems faced by our data center locations, with the telecommunications network providers with whom we or theycontract, or with the systems by which our telecommunications providers allocate capacity among their clients, including us,could adversely affect the availability and processing of our solutions and related services and the experience of our clients.If our data centers are unable to keep up with our growing needs for capacity, this could have an adverse effect on ourbusiness and cause us to incur additional expense. In addition, any financial difficulties faced by our third-party data center’soperator or any of the service providers with whom we or they contract may have negative effects on our business, the natureand extent of which are difficult to predict. Any changes in service levels at our third-party data center or any errors, defects,disruptions or other performance problems with our applications could adversely affect our reputation and may damage ourclients’ stored files or result in lengthy interruptions in our services. Interruptions in our services might reduce our revenues,subject us to potential liability or other expenses or adversely affect our renewal rates. In addition, while we own, control and have access to our servers and all of the components of our network that arelocated in our backup data centers, we do not control the operation of these facilities. The operators of our third party datacenter facilities have no obligations to renew their agreements with us on commercially reasonable terms, or at all. If we areunable to renew these agreements on commercially reasonable terms, or if the data center operators are acquired, we may berequired to transfer our servers and other infrastructure to new data center facilities, and we may incur costs and experienceservice interruption in doing so. Our software might not operate properly, which could damage our reputation, give rise to claims against us, or divertapplication of our resources from other purposes, any of which could harm our business and operating results. Our payroll and HCM software is complex and may contain or develop undetected defects or errors, particularlywhen first introduced or as new versions are released. Despite extensive testing, from time to time we have discovered defectsor errors in our products. In addition, because changes in employer and legal requirements and practices relating to benefitsare frequent, we discover defects and errors in our software and service processes in the normal course of business comparedagainst these requirements and practices. Material performance problems or defects in our products and services might arisein the future, which could have an adverse impact on our business and client relationship and subject us to claims. Moreover, software development is time-consuming, expensive and complex. Unforeseen difficulties can arise. Wemight encounter technical obstacles, and it is possible that we discover problems that prevent our products from operatingproperly. If they do not function reliably or fail to achieve client expectations in terms of performance, clients could canceltheir agreements with us and/or assert liability claims against us. This could damage our reputation, impair our ability toattract or maintain clients and harm our results of operations. Defects and errors and any failure by us to identify and address them could result in delays in product introductionsand updates, loss of revenue or market share, liability to clients or others, failure to achieve market acceptance or expansion,diversion of development and other resources, injury to our reputation, and increased service and maintenance costs. Defectsor errors in our product or service processes might discourage existing or potential clients from purchasing from us.Correction of defects or errors could prove to be impossible or impracticable. The costs incurred in correcting any defects orerrors or in responding to resulting claims or liability might be substantial and could adversely affect our operating results. 23 Table of ContentsBecause of the large amount of data that we collect and manage, it is possible that hardware failures or errors in oursystems could result in data loss or corruption, or cause the information that we collect to be incomplete or containinaccuracies that our clients, their employees and taxing and other regulatory authorities regard as significant. The costsincurred in correcting any errors or in responding to regulatory authorities or to resulting claims or liability might besubstantial and could adversely affect our operating results. We maintain insurance, but our insurance may be inadequate or may not be available in the future on acceptableterms, or at all. In addition, our policy may not cover all claims made against us and defending a suit, regardless of its merit,could be costly and divert management’s attention. Our clients might assert claims against us in the future alleging that they suffered damages due to a defect, error, orother failure of our product or service processes. A product liability claim and errors or omissions claim could subject us tosignificant legal defense costs and adverse publicity regardless of the merits or eventual outcome of such a claim. Client funds that we hold are subject to market, interest rate, credit and liquidity risks. The loss of these funds could havean adverse impact on our business. We invest funds held for our clients in liquid, investment-grade marketable securities, money market securities, andother cash equivalents. Nevertheless, our client fund assets are subject to general market, interest rate, credit, and liquidityrisks. These risks may be exacerbated, individually or in unison, during periods of unusual financial market volatility. Anyloss of or inability to access client funds could have an adverse impact on our cash position and results of operations andcould require us to obtain additional sources of liquidity. In addition, these funds are held in consolidated trust accounts, and as a result the aggregate amounts in theaccounts exceed the applicable federal deposit insurance limits. We believe that since such funds are deposited in trust onbehalf of our clients, the Federal Deposit Insurance Corporation, or the FDIC, would treat those funds as if they had beendeposited by each of the clients themselves and insure each client’s funds up to the applicable deposit insurance limits. If theFDIC were to take the position that it is not obligated to provide deposit insurance for our clients’ funds or if thereimbursement of these funds were delayed, our business and our clients could be materially harmed. If we are required to collect sales and use taxes in additional jurisdictions, we might be subject to liability for past salesand our future sales may decrease. Adverse tax laws or regulations could be enacted or existing laws could be applied to usor our clients, which could increase the costs of our services and adversely impact our business. The application of federal, state, and local tax laws to services provided electronically is evolving. New income,sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time (possibly with retroactiveeffect), and could be applied solely or disproportionately to services provided over the Internet. These enactments couldadversely affect our sales activity due to the inherent cost increase the taxes would represent and ultimately result in anegative impact on our operating results and cash flows. In addition, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified orapplied adversely to us (possibly with retroactive effect), which could require us or our clients to pay additional tax amounts,as well as require us or our clients to pay fines or penalties and interest for past amounts. For example, we might lose sales or incur significant expenses if states successfully impose broader guidelines onstate sales and use taxes. A successful assertion by one or more states requiring us to collect sales or other taxes on oursoftware or provision of our services could result in substantial tax liabilities for past transactions and otherwise harm ourbusiness. Each state has different rules and regulations governing sales and use taxes, and these rules and regulations aresubject to varying interpretations that change over time. We review these rules and regulations periodically and, when webelieve we are subject to sales and use taxes in a particular state, we may voluntarily engage state tax authorities in order todetermine how to comply with that state’s rules and regulations. We cannot assure you that we will not be subject to salesand use taxes or related penalties for past sales in states where we currently believe no such taxes are required.24 Table of Contents Vendors of services, like us, are typically held responsible by taxing authorities for the collection and payment ofany applicable sales and similar taxes. If one or more taxing authorities determines that taxes should have, but have not, beenpaid with respect to our services, we might be liable for past taxes in addition to taxes going forward. Liability for past taxesmight also include substantial interest and penalty charges. Our clients typically pay us for applicable sales and similar taxes.Nevertheless, our clients might be reluctant to pay back taxes and might refuse responsibility for interest or penaltiesassociated with those taxes. If we are required to collect and pay back taxes and the associated interest and penalties, and ifour clients fail or refuse to reimburse us for all or a portion of these amounts, we will incur unplanned expenses that may besubstantial. Moreover, imposition of such taxes on us going forward will effectively increase the cost of our services to ourclients and might adversely affect our ability to retain existing clients or to gain new clients in the areas in which such taxesare imposed. Any future litigation against us could be costly and time-consuming to defend. We may become subject, from time to time, to legal proceedings and claims that arise in the ordinary course ofbusiness such as claims brought by our clients in connection with commercial disputes or employment claims made by ourcurrent or former employees. Litigation might result in substantial costs and may divert management’s attention andresources, which might seriously harm our business, overall financial condition, and operating results. Insurance might notcover such claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims and mightnot continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured couldresult in unanticipated costs, thereby harming our operating results and leading analysts or potential investors to lower theirexpectations of our performance, which could reduce the trading price of our stock. Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology andour brand. Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination ofcopyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our proprietaryrights in our products and services. Our proprietary technologies are not covered by any patent or patent application.However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect ourintellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property.Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that weregard as proprietary to create products and services that compete with ours. Some license provisions protecting againstunauthorized use, copying, transfer and disclosure of our products may be unenforceable under the laws of certainjurisdictions and foreign countries. We enter into confidentiality and invention assignment agreements with our employees and consultants and enterinto confidentiality agreements with the parties with whom we have strategic relationships and business alliances. Noassurance can be given that these agreements will be effective in controlling access to and distribution of our products andproprietary information. The confidentiality agreements on which we rely to protect certain technologies may be breachedand may not be adequate to protect our proprietary technologies. Further, these agreements do not prevent our competitorsfrom independently developing technologies that are substantially equivalent or superior to our solutions. In addition, wedepend, in part, on technology of third parties licensed to us for our solutions, and the loss or inability to maintain theselicenses or errors in the software we license could result in increased costs, reduced service levels or delayed sales of oursolutions. In order to protect our intellectual property rights, we may be required to spend significant resources to monitor andprotect these rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect ourtrade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming anddistracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore,our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking thevalidity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology againstunauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, coulddelay further sales or the implementation of our solutions, impair the25 Table of Contentsfunctionality of our solutions, delay introductions of new solutions, result in our substituting inferior or more costlytechnologies into our solutions, or injure our reputation. In addition, we may be required to license additional technologyfrom third parties to develop and market new solutions, and we cannot assure you that we could license that technology oncommercially reasonable terms, or at all. Although we do not expect that our inability to license this technology in the futurewould have a material adverse effect on our business or operating results, our inability to license this technology couldadversely affect our ability to compete. We may be sued by third parties for alleged infringement of their proprietary rights. There is considerable patent and other intellectual property development activity in our industry. Our successdepends, in part, upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a numberof other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time,third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringingupon such rights. In the future, others may claim that our applications and underlying technology infringe or violate theirintellectual property rights. However, we may be unaware of the intellectual property rights that others may claim cover someor all of our technology or services. Any claims or litigation could cause us to incur significant expenses and, if successfullyasserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering ourservices, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our clients orbusiness partners or pay substantial settlement costs, including royalty payments, in connection with any such claim orlitigation and to obtain licenses, modify applications, or refund fees, which could be costly. Even if we were to prevail insuch a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert theattention of our management and key personnel from our business operations. The use of open source software in our products and solutions may expose us to additional risks and harm our intellectualproperty rights. Some of our products and solutions use or incorporate software that is subject to one or more open source licenses.Open source software is typically freely accessible, usable and modifiable. Certain open source software licenses require auser who intends to distribute the open source software as a component of the user’s software to disclose publicly part or allof the source code to the user’s software. In addition, certain open source software licenses require the user of such software tomake any derivative works of the open source code available to others on potentially unfavorable terms or at no cost. The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts.Accordingly, there is a risk that those licenses could be construed in a manner that imposes unanticipated conditions orrestrictions on our ability to commercialize our solutions. In that event, we could be required to seek licenses from thirdparties in order to continue offering our products or solutions, to re-develop our products or solutions, to discontinue sales ofour products or solutions, or to release our proprietary software code under the terms of an open source license, any of whichcould harm our business. Further, given the nature of open source software, it may be more likely that third parties mightassert copyright and other intellectual property infringement claims against us based on our use of these open source softwareprograms. While we monitor the use of all open source software in our products, solutions, processes and technology and try toensure that no open source software is used in such a way as to require us to disclose the source code to the related product orsolution when we do not wish to do so, it is possible that such use may have inadvertently occurred in deploying ourproprietary solutions. In addition, if a third-party software provider has incorporated certain types of open source softwareinto software we license from such third party for our products and solutions without our knowledge, we could, under certaincircumstances, be required to disclose the source code to our products and solutions. This could harm our intellectualproperty position and our business, results of operations and financial condition. 26 Table of ContentsIf third-party software used in our products is not adequately maintained or updated, our business could be materiallyadversely affected. Our products utilize certain software of third-party software developers. For example, we license technology frombswift as part of our Paylocity Web Benefits solution. Although we believe that there are alternatives for these products, anysignificant interruption in the availability of such third-party software could have an adverse impact on our business unlessand until we can replace the functionality provided by these products at a similar cost. Additionally, we rely, to a certainextent, upon such third parties’ abilities to enhance their current products, to develop new products on a timely and cost-effective basis and to respond to emerging industry standards and other technological changes. We may be unable to replacethe functionality provided by the third-party software currently offered in conjunction with our products in the event thatsuch software becomes obsolete or incompatible with future versions of our products or is otherwise not adequatelymaintained or updated. Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish thedemand for our applications, and could have a negative impact on our business. The future success of our business depends upon the continued use of the Internet as a primary medium forcommerce, communication and business applications. Federal, state or foreign government bodies or agencies have in thepast adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium.Changes in these laws or regulations could require us to modify our applications in order to comply with these changes. Inaddition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing theInternet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerceor communications generally, resulting in reductions in the demand for Internet-based applications such as ours. In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development oradoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease ofuse, accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has beenadversely affected by “viruses,” “worms” and similar malicious programs, and the Internet has experienced a variety ofoutages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet is adversely affectedby these issues, demand for our applications could suffer. Furthermore, the availability or performance of our applications could be adversely affected by a number of factors,including clients’ inability to access the Internet, the failure of our network or software systems, security breaches orvariability in user traffic for our services. For example, our clients access our solutions through their Internet serviceproviders. If a service provider fails to provide sufficient capacity to support our applications or otherwise experiencesservice outages, such failure could interrupt our clients’ access to our solutions, adversely affect their perception of ourapplications’ reliability and reduce our revenues. In addition to potential liability, if we experience interruptions in theavailability of our applications, our reputation could be adversely affected and we could lose clients. Regulatory requirements placed on our software and services could impose increased costs on us, delay or prevent ourintroduction of new products and services, and impair the function or value of our existing products and services. Our products and services may become subject to increasing regulatory requirements, and as these requirementsproliferate, we may be required to change or adapt our products and services to comply. Changing regulatory requirementsmight render our products and services obsolete or might block us from developing new products and services. This might inturn impose additional costs upon us to comply or to further develop our products and services. It might also makeintroduction of new products and services more costly or more time-consuming than we currently anticipate. It might evenprevent introduction by us of new products or services or cause the continuation of our existing products or services tobecome more costly. 27 Table of ContentsWe might require additional capital to support business growth, and this capital might not be available. We intend to continue to make investments to support our business growth and might require additional funds torespond to business challenges or opportunities, including the need to develop new products and services or enhance ourexisting services, enhance our operating infrastructure, and acquire complementary businesses and technologies.Accordingly, we might need to engage in equity or debt financings to secure additional funds. In addition, we will need toexpand our ACH capacity as we grow our business. If we raise additional funds through further issuances of equity or convertible debt securities, our existingstockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences andprivileges superior to those of holders of our common stock. Any debt financing or ACH facility secured by us in the futurecould involve restrictive covenants relating to our capital-raising activities and other financial and operational matters,which might make it more difficult for us to obtain additional capital and to pursue business opportunities and to grow ourbusiness. In addition, we might not be able to obtain additional financing on terms favorable to us, if at all. If we are unableto obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to supportour business growth and to respond to business challenges could be significantly limited. Our services present the potential for embezzlement, identity theft, or other similar illegal behavior by our associates withrespect to third parties. Certain services offered by us involve collecting payroll information from individuals, and this frequently includesinformation about their checking accounts. Our services also involve the use and disclosure of personal and businessinformation that could be used to impersonate third parties, commit identity theft, or otherwise gain access to their data orfunds. If any of our associates take, convert, or misuse such funds, documents or data, we could be liable for damages, and ourbusiness reputation could be damaged or destroyed. Moreover, if we fail to adequately prevent third parties from accessingpersonal and/or business information and using that information to commit identity theft, we might face legal liabilities andother losses than can have a negative impact on our business. We rely on a third-party shipping provider to deliver printed checks to our clients, and therefore our business could benegatively impacted by disruptions in the operations of this third-party provider. We rely on third-party couriers such as the United Parcel Service, or UPS, to ship printed checks to our clients.Relying on UPS and other third-party couriers puts us at risk from disruptions in their operations, such as employee strikes,inclement weather and their ability to perform tasks on our behalf. If UPS or other third-party couriers fail to perform theirtasks, we could incur liability or suffer damages to our reputation, or both. If we are forced to use other third-party couriers,our costs could increase and we may not be able to meet shipment deadlines. Moreover, we may not be able to obtain termsas favorable as those we currently use, which could further increase our costs. These circumstances may negatively impactour business, financial condition and results of operations. Our reported financial results may be adversely affected by changes in accounting principles generally accepted in theUnited States. Generally accepted accounting principles in the United States are subject to interpretation by the FinancialAccounting Standards Board, or FASB, the Securities and Exchange Commission, and various bodies formed to promulgateand interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effecton our reported financial results including increased volatility, and could affect the reporting of transactions completedbefore the announcement of a change. Our accounting policies that have been or may be affected by changes in accountingprinciples include, but are not limited to, revenue recognition and accounting for leases. 28 Table of ContentsWe may acquire other companies or technologies, which could divert our management’s attention, result in additionaldilution to our stockholders and otherwise disrupt our operations and adversely affect our operating results. We may in the future seek to acquire or invest in other businesses or technologies. The pursuit of potentialacquisitions or investments may divert the attention of management and cause us to incur various expenses in identifying,investigating and pursuing suitable acquisitions, whether or not they are consummated. In addition, we have limited experience in acquiring other businesses. If we acquire additional businesses, we maynot be able to integrate the acquired personnel, operations and technologies successfully, or effectively manage thecombined business following the acquisition. We also may not achieve the anticipated benefits from the acquired businessdue to a number of factors, including: ·Inability to integrate or benefit from acquired technologies or services in a profitable manner; ·Unanticipated costs or liabilities associated with the acquisition; ·Incurrence of acquisition-related costs; ·Difficulty integrating the accounting systems, operations and personnel of the acquired business; ·Difficulties and additional expenses associated with supporting legacy products and hosting infrastructureof the acquired business; ·Difficulty converting the clients of the acquired business onto our applications and contract terms,including disparities in the revenues, licensing, support or professional services model of the acquiredcompany; ·Diversion of management’s attention from other business concerns; ·Adverse effects to our existing business relationships with business partners and clients as a result of theacquisition; ·The potential loss of key employees; ·Use of resources that are needed in other parts of our business; and ·Use of substantial portions of our available cash to consummate the acquisition. In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquiredgoodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if ouracquisitions do not yield expected returns, we may be required to take charges to our operating results based on thisimpairment assessment process, which could adversely affect our results of operations. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which couldadversely affect our operating results. In addition, if an acquired business fails to meet our expectations, our operating results,business and financial position may suffer. 29 Table of ContentsRisks Related to Ownership of Our Common Stock Insiders have substantial control over us, which may limit our stockholders’ ability to influence corporate matters anddelay or prevent a third party from acquiring control over us. As of August 4, 2017, our directors, executive officers and holders of more than 5% of our common stock, togetherwith their respective affiliates, beneficially owned, in the aggregate, approximately 48.6% of our outstanding common stock.This significant concentration of ownership may adversely affect the trading price for our common stock because investorsoften perceive disadvantages in owning stock in companies with controlling stockholders. In addition, these stockholderswill be able to exercise influence over all matters requiring stockholder approval, including the election of directors andapproval of corporate transactions, such as a merger or other sale of our company or its assets. This concentration ofownership could limit the ability of our other stockholders to influence corporate matters and may have the effect of delayingor preventing a change in control, including a merger, consolidation, or other business combination involving us, ordiscouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change incontrol would benefit our other stockholders. Our stock price may be subject to wide fluctuations. The trading price of our common stock could be subject to wide fluctuations in response to various factors, some ofwhich are beyond our control. These factors include those discussed in this “Risk Factors” section of this Annual Report onForm 10-K and others such as: ·Our operating performance and the operating performance of similar companies; ·Announcements by us or our competitors of acquisitions, business plans or commercial relationships; ·Any major change in our board of directors or senior management; ·Publication of research reports or news stories about us, our competitors, or our industry, or positive ornegative recommendations or withdrawal of research coverage by securities analysts; ·The public’s reaction to our press releases, our other public announcements and our filings with the SEC; ·Sales of our common stock by our directors, executive officers and affiliates; ·Adverse market reaction to any indebtedness we may incur or securities we may issue in the future; ·Short sales, hedging and other derivative transactions in our common stock; ·Threatened or actual litigation; and ·Other events or factors, including changes in general conditions in the United States and global economiesor financial markets (including those resulting from the United Kingdom’s decision to exit from theEuropean Union, acts of God, war, incidents of terrorism, or other destabilizing events and the resultingresponses to them). In addition, the stock market in general and the market for Internet-related companies in particular, haveexperienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operatingperformance of those companies. Securities class action litigation has often been instituted against companies followingperiods of volatility in the overall market and in the market price of a company’s securities. This litigation, if institutedagainst us, could result in substantial costs, divert our management’s attention and resources, and harm our business,operating results, and financial condition. 30 Table of ContentsWe do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return onyour investment will depend on appreciation in the price of our common stock. We have not declared or paid dividends on our common stock in the past three fiscal years and do not currentlyintend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth.Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future, and the success of aninvestment in shares of our common stock will depend upon future appreciation in its value, if any. There is no guaranteethat shares of our common stock will appreciate in value or even maintain the price at which our stockholders purchased theirshares. Future sales of shares of our common stock by existing stockholders could depress the market price of our common stock. As of August 4, 2017, we had an aggregate of 51,750,086 outstanding shares of common stock. The 17,362,750shares sold in our initial public offering, follow-on offering and secondary offering can be freely sold in the public marketwithout restriction. The remaining shares can be freely sold in the public market, subject in some cases to volume and otherrestrictions under Rule 144 and 701 under the Securities Act of 1933, as amended, and various agreements. In addition, we have registered 15,092,927 shares of common stock that we have issued and may issue under ourequity plans. These shares can be freely sold in the public market upon issuance, subject in some cases to volume and otherrestrictions under Rules 144 and 701 under the Securities Act, and various vesting agreements. In addition, some of ouremployees, including some of our executive officers, have entered into 10b5-1 trading plans regarding sales of shares of ourcommon stock. These plans provide for sales to occur from time to time. If any of these additional shares are sold, or if it isperceived that they will be sold, in the public market, the trading price of our common stock could decline. Also, in the future, we may issue additional securities in connection with investments and acquisitions. The amountof our common stock issued in connection with an investment or acquisition could constitute a material portion of our thenoutstanding stock. Due to these factors, sales of a substantial number of shares of our common stock in the public marketcould occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sellshares, could reduce the market price of our common stock. If we are unable to maintain effective internal controls over financial reporting, investors may lose confidence in theaccuracy and completeness of our financial reports and the market price of our common stock may be negatively affected. As a public company, we are required to maintain internal controls over financial reporting and to report anymaterial weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act,requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and provide amanagement report on the internal controls over financial reporting. In addition, the Sarbanes-Oxley Act requires that ourmanagement report on the internal controls over financial reporting be attested to by our independent registered publicaccounting firm. If we have a material weakness in our internal controls over financial reporting, we may not detect errors ona timely basis and our financial statements may be materially misstated. Compliance with these public companyrequirements has made some activities more time-consuming, costly and complicated. If we identify material weaknesses inour internal controls over financial reporting, if we are unable to assert that our internal controls over financial reporting areeffective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness ofour internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of ourfinancial reports and the market price of our common stock could be negatively affected, and we could become subject toinvestigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which couldrequire additional financial and management resources. 31 Table of ContentsWe have incurred and will continue to incur significantly increased costs and devote substantial management time as aresult of operating as a public company. As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses.For example, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or theExchange Act, and are required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-FrankWall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC andthe NASDAQ Global Select Market including the establishment and maintenance of effective disclosure and financialcontrols and changes in corporate governance practices. Compliance with these requirements has increased our legal andfinancial compliance costs and has made some activities more time consuming and costly. In addition, our management andother personnel have been required to divert attention from operational and other business matters to devote substantial timeto these public company requirements. In particular, we have incurred and will continue to incur significant expenses as wellas devote substantial management effort toward ensuring ongoing compliance with the requirements of Section 404 of theSarbanes-Oxley Act. Although we have hired additional employees to comply with these requirements, we may need to hireadditional accounting and financial staff with appropriate public company experience and technical accounting knowledgeto comply with any regulatory changes. If securities or industry analysts do not continue to publish research or publish unfavorable or misleading research aboutour business, our stock price and trading volume could decline. The trading market for our common stock depends in part on the research and reports that securities or industryanalysts publish about us or our business. If one or more of the analysts who covers us downgrades our stock or publishesunfavorable or misleading research about our business, our stock price would likely decline. If one or more of these analystsceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the market for our stockand demand for our stock could decrease, which could cause our stock price or trading volume to decline. Anti-takeover provisions in our charter documents and Delaware law could discourage, delay, or prevent a change incontrol of our company and may affect the trading price of our common stock. We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law, whichapply to us, may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combinationwith an interested stockholder for a period of three years after the stockholder becomes an interested stockholder, even if achange in control would be beneficial to our existing stockholders. In addition, our amended and restated certificate ofincorporation and amended and restated bylaws may discourage, delay or prevent a change in our management or controlover us that stockholders may consider favorable. Our amended and restated certificate of incorporation and bylaws: ·Authorize the issuance of “blank check” convertible preferred stock that could be issued by our board ofdirectors to thwart a takeover attempt; ·Establish a classified board of directors, as a result of which the successors to the directors whose terms haveexpired will be elected to serve from the time of election and qualification until the third annual meetingfollowing their election; ·Require that directors only be removed from office for cause and only upon a supermajority stockholdervote; ·Provide that vacancies on the board of directors, including newly-created directorships, may be filled onlyby a majority vote of directors then in office rather than by stockholders; ·Prevent stockholders from calling special meetings; and ·Prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of thestockholders.32 Table of ContentsOur bylaws provide that the state and federal courts located within the state of Delaware are the sole and exclusive forumsfor certain legal actions involving the company or our directors, officers and employees.On February 2, 2016, we amended our bylaws to designate the state and federal courts located within the state ofDelaware as the sole and exclusive forums for claims arising derivatively, pursuant to the Delaware General Corporation Lawor governed by the internal affairs doctrine. The choice of forum provision is expressly authorized by the Delaware GeneralCorporation Law, which was amended so that companies would not have to litigate internal claims in more than onejurisdiction. If a court were to find the exclusive forum provision contained in our bylaws to be inapplicable orunenforceable, we may incur additional costs associated with resolving such extra-forum claims, which could adverselyaffect our business and financial condition. This bylaw provision, therefore, may dissuade or discourage claimants frominitiating lawsuits or claims against us or our directors and officers in forums other than Delaware. Item 1B. Unresolved Staff Comments. None. Item 2. Properties. As of June 30, 2017, our corporate headquarters occupied approximately 135,000 square feet in Arlington Heights,Illinois under leases with final expiration in July 2022. As of June 30, 2017, we also leased facilities in Schaumburg, Illinois,New York, New York, Rochester, New York, Lake Mary, Florida, Nashua, New Hampshire, Springfield, New Jersey, Boise,Idaho and Oakland, California. In June 2016, we entered into a lease for approximately 309,559 rentable square feet of office space located inSchaumburg, Illinois. We intend to use the leased premises as our headquarters upon the expiration of the lease of our currentheadquarters. The lease provides for phased delivery and commencement dates, with commencement expected to occur onthe following approximate dates: Phase I (June 1, 2017), Phase II (November 1, 2017), Phase III (July 1, 2018), and Phase IV(July 1, 2019). The actual commencement dates are subject to timely delivery of the premises by the landlord. The leaseprovides for a term beginning on the Phase I commencement date and ending 180 full calendar months after the landlorddelivers the Phase II premises, which is expected to be on or about November 1, 2017, with two subsequent five-year renewaloptions. In February 2017, we entered into a lease for approximately 62,000 rentable square feet of office space located inMeridian, Idaho. We intend to use the leased premises to accommodate the continued expansion of our employee base in thewestern region of the United States. The lease provides for phased delivery and commencement dates with commencementexpected to occur on the following approximate dates: Phase I (July 1, 2018) and Phase II (February 1, 2020). The actualcommencement dates are subject to timely delivery of the premises by the landlord. The lease provides for a term beginningon the Phase I commencement date and ending after 120 full calendar months with four subsequent five-year renewaloptions. For additional information regarding obligations under operating leases, see Note 10 of the Notes to theConsolidated Financial Statements included in Part II, Item 8: “Financial Statements and Supplementary Data” of thisAnnual Report on Form 10-K. Item 3. Legal Proceedings. From time to time, we may become involved in litigation related to claims arising from the ordinary course of ourbusiness. We believe that there are no claims or actions pending or threatened against us, the ultimate disposition of whichwould have a material adverse effect on us. Item 4. Mine Safety Disclosures. Not applicable.33 Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities Market Information Our common stock is listed on the NASDAQ Global Select Market under the symbol “PCTY”. The following table setsforth for the periods indicated the high and low intra-day sale prices per share of our common stock as reported on theNASDAQ Global Select Market: High Low Year ended June 30, 2016 First Quarter $37.49 $29.02 Second Quarter $46.23 $29.66 Third Quarter $38.56 $25.17 Fourth Quarter $43.20 $32.88 Year ended June 30, 2017 First Quarter $47.27 $41.47 Second Quarter $46.02 $30.01 Third Quarter $39.51 $29.92 Fourth Quarter $49.16 $37.93 On August 4, 2017, the last reported sale price of our common stock on the NASDAQ Global Select Market was $43.98per share, and there were 17 holders of record of our common stock. The actual number of holders of common stock is greaterthan these numbers of record holders and includes stockholders who are beneficial owners, but whose shares are held in streetname by brokers and nominees. The number of holders of record also does not include stockholders whose shares may beheld in trust by other entities. Use of Proceeds from Initial Public Offering of Common Stock 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. We sold 5,366,667 of such shares and existingshareholders sold an aggregate of 2,735,083 of such shares. The offer and sale of all of the shares in the IPO were registeredunder the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-193661), which was declared effectiveby 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 & TrustCompany on March 9, 2011, which totaled $1.1 million, paid $9.4 million for the purchase of substantially all of the assetsof BFKMS Inc., and paid $9.5 million for the purchase of substantially all of the assets of Synergy Payroll LLC. Use of Proceeds from Follow-On Offering of Common Stock On December 17, 2014, we completed a follow-on offering of 4,960,000 shares of common stock at a price of $26.25per share, before underwriting discounts and commissions. We sold 750,000 of such shares and existing shareholders sold anaggregate of 4,210,000 of such shares. The offer and sale of all of the shares in the follow-on offering were registered underthe Securities Act pursuant to a registration statement on Form S-1 (File No. 333-200448) which was declared effective by theSEC on December 11, 2014. There have been no material changes in the planned use of proceeds from the follow-on offeringas described in the final prospectus filed with the SEC pursuant to Rule 424(b) on December 12, 2014. 34 Table of ContentsUse of Proceeds from Secondary Offering of Common Stock On September 30, 2015, we completed a secondary offering of 4,301,000 shares of common stock at a price of $29.75per share, before underwriting discounts and commissions. The offer and sale of all of the shares in the secondary offeringwere registered under the Securities Act pursuant to a registration statement on Form S-3 (File No. 333-206941) which wasdeclared effective by the SEC on September 25, 2015. The Company did not receive any proceeds from the sale of commonstock, as all the shares were sold by shareholders of the Company. Dividend Policy We have not declared or paid dividends on our common stock since our IPO. Neither Delaware law nor our amendedand restated certificate of incorporation requires our board of directors to declare dividends on our common stock. Any futuredetermination to declare cash dividends on our common stock will be made at the discretion of our board of directors andwill depend on our financial condition, results of operations, capital requirements, general business conditions and otherfactors that our board of directors may deem relevant. We do not anticipate paying cash dividends on our common stock forthe foreseeable future. Equity Compensation Plan Information Information regarding the securities authorized for issuance under our equity compensation plans will be included inour Proxy Statement relating to our 2018 annual meeting of stockholders to be filed with the SEC within 120 days after theend of our fiscal year ended June 30, 2017, and is incorporated herein by reference. Performance Graph Notwithstanding any statement to the contrary in any of our filings with the SEC, the following information shall notbe deemed “filed” with the SEC or “soliciting material” under the Securities Exchange Act of 1934 and shall not beincorporated by reference into any such filings irrespective of any general incorporation language contained in such filing. The following graph compares the total cumulative stockholder return on our common stock with the total cumulativereturn of the S&P 500 Index and the S&P 1500 Application Software Index during the period commencing on March 19,2014, the initial trading day of our common stock, and ending on June 30, 2017. The graph assumes that $100 was investedat the beginning of the period in our common stock and in each of the comparative indices, and the35 Table of Contentsreinvestment of any dividends. Historical stock price performance should not be relied upon as an indication of future stockprice performance. 36 Table of Contents Item 6. Selected Financial Data. Consolidated Selected Financial Data You should read the following selected consolidated financial data together with our consolidated financialstatements and related notes included elsewhere in this Annual Report on Form 10-K and the information under the sectiontitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our fiscal year ends onJune 30. The statements of operations data presented below have been derived from our audited consolidated financialstatements. Historical results are not necessarily indicative of future results. Year Ended June 30, 2013 2014 2015 2016 2017 (in thousands, except per share data)Consolidated Statements of Operations Data: Revenues: Recurring fees $71,309 $100,362 $142,168 $217,416 $284,817Interest income on funds held for clients 1,459 1,582 1,901 2,688 3,631Total recurring revenues 72,768 101,944 144,069 220,104 288,448Implementation services and other 4,526 6,743 8,629 10,597 11,562Total revenues 77,294 108,687 152,698 230,701 300,010Cost of revenues: Recurring revenues 28,863 37,319 46,366 66,131 85,399Implementation services and other 10,803 17,775 24,530 31,954 38,588Total cost of revenues 39,666 55,094 70,896 98,085 123,987Gross profit 37,628 53,593 81,802 132,616 176,023Operating expenses: Sales and marketing 18,693 28,276 43,035 61,832 77,506Research and development 6,825 10,355 19,864 26,736 29,098General and administrative 12,079 21,980 32,824 47,598 62,123Total operating expenses 37,597 60,611 95,723 136,166 168,727Operating income (loss) 31 (7,018) (13,921) (3,550) 7,296Other income (expense) (16) 163 54 (124) 73 Income (loss) before income taxes 15 (6,855) (13,867) (3,674) 7,369Income tax expense (benefit) (602) 255 105 177 651Net income (loss) $617 $(7,110) $(13,972) $(3,851) $6,718Net income (loss) attributable to common stockholders $(2,291) $(9,392) $(13,972) $(3,851) $6,718Net income (loss) per share attributable to commonstockholders: Basic $(0.07) $(0.26) $(0.28) $(0.08) $0.13Diluted $(0.07) $(0.26) $(0.28) $(0.08) $0.12Weighted average shares used in computing net income (loss)per share attributable to common stockholders: Basic 31,988 36,707 50,127 50,913 51,415Diluted 31,988 36,707 50,127 50,913 54,057Other Financial Data: Adjusted Gross Profit(1) $40,695 $57,029 $87,226 $141,029 $189,272Adjusted Recurring Gross Profit(1) $46,972 $67,458 $101,876 $161,184 $214,825Adjusted EBITDA(1) $6,301 $5,448 $8,238 $28,398 $56,190 37 Table of Contents As of June 30, 2013 2014 2015 2016 2017 (in thousands)Consolidated Balance Sheet Data: Cash and cash equivalents $7,594 $78,848 $81,258 $86,496 $103,468Working capital(2) 2,305 67,137 69,296 68,986 88,040Funds held for clients 355,905 417,261 591,219 1,239,622 942,459Total assets 377,916 528,151 720,548 1,390,689 1,137,441Debt, current portion 625 — — — —Client fund obligations 355,905 417,261 591,219 1,239,622 942,459Long-term debt, net of current portion 938 — — — —Redeemable convertible preferred stock 36,573 — — — —Stockholders’ equity (deficit) (26,592) 91,134 107,580 119,572 147,613(1)We use Adjusted Gross Profit, Adjusted Recurring Gross Profit, and Adjusted EBITDA to evaluate our operating results.We prepare Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA to eliminate the impact ofitems we do not consider indicative of our ongoing operating performance. However, Adjusted Gross Profit, AdjustedRecurring Gross Profit and Adjusted EBITDA are not measurements of financial performance under generally acceptedaccounting principles in the United States, or GAAP, and these metrics may not be comparable to similarly-titledmeasures of other companies. We define Adjusted Gross Profit as gross profit before amortization of capitalized internal-use software costs, stock-basedcompensation expense and employer payroll taxes related to stock releases and option exercises and one-time founderfunded bonus pay-outs, if any. We define Adjusted Recurring Gross Profit as total recurring revenues after cost ofrecurring revenues and before amortization of capitalized internal-use software costs, stock-based compensation expenseand employer payroll taxes related to stock releases and option exercises and one-time founder funded bonus pay-outs, ifany. We define Adjusted EBITDA as net income (loss) before interest expense, income tax expense (benefit),depreciation and amortization expense, stock-based compensation expense and employer payroll taxes related to stockreleases and option exercises and one-time founder funded bonus pay-outs, if any. We disclose Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA, which are non-GAAPmeasures, because we believe these metrics assist investors and analysts in comparing our performance across reportingperiods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.We believe these metrics are commonly used in the financial community to aid in comparisons of similar companies, andwe present them to enhance investors’ understanding of our operating performance and cash flows. Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA have limitations as analytical tools. Someof these limitations are: ·Adjusted EBITDA does not reflect our ongoing or future requirements for capital expenditures; ·Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; ·Adjusted EBITDA does not reflect our income tax expense or the cash requirement to pay our taxes; ·Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may haveto be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and ·Other companies in our industry may calculate Adjusted Gross Profit, Adjusted Recurring Gross Profit and AdjustedEBITDA differently than we do, limiting their usefulness as a comparative measure. 38 Table of ContentsAdditionally, stock-based compensation will continue to be an element of our overall compensation strategy, althoughwe exclude it from Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA as an expense whenevaluating our ongoing operating performance for a particular period. Because of these limitations, you should not consider Adjusted Gross Profit as an alternative to gross profit, AdjustedRecurring Gross Profit as an alternative to total recurring revenues, or Adjusted EBITDA as an alternative to net income(loss) or net cash provided by operating activities, in each case as determined in accordance with GAAP. We compensatefor these limitations by relying primarily on our GAAP results, and we use Adjusted Gross Profit, Adjusted RecurringGross Profit and Adjusted EBITDA only as supplemental information. Directly comparable GAAP measures to Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDAare gross profit, total recurring revenues and net income (loss), respectively. We reconcile Adjusted Gross Profit,Adjusted Recurring Gross Profit and Adjusted EBITDA as follows: Year Ended June 30, 2013 2014 2015 2016 2017 (in thousands)Reconciliation from Gross Profit to Adjusted Gross Profit Gross profit $37,628 $53,593 $81,802 $132,616 $176,023Amortization of capitalized internal-use software costs 3,067 2,195 2,606 5,446 9,447Stock-based compensation expense and employer payroll taxesrelated to stock releases and option exercises — 920 2,818 2,967 3,802One-time founder funded bonus pay-outs — 321 — — —Adjusted Gross Profit $40,695 $57,029 $87,226 $141,029 $189,272 Year Ended June 30, 2013 2014 2015 2016 2017 (in thousands)Reconciliation from Total Recurring Revenues to AdjustedRecurring Gross Profit Total recurring revenues $72,768 $101,944 $144,069 $220,104 $288,448Cost of recurring revenues (28,863) (37,319) (46,366) (66,131) (85,399)Recurring gross profit 43,905 64,625 97,703 153,973 203,049Amortization of capitalized internal-use software costs 3,067 2,195 2,606 5,446 9,447Stock-based compensation expense and employer payroll taxesrelated to stock releases and option exercises — 496 1,567 1,765 2,329One-time founder funded bonus pay-outs — 142 — — —Adjusted Recurring Gross Profit $46,972 $67,458 $101,876 $161,184 $214,825 Year Ended June 30, 2013 2014 2015 2016 2017 (in thousands)Reconciliation from Net Income (Loss) to Adjusted EBITDA Net income (loss) $617 $(7,110) $(13,972) $(3,851) $6,718Interest expense 192 67 — — —Income tax expense (benefit) (602) 255 105 177 651Depreciation and amortization expense 5,571 6,336 8,609 13,873 21,027EBITDA 5,778 (452) (5,258) 10,199 28,396Stock-based compensation expense and employer payroll taxes relatedto stock releases and option exercises 523 4,929 13,496 18,199 27,794One-time founder funded bonus pay-outs — 971 — — —Adjusted EBITDA $6,301 $5,448 $8,238 $28,398 $56,190(2)Working capital is defined as total current assets minus total current liabilities.39 Table of Contents Item 7. 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.” Suchforward-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 ofvarious factors, including those discussed below and under Part I, Item 1A. “Risk Factors.” Overview We are a cloud-based provider of payroll and human capital management or HCM software solutions for medium-sized organizations, which we define as those having between 20 and 1,000 employees. Our comprehensive and easy-to-usesolutions enable our clients to manage their workforces more effectively. Our solutions help drive strategic human capitaldecision-making and improve employee engagement by enhancing the HR, payroll and finance capabilities of our clients. Effective management of human capital is a core function in all organizations and requires a significantcommitment of resources. Medium-sized organizations operating without the infrastructure, expertise or personnel of largerenterprises are uniquely pressured to manage their human capital effectively. Our solutions were specifically designed to meet the payroll and HCM needs of medium-sized organizations. Wedesigned our cloud-based platform to provide a unified suite of applications using a multi-tenant architecture. Our solutionsare highly flexible and configurable and feature a modern, intuitive user experience. Our platform offers automated dataintegration with over 200 related third-party systems, such as 401(k), benefits and insurance provider systems. Our Paylocity Web Pay product is our core payroll solution and was the first of our current offerings introduced intothe market. We believe payroll is the most critical system of record for medium-sized organizations and an essential gatewayto other HCM functionality. We have invested in, and we intend to continue to invest in, research and development toexpand our product offerings and advance our platform. We believe there is a significant opportunity to grow our business by increasing our number of clients and we intendto invest in our business to achieve this purpose. We market and sell our solutions primarily through our direct sales force.We have increased our sales and marketing expenses as we have added sales representatives and related sales and marketingpersonnel. We intend to continue to grow our sales and marketing organization across new and existing geographicterritories. In addition to growing our number of clients, we intend to grow our revenue over the long term by increasing thenumber and quality of products that clients purchase from us. To do so, we must continue to enhance and grow the number ofsolutions we offer to advance our platform. We believe that delivering a positive service experience is an essential element of our ability to sell our solutionsand retain our clients. We seek to develop deep relationships with our clients through our unified service model, which hasbeen designed to meet the service needs of medium-sized organizations. We expect to continue to invest in and grow ourimplementation and client service organization as our client base grows. We believe we have the opportunity to continue to grow our business over the long term, and to do so we haveinvested, and intend to continue to invest, across our entire organization. These investments include increasing the numberof personnel across all functional areas, along with improving our solutions and infrastructure to support our growth. Thetiming and amount of these investments vary based on the rate at which we add new clients, add new personnel and scale ourapplication development and other activities. Many of these investments will occur in advance of experiencing any directbenefit from them, which will make it difficult to determine if we are effectively allocating our resources. We expect theseinvestments to increase our costs on an absolute basis, but as we grow our number of clients and our related revenues, weanticipate that we will gain economies of scale and increased operating leverage. As a result, we expect our gross andoperating margins will improve over the long term. As our business has grown, we have become increasingly subject to the risks arising from adverse changes indomestic and global economic conditions. If general economic conditions were to deteriorate, including declines in40 Table of Contentsprivate sector employment growth and business productivity, increases in the unemployment rate and changes in interestrates, we may experience delays in our sales cycles, increased pressure from prospective customers to offer discounts andincreased pressure from existing customers to renew expiring recurring revenue agreements for lower amounts. Our interestincome on funds held for clients continues to be adversely impacted by historically low interest rates. Our operating subsidiary Paylocity Corporation was incorporated in July 1997 as an Illinois corporation. InNovember 2013, we formed Paylocity Holding Corporation, a Delaware corporation, of which Paylocity Corporation is awholly owned subsidiary. Paylocity Holding Corporation had no operations prior to the restructuring. All of our businessoperations, excluding interest earned on certain cash holdings and expenses associated with certain secondary stockofferings, have historically been, and are currently, conducted by Paylocity Corporation, and the financial results presentedherein are entirely attributable to the results of its operations. Key Metrics We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure ourperformance, identify trends affecting our business, formulate financial projections and make strategic decisions. Recurring Revenue Growth Our recurring revenue model and high annual revenue retention rates provide significant visibility into our futureoperating results and cash flow from operations. This visibility enables us to better manage and invest in our business.Recurring revenue, which is comprised of recurring fees and interest income on funds held for clients, increased from$144.1 million in fiscal 2015 to $220.1 million in fiscal 2016, representing a 53% year-over-year increase. Recurringrevenue increased from $220.1 million in fiscal 2016 to $288.4 million in fiscal 2017, representing a 31% year-over-yearincrease. Recurring revenue was positively impacted by the launch in fiscal 2016 of our Affordable Care Act (“ACA”)compliance solution, which had significant penetration beginning in the second quarter of fiscal 2016. The impact on year-over-year revenue growth of our ACA compliance solution was the highest in the first quarter of fiscal 2017. Recurringrevenue represented 94%, 95% and 96% of total revenue in fiscal 2015, 2016 and 2017, respectively. Client Count Growth We believe there is a significant opportunity to grow our business by increasing our number of clients. We haveincreased our number of clients from approximately 10,350 as of June 30, 2015 to approximately 14,550 as of June 30, 2017,representing a compound annual growth rate of approximately 19%. The table below sets forth our client count for theperiods indicated, rounded to the nearest fifty. Year Ended June 30, 2015 2016 2017Client Count 10,350 12,500 14,550 The rate at which we add clients is highly variable period-to-period and highly seasonal as many clients switchsolutions during the first calendar quarter of each year. Although many clients have multiple divisions, segments orlocations, we only count such clients once for these purposes. Annual Revenue Retention Rate Our annual revenue retention rate has been in excess of 92% during each of the past three fiscal years. We calculateour annual revenue retention rate as our total revenue for the preceding 12 months, less the annualized value of revenue lostduring the preceding 12 months, divided by our total revenue for the preceding 12 months. We calculate the annualizedvalue of revenue lost by summing the recurring fees paid by lost clients over the previous twelve months prior to theirtermination if they have been a client for a minimum of twelve months. For those lost clients who became clients within thelast twelve months, we sum the recurring fees for the period that they have been a client and then41 Table of Contentsannualize the amount. We exclude interest income on funds held for clients from the revenue retention calculation. Webelieve that our annual revenue retention rate is an important metric to measure overall client satisfaction and the generalquality of our product and service offerings. Recurring Fees From New Clients We calculate recurring fees from new clients as the percentage of year-to-date recurring fees from all clients on oursolutions, which had not been on or used any of our solutions for a full year as of the start of the current fiscal year. Webelieve recurring fees from new clients is an important metric to measure the expansion of our existing client base as well asthe growth in our client base. Our recurring fees from new clients was 45% for both fiscal 2015 and fiscal 2016 and 40% forfiscal 2017. Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA We disclose Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA because we use them toevaluate our performance, and we believe Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDAassist in the comparison of our performance across reporting periods by excluding certain items that we do not believe areindicative of our core operating performance. We believe these metrics are used in the financial community, and we present itto enhance investors’ understanding of our operating performance and cash flows. Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA are not measurements of financialperformance under generally accepted accounting principles in the United States, or GAAP, and you should not considerAdjusted Gross Profit as an alternative to gross profit, Adjusted Recurring Gross Profit as an alternative to total recurringrevenues, or Adjusted EBITDA as an alternative to net income (loss) or cash provided by (used in) operating activities, ineach case as determined in accordance with GAAP. In addition, our definition of Adjusted Gross Profit, Adjusted RecurringGross Profit and Adjusted EBITDA may be different than the definition utilized for similarly-titled measures used by othercompanies. We define Adjusted Gross Profit as gross profit before amortization of capitalized internal-use software costs, stock-based compensation expense and employer payroll taxes related to stock releases and option exercises. We define AdjustedRecurring Gross Profit as total recurring revenues after cost of recurring revenues and before amortization of capitalizedinternal-use software costs, stock-based compensation expense and employer payroll taxes related to stock releases andoption exercises. We define Adjusted EBITDA as net income (loss) before interest expense, income tax expense, depreciationand amortization expense, stock-based compensation expense and employer payroll taxes related to stock releases andoption exercises. The table below sets forth our Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDAfor the periods presented. Year Ended June 30, 2015 2016 2017 (in thousands)Adjusted Gross Profit $87,226 $141,029 $189,272Adjusted Recurring Gross Profit $101,876 $161,184 $214,825Adjusted EBITDA $8,238 $28,398 $56,190 For a further discussion of Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA, includinga reconciliation of Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA to GAAP, see Part II, Item 6:“Consolidated Selected Financial Data.” 42 Table of ContentsBasis of Presentation Revenues Recurring Fees We derive the majority of our revenues from recurring fees attributable to our cloud-based payroll and HCMsoftware solutions. Recurring fees for each client generally include a base fee in addition to a fee based on the number ofclient employees and the number of products a client uses. We also charge fees attributable to our preparation of W-2documents and annual required filings on behalf of our clients. Over the past three years, our client size has been on averageover 100 employees. We derive revenue from a client based on the solutions purchased by the client, the number of clientemployees as well as the amount, type and timing of services provided with respect to those client employees. As such, thenumber of client employees on our system is not a good indicator of our financial results in any period. Recurring feesattributable to our cloud-based payroll and HCM solutions accounted for approximately 93%, 94% and 95% of our totalrevenues during the years ended June 30, 2015, 2016 and 2017, respectively. Our agreements with clients do not have a specified term and are generally cancellable by the client on 60 days’ orless notice. Our agreements do not include general rights of return and do not provide clients with the right to takepossession of the software supporting the services being provided. We recognize recurring fees in the period in whichservices are provided and when collection of fees is reasonably assured and the amount of fees is fixed or determinable. 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 taxesin advance of remittance to employees and taxing authorities. Prior to remittance to employees and taxing authorities, weearn interest on these funds through financial institutions with which we have automated clearing house, or ACH,arrangements. Implementation Services and Other Implementation services and other revenues primarily consist of implementation fees charged to new clients forprofessional services provided to implement and configure our payroll and HCM solutions. Implementations of our payrollsolutions typically require only three to four weeks at which point the new client’s payroll is first run using our solution, ourimplementation services are deemed completed, and we recognize the related revenue. We implement additional HCMproducts as requested by clients and leverage the data within our payroll solution to accelerate our implementationprocesses. Implementation services and other revenues may fluctuate significantly from quarter to quarter based on thenumber of new clients, pricing and the product utilization. Cost of Revenues Cost of Recurring Revenues Cost of recurring revenues is generally expensed as incurred and includes costs to provide our payroll and otherHCM solutions primarily consisting of employee-related expenses, including wages, stock-based compensation, bonuses andbenefits, relating to the provision of ongoing client support, payroll tax filing and distribution of printed checks and othermaterials. These costs also include third-party reseller costs, delivery costs, computing costs and amortization of capitalizedinternal-use software costs, as well as bank fees associated with client fund transfers. We expect to realize cost efficienciesover the long term as our business scales, resulting in improved operating leverage and increased margins. We capitalize a portion of our internal-use software costs, which are then all amortized as a cost of recurringrevenues. We amortized $2.6 million, $5.4 million and $9.4 million of capitalized internal-use software costs in fiscal 2015, 2016 and 2017, respectively. 43 Table of ContentsCost of Implementation Services and Other Cost of implementation services and other consists primarily of employee-related expenses, including wages, stock-based compensation, bonuses and benefits involved in the implementation of our payroll and other HCM solutions for newclients. Implementation costs are generally fixed in the short-term and exceed associated implementation revenue charged toeach client. We intend to grow our business through acquisition of new clients, and doing so will require increased personnelto implement our solutions. Therefore, our cost of implementation services and other is expected to increase in absolutedollars for the foreseeable future. Operating Expenses Sales and Marketing Sales and marketing expenses consist primarily of employee-related expenses for our direct sales and marketingstaff, including wages, commissions, stock-based compensation, bonuses and benefits, marketing expenses and other relatedcosts. Commissions are primarily earned and recognized in the month when implementation is complete and the client firstutilizes a service and are typically paid within two months after the start of service. Bonuses paid to sales staff for attainmentof certain performance criteria are accrued in the fiscal year in which they are earned and are subsequently paid annually inthe first fiscal quarter of the following year. We will seek to grow our number of clients for the foreseeable future and therefore our sales and marketing expenseis 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 anddevelopment and product management staff, including wages, stock-based compensation, bonuses and benefits. Additionalexpenses include costs related to the development, maintenance, quality assurance and testing of new technologies andongoing refinement of our existing solutions. Research and development expenses, other than internal-use software costsqualifying for capitalization, are expensed as incurred. We capitalize a portion of our development costs related to internal-use software. The timing of our capitalizeddevelopment projects may affect the amount of development costs expensed in any given period. The table below sets forththe amounts of capitalized and expensed research and development expenses for each of fiscal 2015, 2016 and 2017. Year Ended June 30, 2015 2016 2017 (in thousands)Capitalized portion of research and development $4,870 $9,516 $15,414Expensed portion of research and development 19,864 26,736 29,098Total research and development $24,734 $36,252 $44,512 We expect to grow our research and development efforts as we continue to broaden our product offerings and extendour technological leadership by investing in the development of new technologies and introducing them to new and existingclients. We expect research and development expenses to continue to increase in absolute dollars but to vary as a percentageof total revenue on a period-to-period basis. General and Administrative General and administrative expenses consist primarily of other employee-related costs, including wages, stock-based compensation, bonuses and benefits for our administrative, finance, accounting, and human resources departments.Additional expenses include consulting and professional fees, occupancy costs, insurance and other corporate expenses.44 Table of Contents We expect our general and administrative expenses to continue to increase in absolute dollars as a result of ouroperations as a public company. These expenses include costs associated with compliance with regulations governing publiccompanies, costs of directors’ and officers’ liability insurance and professional services expenses. Other Income (Expense) Other income (expense) generally consists of interest income related to interest received on our cash and cashequivalents, net of losses on disposals of property and equipment. Results of Operations The following table sets forth our statements of operations data for each of the periods indicated. Year Ended June 30, 2015 2016 2017 (in thousands)Consolidated Statements of Operations Data: Revenues: Recurring fees $142,168 $217,416 $284,817Interest income on funds held for clients 1,901 2,688 3,631Total recurring revenues 144,069 220,104 288,448Implementation services and other 8,629 10,597 11,562Total revenues 152,698 230,701 300,010Cost of revenues: Recurring revenues 46,366 66,131 85,399Implementation services and other 24,530 31,954 38,588Total cost of revenues 70,896 98,085 123,987Gross profit 81,802 132,616 176,023Operating expenses: Sales and marketing 43,035 61,832 77,506Research and development 19,864 26,736 29,098General and administrative 32,824 47,598 62,123Total operating expenses 95,723 136,166 168,727Operating income (loss) (13,921) (3,550) 7,296Other income (expense) 54 (124) 73Income (loss) before income taxes (13,867) (3,674) 7,369Income tax expense 105 177 651Net income (loss) $(13,972) $(3,851) $6,718 45 Table of ContentsThe following table sets forth our statements of operations data as a percentage of total revenue for each of theperiods indicated. Year Ended June 30, 2015 2016 2017 Consolidated Statements of Operations Data: Revenues: Recurring fees 93% 94% 95%Interest income on funds held for clients 1% 1% 1%Total recurring revenues 94% 95% 96%Implementation services and other 6% 5% 4%Total revenues 100% 100% 100%Cost of revenues: Recurring revenues 30% 29% 28%Implementation services and other 16% 14% 13%Total cost of revenues 46% 43% 41%Gross profit 54% 57% 59%Operating expenses: Sales and marketing 28% 27% 26%Research and development 13% 11% 10%General and administrative 22% 21% 21%Total operating expenses 63% 59% 57%Operating income (loss) (9)% (2)% 2%Other income (expense) 0% 0% 0%Income (loss) before income taxes (9)% (2)% 2%Income tax expense 0% 0% 0%Net income (loss) (9)% (2)% 2% Comparison of Fiscal Years Ended June 30, 2015, 2016 and 2017 Revenues($ in thousands) Change from Change from Year Ended June 30, 2015 to 2016 2016 to 2017 2015 2016 2017 $ % $ % Recurring fees $142,168 $217,416 $284,817 $75,248 53% $67,401 31%Percentage of total revenues 93% 94% 95% Interest income on funds held for clients $1,901 $2,688 $3,631 $787 41% $943 35%Percentage of total revenues 1% 1% 1% Implementation services and other $8,629 $10,597 $11,562 $1,968 23% $965 9%Percentage of total revenues 6% 5% 4% Recurring Fees Recurring fees for the year ended June 30, 2017 increased by $67.4 million, or 31%, to $284.8 million from$217.4 million for the year ended June 30, 2016. Recurring fees increased primarily as a result of incremental revenues fromnew and existing clients, including revenue related to our ACA compliance solution offered to new and existing clients,which we launched in fiscal 2016 and experienced significant penetration beginning in the second quarter of fiscal 2016.Our client count at June 30, 2017 increased by 16% to approximately 14,550 from approximately 12,500 at June 30, 2016. 46 Table of ContentsRecurring fees for the year ended June 30, 2016 increased by $75.2 million, or 53%, to $217.4 million from$142.2 million for the year ended June 30, 2015. Recurring fees increased primarily as a result of incremental revenues fromnew and existing clients, including revenue related to our ACA compliance solution offered to new and existing clients,which we launched in fiscal 2016. Our client count at June 30, 2016 increased by 21% to approximately 12,500 fromapproximately 10,350 at June 30, 2015. Interest Income on Funds Held for Clients Interest income on funds held for clients for the year ended June 30, 2017 increased by $0.9 million, or 35%, to$3.6 million from $2.7 million for the year ended June 30, 2016. Interest income increased primarily as a result of anincreased average daily balance of funds held due to the addition of new clients to our client base. Interest income on funds held for clients for the year ended June 30, 2016 increased by $0.8 million, or 41%, to$2.7 million from $1.9 million for the year ended June 30, 2015. Interest income increased primarily as a result of anincreased average daily balance of funds held due to the addition of new clients to our client base. Implementation Services and Other Implementation services and other revenue for the year ended June 30, 2017 increased by $1.0 million, or 9%, to$11.6 million from $10.6 million for the year ended June 30, 2016. Implementation services and other revenue increasedprimarily as a result of an increase in the number of new clients during fiscal 2017 as compared to fiscal 2016. Implementation services and other revenue for the year ended June 30, 2016 increased by $2.0 million, or 23%, to$10.6 million from $8.6 million for the year ended June 30, 2015. Implementation services and other revenue increasedprimarily as a result of an increase in the number of new clients during fiscal 2016 as compared to fiscal 2015. Cost of Revenues($ in thousands) Change from Change from Year Ended June 30, 2015 to 2016 2016 to 2017 2015 2016 2017 $ % $ % Cost of recurring revenues $46,366 $66,131 $85,399 $19,765 43% $19,268 29%Percentage of recurring revenues 32% 30% 30% Recurring gross margin 68% 70% 70% Cost of implementation services and other $24,530 $31,954 $38,588 $7,424 30% $6,634 21%Percentage of implementation servicesand other 284% 302% 334% Implementation gross margin (184)% (202)% (234)% Cost of Recurring Revenues Cost of recurring revenues for the year ended June 30, 2017 increased by $19.3 million, or 29%, to $85.4 millionfrom $66.1 million for the year ended June 30, 2016. Cost of recurring revenues increased primarily as a result of thecontinued growth of our business, in particular $8.8 million in additional employee-related costs resulting from additionalpersonnel to provide services to new and existing clients, $5.9 million in delivery and other processing-related fees and $4.0million in increased internal-use software amortization. Recurring gross margin was 70% in both fiscal 2016 and 2017. Cost of recurring revenues for the year ended June 30, 2016 increased by $19.8 million, or 43%, to $66.1 millionfrom $46.4 million for the year ended June 30, 2015. Cost of recurring revenues increased primarily as a result of thecontinued growth of our business, in particular $10.8 million in additional employee-related costs resulting from additionalpersonnel to provide services to new and existing clients, $8.3 million in delivery and other processing-related fees and $2.8million in increased internal-use software amortization, partially offset by a $2.3 million decrease47 Table of Contentsin reseller expenses primarily due to our acquisition of our remaining reseller during fiscal 2015. Recurring gross marginincreased by 2% from 68% in fiscal 2015 to 70% in fiscal 2016 primarily due to a 2% reduction in reseller expenses as apercentage of total recurring revenue. Cost of Implementation Services and Other Cost of implementation services and other for the year ended June 30, 2017 increased by $6.6 million, or 21%, to$38.6 million from $32.0 million for the year ended June 30, 2016. Cost of implementation services and other increasedprimarily due to an increase in new clients during fiscal 2017, and a corresponding increase of $5.6 million in employee-related costs to implement our solutions for new and existing clients. Cost of implementation services and other for the year ended June 30, 2016 increased by $7.4 million, or 30%, to$32.0 million from $24.5 million for the year ended June 30, 2015. Cost of implementation services and other increasedprimarily due to an increase in new clients during fiscal 2016, and a corresponding increase of $7.5 million in employee-related costs to implement our solutions for new and existing clients. Operating Expenses($ in thousands) Sales and Marketing Change from Change from Year Ended June 30, 2015 to 2016 2016 to 2017 2015 2016 2017 $ % $ % Sales and marketing $43,035 $61,832 $77,506 $18,797 44% $15,674 25%Percentage of total revenues 28% 27% 26% Sales and marketing expenses for the year ended June 30, 2017 increased by $15.7 million, or 25%, to $77.5 millionfrom $61.8 million for the year ended June 30, 2016. The increase in sales and marketing expenses in fiscal 2017 wasprimarily the result of $12.0 million of additional employee-related costs from the expansion of our sales team by 81personnel (including management, sales engineers, direct sales, sales administration and sales lead generation support). Theincrease was also attributable to $1.8 million of stock-based compensation associated with our equity incentive plan. Sales and marketing expenses for the year ended June 30, 2016 increased by $18.8 million, or 44%, to $61.8 millionfrom $43.0 million for the year ended June 30, 2015. The increase in sales and marketing expenses in fiscal 2016 wasprimarily the result of $15.6 million of additional employee-related costs from the expansion of our sales force by 75personnel (including management, sales engineers, direct sales and sales administration), our sales lead generation group by14 personnel and our marketing team by 3 personnel. The increase was also attributable to $1.2 million of stock-basedcompensation associated with our equity incentive plan. Research and Development Change from Change from Year Ended June 30, 2015 to 2016 2016 to 2017 2015 2016 2017 $ % $ % Research and development $19,864 $26,736 $29,098 $6,872 35% $2,362 9%Percentage of total revenues 13% 11% 10% Research and development for the year ended June 30, 2017 increased by $2.4 million, or 9%, to $29.1 million from$26.7 million for the year ended June 30, 2016. Research and development costs increased in fiscal 2017 primarily due to$7.2 million of additional employee-related expenses related to 49 additional development personnel and $1.0 million ofadditional stock-based compensation associated with our equity incentive plan, partially offset by higher year-over-yearcapitalized internal-use software costs of $6.1 million. 48 Table of ContentsResearch and development for the year ended June 30, 2016 increased by $6.9 million, or 35%, to $26.7 millionfrom $19.9 million for the year ended June 30, 2015. Research and development costs increased in fiscal 2016 primarily dueto $9.9 million of additional employee-related expenses related to 54 additional development personnel, partially offset byhigher year-over-year capitalized internal-use software costs of $4.2 million. General and Administrative Change from Change from Year Ended June 30, 2015 to 2016 2016 to 2017 2015 2016 2017 $ % $ % General and administrative $32,824 $47,598 $62,123 $14,774 45% $14,525 31%Percentage of total revenues 22% 21% 21% General and administrative expenses for the year ended June 30, 2017 increased by $14.5 million, or 31%, to$62.1 million from $47.6 million for the year ended June 30, 2016. General and administrative expenses increased primarilyas a result of $6.3 million of additional stock-based compensation costs, of which $2.9 million is related to modified equityawards as explained in Note 13 of the Notes to the Consolidated Financial Statements included in Part II, Item 8: “FinancialStatements and Supplementary Data”, $3.9 million of increased occupancy costs incurred as a result of our requirement foradditional office space and $3.8 million of additional employee-related expenses including the addition of 14 personnel. General and administrative expenses for the year ended June 30, 2016 increased by $14.8 million, or 45%, to$47.6 million from $32.8 million for the year ended June 30, 2015. General and administrative expenses increased primarilyas a result of $6.7 million of additional employee-related expenses relating to 36 additional personnel, $2.9 million ofadditional stock-based compensation costs, $1.5 million of increased occupancy costs incurred as a result of our requirementfor additional office space and $1.3 million of increased professional services fees. Other Income (Expense) Change from Change from Year Ended June 30, 2015 to 2016 2016 to 2017 2015 2016 2017 $ % $ % Other income (expense) $54 $(124) $73 $(178) * $197 * Percentage of total revenues 0% 0% 0% *Not Meaningful Other income (expense) for the year ended June 30, 2017 increased by $0.2 million as compared to the year endedJune 30, 2016. Other income (expense) for the year ended June 30, 2017 primarily consists of interest income earned on ourcash and cash equivalents, partially offset by loss on the disposal of property and equipment. Other income (expense) for the year ended June 30, 2016 decreased by $0.2 million as compared to the year endedJune 30, 2015. Other income (expense) for the year ended June 30, 2016 primarily consists of loss on the disposal of propertyand equipment, partially offset by interest income earned on our cash and cash equivalents. Income Tax Expense Change from Change from Year Ended June 30, 2015 to 2016 2016 to 2017 2015 2016 2017 $ % $ % Effective tax rate * * * Income tax expense $105 $177 $651 $72 69% $474 268% Percentage of total revenues 0% 0% 0% *Not Meaningful49 Table of Contents Income tax expense for the year ended June 30, 2017 was higher due to the generation of net income for fiscal 2017as compared to the year ended June 30, 2016. Income tax expense for the year ended June 30, 2016 was not materially different as compared to the year endedJune 30, 2015. See Note 11 of the Notes to Consolidated Financial Statements included in Part II, Item 8: “Financial Statements andSupplementary Data” of this Annual Report on Form 10-K for further details on the valuation allowance and a reconciliationof the U.S. federal statutory rate to the effective tax rate. Critical Accounting Policies and Significant Judgments and Estimates In preparing our financial statements and accounting for the underlying transactions and balances in accordancewith GAAP, we apply various accounting policies that require our management to make estimates, judgments andassumptions that affect the amounts reported in our financial statements. We consider the policies discussed below as criticalto understanding our financial statements, as their application places the most significant demands on management’sjudgment. Management bases its estimates, judgments and assumptions on historical experience, current economic andindustry conditions and on various other factors deemed to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from othersources. Because the use of estimates is an integral part of the financial reporting process, actual results could differ and suchdifferences could be material. Revenue Recognition We derive revenues predominantly from recurring revenues associated with our cloud-based payroll and HCMsoftware applications and one-time service fees for implementation of our solutions. Our agreements with clients do notinclude general rights of return and do not provide clients with the right to take possession of the software supporting theservices being provided. As such, revenue is recognized as services are performed. We recognize revenue when all of the following criteria are achieved: ·There is persuasive evidence of an agreement;·The service has been provided to the client;·The amount of fees to be paid by the client is fixed or determinable; and·Collection of the fees is reasonably assured. For arrangements with multiple-elements, we recognize revenues in accordance with Accounting Standards Update(ASU) 2009-13, Multiple-Deliverable Revenue Arrangements. For each agreement, we evaluate whether the individualdeliverables qualify as separate units of accounting. If one or more of the deliverables does not have standalone value upondelivery, the deliverables that do not have standalone value are generally combined and treated as a single unit ofaccounting. Revenue for arrangements treated as a single unit of accounting is generally recognized within the same monththat the services are rendered given that the agreements are cancellable with 60 days’ or less notice. In determining whether revenues from implementation services can be accounted for separately from recurringrevenues, we consider the nature of the implementation services and the availability of the implementation services fromother vendors. We established standalone value for implementation primarily due to the historical activity of third-partyvendors that performed these services and as such, account for such implementation services separate from the recurringrevenues. If we determine that the services have standalone value upon delivery, we account for each separately and revenuesare recognized as the services are delivered with allocation of consideration based on the relative selling price method. Thatmethod requires the selling price of each element in a multiple deliverable arrangement to be based on, in50 Table of Contentsdescending order: (i) vendor- specific objective evidence of fair value, or VSOE, (ii) third-party evidence of fair value, orTPE, or (iii) management’s best estimate of the selling price, or BESP. We are not able to demonstrate VSOE of selling price with respect to our recurring fees paid for our solutionsbecause the deliverables are sold across an insufficiently narrow range of prices on a stand-alone basis. We are also not ableto demonstrate TPE for subscription fees because no third-party offerings are reasonably comparable to our product offerings.We thus establish BESP by service offering, requiring the use of significant estimates and judgment. To determine BESP, weconsider numerous factors, including the nature of the deliverables themselves, the geography for the sale, internal costs, andpricing and discounting practices utilized by our direct sales force. Arrangement consideration is allocated to eachdeliverable based on the established BESP and subject to the limitation that because the arrangements are cancellable with60 days’ or less notice, recurring revenue is not allocated to any deliverable until the consideration has been earned,typically with each payroll cycle or monthly, depending on the service. Property and Equipment and Long-Lived Assets We state property and equipment at cost. We calculate depreciation on property and equipment using a straight-linemethod over the estimated useful lives of the assets, generally three to seven years for most classes of assets, or over the termof the related lease for leasehold improvements. We recognized depreciation expense of $5.1 million, $6.9 million and $10.1million during the years ended June 30, 2015, 2016, and 2017, respectively. We review long-lived assets, such as property and equipment, for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-livedasset or asset group be tested for possible impairment, we first compare the undiscounted cash flows expected to be generatedby that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is notrecoverable on an undiscounted cash flow basis, we recognize impairment to the extent that the carrying amount exceeds itsfair value. We determine fair value through various valuation techniques including discounted cash flow models, quotedmarket values and third-party independent appraisals, as considered necessary. There were no impairments of long-livedassets during the years ended June 30, 2015, 2016 or 2017. Capitalized Internal-Use Software Costs We apply ASC 350-40, Intangibles—Goodwill and Other—Internal-Use Software, to the accounting for costs ofinternal-use software. Software development costs are capitalized when application development begins, it is probable thatthe project will be completed, and the software will be used as intended. Costs associated with preliminary project stageactivities, training, maintenance and all other post implementation stage activities are expensed as incurred. We alsocapitalize certain costs related to specific upgrades and enhancements when it is probable the expenditures will result insignificant additional functionality. The capitalization policy provides for the capitalization of certain payroll costs foremployees who are directly associated with developing internal-use software as well as certain external direct costs.Capitalized employee costs are limited to the time directly spent on such projects. Internal-use software is amortized on a straight-line basis, generally over a 24-month period. We evaluate the usefullives of these assets on an annual basis and test for impairments whenever events or changes in circumstances occur thatcould impact the recoverability of these assets. There were no impairments to capitalized internal-use software during theyears ended June 30, 2015, 2016 or 2017. We capitalized $4.9 million, $9.5 million, and $15.4 million of internal-usesoftware costs for the years ended June 30, 2015, 2016 and 2017, respectively, including stock-based compensation costs of$0.7 million, $1.1 million and $1.8 million in the years ended June 30, 2015, 2016 and 2017, respectively. We amortized$2.6 million, $5.4 million, and $9.4 million of capitalized internal-use software costs for the years ended June 30, 2015, 2016 and 2017, respectively. In fiscal 2015, fiscal 2016 and fiscal 2017, we developed significant additional functionalityin several of our applications. This development resulted in an increase in capitalized internal-use software costs in fiscal2017 as compared to fiscal 2016 and in fiscal 2016 as compared to fiscal 2015. 51 Table of ContentsGoodwill and Intangible Assets Goodwill is an asset representing the future economic benefits arising from other assets acquired in a businesscombination that are not individually identified and separately recognized. We have recorded goodwill in connection withthe acquisitions of BFKMS, Inc. and Synergy Payroll LLC. Goodwill is not amortized, but instead is tested for impairment atleast annually. ASU 2011-08, Testing Goodwill for Impairment provides an entity the option to perform a qualitativeassessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carryingamount prior to performing the two-step impairment test. If the estimated fair value of a reporting unit, including goodwill, isless than its carrying amount, the two-step goodwill impairment test is required. Otherwise, no further analysis is required. If the two-step goodwill impairment test is required, the fair value of the reporting unit is compared with its carryingamount, including goodwill. If the fair value of the reporting unit is less than its carrying amount, an indication of goodwillimpairment exists for the reporting unit. In the second step, an impairment loss is recognized for any excess of the carryingamount of the reporting unit’s goodwill over the implied fair value of the goodwill. The implied fair value of goodwill isdetermined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and theresidual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unitis determined using a discounted cash flow analysis. In the event the fair value of the reporting unit exceeds its carryingamount, step two is not performed. We perform our annual impairment review of goodwill in our fiscal fourth quarter or when a triggering event occursbetween annual impairment tests. Based on our qualitative assessments over our single reporting segment, we did notrecognize any impairment for fiscal year 2015, 2016 or 2017. Intangible assets are comprised primarily of client list acquisitions and are reported net of accumulated amortizationon the consolidated balance sheets. Client relationships use the straight-line method of amortization over an acceleratednine-year time frame, while the non-solicitation agreements uses the straight-line method of amortization over two to threeyear life of the agreements. Amortization expense associated with our intangible assets was $0.9 million during the yearended June 30, 2015 and $1.5 million during the years ended June 30, 2016 and 2017. We test intangible assets for potentialimpairment when events or changes in circumstances indicate that the carrying value of such assets may not berecoverable. There were no such events or changes in circumstances during the years ended June 30, 2015, 2016 or 2017. Income Taxes We account for federal income taxes under the asset and liability method. Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred taxassets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change intax rates is recognized in income in the period that includes the enactment date. Deferred tax assets may be reduced by a valuation allowance to the extent we determine it is more likely than notthat some portion or all of the deferred tax assets will not be realized. The valuation of deferred tax assets requires judgmentin assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returnsand future profitability. Our accounting for deferred tax consequences represents the best estimate of those future events.Changes in current estimates, due to unanticipated events or otherwise, could have an adverse impact on our financialcondition and results of operations. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to thelikelihood of realization of the deferred tax assets. The weight given to positive and negative evidence is commensurate withthe extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regardingprojected future taxable income exclusive of reversing taxable temporary differences to outweigh objective52 Table of Contentsnegative evidence of recent financial reporting losses. Cumulative losses in recent years are significant negative evidencethat is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained.Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized.Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Stock-Based Compensation We maintain a 2008 Equity Incentive Plan (the “2008 Plan”) and a 2014 Equity Incentive Plan (the “2014 Plan”)pursuant to which we have issued options to purchase shares of our common stock and grants of restricted stock awards toemployees, officers, directors and consultants. The 2014 Plan serves as the successor to the 2008 Plan and permits thegranting of options to purchase common stock and other equity incentives at the discretion of the compensation committeeof our board of directors. We will not grant any additional awards under our 2008 Plan, though our 2008 Plan will continueto govern the terms and conditions of all outstanding equity awards granted under the 2008 Plan. As of June 30, 2017, options to purchase 2.8 million shares of our common stock were outstanding, 1.5million restricted stock units were outstanding and 8.2 million shares of our common stock were reserved for future grant. The following table presents data related to stock options granted on the dates indicated: Aug. 18, Aug. 17, 2014 2015 Options granted 321,700 149,000 Fair value of stock $24.80 $35.28 Exercise price $24.80 $35.28 Fair value of option $11.14 $12.92 There were no options granted during fiscal 2017. Equity-classified awards are measured at the grant date fair valueof the award and expense is recognized, net of assumed forfeitures, on a straight-line basis over the requisite service periodfor each separately vesting portion of the award. We estimate grant date fair value using the Black-Scholes Option-PricingModel, or Black-Scholes, which requires the use of certain subjective assumptions. Below is a table of the key weighted-average assumptions used in the option valuation calculation for options issued on the dates indicated. Aug. 18, Aug. 17, 2014 2015 Valuation assumptions: Weighted average expected dividend yield — — Weighted average expected volatility 43.9% 34.0% Weighted average expected term (years) 6.25 6.25 Weighted average risk-free interest rate 1.91% 1.83% We use a dividend yield assumption of zero, as we have never paid regular cash dividends on our common stocksince our IPO and presently have no intention of paying any such cash dividends. Since our shares were not publicly tradedprior to March 2014, expected volatility is estimated based on the average historical volatility of similar entities withpublicly traded shares. The expected life represents the period of time the stock options are expected to be outstanding and isbased on the simplified method. Under the simplified method, the expected life of an option is presumed to be the mid-pointbetween the vesting date and the end of the contractual term. Given our limited history of trading as a public company, theCompany utilizes the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basisupon which to otherwise estimate the expected life of the stock options. The risk-free rate for the expected term of the optionis based on the U.S. Treasury yield curve at the date of grant. 53 Table of ContentsStock-based compensation expense was $13.2 million, $17.6 million and $26.7 million for the years endedJune 30, 2015, 2016 and 2017, respectively. If factors change and we employ different assumptions, stock-basedcompensation expense may differ from what we have recorded in the past. If there is a difference between the assumptionsused in determining stock-based compensation expense and the actual factors, which become known over time, we maychange the input factors used in determining stock-based compensation costs for future grants. These changes, if any, mayadversely impact our results of operations in the period such changes are made. We expect to continue to grant equity awardsin the future, and to the extent that we do, our actual stock-based compensation expense recognized in future periods willlikely increase. Based on the closing stock price on June 30, 2017 of $45.18, the aggregate intrinsic value of outstanding options topurchase shares of our common stock as of June 30, 2017 was $92.6 million, of which $84.8 million related to vested optionsand $7.8 million to unvested options. The aggregate intrinsic value of outstanding restricted stock units as of June 30, 2017was $65.8 million, of which all were unvested. Follow-On Offering In December 2014, the Company completed a follow-on offering in which it issued and sold 0.8 million shares ofcommon stock and existing shareholders sold 3.9 million shares of common stock at a public offering price of $26.25 pershare. The Company did not receive any proceeds from the sale of common stock by the existing shareholders. The Companyreceived net proceeds of $18.4 million after deducting underwriting discounts and commissions of $0.9 million and otheroffering expenses of $0.4 million. In January 2015, the underwriters for the Company’s follow-on offering exercised their option to purchase 0.4million additional shares from certain shareholders of the Company of the 0.7 million available as described in the finalprospectus filed with the Securities and Exchange Commission (“SEC”) in December 2014. The Company did not receiveany proceeds from the sale of common stock by the existing shareholders. Secondary Offering In September 2015, the Company completed a secondary offering in which its existing shareholders sold 3.7 millionshares of common stock at a public offering price of $29.75 per share. The Company did not receive any proceeds from thesale of common stock by the existing shareholders. In October 2015, the underwriters for the Company’s secondary offering exercised their option to purchase 0.6million additional shares from certain shareholders of the Company as described in the final prospectus filed with the SEC onSeptember 25, 2015. The Company did not receive any proceeds from the sale of common stock by the existingshareholders. Liquidity and Capital Resources Our primary liquidity needs are related to the funding of general business requirements, including working capitalrequirements, research and development, and capital expenditures. As of June 30, 2017, our principal source of liquidity was$103.5 million of cash and cash equivalents. In order to grow our business, we intend to increase our personnel and related expenses and to make significantinvestments in our platform, data centers and general infrastructure. The timing and amount of these investments will varybased on the rate at which we can add new clients and new personnel and the scale of our application development, datacenters and other activities. Many of these investments will occur in advance of our experiencing any direct benefit fromthem, which could negatively impact our liquidity and cash flows during any particular period and may make it difficult todetermine if we are effectively allocating our resources. However, we expect to fund our operations, capital expenditures andother investments principally with cash flows from operations, and to the extent that our liquidity needs exceed our cashfrom operations, we would look to our cash on hand and seek to establish borrowing capacity to satisfy those needs. 54 Table of ContentsOur cash flows from investing and financing activities are influenced by the amount of funds held for clients, whichvaries significantly from quarter to quarter. The balance of the funds we hold depends on our clients’ payroll calendar, andtherefore such balance changes from period to period in accordance with the timing with each payroll cycle. Funds held forclients are solely for the repayment of client fund obligations. We believe our current cash and cash equivalents and cash flow from operations will be sufficient to meet ourworking capital, capital expenditure and other investment requirements for at least the next 12 months. Cash Flows The following table sets forth data regarding cash flows for the periods indicated: Year Ended June 30, 2015 2016 2017 Net cash provided by operating activities $11,105 $32,993 $61,980 Cash flows from investing activities: Capitalized internal-use software costs (4,215) (8,391) (13,641) Purchases of property and equipment (9,020) (16,083) (21,338) Lease allowances used for tenant improvements — — (2,845) Payments for acquisitions (11,979) (483) — Net change in funds held for clients (173,958) (648,403) 297,163 Net cash provided by (used in) investing activities (199,172) (673,360) 259,339 Cash flows from financing activities: Net change in client fund obligations 173,958 648,403 (297,163) Proceeds from follow-on offering, net of issuance costs 18,367 — — Payments on initial public offering costs (75) — — Proceeds from exercise of stock options 247 137 34 Proceeds from employee stock purchase plan 1,773 2,991 3,677 Taxes paid related to net share settlement of equity awards (3,793) (5,926) (11,342) Excess tax benefits from stock-based compensation — — 447 Net cash provided by (used in) financing activities 190,477 645,605 (304,347) Net change in cash and cash equivalents $2,410 $5,238 $16,972 Operating Activities Net cash provided by operating activities was $11.1 million, $33.0 million and $62.0 million for the years endedJune 30, 2015, 2016 and 2017, respectively. The increase in net cash provided by operating activities from fiscal 2016 to fiscal 2017 as well as from fiscal 2015to fiscal 2016 was primarily due to improved operating results after adjusting for non-cash items, including stock-basedcompensation expense and depreciation and amortization expense. Investing Activities Net cash provided by (used in) investing activities was $(199.2) million, $(673.4) million and $259.3 million, forthe years ended June 30, 2015, 2016 and 2017, respectively. Changes in net cash provided by (used in) investing activities are significantly influenced by the amount of fundsheld for clients at the end of a reporting period. Changes in the amount of funds held for clients from period to period willvary substantially as a result of the timing of payroll and tax obligations due. Our payroll processing activities involves themovement of significant funds from the account of an employer to employees and relevant taxing authorities. During theyear ended June 30, 2017, we processed over $92 billion in payroll transactions. Though we debit a client’s account prior toany disbursement on its behalf, there is a delay between our payment of amounts due to employees and taxing and otherregulatory authorities and when the incoming funds from the client to cover these55 Table of Contentsamounts payable actually clear into our operating accounts. We currently have agreements with nine banks to execute ACHand wire transfers to support our client payroll and tax services. We believe we have sufficient capacity under these ACHarrangements to handle our transactions for the foreseeable future. Excluding the net change in funds held for clients, our net cash used in investing activities was $25.2 million,$25.0 million and $37.8 million, for the years ended June 30, 2015, 2016 and 2017, respectively. The increase in net cash used in investing activities of $932.7 million from fiscal 2016 to fiscal 2017 was primarilydue to the timing of receipts and disbursements of cash and cash equivalents held to satisfy client funds obligations of$945.6 million. This was partially offset by increased capitalized internal-use software costs of $5.3 million, increasedpurchases of property and equipment of $5.3 million and $2.8 million in lease allowances used for tenant improvements. Theincrease in net cash used in investing activities of $474.2 million from fiscal 2015 to fiscal 2016 was primarily due to thetiming of receipts and disbursements of cash and cash equivalents held to satisfy client funds obligations of $474.4 million,increased purchases of property and equipment by $7.1 million and increased capitalized internal-use software costs of $4.2million, partially offset by a $11.5 million reduction in payments for acquisitions. Financing Activities Net cash provided by (used in) financing activities was $190.5 million, $645.6 million and $(304.3) million for theyears ended June 30, 2015, 2016 and 2017, respectively. Excluding the net change in client fund obligations, net cashprovided by (used in) financing activities was $16.5 million, $(2.8) million and $(7.2) million, respectively. The decrease in net cash provided by (used in) financing activities of $(950.0) million from fiscal 2016 to fiscal2017 was primarily the result of a $945.6 million decrease in funds held for clients and a $5.4 million increase in taxes paidrelated to employees’ net share settlement of equity awards. The increase in net cash provided by financing activities of$455.1 million from fiscal 2015 to fiscal 2016 was primarily the result of a $474.4 million increase in funds held for clients, a$1.2 million increase in proceeds received as a result of employees’ purchase of shares under the employee stock purchaseplan, partially offset by $18.4 million of proceeds related to the follow-on offering, net of issuance costs during fiscal 2015and a $2.1 million increase in taxes paid related to employees’ net share settlement of equity awards. Contractual Obligations and Commitments Our principal commitments consist of operating lease obligations. The following table summarizes our contractualobligations at June 30, 2017: Payment Due By Fiscal Period 2023 and Total 2018 2019-2020 2021-2022 Thereafter Operating lease obligations $117,338 $7,025 $16,927 $18,225 $75,161 Unconditional purchase obligations 2,268 1,269 999 — — $119,606 $8,294 $17,926 $18,225 $75,161 Capital Expenditures We expect to increase capital spending as we continue to grow our business and expand and enhance our operatingfacilities, data centers and technical infrastructure. Future capital requirements will depend on many factors, including ourrate of sales growth. In the event that our sales growth or other factors do not meet our expectations, we may eliminate orcurtail capital projects in order to mitigate the impact on our use of cash. Capital expenditures were $9.0 million,$16.1 million and $21.3 million for the years ended June 30, 2015, 2016 and 2017, respectively, exclusive of capitalizedinternal-use software costs of $4.2 million, $8.4 million, and $13.6 million for the same periods, respectively. In fiscal 2017,we also purchased $2.8 million in capital expenditures for which we received reimbursement from lease allowances. 56 Table of ContentsOff-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or futureeffect 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 Consolidated Financial Statements included in Part II, Item 8: “FinancialStatements and Supplementary Data” for a discussion of recently issued accounting standards. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. We have operations solely in the United States and are exposed to market risks in the ordinary course of ourbusiness. These risks primarily include interest rate and certain exposure as well as risks relating to changes in the generaleconomic conditions in the United States. We have not used, nor do we intend to use, derivatives to mitigate the impact ofinterest rate or other exposure or for trading or speculative purposes. Interest Rate Risk Funds held for clients are held in interest-bearing accounts at financial institutions. As a result of our investingactivities, we are exposed to changes in interest rates that may materially affect our results of operations. In a falling rateenvironment, a decline in interest rates would decrease our interest income. Inflation Risk We do not believe that inflation has had a material effect on our business, financial condition or results ofoperations. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fullyoffset such higher costs through price increases. Our inability or failure to do so could harm our business, financial conditionand results of operations. Item 8. Financial Statements and Supplementary Data. The information required by this item is incorporated by reference to the consolidated financial statements andaccompanying notes set forth on pages F-1 through F-23 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Disclosure Controls and Procedures The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Actrefers to controls and procedures that are designed to ensure that information required to be disclosed by a company in thereports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the timeperiods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls andprocedures 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 requireddisclosure. Our management, with the participation of our Chief Executive Officer and acting Chief Financial Officer, hasevaluated the effectiveness of our disclosure controls and procedures as of June 30, 2017, the end of the period covered57 Table of Contentsby this Annual Report on Form 10-K. Based upon such evaluation, our Chief Executive Officer and acting Chief FinancialOfficer has concluded that our disclosure controls and procedures were effective as of such date. Management’s Report on Internal Control Over Financial Reporting and Attestation Report of the Registered PublicAccounting Firm Our management, including our Chief Executive Officer and acting Chief Financial Officer, is responsible forestablishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements inaccordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations ofour management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Under the supervision and with the participation of our management, including our Chief Executive Officer andacting Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financialreporting as of June 30, 2017, based on the framework in Internal Control—Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework). Based on this evaluation under theInternal Control—Integrated Framework our Chief Executive Officer and acting Chief Financial Officer has concluded thatour internal control over financial reporting was effective as of June 30, 2017. Our independent registered public accounting firm, which has audited our financial statements, has also audited theeffectiveness of our internal control over financial reporting as of June 30, 2017, as stated in their report, which is included inItem 15(a)(1) of this Annual Report on Form 10-K. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2017,that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Limitations on Controls Our disclosure controls and procedures and internal control over financial reporting are designed to providereasonable assurance of achieving their objectives as specified above. Management does not expect, however, that ourdisclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud.Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide onlyreasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absoluteassurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, withinthe Company have been detected. Item 9B. Other Information. None.58 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance Information required by Part III, Item 10, will be included in our Proxy Statement relating to our 2018 annualmeeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended June 30, 2017, and isincorporated herein by reference. Item 11. Executive Compensation Information required by Part III, Item 11, will be included in our Proxy Statement relating to our 2018 annualmeeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended June 30, 2017, and isincorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Information required by Part III, Item 12, will be included in our Proxy Statement relating to our 2018 annualmeeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended June 30, 2017, and isincorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. Information required by Part III, Item 13, will be included in our Proxy Statement relating to our 2018 annualmeeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended June 30, 2017, and isincorporated herein by reference. Item 14. Principal Accounting Fees and Services. Information required by Part III, Item 14, will be included in our Proxy Statement relating to our 2018 annualmeeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended June 30, 2017, and isincorporated herein by reference.59 Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules(a)Documents Filed with Report (1) Financial Statements. Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of June 30, 2016 and 2017 F-3 Consolidated Statements of Operations for the years ended June 30, 2015, 2016 and 2017 F-4 Consolidated Statements of Changes Stockholders’ Equity for the years ended June 30, 2015, 2016 and 2017 F-5 Consolidated Statements of Cash Flows for the years ended June 30, 2015, 2016 and 2017 F-6 Notes to the Consolidated Financial Statements F-7 (2) Exhibits. The information required by this Item is set forth on the exhibit index that follows the signature page of this AnnualReport on Form 10-K. Item 16. Form 10-K Summary None.60 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 11, 2017 PAYLOCITY HOLDING CORPORATION By:/s/ Steven R. Beauchamp Steven R. Beauchamp President, Chief Executive Officer (PrincipalExecutive Officer), Chief Financial Officer (PrincipalFinancial Officer) and Director 61 Table of ContentsSIGNATURES AND POWER OF ATTORNEY Each person whose individual signature appears below hereby authorizes and appoints Steven R. Beauchamp, with fullpower of substitution and resubstitution and full power to act, as his or her true and lawful attorney-in-fact and agent to act inhis or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacitystated below, and to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibitsthereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents full power and authority to do and perform each and every act and thing, ratifying andconfirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do orcause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities indicated. Signature Title Date /s/ Steven R. Beauchamp President, Chief Executive Officer (PrincipalExecutive Officer), Chief Financial Officer(Principal Financial Officer) and Director August 11, 2017Steven R. Beauchamp /s/ Ian Rogers Controller (Principal Accounting Officer) August 11, 2017Ian Rogers /s/ Steven I. Sarowitz Chairman of the Board of Directors August 11, 2017Steven I. Sarowitz /s/ Ellen Carnahan Director August 11, 2017Ellen Carnahan /s/ Jeffrey T. Diehl Director August 11, 2017Jeffrey T. Diehl /s/ Mark H. Mishler Director August 11, 2017Mark H. Mishler /s/ Andres D. Reiner Director August 11, 2017Andres D. Reiner /s/ Ronald V. Waters, III Director August 11, 2017Ronald V. Waters, III 62 Table of ContentsINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageConsolidated Financial Statements: Report of Independent Registered Public Accounting Firm F-2Consolidated Balance Sheets as of June 30, 2016 and 2017 F-3Consolidated Statements of Operations for the years ended June 30, 2015, 2016 and 2017 F-4Consolidated Statements of Changes in Stockholders’ Equity for the years ended June 30, 2015, 2016 and 2017 F-5Consolidated Statements of Cash Flows for the years ended June 30, 2015, 2016 and 2017 F-6Notes to the Consolidated Financial Statements F-7 F-1 Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersPaylocity Holding Corporation:We have audited the accompanying consolidated balance sheets of Paylocity Holding Corporation and subsidiary (theCompany) as of June 30, 2016 and 2017, and the related consolidated statements of operations, stockholders’ equity, andcash flows for each of the years in the three-year period ended June 30, 2017. We also have audited the Company’s internalcontrol over financial reporting as of June 30, 2017, based on criteria established in Internal Control – IntegratedFramework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). TheCompany’s management is responsible for these consolidated financial statements, for maintaining effective internal controlover financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included inthe accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express anopinion on these consolidated financial statements and an opinion on the Company’s internal control over financialreporting based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement and whether effective internal control over financial reporting wasmaintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internalcontrol over financial reporting included obtaining an understanding of internal control over financial reporting, assessingthe risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal controlbased on the assessed risk. Our audits also included performing such other procedures as we considered necessary in thecircumstances. We believe that our audits provide a reasonable basis for our opinions.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and thatreceipts and expenditures of the company are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financialposition of Paylocity Holding Corporation and subsidiary as of June 30, 2016 and 2017, and the results of its operations andits cash flows for each of the years in the three-year period ended June 30, 2017, in conformity with U.S. generally acceptedaccounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control overfinancial reporting as of June 30, 2017, based on criteria established in Internal Control – Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)/s/ KPMG LLPChicago, IllinoisAugust 11, 2017 F-2 .Table of ContentsPAYLOCITY HOLDING CORPORATIONConsolidated Balance Sheets(in thousands, except per share data) As of June 30, 2016 2017 Assets Current assets: Cash and cash equivalents $86,496 $103,468 Accounts receivable, net 1,681 2,040 Prepaid expenses and other 7,409 14,879 Total current assets before funds held for clients 95,586 120,387 Funds held for clients 1,239,622 942,459 Total current assets 1,335,208 1,062,846 Long-term prepaid expenses 845 1,535 Capitalized internal-use software, net 11,427 17,394 Property and equipment, net 26,787 40,756 Intangible assets, net 10,419 8,907 Goodwill 6,003 6,003 Total assets $1,390,689 $1,137,441 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $1,621 $2,046 Accrued expenses 24,979 30,301 Total current liabilities before client fund obligations 26,600 32,347 Client fund obligations 1,239,622 942,459 Total current liabilities 1,266,222 974,806 Deferred rent 4,646 14,621 Deferred income tax liabilities, net 249 401 Total liabilities $1,271,117 $989,828 Stockholders’ equity: Preferred stock, $0.001 par value, 5,000 authorized, no shares issued and outstanding atJune 30, 2016 and 2017 $ — $ — Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2016 and 2017;51,132 shares issued and outstanding at June 30, 2016 and 51,738 shares issued andoutstanding at June 30, 2017 51 52 Additional paid-in capital 171,515 192,837 Accumulated deficit (51,994) (45,276) Total stockholders’ equity $119,572 $147,613 Total liabilities and stockholders’ equity $1,390,689 $1,137,441 See accompanying notes to consolidated financial statements.F-3 Table of ContentsPAYLOCITY HOLDING CORPORATIONConsolidated Statements of Operations(in thousands, except per share data) For the Years Ended June 30, 2015 2016 2017 Revenues: Recurring fees $142,168 $217,416 $284,817 Interest income on funds held for clients 1,901 2,688 3,631 Total recurring revenues 144,069 220,104 288,448 Implementation services and other 8,629 10,597 11,562 Total revenues 152,698 230,701 300,010 Cost of revenues: Recurring revenues 46,366 66,131 85,399 Implementation services and other 24,530 31,954 38,588 Total cost of revenues 70,896 98,085 123,987 Gross profit 81,802 132,616 176,023 Operating expenses: Sales and marketing 43,035 61,832 77,506 Research and development 19,864 26,736 29,098 General and administrative 32,824 47,598 62,123 Total operating expenses 95,723 136,166 168,727 Operating income (loss) (13,921) (3,550) 7,296 Other income (expense) 54 (124) 73 Income (loss) before income taxes (13,867) (3,674) 7,369 Income tax expense 105 177 651 Net income (loss) $(13,972) $(3,851) $6,718 Net income (loss) per share: Basic $(0.28) $(0.08) $0.13 Diluted $(0.28) $(0.08) $0.12 Weighted-average shares used in computing net income (loss) per share: Basic 50,127 50,913 51,415 Diluted 50,127 50,913 54,057 See accompanying notes to consolidated financial statements.F-4 Table of Contents PAYLOCITY HOLDING CORPORATIONConsolidated Statements of Changes in Stockholders’ Equity(in thousands) Stockholders’ Equity Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity Balances at June 30, 2014 49,564 $50 $125,255 $(34,171) $91,134 Follow-on offering, net of issuance costs 750 1 18,366 — 18,367 Stock-based compensation — — 13,824 — 13,824 Stock options exercised 452 — 4,335 — 4,335 Issuance of common stock upon vesting of restricted stock units 120 — — — — Issuance of common stock under employee stock purchase plan 83 — 1,773 — 1,773 Net settlement for taxes and/or exercise price related to equity awards (266) — (7,881) — (7,881) Net loss — — — (13,972) (13,972) Balances at June 30, 2015 50,703 $51 $155,672 $(48,143) $107,580 Stock-based compensation — — 18,641 — 18,641 Stock options exercised 536 — 6,197 — 6,197 Issuance of common stock upon vesting of restricted stock units 120 — — — — Issuance of common stock under employee stock purchase plan 102 — 2,991 — 2,991 Net settlement for taxes and/or exercise price related to equity awards (329) — (11,986) — (11,986) Net loss — — — (3,851) (3,851) Balances at June 30, 2016 51,132 $51 $171,515 $(51,994) $119,572 Stock-based compensation — — 28,507 — 28,507 Stock options exercised 691 1 8,550 — 8,551 Issuance of common stock upon vesting of restricted stock units 255 — — — — Issuance of common stock under employee stock purchase plan 127 — 3,677 — 3,677 Net settlement for taxes and/or exercise price related to equity awards (467) — (19,859) — (19,859) Excess tax benefits from stock-based compensation — — 447 — 447 Net income — — — 6,718 6,718 Balances at June 30, 2017 51,738 $52 $192,837 $(45,276) $147,613 See accompanying notes to consolidated financial statements. F-5 Table of ContentsPAYLOCITY HOLDING CORPORATIONConsolidated Statements of Cash Flows(in thousands) For the Years Ended June 30, 2015 2016 2017 Cash flows from operating activities: Net income (loss) $(13,972) $(3,851) $6,718 Adjustments to reconcile net income (loss) to net cash provided by operatingactivities: Stock-based compensation expense 13,169 17,563 26,734 Depreciation and amortization expense 8,609 13,873 21,027 Deferred income tax expense 91 150 152 Provision for doubtful accounts 90 159 113 Loss on disposal of equipment 256 712 253 Changes in operating assets and liabilities: Accounts receivable (449) (725) (472) Prepaid expenses and other (1,754) (3,270) (2,074) Accounts payable (186) 72 219 Accrued expenses 5,251 8,310 6,465 Tenant improvement allowance — — 2,845 Net cash provided by operating activities 11,105 32,993 61,980 Cash flows from investing activities: Capitalized internal-use software costs (4,215) (8,391) (13,641) Purchases of property and equipment (9,020) (16,083) (21,338) Lease allowances used for tenant improvements — — (2,845) Payments for acquisitions (11,979) (483) — Net change in funds held for clients (173,958) (648,403) 297,163 Net cash provided by (used in) investing activities (199,172) (673,360) 259,339 Cash flows from financing activities: Net change in client fund obligations 173,958 648,403 (297,163) Proceeds from follow-on offering, net of issuance costs 18,367 — — Payments on initial public offering costs (75) — — Proceeds from exercise of stock options 247 137 34 Proceeds from employee stock purchase plan 1,773 2,991 3,677 Taxes paid related to net share settlement of equity awards (3,793) (5,926) (11,342) Excess tax benefits from stock-based compensation — — 447 Net cash provided by (used in) financing activities 190,477 645,605 (304,347) Net Change in Cash and Cash Equivalents 2,410 5,238 16,972 Cash and Cash Equivalents—Beginning of Year 78,848 81,258 86,496 Cash and Cash Equivalents—End of Year $81,258 $86,496 $103,468 Supplemental Disclosure of Non-Cash Investing and Financing Activities Build-out allowances received from landlords $ — $1,888 $ — Purchase of property and equipment and internal-use software, accrued but notpaid $210 $607 $667 Supplemental Disclosure of Cash Flow Information Cash paid for income taxes, net of refunds $162 $ 3 $28 See accompanying notes to consolidated financial statements.F-6 Table of ContentsPAYLOCITY HOLDING CORPORATIONNotes to the Consolidated Financial Statements (all amounts in thousands, except per share data) (1) Organization and Description of Business Paylocity Holding Corporation (the “Company”), through its wholly owned subsidiary, Paylocity Corporation, is acloud-based provider of payroll and human capital management software solutions for medium-sized organizations. Servicesare provided in a Software-as-a-Service (“SaaS”) delivery model utilizing the Company’s cloud-based platform. Payrollservices include collection, remittance and reporting of payroll liabilities to the appropriate federal, state and localauthorities. (2) Summary of Significant Accounting Policies (a) Basis of Presentation, Consolidation, and Use of Estimates The accompanying consolidated financial statements of the Company have been prepared pursuant to the rules andregulations of the United States Securities and Exchange Commission (the “SEC”). The preparation of consolidated financial statements in conformity with U.S. generally accepted accountingprinciples (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.Significant items subject to such estimates and assumptions include the allowance for doubtful accounts, internal-usesoftware, valuation and useful lives of long-lived assets, definite-lived intangibles, goodwill, incurred but not reportedmedical and dental claims, stock-based compensation, valuation of net deferred income tax assets and the best estimate ofselling price for revenue recognition purposes. Future events and their effects cannot be predicted with certainty;accordingly, accounting estimates require the exercise of judgment. Accounting estimates used in the preparation of theseconsolidated financial statements change as new events occur, as more experience is acquired, as additional information isobtained and as the operating environment changes. The consolidated financial statements reflect the financial position and operating results of Paylocity HoldingCorporation and include its wholly owned subsidiary Paylocity Corporation. Intercompany accounts and transactions havebeen eliminated in consolidation. (b) Concentrations of Risk The Company regularly maintains cash balances that exceed Federal Depository Insurance Corporation limits. Noindividual client represents 10% or more of total revenues. For all periods presented, 100% of total revenues were generatedby clients in the United States. (c) Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less whenpurchased to be cash equivalents. (d) Accounts Receivable Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on tradeaccounts receivable are included in net cash provided by operating activities in the statements of cash flows. The Companymaintains an allowance for doubtful accounts reflecting estimated potential losses in its accounts receivable portfolio. Inestablishing the required allowance, management considers historical losses adjusted to take into account current marketconditions and the Company’s clients’ financial conditions, the amount of receivables in dispute, the current receivablesaging and current payment patterns. The Company reviews its allowance for doubtful accounts quarterly. Past due balancesover 60 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on apooled basis. Account balances are charged off against the allowance after allF-7 Table of Contentscommercially reasonable means of collection have been exhausted and the potential for recovery is considered remote. TheCompany does not have any off-balance-sheet credit exposure related to its clients. Activity in the allowance for doubtful accounts was as follows: For the Years Ended June 30, 2015 2016 2017 Balance at the beginning of the year $126 $149 $193 Charged to expense 90 159 113 Write-offs (67) (115) (40) Balance at the end of the year $149 $193 $266 (e) Prepaid Expenses and Other Assets Prepaid expenses and other assets consist primarily of tenant improvement allowance receivable from landlord,prepaid licensing fees, prepaid insurance premiums, deposits with vendors and time clocks available for sale or lease. (f) Capitalized Internal-Use Software The Company applies Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)350-40, Intangibles—Goodwill and Other—Internal-Use Software, to the accounting for costs of internal-use software.Internal-use software costs are capitalized when application development begins, it is probable that the project will becompleted, and the software will be used as intended. Costs associated with preliminary project stage activities, training,maintenance and all other post implementation stage activities are expensed as incurred. The Company also capitalizescertain costs related to specific upgrades and enhancements when it is probable the expenditures will result in significantadditional functionality. The capitalization policy provides for the capitalization of certain payroll costs for employees whoare directly associated with developing internal-use software as well as certain external direct costs, such as consulting fees.Capitalized employee costs are limited to the time directly spent on such projects. Capitalized internal-use software costs are amortized on a straight-line basis over the estimated useful lives,generally over a 24-month period. Management evaluates the useful lives of these assets on an annual basis and tests forimpairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. (g) Property and Equipment and Long-Lived Assets Property and equipment are stated at cost. Depreciation on property and equipment is calculated on the straight-linemethod over the estimated useful lives of the assets, generally three to seven years for most classes of assets, or over the termof the related lease for leasehold improvements. Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-livedasset or asset group to be tested for possible impairment, the Company first compares the undiscounted cash flows expectedto be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or assetgroup is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carryingamount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flowmodels, quoted market values and third-party independent appraisals, as considered necessary. (h) Intangible Assets, Net of Accumulated Amortization Intangible assets are comprised primarily of client list acquisitions and are reported net of accumulated amortizationon the consolidated balance sheets. Client relationships use the straight-line method of amortization over a nine-year timeframe from the date of acquisition, while non-solicitation agreements use the straight-line method of amortization over thelives of the related agreements. The Company tests intangible assets for potential impairment when events or changes incircumstances indicate that the carrying value of such assets may not be recoverable. F-8 Table of Contents(i) Goodwill Goodwill is an asset representing the future economic benefits arising from other assets acquired in a businesscombination that are not individually identified and separately recognized. As described in Note 5, the Company hasrecorded goodwill in connection with the acquisitions of certain assets of BFKMS, Inc. and Synergy Payroll, LLC. Goodwillis not amortized, but instead is tested for impairment at least annually in the fourth quarter. ASU 2011-08, Testing Goodwillfor Impairment provides an entity the option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step impairment test. Ifthe estimated fair value of a reporting unit, including goodwill, is less than its carrying amount, the two-step goodwillimpairment test is required. Otherwise, no further analysis is required. If the two-step goodwill impairment test is required, the fair value of the reporting unit is compared with its carryingamount, including goodwill. If the fair value of the reporting unit is less than its carrying amount, an indication of goodwillimpairment exists for the reporting unit. In the second step, an impairment loss is recognized for any excess of the carryingamount of the reporting unit’s goodwill over the implied fair value of the goodwill. The implied fair value of goodwill isdetermined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and theresidual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unitis determined using a discounted cash flow analysis. In the event the fair value of the reporting unit exceeds its carryingamount, step two is not performed. The Company performs its annual impairment review of goodwill in its fiscal fourth quarter or when a triggeringevent occurs between annual impairment tests. No impairment was recorded in fiscal 2015, 2016 or 2017 as a result of theCompany’s qualitative assessments over its single reporting segment. (j) Deferred Rent The Company has operating lease agreements for its office space, which contain provisions for future rent increases,periods of rent abatement and build-out allowances. The Company records monthly rent expense for each lease equal to thetotal payments due over the lease term, divided by the number of months of the lease term. Build-out allowances are recordedas part of leasehold improvements and the incentive is amortized over the lease term against depreciation. The differencebetween recorded rent expense and the amount paid is included in “Accrued expenses” and as “Deferred rent” in theaccompanying consolidated balance sheets. (k) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred taxassets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount more likely than notto be realized. Significant management judgment is required in determining the period in which the reversal of a valuationallowance should occur. The Company is required to consider all available evidence, both positive and negative, such ashistorical levels of income and future forecasts of taxable income among other items, in determining whether a full or partialrelease of its valuation allowance is required. The Company is also required to schedule future taxable income in accordancewith accounting standards that address income taxes to assess the appropriateness of a valuation allowance, which furtherrequires the exercise of significant management judgment. The Company recognizes the effect of income tax positions only if those positions are more likely than not of beingsustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of beingrealized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. TheCompany records interest and penalties as an element of income tax expense. Refer to Note 11 for additional information on income taxes. F-9 Table of Contents(l) Revenue Recognition The Company recognizes revenue in accordance with ASC 605-25, Revenue Recognition—Multiple ElementArrangements, Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009‑13”),and Staff Accounting Bulletin 104, Revenue Recognition. Revenue is recognized when there is persuasive evidence that anarrangement exists, delivery has occurred, the fee is fixed or determinable and collection of the revenue is probable. The Company derives its revenue predominantly from recurring fees and non-recurring service fees. Recurring feesare collected under agreements for payroll, timekeeping, HR-related cloud-based computing services and monthly time clockrentals, all of which are generally cancellable by the client on 60 days’ notice or less. Non-recurring service fees consistmainly of implementation and custom reporting services. Such fees are billed to clients and revenue is recorded uponcompletion of the service. The Company’s agreements do not include general rights of return and do not provide clients withthe right to take possession of the software supporting the services being provided. As such, the agreements are accounted foras service contracts. Interest income collected on funds held for clients is recognized in recurring revenues when earned as the collection,holding and remittance of these funds are critical components of providing these services. Most multiple-element arrangements include a short implementation services phase, which involves establishingthe client within and loading data into the Company’s cloud-based applications. Major recurring fees included in multiple-element arrangements include: ·Payroll processing and related services, including payroll reporting and tax filing services delivered on aweekly, biweekly, semi-monthly, or monthly basis depending upon the payroll frequency of the client and onan annual basis if a client selects W-2 preparation and processing services, ·Time and attendance reporting services, including time clock rentals, delivered on a monthly basis, and ·Cloud-based HR software solutions, including employee administration and benefits enrollment andadministration, delivered on a monthly basis. For each agreement, the Company evaluates whether the individual deliverables qualify as separate units ofaccounting. If one or more of the deliverables does not have standalone value upon delivery, the deliverables that do nothave standalone value are generally combined and treated as a single unit of accounting by frequency of occurrence for theproduct category involved such as biweekly payroll or monthly timekeeping services. Revenues for arrangements treated as asingle unit of accounting are generally recognized within the same month that the services are rendered given that theagreements are cancellable with 60 days’ or less notice. In determining whether implementation services can be accounted for separately from recurring revenues, theCompany considers the nature of the implementation services and the availability of the implementation services from othervendors. The Company was able to establish standalone value for implementation activities based on the historical activityof third-party vendors that performed these services and as such, accounts for such implementation services separate from therecurring revenues. If the recurring services have standalone value upon delivery, the Company accounts for each separately andrevenues are recognized as services are delivered with allocation of consideration based on the relative selling price methodas established in ASU 2009-13. That method requires the selling price of each element in a multiple-deliverable arrangementto be based on, in descending order: (i) vendor specific objective evidence of fair value (“VSOE”), (ii) third-party evidence offair value (“TPE”) or (iii) management’s best estimate of the selling price (“BESP”). The Company is not able to establish VSOE because the deliverables are sold across an insufficiently narrow rangeof prices on a stand-alone basis and is also not able to establish TPE because no third-party offerings are reasonablycomparable to the Company’s offerings. The Company thus established its BESP by service offering, requiring the use ofsignificant estimates and judgment. The Company considers numerous factors, including the nature of the deliverablesthemselves; the geography of the sale; and pricing and discounting practices utilized by the Company’s sales force.Arrangement consideration is allocated to each deliverable based on the established BESP andF-10 Table of Contentssubject to the limitation that because the arrangements are cancellable with 60 days’ or less notice, recurring revenue is notallocated to any deliverable until the consideration has been earned, typically with each payroll cycle or monthly,depending on the service. Revenues generated from sales through partners or utilizing partner services are recognized in accordance with theappropriate accounting guidance of ASC 605-45, Principal Agent Considerations. The Company reports revenue generatedthrough partners or utilizing partner services at the gross amount billed to clients when (i) the Company is the primaryobligor, (ii) the Company has latitude to establish the price charged and (iii) the Company bears the credit risk in thetransaction. Sales taxes collected from clients and remitted to governmental authorities where applicable are accounted for on anet basis and therefore are excluded from revenues in the statements of operations. (m) Cost of Revenues Cost of revenues consists primarily of the cost of recurring revenues and implementation services, which areexpensed when incurred. Cost of revenues for recurring revenues consists primarily of costs to provide recurring services andsupport to the Company’s clients, and includes amortization of capitalized internal-use software. Cost of revenues forimplementation services and other consists primarily of costs to provide implementation and other services. (n) Advertising Advertising costs are expensed as incurred. Advertising costs amounted to $187, $219 and $199 for the years endedJune 30, 2015, 2016 and 2017, respectively. (o) Stock-Based Compensation The Company recognizes all employee stock-based compensation as a cost in the financial statements. Equity-classified awards, including those under the 2014 Employee Stock Purchase Plan (“ESPP”), are measured at the grant date fairvalue of the award and expense is recognized, net of assumed forfeitures, on a straight-line basis over the requisite serviceperiod for each separately vesting portion of the award. The Company estimates grant date fair value using the Black-Scholesoption-pricing model and periodically updates the assumed forfeiture rates for actual experience over their vesting term orthe term of the ESPP purchase period. (p) Commitments and Contingencies Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sourcesare recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costsincurred in connection with loss contingencies are expensed as incurred. (q) Segment Information The Company’s chief operating decision maker reviews the financial results of the Company in total whenevaluating financial performance and for purposes of allocating resources. The Company has thus determined that it operatesin a single cloud-based software solution reporting segment. (r) Recently Issued Accounting Standards In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts withCustomers (Topic 606) (“ASU 2014-09”). ASU 2014-09 supersedes a majority of existing revenue recognition guidanceunder US GAAP, and requires companies to recognize revenue when it transfers goods or services to a customer in an amountthat reflects the consideration to which a company expects to be entitled. Companies may need to apply more judgment andestimation techniques or methods while recognizing revenue, which could result in additional disclosures to the financialstatements. In addition, in March 2016, April 2016, May 2016 and December 2016 the FASB issued ASU 2016-08, Revenuefrom Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versusNet) (“ASU 2016-08”), ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying PerformanceObligations and Licensing (“ASU 2016-10”), ASU 2016-12, Revenue from ContractsF-11 Table of Contentswith Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”) and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”),respectively, to amend certain guidance in ASU 2014-09. Topic 606 allows for either a retrospective or cumulative effecttransition method. ASU 2014-09 was originally effective for fiscal years beginning after December 15, 2016. In July 2015,the FASB approved a one-year deferral of ASU 2014-09 and all amendments to it, with a new effective date for fiscal yearsbeginning after December 15, 2017 with early adoption permitted as of the original effective date. The Company currently expects to adopt the new standard in its fiscal year beginning July 1, 2018 and is evaluatingadoption methods. While the impact the new revenue recognition standard will have on its consolidated financial statementsand disclosures has not yet been fully assessed, the Company currently expects that there will be a material impact in themanner in which it treats certain costs of obtaining new contracts (i.e., selling and commission costs). The new standard willrequire the Company to defer these costs and amortize them versus expensing these costs as incurred. The Company iscontinuing to evaluate all potential impacts as well as the changes required for systems, processes and internal controls tomeet the new standard’s reporting and disclosure requirements. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) which amends variousaspects of existing guidance for leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a leasewith terms greater than twelve months, along with additional qualitative and quantitative disclosures. ASU 2016-02 alsorequires the use of the modified retrospective method, which will require adjustment to all comparative periods presented.ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company iscurrently assessing the potential effects of these changes to its consolidated financial statements and is evaluating the timingof adoption. In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”)which modifies accounting for excess tax benefits and tax deficiencies, forfeitures, and employer tax withholdingrequirements. ASU 2016-09 also clarifies certain classifications on the statement of cash flows. ASU 2016-09 is effective forfiscal years beginning after December 15, 2016, with early adoption permitted. The Company adopted this standard effectiveJuly 1, 2017. Due to the Company’s tax valuation allowance, it does not expect the portions of the updated standard thatrelate to excess tax benefits and deficiencies to have a material impact on the Consolidated Financial Statements anddisclosures. Additionally, the Company will continue to estimate forfeitures at each reporting period, rather than electing anaccounting policy change to record the impact of such forfeitures as they occur. From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that areadopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that theimpact of other recently issued standards that are not yet effective will not have a material impact on the Company’sconsolidated financial statements upon adoption. (3) Funds Held for Clients and Client Fund Obligations The Company obtains funds from clients in advance of performing payroll and payroll tax filing services on behalfof those clients. Funds held for clients represent assets that are used solely for the purposes of satisfying the obligations toremit funds relating to payroll and payroll tax filing services. Funds held for clients are held in demand deposit and moneymarket accounts at major financial institutions. The Company has classified funds held for clients as a current asset sincethese funds are held solely for the purposes of satisfying the client fund obligations. Client fund obligations represent the Company’s contractual obligations to remit funds to satisfy clients’ payrolland tax payment obligations and are recorded in the accompanying balance sheets at the time that the Company obtainsfunds from clients. The client fund obligations represent liabilities that will be repaid within one year of the balance sheetdate. (4) Fair Value Measurements The Company applies the fair value measurement and disclosure provisions of ASC 820, Fair Value Measurementsand Disclosures, and ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair ValueMeasurement and Disclosure Requirements in U.S. GAAP and IFRS. Fair value is defined as the price that would be receivedto sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Athree-level fair value hierarchy prioritizes the inputs used to measure fair value.F-12 Table of ContentsThe hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. Thethree 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 forthe 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 thefair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologiesand similar techniques that use significant unobservable inputs. Substantially all of the Company’s assets that are measured at fair value on a recurring basis are measured usingLevel 1 inputs. The Company considers the recorded value of its financial assets and liabilities, which consist primarily ofcash and cash equivalents, accounts receivable, funds held for clients, accounts payable and client fund obligations toapproximate the fair value of the respective assets and liabilities at June 30, 2016 and 2017 based upon the short-term natureof these assets and liabilities. (5) Business Combinations The Company had agreements with two resellers. The Company, under the revenue sharing provisions of theterminated reseller agreements, paid $2,495 to BFKMS Inc. during fiscal year 2014, and $2,081 and $2,361 to SynergyPayroll, LLC during fiscal years 2014 and 2015, respectively. The reseller agreements provided that the Company wasrequired to acquire the assets of the resellers upon termination of the agreements. The following acquisitions were accountedfor as a business combination in accordance with ASC 805, Business Combinations. The Company recorded the acquisitionsusing the acquisition method of accounting and recognized assets at their fair value as of the date of acquisition. In May 2014, the Company acquired certain assets sufficient to sell the Company’s products in the SouthernCalifornia marketplace upon the termination of its reseller agreement with BFKMS Inc. The total consideration paid for theacquisition was $9,435, of which $6,450 and $2,985 was paid during the years ended June 30, 2014 and 2015, respectively.The following table summarizes the fair value of the assets acquired at the date of acquisition: At May 23, 2014 Intangible assets $6,400 Goodwill 3,035 Total purchase price $9,435 The $6,400 of amortizable intangible assets consists of $6,180 in client relationships and $220 in a non-solicitationagreement. Goodwill will be amortized over a period of 15 years for income tax purposes. In April 2015, the Company acquired certain assets sufficient to sell the Company’s products in the State of NewJersey marketplace upon the termination of its reseller agreement with Synergy Payroll, LLC, as part of the Company’sstrategy of simplifying its sales channels. The total consideration for the acquisition was $9,508, of which $8,994 was paid atclosing. The Company paid $483 during fiscal year 2016, which was net of adjustments in accordance with the assetpurchase agreement. The following table summarizes the fair value of the assets acquired at the date of acquisition: At April 16, 2015 Intangible assets $6,540 Goodwill 2,968 Total purchase price $9,508 The $6,540 of amortizable intangible assets consists of $6,400 in client relationships and $140 in non-solicitationagreements. Goodwill will be amortized over a period of 15 years for income tax purposes. F-13 Table of ContentsThe balance of the acquired intangibles, net of amortization, is stated separately on the consolidated balance sheet.Direct costs related to the acquisition were recorded as general and administrative expense as incurred. (6) Capitalized Internal-Use Software Capitalized internal-use software and accumulated amortization were as follows: Year ended June 30, 2016 2017 Capitalized internal-use software $34,249 $49,663 Accumulated amortization (22,822) (32,269) Capitalized internal-use software, net $11,427 $17,394 Amortization of capitalized internal-use software amounted to $2,606, $5,446 and $9,447 for the years endedJune 30, 2015, 2016 and 2017, respectively and is included in Cost of Revenues—Recurring Revenues. (7) Property and Equipment The major classes of property and equipment are as follows as of June 30: Year ended June 30, 2016 2017 Office equipment $2,528 $3,591 Computer equipment 18,139 24,411 Furniture and fixtures 4,308 7,547 Software 5,059 4,954 Leasehold improvements 11,164 21,426 Time clocks rented by clients 4,046 4,240 Total 45,244 66,169 Accumulated depreciation (18,457) (25,413) Property and equipment, net $26,787 $40,756 Depreciation expense amounted to $5,084, $6,905 and $10,068 for the years ended June 30, 2015, 2016 and 2017,respectively. (8) Goodwill and Intangible Assets Goodwill represents the excess of cost over the net tangible and identifiable intangible assets of acquiredbusinesses. Goodwill amounts are not amortized, but rather tested for impairment at least annually in the fourth quarter.Identifiable intangible assets acquired in business combinations are recorded based on fair value at the date of acquisitionand amortized over their estimated useful lives. See Note 5 for further information regarding the acquisitions completed in2014 and 2015. The Company’s amortizable intangible assets have estimated useful lives as follows: Weighted Average Year ended June 30, Useful 2016 2017 Life Client relationships $12,580 $12,580 9 years Non-solicitation agreements 360 360 2 - 3years Total 12,940 12,940 Accumulated amortization (2,521) (4,033) Intangible assets, net $10,419 $8,907 F-14 Table of ContentsAmortization expense for acquired intangible assets was $919, $1,522 and $1,512 for the years endedJune 30, 2015, 2016 and 2017, respectively. Future amortization expense for acquired intangible is as follows, as ofJune 30, 2017: Year ending June 30, 2018 $1,427 2019 1,398 2020 1,398 2021 1,398 2022 1,398 Thereafter 1,888 Total $8,907 (9) Accrued Expenses The components of accrued expenses are as follows: Year ended June 30, 2016 2017 Accrued payroll and personnel costs $21,658 $25,131 Other 3,321 5,170 Total accrued expenses $24,979 $30,301 (10) Leases The Company primarily leases office space in Illinois, California, Florida, Idaho, New Jersey, New Hampshire andNew York under non-cancellable operating leases expiring on various dates from June 2018 through October 2032. Theleases provide for increasing annual base rents and oblige the Company to fund proportionate share of operating expensesand, in certain cases, real estate taxes. The Company also leases various types of office and production related equipmentunder non-cancellable operating leases expiring on various dates from April 2018 through December 2021. In June 2016, the Company entered into a lease for approximately 310 rentable square feet of office space located inSchaumburg, Illinois. The Company intends to use the leased premises as its headquarters upon the expiration of the lease ofits current headquarters. The lease provides for phased delivery and commencement dates, with commencement expected tooccur on the following approximate dates: Phase I (June 1, 2017), Phase II (November 1, 2017), Phase III (July 1, 2018), andPhase IV (July 1, 2019). The actual commencement dates are subject to timely delivery of the premises by the landlord.Under the terms of the lease, the Company will receive a tenant improvement allowance equal to $65.00 per rentable squarefoot and a 12-month rent abatement period for each lease phase. The lease also provides for a term beginning on the Phase Icommencement date and ending 180 full calendar months after the landlord delivers the Phase II premises to the Company,which is expected to be on or about November 1, 2017, with two subsequent five-year renewal options. In February 2017, the Company entered into a lease for approximately 62 rentable square feet of office space locatedin Meridian, Idaho. The Company intends to use the leased premises to accommodate the continued expansion of itsemployee base in the western region of the United States. The lease provides for phased delivery and commencement dateswith commencement expected to occur on the following approximate dates: Phase I (July 1, 2018) and Phase II (February 1,2020). The actual commencement dates are subject to timely delivery of the premises by the landlord. Under the terms of thelease, the Company will receive a tenant improvement allowance equal to $50.00 per rentable square foot and a 3-month rentabatement period for each lease phase. The lease also provides for a term beginning on the Phase I commencement date andending after 120 full calendar months with four subsequent five-year renewal options. Minimum rent payments under operating leases are recognized on a straight-line basis over the term of the leaseincluding any periods of free rent and future rent increases. Rental expense for operating leases, including amortization ofleasehold improvements, was $4,238, $5,596 and $8,571 for the years ended June 30, 2015, 2016 and 2017, respectively. F-15 Table of ContentsFuture minimum lease payments under non-cancellable operating leases (with initial or remaining lease terms inexcess of one year) as of June 30, 2017 are: Year ending June 30, 2018 $7,025 2019 8,354 2020 8,573 2021 9,677 2022 8,548 Later years, through 2033 75,161 Total minimum lease payments $117,338 (11) Income Taxes (a) Income Taxes Income tax expense for the years ended June 30, 2015, 2016 and 2017 consists of the following: Year ended June 30, 2015 2016 2017 Current taxes U.S. federal $ — $ — $ — State and local 14 27 500 Deferred taxes: U.S. federal 83 136 137 State and local 8 14 14 Total income tax expense $105 $177 $651 (b) Tax Rate Reconciliation Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% topretax income (loss) as a result of the following: Year ended June 30, 2015 2016 2017 Income tax expense (benefit) at statutory federal rate $(4,716) $(1,249) $2,503 Increase (reduction) in income taxes resulting from: Research and development credit, net of federal income tax benefit (276) (504) (1,025) Non-deductible expenses 418 557 685 Change in valuation allowance 4,570 2,590 (1,349) State and local income taxes, net of federal income tax benefit (562) (432) (196) Other 671 (785) 33 $105 $177 $651 F-16 Table of Contents(c) Components of Deferred Tax Assets and Liabilities The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferredtax liabilities at June 30, 2016 and 2017 are presented below. Year ended June 30, 2016 2017 Deferred tax assets: Deferred rent $694 $1,090 Allowance for doubtful accounts 73 100 Accrued expenses 1,812 2,290 Stock-based compensation 7,367 11,034 Net operating loss carryforwards 4,498 253 Research and development and other credits 3,236 4,984 AMT Credits 11 29 Intangible assets 413 657 Total deferred tax assets 18,104 20,437 Valuation allowance (10,038) (8,689) Net deferred tax assets 8,066 11,748 Deferred tax liabilities: Research and development costs (3,681) (5,649) Prepaid expenses (91) — Depreciation (4,543) (6,500) Total deferred liabilities (8,315) (12,149) Net deferred tax liability $(249) $(401) In assessing the realizability of deferred tax assets, management considers whether it is more likely than not thatsome portion or all of the deferred tax assets will not be realized through the generation of future taxable income. Theultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible. Management considers the scheduled reversal of deferred taxliabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax-planning strategies in making this assessment. Taxable loss for the years ended June 30, 2015, 2016 and 2017 wasapproximately $12,424, $8,330 and $3,294, respectively, prior to utilization or establishment of net operating losscarryforwards. Based upon the same three-year period pre-tax book income, the Company is in a three-year cumulative lossposition. As a result of this and other assessments in the year ended June 30, 2017, management concluded that a fullvaluation allowance is required for all deferred tax assets except for those associated with indefinite-lived intangible assets. At June 30, 2017, the Company has gross excess tax benefits from stock option exercises of approximately $30,264for federal and state income tax purposes. At June 30, 2017, the Company has net operating loss carryforwards for federalincome tax purposes of approximately $484 and state income tax purposes of approximately $1,777, both excluding theexcess tax benefits from stock option exercises noted above. The net tax impact of $10,290 and $644 for federal and stateincome tax purposes, respectively, related to the excess tax benefits from stock option exercises will be credited to additionalpaid-in capital when realized. The federal NOL carryforwards expire from 2030 to 2037.The state NOL carryforwards expirefrom 2020 to 2037. The Company also has gross federal and state research and development tax credit and other state creditcarryforwards of approximately $4,984, which expire between 2018 and 2037. In addition, the Company has alternativeminimum tax credit carryforwards of approximately $11, which are available to reduce future federal regular income taxes, ifany, over an indefinite period. The Company had no unrecognized tax benefits as of June 30, 2015, 2016 and 2017, respectively. The Company files income tax returns with the United States federal government and various state jurisdictions.Certain tax years remain open for federal and state tax reporting jurisdictions in which the Company does business due to netoperating loss carryforwards and tax credits unutilized from such years or utilized in a period remaining open for audit undernormal statute of limitations relating to income tax liabilities. The Company, including its domestic subsidiary, files aconsolidated federal income tax return. For years before 2013 (fiscal year ended June 30, 2014), the Company is no longersubject to U.S. federal examination; however, the Internal Revenue Service (IRS) hasF-17 Table of Contentsthe ability to review years prior to 2013 to the extent the Company utilized tax attributes carried forward from those prioryears. The statute of limitations on state filings is generally three to four years. (12) Stockholders’ Equity Common Stock Holders of common stock are entitled to one vote per share and to receive dividends, when declared. The holdershave no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to suchshares. (13) Benefit Plans (a) Equity Incentive Plans 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, directorsand non-employee third parties. The 2014 Plan serves as the successor to the 2008 Plan and permits the granting of optionsto purchase common stock and other equity incentives at the discretion of the compensation committee of the Company’sboard 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 ofshares of common stock reserved for issuance under the 2014 Plan will increase automatically each calendar year, continuingthrough and including January 1, 2024 (“Evergreen provision”). The number of shares added each year will be equal to thelesser of (a) four and five tenths percent (4.5%) of the number of shares of common stock of the Company issued andoutstanding on the immediately preceding December 31, or (b) an amount determined by the Company’s board of directors.The Company’s board of directors determined that, effective January 1, 2017, it would increase the number of common sharesin reserve for issuance under the 2014 Plan by 2,314 shares. As of June 30, 2017, the Company had 12,433 shares allocated to the plans, of which 4,206 shares were subject tooutstanding options or awards. Generally, the Company issues previously unissued shares for the exercise of stock options orvesting of awards; however, shares previously subject to 2014 Plan grants or awards that are forfeited or net settled at exerciseor release may be reissued to satisfy future issuances. The following table summarizes changes during the year ended June 30, 2017 in the number of shares available forgrant under the Company’s equity incentive plans: Number ofShares Available for grant at July 1, 2016 6,244 January 1, 2017 Evergreen provision increase 2,314 RSUs granted (774) Shares withheld in settlement of taxes and/or exercise price 467 Forfeitures 89 Shares removed (113) Available for grant at June 30, 2017 8,227 Shares removed represents forfeitures of shares and shares withheld in settlement of taxes and/or payment of exerciseprice related to grants made under the 2008 Plan. As noted above, no new awards will be issued under the 2008 Plan. F-18 Table of ContentsStock-based compensation expense related to stock options, restricted stock units (“RSUs”), and the EmployeeStock Purchase Plan (as described below) is included in the following line items in the accompanying audited consolidatedstatements of operations: Year ended June 30, 2015 2016 2017 Cost of revenue – recurring $1,532 $1,648 $2,162 Cost of revenue – non-recurring 1,222 1,127 1,357 Sales and marketing 3,247 4,441 6,287 Research and development 2,533 2,789 3,086 General and administrative 4,635 7,558 13,842 Total stock-based compensation expense $13,169 $17,563 $26,734 In addition, the Company capitalized $655, $1,078 and $1,773 of stock-based compensation costs in its internal-use software in the years ended June 30, 2015, 2016 and 2017, respectively. In June 2017, Peter McGrail ceased to serve as the Company’s Chief Financial Officer, but continued to serve as anemployee of the Company. In connection with Mr. McGrail’s modified employment arrangement, the compensationcommittee of the Board of Directors approved modifications to terms of the unvested equity awards granted to Mr. McGrail.Any awards held by Mr. McGrail that are subject to time-based vesting will become fully-vested upon his death or disability.Additionally, any performance-based restricted stock unit (“PSU”) awards held by Mr. McGrail will continue to vest andsettle based upon actual achievement of previously-established performance metrics, with Mr. McGrail receiving a pro-ratashare of the PSU awards based on the number of days Mr. McGrail is employed over the vesting period. As a result of theseaward modifications, the Company recognized $2,925 in additional stock-based compensation expense for the fiscal yearended June 30, 2017, which was included in general and administrative expense in the Company’s consolidated statementsof operations. Under the 2008 and 2014 Plans, the exercise price of each option cannot be less than the fair value of a share ofcommon stock on the grant date. The options typically vest ratably over a three or four year period and expire 10 years fromthe grant date. Stock-based compensation expense for the fair value of the options at their grant date is recognized ratablyover the vesting schedule for each separately vesting portion of the award. The Company values stock options using the Black-Scholes option-pricing model, which requires the input ofsubjective assumptions, including the risk-free interest rate, expected life, expected stock price volatility and dividendyield. The risk-free interest rate assumption is based upon observed interest rates for U.S. Treasury securities consistent withthe expected term of the Company’s employee stock options. The expected life represents the period of time the stockoptions are expected to be outstanding and is based on the simplified method. Under the simplified method, the expected lifeof an option is presumed to be the mid-point between the vesting date and the end of the contractual term. As the Companyhas a limited history of trading as a public company, the Company utilizes the simplified method due to the lack of sufficienthistorical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options.Therefore, the expected volatility is based on historical volatilities for publicly traded stock of comparable companies overthe estimated expected life of the stock options. The Company assumed no dividend yield because it does not expect to paydividends in the near future, which is consistent with the Company’s history of not paying dividends. There were no stock options granted during the year ended June 30, 2017. The following table summarizes theassumptions used for estimating the fair value of stock options granted for the years ended June 30: Year ended June 30, 2015 2016 Valuation assumptions: Expected dividend yield 0% 0% Expected volatility 43.9% 34.0% Expected term (years) 6.25 6.25 Risk-free interest rate 1.91% 1.83% F-19 Table of Contents Stock option activity during the periods indicated is as follows: Outstanding Options Weighted Weighted average average remaining Aggregate Number of exercise contractual intrinsic shares price term(years) value Balance at July 1, 2016 3,464 $11.75 6.70 $108,944 Options forfeited (22) $18.88 Options exercised (691) $12.37 Balance at June 30, 2017 2,751 $11.54 5.69 $92,556 Options exercisable at June 30, 2017 2,395 $9.80 5.47 $84,757 Options vested and expected to vest at June 30, 2017 2,742 $11.47 5.68 $92,414 There were no stock options granted during the year ended June 30, 2017. The weighted average grant date fairvalue of options granted during the years ended June 30, 2015 and 2016 was $11.14 and $12.92, respectively. The totalintrinsic value of options exercised during the years ended June 30, 2015, 2016 and 2017 was $8,802, $13,362 and $20,802,respectively. At June 30, 2017, there was $625 of total unrecognized compensation cost, net of estimated forfeitures, relatedto unvested stock options granted. That cost is expected to be recognized over a weighted average period of 1.36 years. The following table summarizes information about stock options outstanding and stock options exercisable atJune 30, 2017: Options Outstanding Options Exercisable Price Range Numberofshares Weightedaverageremainingcontractualterm Weightedaverageexerciseprice Numberofshares Weightedaverageexerciseprice $1.31 to $3.58 463 3.15 $1.49 463 $1.49 $3.59 to $5.96 854 5.14 $4.88 854 $4.88 $5.97 to $12.02 224 6.03 $7.04 128 $7.04 $12.03 to $20.90 796 6.72 $17.00 796 $17.00 $20.91 to $35.28 414 7.48 $28.46 154 $27.16 Total 2,751 5.69 $11.54 2,395 $9.80 The Company may also grant RSUs under the 2014 Plan with terms determined at the discretion of thecompensation committee of the Company’s board of directors. RSUs generally vest over three or four years following thegrant date. Certain RSU awards have time-based vesting conditions while other RSUs vest based on the achievement ofcertain revenue metrics in future fiscal years. The following table represents restricted stock unit activity during the yearended June 30, 2017: Units Weightedaveragegrant datefair value RSU balance at July 1, 2016 1,003 $32.74 RSUs granted 774 $45.66 RSUs vested (255) $32.97 RSUs forfeited (67) $38.09 RSU balance at June 30, 2017 1,455 $39.96 RSUs expected to vest at June 30, 2017 1,269 $39.59 At June 30, 2017, there was $20,599 of total unrecognized compensation cost, net of estimated forfeitures, related tounvested restricted stock units granted. That cost is expected to be recognized over a weighted average period of 1.89 years.F-20 Table of ContentsThe total excess income tax benefits for stock-based compensation arrangements was $5,562, $8,228 and $15,130for the years ended June 30, 2015, 2016 and 2017, respectively. As described in Note 2, the Company will adopt ASU 2016-09 as of July 1, 2017. As a result, in the future, the Company will recognize these tax benefits through income tax expenseinstead of additional paid-in capital as required under current GAAP.(b) Employee Stock Purchase PlanUnder the Company’s Employee Stock Purchase Plan (“ESPP”), the Company can grant stock purchase rights to alleligible employees during specific offering periods not to exceed twenty-seven months. Each offering period will begin onthe trading day closest to May 16 and November 16 of each year. Shares are purchased through employees’ payrolldeductions, up to a maximum of 10% of employees’ compensation for each purchase period, at a purchase price equal to 85%of the lesser of the fair market value of the Company’s common stock at the first trading day of the applicable offering periodor the purchase date. Participants may purchase up to $25 worth of common stock or 2 shares of common stock in any oneyear. The ESPP is considered compensatory and results in compensation expense.As of June 30, 2017, a total of 824 shares of common stock were reserved for future issuances under the ESPP. Thenumber of shares of common stock reserved for issuance under the ESPP will increase automatically each calendar year,continuing through and including January 1, 2024. The number of shares added each year will be equal to the lesser of (a)400, (b) seventy-five one hundredths percent (0.75%) of the number of shares of common stock of the Company issued andoutstanding on the immediately preceding December 31, or (c) an amount determined by the Company’s board of directors.For fiscal year 2017, the Company’s board of directors determined that it would not increase the number of common sharesreserved for issuance under the ESPP.The Company issued a total of 127 shares upon the completion of its six-month offering periods ending November15, 2016 and May 15, 2017. The Company recorded compensation expense attributable to the ESPP of $656, $1,069 and$1,263 for the years ended June 30, 2015, 2016 and 2017, respectively, which is included in the summary of stock-basedcompensation expense above. The grant date fair value of the ESPP offering periods was estimated using the followingweighted average assumptions: Year ended June 30, 2015 2016 2017 Valuation assumptions: Expected dividend yield 0% 0% 0% Expected volatility 35.5 - 48.4% 44.1 - 53.4% 38.9 - 53.4% Expected term (years) 0.3 - 0.5 0.5 0.5 Risk‑free interest rate 0.04 - 0.11% 0.11 - 0.31% 0.28 - 1.02% (c) 401(k) Plan The Company maintains a 401(k) plan with a safe harbor matching provision that covers all eligible employees. Upto December 31, 2015, the Company matched 50% of the employees’ contributions up to 6% of their gross pay. EffectiveJanuary 1, 2016, the Company increased its match to 50% of employees’ contributions up to 8% of their gross pay.Contributions were $1,656, $2,717 and $3,667 for the years ended June 30, 2015, 2016 and 2017, respectively. (14) Commitments and Contingencies (a) Employment Agreements The Company has employment agreements with certain of its key officers. The agreements allow for minimumannual compensation increases, participation in equity incentive plans and bonuses for annual performance as well as certainchange of control events as defined in the agreements. (b) Litigation From time to time, the Company is subject to litigation arising in the ordinary course of business. Many of theseproceedings are covered in whole or in part by insurance. In the opinion of the Company’s management, the ultimateF-21 Table of Contentsdisposition of any matters currently outstanding or threatened will not have a material adverse effect on the Company’sfinancial position, results of operations, or liquidity. (15) Earnings Per Share Basic net income (loss) per share is computed using the weighted-average number of common shares outstandingduring the period. Diluted net income (loss) per share is computed using the weighted-average number of common sharesoutstanding during the period and, if dilutive, potential common shares outstanding during the period. The Company’spotential common shares consist of the incremental common shares issuable upon the exercise of stock options, the release ofrestricted stock units and the shares purchasable via the employee stock purchase plan as of the balance sheet date. The following table presents the calculation of basic and diluted net income (loss) per share: Year ended June 30, 2015 2016 2017 Numerator: Net income (loss) $(13,972) $(3,851) $6,718 Denominator: Weighted-average shares used in computing net income (loss) per share: Basic 50,127 50,913 51,415 Weighted-average effect of potentially dilutive shares: Employee stock options and restricted stock units — — 2,642 Diluted 50,127 50,913 54,057 Net income (loss) per share: Basic $(0.28) $(0.08) $0.13 Diluted $(0.28) $(0.08) $0.12 The following table summarizes the outstanding employee stock options, restricted stock units and employee stockpurchase plan shares that were excluded from the diluted per share calculation for the periods presented because to includethem would have been anti-dilutive: Year ended June 30, 2015 2016 2017 Employee stock options 3,956 3,464 145 Restricted stock units 386 1,003 627 Employee stock purchase plan shares 13 15 14 Total 4,355 4,482 786 F-22 Table of Contents(16) Selected Quarterly Financial Data (unaudited) The following tables set forth selected unaudited quarterly statements of operations data for each of the eight quartersin the years ended June 30, 2016 and 2017. Quarter Ended September 30, December 31, 2015 2015 March 31, 2016 June 30, 2016 Consolidated Statements of Operations Data Revenues $45,108 $55,184 $70,570 $59,839 Gross profit $24,913 $31,084 $43,361 $33,258 Operating income (loss) $(3,417) $(1,294) $6,201 $(5,040) Net income (loss) $(3,435) $(1,165) $6,161 $(5,412) Net income (loss) per share: Basic $(0.07) $(0.02) $0.12 $(0.11) Diluted $(0.07) $(0.02) $0.12 $(0.11) Weighted-average shares used in computing net income (loss) per share: Basic 50,744 50,890 50,962 51,058 Diluted 50,744 50,890 53,424 51,058 Quarter Ended September 30, December 31, 2016 2016 March 31, 2017 June 30, 2017 Consolidated Statements of Operations Data Revenues $65,022 $68,654 $90,273 $76,061 Gross profit $36,663 $38,271 $58,191 $42,898 Operating income (loss) $(2,507) $(1,643) $14,880 $(3,434) Net income (loss) $(2,568) $(1,671) $14,801 $(3,844) Net income (loss) per share: Basic $(0.05) $(0.03) $0.29 $(0.07) Diluted $(0.05) $(0.03) $0.27 $(0.07) Weighted-average shares used in computing net income (loss) per share: Basic 51,231 51,384 51,447 51,602 Diluted 51,231 51,384 54,002 51,602 F-23 Table of Contents EXHIBIT INDEX Exhibit Incorporated by ReferenceNumber Exhibit Description Form File No. Exhibit Filing Date 2.1 Share Exchange Agreement, dated November 7, 2013. S-1 333-193661 2.1 January 30, 2014 3.1 First Amended and Restated Certificate of Incorporation of theRegistrant. S-1/A 333-193661 3.2 February 14, 2014 3.2* Amended and Restated By-Laws of the Registrant. 4.1 Amended and Restated Investor Rights Agreement, dated June 29, 2012. S-1 333-193661 4.1 January 30, 2014 10.1 Form of Indemnification Agreement for directors and officers. S-1 333-193661 10.2 January 30, 2014 10.2† 2008 Equity Incentive Plan and forms of agreement thereunder. S-1 333-193661 10.3 January 30, 2014 10.2.1† First Amendment to the 2008 Equity Incentive Plan, dated August 5,2010. S-1 333-193661 10.3.1 January 30, 2014 10.2.2† Second Amendment to the 2008 Equity Incentive Plan, dated June 29,2012. S-1 333-193661 10.3.2 January 30, 2014 10.3† 2014 Equity Incentive Plan and forms of agreement thereunder. S-1/A 333-193661 10.4 February 14, 2014 10.4† Third Amended and Restated Executive Employment Agreement betweenPaylocity Corporation and Steven R. Beauchamp, dated February 7,2014. S-1/A 333-193661 10.5 February 14, 2014 10.5† Second Amended and Restated Executive Employment Agreementbetween Paylocity Corporation and Michael R. Haske, dated February 7,2014. S-1/A 333-193661 10.7 February 14, 2014 10.6 Office Lease between 3850 Wilke LLC and Paylocity Corporation, datedJanuary 12, 2007. S-1 333-193661 10.8 January 30, 2014 10.7.1 Amendment to Office Lease, dated January 5, 2011. S-1 333-193661 10.8.1 January 30, 2014 10.7.2 Amendment to Office Lease, dated May 6, 2013. S-1 333-193661 10.8.2 January 30, 201410.7.3 Multi-Tenant Office Lease Agreement, dated June 1, 2016, by andbetween Paylocity Corporation and RPAI Schaumburg American Lane,L.L.C. 8-K 001-36348 10.1 June 2, 2016 10.8† 2014 Employee Stock Purchase Plan. S-1/A 333-193661 10.9 February 14, 2014 10.9† First Amended and Restated Executive Employment Agreement betweenPaylocity Corporation and Peter J. McGrail, dated February 7, 2014. 10-K 001-36348 10.10 August 14, 2015 10.10† Executive Employment Agreement between Paylocity Corporation andMark S. Kinsey, dated May 1, 2015. 10-K 001-36348 10.11 August 12, 2016 Table of ContentsExhibit Incorporated by ReferenceNumber Exhibit Description Form File No. Exhibit Filing Date 10.11† Executive Employment Agreement between Paylocity Corporation andEdward W. Gaty, dated August 8, 2016. 8-K 001-36348 10.1 August 9, 2016 14.1 Code of Business Conduct and Ethics. 10-K 001-36348 14.1 August 22, 2014 21.1 List of Subsidiaries of the Registrant. S-1 333-193661 21.1 January 30, 2014 23.1* Consent of KPMG LLP, Independent Registered Public AccountingFirm. 24.1* Power of Attorney (see page 62 to this Annual Report on Form 10-K). 31.1* Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. 31.2* Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. 32.1** Certification of Chief Executive Officer Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C.§1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of2002. 32.2** Certification of Chief Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended,and 18 U.S.C. §1350 as adopted pursuant to Section 906 of TheSarbanes-Oxley Act of 2002. 101.INS* XBRL Instance Document. 101.SCH* XBRL Taxonomy Extension Schema. 101.CAL* XBRL Taxonomy Extension Calculation Linkbase. 101.LAB* XBRL Taxonomy Extension Label Linkbase. 101.PRE* XBRL Taxonomy Extension Presentation Linkbase. 101.DEF* XBRL Taxonomy Extension Definition Linkbase. †Management contract, compensatory plan orarrangement.*Filedherewith.**Furnishedherewith. Exhibit 3.2AMENDED AND RESTATED BYLAWS OFPAYLOCITY HOLDING CORPORATIONARTICLE ISTOCKHOLDERS1.1 Place of Meetings. All meetings of stockholders shall be held at such place (if any) withinor without the State of Delaware as may be determined from time to time by the Board of Directors or,if not determined by the Board of Directors, by the Chairman of the Board, the President or the ChiefExecutive Officer; provided that the Board of Directors may, in its sole discretion, determine that anymeeting of stockholders shall not be held at any place but shall be held solely by means of remotecommunication in accordance with Section 1.13.1.2 Annual Meeting. The annual meeting of stockholders for the election of directors and forthe transaction of such other business as may properly be brought before the meeting shall be held on adate to be fixed by the Board of Directors at a time to be fixed by the Board of Directors and stated inthe notice of the meeting. 1.3 Special Meetings. Special meetings of stockholders may be called at any time by the Boardof Directors, the Chairman of the Board or the Chief Executive Officer, for any purpose or purposesprescribed in the notice of the meeting and shall be held on such date and at such time as the Boardmay fix. Business transacted at any special meeting of stockholders shall be confined to the purpose orpurposes stated in the notice of meeting.1.4 Notice of Meetings. (a) Written notice of each meeting of stockholders, whether annual or special, shall begiven not less than 10 nor more than 60 days before the date on which the meeting is to be held, toeach stockholder entitled to vote at such meeting as of the record date fixed by the Board of Directorsfor determining the stockholders entitled to notice of the meeting, except as otherwise provided hereinor as required by law (meaning here and hereafter, as required from time to time by the DelawareGeneral Corporation Law or the Certificate of Incorporation of the corporation). The notice of anymeeting shall state the place, if any, date and hour of the meeting, and the means of remotecommunication, if any, by which stockholders and proxy holders may be deemed to be present inperson and vote at such meeting. The notice of a special meeting shall state, in addition, the purpose orpurposes for which the meeting is called.(b) Notice to stockholders may be given by personal delivery, mail, or, with theconsent of the stockholder entitled to receive notice, by facsimile or other means of electronictransmission. If mailed, such notice shall be delivered by postage prepaid envelope directed to eachstockholder at such stockholder’s address as it appears in the records of the corporation and shall bedeemed given when deposited in the United States mail. Notice given by electronic transmissionpursuant to this subsection shall be deemed given: (1) if by facsimile telecommunication, when directedto a facsimile telecommunication number at which the stockholder has consented to receive notice; (2)if by electronic mail, when directed to an electronic mail address at which the stockholder hasconsented to receive notice; (3) if by posting on an electronic network together with separate notice tothe stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of suchseparate notice; and (4) if by any other form of electronic transmission, when directed to thestockholder. An affidavit of the secretary or an assistant secretary or of the transfer agent or other agentof the corporation that the notice has been given by personal delivery, by mail, or by a form of electronic transmission shall, in the absence of fraud, beprima facie evidence of the facts stated therein.(c) Notice of any meeting of stockholders need not be given to any stockholder ifwaived by such stockholder either in a writing signed by such stockholder or by electronictransmission, whether such waiver is given before or after such meeting is held. If such a waiver isgiven by electronic transmission, the electronic transmission must either set forth or be submitted withinformation from which it can be determined that the electronic transmission was authorized by thestockholder.1.5 Voting List. The officer who has charge of the stock ledger of the corporation shallprepare, at least 10 days before each meeting of stockholders, a complete list of the stockholdersentitled to vote at the meeting; the list shall reflect the stockholders entitled to vote as of the tenth daybefore the meeting date, arranged in alphabetical order for each class of stock and showing the mailingaddress of each stockholder and the number of shares registered in the name of each stockholder. Thecorporation shall not be required to include electronic mail addresses or other electronic contactinformation on such list. Such list shall be open to the examination of any stockholder, for any purposegermane to the meeting, for a period of at least 10 days prior to the meeting: (a) on a reasonablyaccessible electronic network, provided that the information required to gain access to such list isprovided with the notice of the meeting, (b) during ordinary business hours at the principal place ofbusiness of the corporation or (c) in any other manner provided by law. If the meeting is to be held at aplace, the list shall be produced and kept at the time and place of the meeting during the whole time ofthe meeting, and may be examined by any stockholder who is present. If the meeting is to be heldsolely by means of remote communication, such list shall also be open to the examination of anystockholder during the whole time of the meeting on a reasonably accessible electronic network, andthe information required to access such list shall be provided with the notice of the meeting. The stockledger shall be the only evidence as to the stockholders who are entitled to examine the list required bythis Section 1.5 or to vote in person or by proxy at any meeting of stockholders.1.6 Quorum. Except as otherwise provided by law or these Bylaws, the holders of a majorityof the shares of the capital stock of the corporation entitled to vote at the meeting, present in person orrepresented by proxy, shall constitute a quorum for the transaction of business. Where a separate classvote by a class or classes or series is required, a majority of the shares of such class or classes or seriespresent in person or represented by proxy shall constitute a quorum entitled to take action with respectto that vote on that matter.1.7 Adjournments. Any meeting of stockholders may be adjourned to any other time and toany other place at which a meeting of stockholders may be held under these Bylaws by the chairman ofthe meeting or, in the absence of such person, by any officer entitled to preside at or to act as secretaryof such meeting, or by the holders of a majority of the shares of stock present or represented at themeeting and entitled to vote, although less than a quorum. When a meeting is adjourned to anotherplace, date or time, written notice need not be given of the adjourned meeting if the date, time andplace, if any, thereof, and the means of remote communication, if any, by which stockholders andproxy holders may be deemed to be present in person and vote at such adjourned meeting, areannounced at the meeting at which the adjournment is taken; provided, however, that if the date of anyadjourned meeting is more than 30 days after the date for which the meeting was originally noticed, orif the Board of Directors fixes a new record date for determining the stockholders entitled to vote at theadjourned meeting in accordance with Section 4.5, written notice of the place, if any, date and time ofthe adjourned meeting and the means of remote communication, if any, by which stockholders andproxy holders may be deemed to be present in person and vote at such adjourned meeting, shall begiven in conformity herewith. At the adjourned meeting, the corporation may transact any businesswhich might have been transacted at the original meeting.2 1.8 Voting and Proxies. Each stockholder shall have one vote for each share of stock entitledto vote held of record by such stockholder and a proportionate vote for each fractional share so held,unless otherwise provided by law or in the Certificate of Incorporation. Each stockholder of recordentitled to vote at a meeting of stockholders may vote in person or may authorize any other person orpersons to vote or act for such stockholder by a written proxy executed by the stockholder or thestockholder’s authorized agent or by an electronic transmission permitted by law and delivered to theSecretary of the corporation. Any copy, facsimile transmission or other reliable reproduction of thewriting or electronic transmission created pursuant to this section may be substituted or used in lieu ofthe original writing or electronic transmission for any and all purposes for which the original writing ortransmission could be used, provided that such copy, facsimile transmission or other reproduction shallbe a complete reproduction of the entire original writing or electronic transmission.1.9 Action at Meeting. (a) At any meeting of stockholders for the election of one or more directors at which aquorum is present, the election shall be determined by a plurality of the votes cast by the stockholdersentitled to vote at the election. (b) All other matters shall be determined by a majority in voting power of the sharespresent in person or represented by proxy and entitled to vote on the matter (or if there are two or moreclasses of stock entitled to vote as separate classes, then in the case of each such class, a majority of theshares of each such class present in person or represented by proxy and entitled to vote on the mattershall decide such matter), provided that a quorum is present, except when a different vote is required byexpress provision of law, the Certificate of Incorporation or these Bylaws. (c) All voting, including on the election of directors, but excepting where otherwiserequired by law, may be by a voice vote; provided, that upon demand therefor by a stockholder entitledto vote or the stockholder’s proxy, a vote by ballot shall be taken. Each ballot shall state the name ofthe stockholder or proxy voting and such other information as may be required under the procedureestablished for the meeting. The corporation may, and to the extent required by law, shall, in advanceof any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a writtenreport thereof. The corporation may designate one or more persons as an alternate inspector to replaceany inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, theperson presiding at the meeting may, and to the extent required by law, shall, appoint one or moreinspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shalltake and sign an oath to faithfully execute the duties of inspector with strict impartiality and accordingto the best of his ability.1.10 Stockholder Business (Other Than the Election of Directors).(a) Only such business (other than nominations for election of directors, which isgoverned by Section 2.15 of these Bylaws) shall be conducted as shall have been properly broughtbefore an annual meeting. To be properly brought before an annual meeting, business must be either(i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of theBoard of Directors, (ii) otherwise properly brought before the meeting by or at the direction of theBoard of Directors, or (iii) otherwise properly brought before the meeting by a stockholder who (A) is astockholder of record (and, with respect to any beneficial owner, if different, on whose behalf suchbusiness is proposed, only if such beneficial owner is the beneficial owner of shares of the corporation)both at the time of giving the notice provided for in this Section 1.10 and at the time of the meeting, (B)is entitled to vote at the meeting and (C) has complied with the notice procedures set forth in thisSection 1.10 as to such business. For any business to be properly brought before an annual meeting bya stockholder (other than nominations for election of directors, which is governed by Section 2.15 ofthese Bylaws), it must be a proper matter for3 stockholder action under the Delaware General Corporation Law, and the stockholder must have giventimely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder’s noticeshall be in writing and must be received at the corporation’s principal executive offices not later than 90days nor earlier than 120 days prior to the first anniversary of the date of the preceding year’s annualmeeting as first specified in the corporation’s notice of meeting (without regard to any postponementsor adjournments of such meeting after such notice was first sent), provided, however, that if no annualmeeting was held in the previous year or the date of the annual meeting is advanced by more than thirty(30) days, or delayed (other than as a result of adjournment) by more than thirty (30) days from theanniversary of the previous year’s annual meeting, notice by the stockholder to be timely must bereceived not later than the close of business on the later of the ninetieth (90) day prior to such annualmeeting or the tenth (10) day following the date on which public announcement of the date of suchmeeting is first made. “Public announcement” for purposes hereof shall have the meaning set forth inSection 2.15(c) of these Bylaws. In no event shall the public announcement of an adjournment orpostponement of an annual meeting commence a new time period (or extend any time period) for thegiving of a stockholder’s notice as described above. For business to be properly brought before aspecial meeting by a stockholder, the business must be limited to the purpose or purposes set forth in arequest under Section 1.3.(b) A stockholder’s notice to the Secretary of the corporation shall set forth (i) as toeach matter the stockholder proposes to bring before the annual meeting, a brief description of thebusiness desired to be brought before the annual meeting and the text of the proposal or business,including the text of any resolutions proposed for consideration and in the event that such businessincludes a proposal to amend the Bylaws of the corporation, the language of the proposed amendment,and (ii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf theproposal is being made, and any of their respective affiliates or associates or others acting in concerttherewith (each, a “Proposing Person”), (A) the name and address, as they appear on the corporation’sbooks, of the stockholder proposing such business and of any other Proposing Person, (B) the class orseries and number of shares of the corporation which are owned beneficially and of record by thestockholder and any other Proposing Person as of the date of the notice, and a representation that thestockholder will notify the corporation in writing within five (5) business days after the record date forvoting at the meeting of the class or series and number of shares of the corporation owned beneficiallyand of record by the stockholder and any other Proposing Person as of the record date for voting at themeeting, (C) a representation that the stockholder intends to appear in person or by proxy at themeeting to propose the business specified in the notice, (D) any material interest of the stockholder andany other Proposing Person in such business, (E) the following information regarding the ownershipinterests of the stockholder and any other Proposing Person which shall be supplemented in writing bythe stockholder not later than ten (10) days after the record date for voting at the meeting to disclosesuch interests as of such record date: (1) a description of any option, warrant, convertible security,stock appreciation right, or similar right with an exercise or conversion privilege or a settlementpayment or mechanism at a price related to any class or series of shares of the corporation or with avalue derived in whole or in part from the value of any class or series of shares of the corporation, anyderivative or synthetic arrangement having the characteristics of a long position in any class or series ofshares of the corporation, or any contract, derivative, swap or other transaction or series of transactionsdesigned to produce economic benefits and risks that correspond substantially to the ownership of anyclass or series of shares of the corporation, including due to the fact that the value of such contract,derivative, swap or other transaction or series of transactions is determined by reference to the price,value or volatility of any class or series of shares of the corporation, whether or not such instrument,contract or right shall be subject to settlement in the underlying class or series of shares of thecorporation, through the delivery of cash or other property, or otherwise, and without regard to whetherthe stockholder of record or any other Proposing Person may have entered into transactions that hedgeor mitigate the economic effect of such instrument, contract or right (a “Derivative Instrument”)directly or indirectly owned beneficially by such stockholder or other Proposing Person, and any otherdirect or indirect opportunity to profit or share in any profit derived from any increase or decrease inthe value of shares of4 thththe corporation; (2) a description of any proxy, contract, arrangement, understanding, or relationshippursuant to which such stockholder or other Proposing Person has a right to vote any shares of anysecurity of the corporation; (3) a description of any agreement, arrangement, understanding,relationship or otherwise, including any repurchase or similar so-called “stock borrowing” agreement orarrangement, engaged in, directly or indirectly, by such stockholder or other Proposing Person, thepurpose or effect of which is to mitigate loss to, reduce the economic risk (of ownership or otherwise)of any class or series of the shares of the corporation by, manage the risk of share price changes for, orincrease or decrease the voting power of, such stockholder or other Proposing Person with respect toany class or series of the shares of the corporation, or which provides, directly or indirectly, theopportunity to profit or share in any profit derived from any decrease in the price or value of any classor series of the shares of the corporation (“Short Interests”); (4) a description of any rights to dividendson the shares of the corporation owned beneficially by such stockholder or other Proposing Person thatare separated or separable from the underlying shares of the corporation; (5) a description of anyproportionate interest in shares of the corporation or Derivative Instruments held, directly or indirectly,by a general or limited partnership in which such stockholder or other Proposing Person is a generalpartner or, directly or indirectly, beneficially owns an interest in a general partner; (6) a description ofany performance-related fees (other than an asset-based fee) to which such stockholder or otherProposing Person is entitled based on any increase or decrease in the value of shares of the corporationor Derivative Instruments, if any, as of the date of such notice, including, without limitation, any suchinterests held by members of such stockholder’s or other Proposing Person’s immediate family sharingthe same household; (7) a description of any significant equity interests or any Derivative Instrumentsor Short Interests in any principal competitor of the corporation held by such stockholder or otherProposing Person; and (8) a description of any direct or indirect interest of such stockholder or otherProposing Person in any contract with the corporation, any affiliate of the corporation or any principalcompetitor of the corporation (including, in any such case, any employment agreement, collectivebargaining agreement or consulting agreement), and (F) any other information relating to suchstockholder or other Proposing Person, if any, that would be required to be disclosed in a proxystatement or other filings required to be made in connection with solicitations of proxies for, asapplicable, the proposal and/or for the election of directors in a contested election pursuant toSection 14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rulesand regulations promulgated thereunder. The terms “associate” and “beneficially owned” for purposeshereof shall have the meanings set forth in Section 2.15(e) of these Bylaws.(c) Unless otherwise required by law, if the stockholder (or a qualified representativeof the stockholder) does not appear at the annual meeting of stockholders to present the proposedbusiness, such proposed business shall not be transacted, notwithstanding that proxies in respect ofsuch vote may have been received by the corporation. For purposes of this section, to be considered aqualified representative of the stockholder, a person must be a duly authorized officer, manager orpartner of such stockholder or authorized by a writing executed by such stockholder (or a reliablereproduction or electronic transmission of the writing) delivered to the corporation prior to the makingof such proposal at such meeting by such stockholder stating that such person is authorized to act forsuch stockholder as proxy at the meeting of stockholders.(d) Notwithstanding the foregoing provisions of this Section 1.10, a stockholder shallalso comply with all applicable requirements of the Exchange Act and the rules and regulationsthereunder with respect to the matters set forth in this Section 1.10; provided however, that anyreferences in this Section 1.10 to the Exchange Act or the rules and regulations promulgated thereunderare not intended to and shall not limit any requirements applicable to proposals as to any business to beconsidered pursuant to this Section 1.10. Nothing in this Section 1.10 shall be deemed to affect anyrights (i) of stockholders to request inclusion of proposals in the corporation’s proxy statement pursuantto Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock if and to theextent provided for under law, the Certificate of Incorporation or these Bylaws.5 (e) Notwithstanding any provisions to the contrary, the notice requirements set forth insubsections (a) and (b) above shall be deemed satisfied by a stockholder if the stockholder has notifiedthe corporation of the stockholder’s intention to present a proposal at an annual meeting in compliancewith applicable rules and regulations promulgated under the Exchange Act and such stockholder’sproposal has been included in a proxy statement that has been prepared by the corporation to solicitproxies for such annual meeting. 1.11 Conduct of Business. At every meeting of the stockholders, the Chairman of theBoard, or, in his absence, the Chief Executive Officer, or, in his absence, such other person as may beappointed by the Board of Directors, shall act as chairman. The Secretary of the corporation or aperson designated by the chairman of the meeting shall act as secretary of the meeting. Unlessotherwise approved by the chairman of the meeting, attendance at the stockholders’ meeting isrestricted to stockholders of record, persons authorized in accordance with Section 1.8 of these Bylawsto act by proxy, and officers of the corporation.The chairman of the meeting shall call the meeting to order, establish the agenda, and conductthe business of the meeting in accordance therewith or, at the chairman’s discretion, the business of themeeting may be conducted otherwise in accordance with the wishes of the stockholders inattendance. The date and time of the opening and closing of the polls for each matter upon which thestockholders will vote at the meeting shall be announced at the meeting.The chairman shall also conduct the meeting in an orderly manner, rule on the precedence of,and procedure on, motions and other procedural matters, and exercise discretion with respect to suchprocedural matters with fairness and good faith toward all those entitled to take part. Without limitingthe foregoing, the chairman may (a) restrict attendance at any time to bona fide stockholders of recordand their proxies and other persons in attendance at the invitation of the presiding officer or Board ofDirectors, (b) restrict use of audio or video recording devices at the meeting, and (c) impose reasonablelimits on the amount of time taken up at the meeting on discussion in general or on remarks by any onestockholder. Should any person in attendance become unruly or obstruct the meeting proceedings, thechairman shall have the power to have such person removed from the meeting. Notwithstandinganything in the Bylaws to the contrary, no business shall be conducted at a meeting except inaccordance with the procedures set forth in Section 1.10, this Section 1.11 and Section 2.15. Thechairman of the meeting, in addition to making any other determinations that may be appropriate to theconduct of the meeting, shall have the power and duty to determine whether a nomination or anybusiness proposed to be brought before the meeting was made or proposed, as the case may be, inaccordance with the provisions of Section 1.10, this Section 1.11 and Section 2.15, and if he should sodetermine that any proposed nomination or business is not in compliance with such sections, he shall sodeclare to the meeting that such defective nomination or proposal shall be disregarded.1.12 Stockholder Action Without Meeting. Any action required or permitted to be taken bythe stockholders of the corporation must be effected at a duly called annual or special meeting ofstockholders of the corporation and may not be effected by any consent in writing by suchstockholders.1.13 Meetings by Remote Communication. If authorized by the Board of Directors, andsubject to such guidelines and procedures as the Board may adopt, stockholders and proxy holders notphysically present at a meeting of stockholders may, by means of remote communication, participate inthe meeting and be deemed present in person and vote at the meeting, whether such meeting is to beheld at a designated place or solely by means of remote communication, provided that (a) thecorporation shall implement reasonable measures to verify that each person deemed present andpermitted to vote at the meeting by means of remote communication is a stockholder or proxy holder,(b) the corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate6 in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read orhear the proceedings of the meeting substantially concurrently with such proceedings, and (c) if anystockholder or proxy holder votes or takes other action at the meeting by means of remotecommunication, a record of such vote or other action shall be maintained by the corporation.ARTICLE IIBOARD OF DIRECTORS1.14 General Powers. The business and affairs of the corporation shall be managed by orunder the direction of a Board of Directors, who may exercise all of the powers of the corporationexcept as otherwise provided by law or the Certificate of Incorporation. In the event of a vacancy onthe Board of Directors, the remaining directors, except as otherwise provided by law, may exercise thepowers of the full Board until the vacancy is filled.1.15 Number and Term of Office. Subject to the rights of the holders of any series ofpreferred stock to elect directors under specified circumstances, the number of directors shall initiallybe five (5) and, thereafter, shall be fixed from time to time exclusively by the Board of Directorspursuant to a resolution adopted by a majority of the total number of authorized directors (whether ornot there exist any vacancies in previously authorized directorships at the time any such resolution ispresented to the Board for adoption). Effective upon the date of the closing of the corporation’s initialpublic offering of its common stock (the “Effective Date”), the directors, other than those who may beelected by the holders of any series of preferred stock under specified circumstances, shall be dividedinto three classes, with the term of office of the first class to expire at the first annual meeting ofstockholders held after the Effective Date; the term of office of the second class to expire at the secondannual meeting of stockholders held after the Effective Date; the term of office of the third class toexpire at the third annual meeting of stockholders held after the Effective Date; and thereafter for eachsuch term to expire at each third succeeding annual meeting of stockholders after such election. Alldirectors shall hold office until the expiration of the term for which elected and until their respectivesuccessors are elected, except in the case of the death, resignation or removal of any director. At eachannual meeting of stockholders commencing with the first annual meeting held after the Effective Date,(i) the successors to the class of directors whose term expires in that year shall be elected to hold officefor a term of three years to succeed those whose term expires so that the term of office of one class ofdirectors shall expire in each year, with each director to hold office until his successor shall have beenduly elected and qualified, and (ii) if authorized by a resolution of the Board of Directors, directors maybe elected to fill any vacancy on the Board of Directors, regardless of how such vacancy shall havebeen created.1.16 Vacancies and Newly Created Directorships. Subject to the rights of the holders of anyseries of preferred stock then outstanding, newly created directorships resulting from any increase inthe authorized number of directors or any vacancies in the Board of Directors resulting from death,resignation, retirement, disqualification or other cause (including removal from office by a vote of thestockholders) may be filled only by a majority vote of the directors then in office, though less than aquorum, or by the sole remaining director, and directors so chosen shall hold office for a term expiringat the next annual meeting of stockholders at which the term of office of the class to which they havebeen elected expires or until such director’s successor shall have been duly elected and qualified. Nodecrease in the number of authorized directors shall shorten the term of any incumbent director.1.17 Resignation. Any director may resign by delivering notice in writing or by electronictransmission to the President, Chief Executive Officer, Chairman of the Board or Secretary. Suchresignation shall be effective upon receipt unless it is specified to be effective at some other time orupon the happening of some other event.7 1.18 Removal. Subject to the rights of the holders of any series of preferred stock thenoutstanding, any directors, or the entire Board of Directors, may be removed from office at any time,but only for cause, by the affirmative vote of the holders of sixty-six and two-thirds percent (66-2/3%)of the voting power of all of the outstanding shares of capital stock entitled to vote generally in theelection of directors, voting together as a single class. Vacancies in the Board of Directors resultingfrom such removal may be filled by a majority of the directors then in office, though less than aquorum, or by the sole remaining director. Directors so chosen shall hold office until the next annualmeeting of stockholders at which the term of office of the class to which they have been electedexpires.1.19 Regular Meetings. Regular meetings of the Board of Directors may be held withoutnotice at such time and place, either within or without the State of Delaware, as shall be determinedfrom time to time by the Board of Directors; provided that any director who is absent when such adetermination is made shall be given notice of the determination. A regular meeting of the Board ofDirectors may be held without notice immediately after and at the same place as the annual meeting ofstockholders.1.20 Special Meetings. Special meetings of the Board of Directors may be called by theChairman of the Board, the Chief Executive Officer, the President or two or more directors and may beheld at any time and place, within or without the State of Delaware.1.21 Notice of Special Meetings. Notice of any special meeting of directors shall be givento each director by whom it is not waived by the Secretary or by the officer or one of the directorscalling the meeting. Notice shall be duly given to each director by (a) giving notice to such director inperson or by telephone, electronic transmission or voice message system at least 24 hours in advance ofthe meeting, (b) sending a facsimile to his last known facsimile number, or delivering written notice byhand to his last known business or home address, at least 24 hours in advance of the meeting, or(c) mailing written notice to his last known business or home address at least three days in advance ofthe meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify thepurposes of the meeting. Unless otherwise indicated in the notice thereof, any and all business may betransacted at a special meeting.1.22 Participation in Meetings by Telephone Conference Calls or Other Methods ofCommunication. Directors or any members of any committee designated by the directors mayparticipate in a meeting of the Board of Directors or such committee by means of conference telephoneor other communications equipment by means of which all persons participating in the meeting canhear each other, and participation by such means shall constitute presence in person at such meeting.1.23 Quorum. A majority of the total number of authorized directors shall constitute aquorum at any meeting of the Board of Directors. In the absence of a quorum at any such meeting, amajority of the directors present may adjourn the meeting from time to time without further notice otherthan announcement at the meeting, until a quorum shall be present. Interested directors may becounted in determining the presence of a quorum at a meeting of the Board of Directors or at a meetingof a committee which authorizes a particular contract or transaction.1.24 Action at Meeting. At any meeting of the Board of Directors at which a quorum ispresent, the vote of a majority of those present shall be sufficient to take any action, unless a differentvote is specified by law, the Certificate of Incorporation or these Bylaws.1.25 Action by Written Consent. Any action required or permitted to be taken at anymeeting of the Board of Directors or of any committee of the Board of Directors may be taken withouta meeting if all members of the Board or committee, as the case may be, consent to the action in writingor by electronic transmission, and the writings or electronic transmissions are filed with the minutes ofproceedings of the8 Board or committee. Such filing shall be in paper form if the minutes are maintained in paper form andshall be in electronic form if the minutes are maintained in electronic form.1.26 Committees. The Board of Directors may designate one or more committees, eachcommittee to consist of one or more of the directors of the corporation, with such lawfully delegatedpowers and duties as it therefor confers, to serve at the pleasure of the Board. The Board maydesignate one or more directors as alternate members of any committee, who may replace any absent ordisqualified member at any meeting of the committee. In the absence or disqualification of a memberof a committee, the member or members of the committee present at any meeting and not disqualifiedfrom voting, whether or not he or they constitute a quorum, may unanimously appoint another memberof the Board of Directors to act at the meeting in the place of any such absent or disqualifiedmember. Any such committee, to the extent provided in the resolution of the Board of Directors andsubject to the provisions of the Delaware General Corporation Law, shall have and may exercise all thepowers and authority of the Board of Directors in the management of the business and affairs of thecorporation and may authorize the seal of the corporation to be affixed to all papers which may requireit. Each such committee shall keep minutes and make such reports as the Board of Directors may fromtime to time request. Except as the Board of Directors may otherwise determine, any committee maymake rules for the conduct of its business, but unless otherwise provided by such rules, its businessshall be conducted as nearly as possible in the same manner as is provided in these Bylaws for theBoard of Directors.1.27 Compensation of Directors. Directors may be paid such compensation for theirservices and such reimbursement for expenses of attendance at meetings as the Board of Directors mayfrom time to time determine. No such payment shall preclude any director from serving the corporationor any of its parent or subsidiary corporations in any other capacity and receiving compensation forsuch service.1.28 Nomination of Director Candidates.(a) Subject to the rights of holders of any class or series of Preferred Stock thenoutstanding, nominations for the election of directors at an annual meeting may be made by (i) theBoard of Directors or a duly authorized committee thereof or (ii) any stockholder of the corporationwho is a stockholder of record at the time of giving the notice provided for in paragraphs (b) and (c) ofthis Section 2.15, who is entitled to vote at the meeting and who complies with the procedures set forthin this Section 2.15. (b) All nominations by stockholders must be made pursuant to timely notice given inwriting to the Secretary of the corporation. To be timely, a stockholder’s nomination for a director tobe elected at an annual meeting must be received at the corporation’s principal executive offices notlater than 90 days nor earlier than 120 days prior to the first anniversary of the date of the precedingyear’s annual meeting as first specified in the corporation’s notice of meeting (without regard to anypostponements or adjournments of such meeting after such notice was first sent), provided, however,that if no annual meeting was held in the previous year or the date of the annual meeting is advancedby more than thirty (30) days or delayed (other than as a result of adjournment) by more than thirty(30) days from the first anniversary of the previous year’s annual meeting, notice by the stockholder tobe timely must be received not later than the close of business on the later of the ninetieth (90) dayprior to such annual meeting or the tenth (10) day following the date on which public announcementof the date of such meeting is first made. Each such notice shall set forth (i) as to the stockholder andthe beneficial owner, if any, on whose behalf the nomination is being made, and any of their respectiveaffiliates or associates or others acting in concert therewith (each, a “Nominating Person”), the nameand address, as they appear on the corporation’s books, of the stockholder who intends to make thenomination and of any other Nominating Person, (ii) the class or series and number of shares of thecorporation which are owned beneficially and of record by the stockholder and any other NominatingPerson as of the date of the notice, and a representation that the9 ththstockholder will notify the corporation in writing within five (5) business days after the record date forvoting at the meeting of the class or series and number of shares of the corporation owned beneficiallyand of record by the stockholder and any other Nominating Person as of the record date for voting atthe meeting, (iii) a representation that the stockholder intends to appear in person or by proxy at themeeting to nominate the nominee specified in the notice, (iv) the following information regarding theownership interests of the stockholder and any other Nominating Person, which shall be supplementedin writing by the stockholder not later than ten (10) days after the record date for notice of the meetingto disclose such interests as of such record date: (A) a description of any Derivative Instrument directlyor indirectly owned beneficially by such stockholder or other Nominating Person, and any other director indirect opportunity to profit or share in any profit derived from any increase or decrease in the valueof shares of the corporation; (B) a description of any proxy, contract, arrangement, understanding, orrelationship pursuant to which such stockholder or other Nominating Person has a right to vote anyshares of any security of the corporation; (C) a description of any Short Interests in any securities of thecorporation directly or indirectly owned beneficially by such stockholder or other Nominating Person;(D) a description of any rights to dividends on the shares of the corporation owned beneficially by suchstockholder or other Nominating Person that are separated or separable from the underlying shares ofthe corporation; (E) a description of any proportionate interest in shares of the corporation or DerivativeInstruments held, directly or indirectly, by a general or limited partnership in which such stockholder orother Nominating Person is a general partner or, directly or indirectly, beneficially owns an interest in ageneral partner; (F) a description of any performance-related fees (other than an asset-based fee) towhich such stockholder or other Nominating Person is entitled based on any increase or decrease in thevalue of shares of the corporation or Derivative Instruments, if any, as of the date of such notice,including, without limitation, any such interests held by members of such stockholder’s or otherNominating Person’s immediate family sharing the same household; (G) a description of any significantequity interests or any Derivative Instruments or Short Interests in any principal competitor of thecorporation held by such stockholder or other Nominating Person; and (H) a description of any direct orindirect interest of such stockholder or other Nominating Person in any contract with the corporation,any affiliate of the corporation or any principal competitor of the corporation (including, in any suchcase, any employment agreement, collective bargaining agreement or consulting agreement), (v) adescription of all arrangements or understandings between the stockholder or other NominatingPerson and each nominee and any other person or persons (naming such person or persons) pursuant towhich the nomination or nominations are to be made by the stockholder, (vi) a description of all directand indirect compensation and other material monetary agreements, arrangements and understandingsduring the past three years, and any other material relationships, between or among such stockholderand any other Nominating Person, on the one hand, and each nominee, and his respective affiliates andassociates, or others acting in concert therewith, on the other hand, including, without limitation allinformation that would be required to be disclosed pursuant to Rule 404 promulgated under RegulationS-K if the stockholder and any Nominating Person, if any, or any affiliate or associate thereof or personacting in concert therewith, were the “registrant” for purposes of such rule and the nominee were adirector or executive officer of such registrant, (vii) such other information regarding each nominee aswould be required to be included in a proxy statement filed pursuant to the proxy rules of the SEC, hadthe nominee been nominated, or intended to be nominated, by the Board of Directors, and (viii) thesigned consent of each nominee to serve as a director of the corporation if so elected. In no event shallthe public announcement of an adjournment or postponement of an annual meeting commence a newtime period (or extend any time period) for the giving of a stockholder’s notice as describedabove. Notwithstanding the second sentence of this Section 2.15(b), in the event that the number ofdirectors to be elected at an annual meeting is increased and there is no public announcement by thecorporation naming the nominees for the additional directorships at least 100 days prior to the one-yearanniversary of the date of the preceding year’s annual meeting as first specified in the corporation’snotice of meeting (without regard to any postponements or adjournments of such meeting after suchnotice was first sent), a stockholder’s notice required by this Section 2.15(b) shall also be consideredtimely, but only with respect to nominees for the additional directorships, if it shall be delivered to theSecretary at the principal executive offices of the10 corporation not later than the close of business on the 10th day following the day on which such publicannouncement is first made by the corporation.(c) Nominations of persons for election to the Board of Directors may be made at aspecial meeting of stockholders at which directors are to be elected pursuant to the corporation’s noticeof meeting (i) by or at the direction of the Board of Directors or a committee thereof or (ii) by anystockholder who complies with the notice procedures set forth in this Section 2.15 and who is astockholder of record at the time such notice is delivered to the Secretary of the corporation. In theevent the corporation calls a special meeting of stockholders for the purpose of electing one or moredirectors to the Board of Directors, any such stockholder may nominate a person or persons (as the casemay be), for election to such position(s) as are specified in the corporation’s notice of meeting, if thestockholder’s notice as required by Section 2.15(a) is delivered to the Secretary at the principalexecutive offices of the corporation not earlier than ninety (90) days prior to such special meeting andnot later than the close of business on the later of the sixtieth (60) day prior to such special meeting orthe tenth (10) day following the day on which public announcement is first made of the date of thespecial meeting and of the nominees proposed by the Board of Directors to be elected at suchmeeting. In no event shall the public announcement of an adjournment or postponement of a specialmeeting commence a new time period (or extend any time period) for the giving of a stockholder’snotice as described above.(d) For purposes of these Bylaws, “public announcement” shall mean disclosure in apress release reported by the Dow Jones News Service, Associated Press or comparable national newsservice or in a document publicly filed or furnished by the corporation with the SEC pursuant toSection 13, 14 or 15(d) of the Exchange Act. (e) Only those persons who are nominated in accordance with the procedures set forthin this section shall be eligible for election as directors at any meeting of stockholders. The Chairmanof the Board of Directors or Secretary may, if the facts warrant, determine that a notice received by thecorporation relating to a nomination proposed to be made does not satisfy the requirements of thisSection 2.15 (including if the stockholder does not provide the updated information required underSection 2.15(b) to the corporation within five (5) business days following the record date for themeeting), and if it be so determined, shall so declare and any such nomination shall not be introducedat such meeting of stockholders, notwithstanding that proxies in respect of such vote may have beenreceived. The chairman of the meeting shall have the power and duty to determine whether anomination brought before the meeting was made in accordance with the procedures set forth in thissection, and, if any nomination is not in compliance with this section (including if the stockholder doesnot provide the updated information required under Section 2.15(b) to the corporation within five (5)business days following the record date for the meeting), to declare that such defective nomination shallbe disregarded, notwithstanding that proxies in respect of such vote may have been received. Unlessotherwise required by law, if the stockholder (or a qualified representative of the stockholder) does notappear at the annual meeting or a special meeting of stockholders of the corporation to present anomination, such nomination shall be disregarded, notwithstanding that proxies in respect of such votemay have been received by the corporation. For purposes of this Section 2.15, to be considered aqualified representative of the stockholder, a person must be a duly authorized officer, manager orpartner of such stockholder or authorized by a writing executed by such stockholder (or a reliablereproduction or electronic transmission of the writing) delivered to the corporation prior to the makingof such nomination at such meeting by such stockholder stating that such person is authorized to act forsuch stockholder as proxy at the meeting of stockholders.(f) Notwithstanding the foregoing provisions of this Section 2.15, a stockholder shallalso comply with all applicable requirements of the Exchange Act and the rules and regulationsthereunder with respect to the matters set forth in this Section 2.15; provided however, that anyreferences in this Section 2.15 to the Exchange Act or the rules promulgated thereunder are notintended to and shall not limit any11 ththrequirements applicable to nominations to be considered pursuant to this Section 2.15. Nothing in thisSection 2.15 shall be deemed to affect any rights of the holders of any series of preferred stock if and tothe extent provided for under law, the Certificate of Incorporation or these Bylaws.ARTICLE IIIOFFICERS1.29 Enumeration. The officers of the corporation shall consist of a Chief ExecutiveOfficer, a President, a Secretary, a Treasurer, a Chief Financial Officer and such other officers with suchother titles as the Board of Directors shall determine, including, at the discretion of the Board ofDirectors, a Chairman of the Board and one or more Vice Presidents and Assistant Secretaries. TheBoard of Directors may appoint such other officers as it may deem appropriate.1.30 Election. Officers shall be elected annually by the Board of Directors at its firstmeeting following the annual meeting of stockholders. Officers may be appointed by the Board ofDirectors at any other meeting.1.31 Qualification. No officer need be a stockholder. Any two or more offices may be heldby the same person.1.32 Tenure. Except as otherwise provided by law, by the Certificate of Incorporation or bythese Bylaws, each officer shall hold office until his successor is elected and qualified, unless adifferent term is specified in the vote appointing the officer, or until his earlier death, resignation orremoval.1.33 Resignation and Removal. Any officer may resign by delivering his writtenresignation to the corporation at its principal office or to the President or Secretary. Such resignationshall be effective upon receipt unless it is specified to be effective at some other time or upon thehappening of some other event. Any officer elected by the Board of Directors may be removed at anytime, with or without cause, by the Board of Directors.1.34 Chairman of the Board. The Board of Directors may appoint a Chairman of theBoard. If the Board of Directors appoints a Chairman of the Board, he shall perform such duties andpossess such powers as are assigned to the Chairman by the Board of Directors and theseBylaws. Unless otherwise provided by the Board of Directors, he shall preside at all meetings of theBoard of Directors.1.35 Chief Executive Officer. The Chief Executive Officer of the corporation shall, subjectto the direction of the Board of Directors, have general supervision, direction and control of thebusiness and the officers of the corporation. He shall preside at all meetings of the stockholders and, inthe absence or nonexistence of a Chairman of the Board, at all meetings of the Board of Directors. Heshall have the general powers and duties of management usually vested in the chief executive officer ofa corporation, including general supervision, direction and control of the business and supervision ofother officers of the corporation, and shall have such other powers and duties as may be prescribed bythe Board of Directors or these Bylaws.1.36 President. Subject to the direction of the Board of Directors and such supervisorypowers as may be given by these Bylaws or the Board of Directors to the Chairman of the Board or theChief Executive Officer, if such titles be held by other officers, the President shall have generalsupervision, direction and control of the business and supervision of other officers of thecorporation. Unless otherwise designated by the Board of Directors, the President shall be the ChiefExecutive Officer of the corporation. The President shall have such other powers and duties as may beprescribed by the Board of Directors or these Bylaws. He shall have power to sign stock certificates,contracts and other instruments of the12 corporation which are authorized and shall have general supervision and direction of all of the otherofficers, employees and agents of the corporation, other than the Chairman of the Board and the ChiefExecutive Officer.1.37 Vice Presidents. Any Vice President shall perform such duties and possess suchpowers as the Board of Directors, the Chief Executive Officer or the President may from time to timeprescribe. In the event of the absence, inability or refusal to act of the President, the Vice President (orif there shall be more than one, the Vice Presidents in the order determined by the Board of Directors)shall perform the duties of the President and when so performing shall have all the powers of and besubject to all the restrictions upon the President. The Board of Directors may assign to any VicePresident the title of Executive Vice President, Senior Vice President or any other title selected by theBoard of Directors.1.38 Secretary and Assistant Secretaries. The Secretary shall perform such duties and shallhave such powers as the Board of Directors or the President may from time to time prescribe. Inaddition, the Secretary shall perform such duties and have such powers as are set forth in these Bylawsand as are incident to the office of the Secretary, including, without limitation, the duty and power togive notices of all meetings of stockholders and special meetings of the Board of Directors, to keep arecord of the proceedings of all meetings of stockholders and the Board of Directors, to maintain astock ledger and prepare lists of stockholders and their addresses as required, to be custodian ofcorporate records and the corporate seal and to affix and attest to the same on documents.Any Assistant Secretary shall perform such duties and possess such powers as the Board ofDirectors, the Chief Executive Officer, the President or the Secretary may from time to timeprescribe. In the event of the absence, inability or refusal to act of the Secretary, the Assistant Secretary(or if there shall be more than one, the Assistant Secretaries in the order determined by the Board ofDirectors) shall perform the duties and exercise the powers of the Secretary.In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders ordirectors, the person presiding at the meeting shall designate a temporary secretary to keep a record ofthe meeting.1.39 Treasurer. The Treasurer shall perform such duties and have such powers as areincident to the office of treasurer, including without limitation, the duty and power to keep and beresponsible for all funds and securities of the corporation, to maintain the financial records of thecorporation, to deposit funds of the corporation in depositories as authorized, to disburse such funds asauthorized, to make proper accounts of such funds, and to render as required by the Board of Directorsaccounts of all such transactions and of the financial condition of the corporation.1.40 Chief Financial Officer. The Chief Financial Officer shall perform such duties andshall have such powers as may from time to time be assigned to the Chief Financial Officer by theBoard of Directors, the Chief Executive Officer or the President. Unless otherwise designated by theBoard of Directors, the Chief Financial Officer shall be the Treasurer of the corporation. 1.41 Salaries. Officers of the corporation shall be entitled to such salaries, compensation orreimbursement as shall be fixed or allowed from time to time by the Board of Directors.1.42 Delegation of Authority. The Board of Directors may from time to time delegate thepowers or duties of any officer to any other officers or agents, notwithstanding any provision hereof.13 ARTICLE IVCAPITAL STOCK1.43 Issuance of Stock. Subject to the provisions of the Certificate of Incorporation, thewhole or any part of any unissued balance of the authorized capital stock of the corporation or thewhole or any part of any unissued balance of the authorized capital stock of the corporation held in itstreasury may be issued, sold, transferred or otherwise disposed of by vote of the Board of Directors insuch manner, for such consideration and on such terms as the Board of Directors may determine.1.44 Stock Certificates. The shares of stock of the corporation shall be represented bycertificates, provided that the Board of Directors may provide by resolution or resolutions that some orall of any class or series of stock of the corporation shall be uncertificated shares; provided, however,that no such resolution shall apply to shares represented by a certificate until such certificate issurrendered to the corporation. Every holder of stock of the corporation represented by certificates,and, upon written request to the corporation’s transfer agent or registrar, any holder of uncertificatedshares, shall be entitled to have a certificate, in such form as may be prescribed by law and by theBoard of Directors, certifying the number and class of shares of stock owned by such stockholder in thecorporation. Each such certificate shall be signed by, or in the name of the corporation by, theChairman or Vice Chairman, if any, of the Board of Directors, or the President or a Vice President, andthe Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of thecorporation. Any or all of the signatures on the certificate may be a facsimile.Each certificate for shares of stock which are subject to any restriction on transfer pursuant tothe Certificate of Incorporation, the Bylaws, applicable securities laws or any agreement among anynumber of stockholders or among such holders and the corporation shall have conspicuously noted onthe face or back of the certificate either the full text of the restriction or a statement of the existence ofsuch restriction.1.45 Transfers. Except as otherwise established by rules and regulations adopted by theBoard of Directors, and subject to applicable law, shares of stock may be transferred on the books ofthe corporation: (i) in the case of shares represented by a certificate, by the surrender to the corporationor its transfer agent of the certificate representing such shares properly endorsed or accompanied by awritten assignment or power of attorney properly executed, and with such proof of authority orauthenticity of signature as the corporation or its transfer agent may reasonably require; and (ii) in thecase of uncertificated shares, upon the receipt of proper transfer instructions from the registered ownerthereof. Except as may be otherwise required by law, the Certificate of Incorporation or the Bylaws,the corporation shall be entitled to treat the record holder of stock as shown on its books as the ownerof such stock for all purposes, including the payment of dividends and the right to vote with respect tosuch stock, regardless of any transfer, pledge or other disposition of such stock until the shares havebeen transferred on the books of the corporation in accordance with the requirements of these Bylaws.1.46 Lost, Stolen or Destroyed Certificates. The corporation may issue a new certificate inplace of any previously issued certificate alleged to have been lost, stolen, or destroyed, or it may issueuncertificated shares if the shares represented by such certificate have been designated as uncertificatedshares in accordance with Section 4.2, upon such terms and conditions as the Board of Directors mayprescribe, including the presentation of reasonable evidence of such loss, theft or destruction and thegiving of such indemnity as the Board of Directors may require for the protection of the corporation orany transfer agent or registrar.1.47 Record Dates. The Board of Directors may fix in advance a record date for thedetermination of the stockholders entitled to vote at any meeting of stockholders. Such record dateshall14 not precede the date on which the resolution fixing the record date is adopted and shall not be morethan 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining thestockholders entitled to notice of or to vote at a meeting of stockholders shall be the close of businesson the day before the date on which notice is given, or, if notice is waived, the close of business on theday before the date on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting ofstockholders shall apply to any adjournment of the meeting; provided, however, that the Board ofDirectors may fix a new record date for the determination of stockholders entitled to vote at theadjourned meeting, and in such case shall also fix as the record date for stockholders entitled to noticeof such adjourned meeting the same or an earlier date as that fixed for the determination of stockholdersentitled to vote in accordance with the foregoing provisions.The Board of Directors may fix in advance a record date (a) for the determination ofstockholders entitled to receive payment of any dividend or other distribution or allotment of any rightsin respect of any change, concession or exchange of stock, or (b) for the purpose of any other lawfulaction. Any such record date shall not precede the date on which the resolution fixing the record date isadopted and shall not be more than 60 days prior to the action to which such record date relates. If norecord date is fixed by the Board of Directors, the record date for determining stockholders entitled toexpress consent to corporate action in writing without a meeting when no prior action by the Board ofDirectors is necessary shall be the date on which the first written consent is expressed. The record datefor determining stockholders for any other purpose shall be the close of business on the day on whichthe Board of Directors adopts the resolution relating to such purpose.ARTICLE VGENERAL PROVISIONS1.48 Fiscal Year. The fiscal year of the corporation shall be as fixed by the Board ofDirectors.1.49 Waiver of Notice. Whenever any notice whatsoever is required to be given by law, bythe Certificate of Incorporation or by these Bylaws, a waiver of such notice either in writing signed bythe person entitled to such notice or such person’s duly authorized attorney, or by electronictransmission or any other method permitted under the Delaware General Corporation Law, whetherbefore, at or after the time stated in such waiver, or the appearance of such person or persons at suchmeeting in person or by proxy, shall be deemed equivalent to such notice. Neither the business nor thepurpose of any meeting need be specified in such a waiver. Attendance at any meeting shall constitutewaiver of notice except attendance for the sole purpose of objecting to the timeliness or manner ofnotice.1.50 Actions with Respect to Securities of Other Corporations. Except as the Board ofDirectors may otherwise designate, the Chief Executive Officer or President or any officer of thecorporation authorized by the Chief Executive Officer or President shall have the power to vote andotherwise act on behalf of the corporation, in person or by proxy, and may waive notice of, and act as,or appoint any person or persons to act as, proxy or attorney-in-fact to this corporation (with or withoutpower of substitution) at any meeting of stockholders or shareholders (or with respect to any action ofstockholders) of any other corporation or organization, the securities of which may be held by thiscorporation and otherwise to exercise any and all rights and powers that this corporation may possessby reason of this corporation’s ownership of securities in such other corporation or other organization.15 1.51 Evidence of Authority. A certificate by the Secretary, or an Assistant Secretary, or atemporary Secretary, as to any action taken by the stockholders, directors, a committee or any officer orrepresentative of the corporation shall as to all persons who rely on the certificate in good faith beconclusive evidence of such action.1.52 Certificate of Incorporation. All references in these Bylaws to the Certificate ofIncorporation shall be deemed to refer to the Certificate of Incorporation of the corporation, asamended and in effect from time to time.1.53 Severability. Any determination that any provision of these Bylaws is for any reasoninapplicable, illegal or ineffective shall not affect or invalidate any other provision of these Bylaws.1.54 Pronouns. All pronouns used in these Bylaws shall be deemed to refer to themasculine, feminine or neuter, singular or plural, as the identity of the person or persons may require.1.55 Notices. Except as otherwise specifically provided herein or required by law, allnotices required to be given to any stockholder, director, officer, employee or agent of the corporationshall be in writing and may in every instance be effectively given by hand delivery to the recipientthereof, by depositing such notice in the mails, postage paid, or by sending such notice by commercialcourier service, or by facsimile or other electronic transmission, provided that notice to stockholders byelectronic transmission shall be given in the manner provided in Section 232 of the Delaware GeneralCorporation Law. Any such notice shall be addressed to such stockholder, director, officer, employeeor agent at his last known address as the same appears on the books of the corporation. The time whensuch notice shall be deemed to be given shall be the time such notice is received by such stockholder,director, officer, employee or agent, or by any person accepting such notice on behalf of such person,if delivered by hand, facsimile, other electronic transmission or commercial courier service, or the timesuch notice is dispatched, if delivered through the mails. Without limiting the manner by which noticeotherwise may be given effectively, notice to any stockholder shall be deemed given: (a) if byfacsimile, when directed to a number at which the stockholder has consented to receive notice; (b) if byelectronic mail, when directed to an electronic mail address at which the stockholder has consented toreceive notice; (c) if by a posting on an electronic network together with separate notice to thestockholder of such specific posting, upon the later of (i) such posting and (ii) the giving of suchseparate notice; (d) if by any other form of electronic transmission, when directed to the stockholder;and (e) if by mail, when deposited in the mail, postage prepaid, directed to the stockholder at suchstockholder’s address as it appears on the records of the corporation.1.56 Reliance Upon Books, Reports and Records. Each director, each member of anycommittee designated by the Board of Directors, and each officer of the corporation shall, in theperformance of his duties, be fully protected in relying in good faith upon the books of account or otherrecords of the corporation as provided by law, including reports made to the corporation by any of itsofficers, by an independent certified public accountant, or by an appraiser selected with reasonablecare.1.57 Time Periods. In applying any provision of these Bylaws which require that an act bedone or not done a specified number of days prior to an event or that an act be done during a period ofa specified number of days prior to an event, calendar days shall be used, the day of the doing of theact shall be excluded, and the day of the event shall be included.1.58 Facsimile Signatures. In addition to the provisions for use of facsimile signatureselsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of thecorporation may be used whenever and as authorized by the Board of Directors or a committee thereof.16 ARTICLE VIAMENDMENTS1.59 By the Board of Directors. Except as otherwise set forth in these Bylaws, these Bylawsmay be altered, amended or repealed or new Bylaws may be adopted by the affirmative vote of amajority of the directors present at any regular or special meeting of the Board of Directors at which aquorum is present.1.60 By the Stockholders. Except as otherwise set forth in these Bylaws, these Bylaws maybe altered, amended or repealed or new Bylaws may be adopted by the affirmative vote of the holdersof at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the shares of capitalstock of the corporation issued and outstanding and entitled to vote generally in any election ofdirectors, voting together as a single class. Such vote may be held at any annual meeting ofstockholders, or at any special meeting of stockholders provided that notice of such alteration,amendment, repeal or adoption of new Bylaws shall have been stated in the notice of such specialmeeting.ARTICLE VIIINDEMNIFICATION OF DIRECTORS AND OFFICERS1.61 Right to Indemnification. Each person who was or is made a party or is threatened tobe made a party to or is involved in any action, suit or proceeding, whether civil, criminal,administrative or investigative (“proceeding”), by reason of the fact that he or a person of whom he isthe legal representative, is or was a director or officer of the corporation or is or was serving at therequest of the corporation as a director or officer of another corporation, or as a controlling person of apartnership, joint venture, trust or other enterprise, including service with respect to employee benefitplans, whether the basis of such proceeding is alleged action in an official capacity as a director orofficer, or in any other capacity while serving as a director or officer, shall be indemnified and heldharmless by the corporation to the fullest extent authorized by the Delaware General Corporation Law,as the same exists or may hereafter be amended (but, in the case of any such amendment, only to theextent that such amendment permits the corporation to provide broader indemnification rights than suchlaw permitted the corporation to provide prior to such amendment) against all expenses, liability andloss reasonably incurred or suffered by such person in connection therewith and such indemnificationshall continue as to a person who has ceased to be a director or officer and shall inure to the benefit ofhis heirs, executors and administrators; provided, that except as provided in Section 7.2 of thisArticle VII, the corporation shall indemnify any such person seeking indemnity in connection with aproceeding (or part thereof) initiated by such person only if (a) such indemnification is expresslyrequired to be made by law, (b) the proceeding (or part thereof) was authorized by the Board ofDirectors, (c) such indemnification is provided by the corporation, in its sole discretion, pursuant to thepowers vested in the corporation under the Delaware General Corporation Law, or (d) the proceeding(or part thereof) is brought to establish or enforce a right to indemnification or advancement under anindemnity agreement or any other statute or law or otherwise as required under Section 145 of theDelaware General Corporation Law. The rights hereunder shall be contract rights and shall include theright to be paid expenses incurred in defending any such proceeding in advance of its final disposition;provided, that the payment of such expenses incurred by a director or officer of the corporation in hiscapacity as a director or officer (and not in any other capacity in which service was or is tendered bysuch person while a director or officer, including, without limitation, service to an employee benefitplan) in advance of the final disposition of such proceeding, shall be made only upon delivery to thecorporation of an undertaking, by or on behalf of such director or officer, to repay all amounts soadvanced if it should be determined ultimately by final judicial decision from which there is no furtherright to appeal that such director or officer is not entitled to be indemnified under this section orotherwise.17 1.62 Right of Claimant to Bring Suit. If a claim under Section 7.1 is not paid in full by thecorporation within 60 days after a written claim has been received by the corporation, or 20 days in thecase of a claim for advancement of expenses, the claimant may at any time thereafter bring suit againstthe corporation to recover the unpaid amount of the claim and, if such suit is not frivolous or brought inbad faith, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shallbe a defense to any such action (other than an action brought to enforce a claim for expenses incurredin defending any proceeding in advance of its final disposition where the required undertaking, if any,has been tendered to this corporation) that the claimant has not met the standards of conduct whichmake it permissible under the Delaware General Corporation Law for the corporation to indemnify theclaimant for the amount claimed. Neither the failure of the corporation (including its Board ofDirectors, independent legal counsel, or its stockholders) to have made a determination prior to thecommencement of such action that indemnification of the claimant is proper in the circumstancesbecause he has met the applicable standard of conduct set forth in the Delaware General CorporationLaw, nor an actual determination by the corporation (including its Board of Directors, independentlegal counsel or its stockholders) that the claimant has not met such applicable standard of conduct,shall be a defense to the action or create a presumption that claimant has not met the applicablestandard of conduct. In any suit brought by the corporation to recover an advancement of expensespursuant to the terms of an undertaking, the corporation shall be entitled to recover such expenses upona final judicial decision from which there is no further right to appeal that the indemnitee has not metany applicable standard for indemnification set forth in the Delaware General Corporation Law. In anysuit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenseshereunder, or brought by the corporation to recover an advancement of expenses pursuant to the termsof an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or tosuch advancement of expenses, shall be on the corporation. 1.63 Indemnification of Employees and Agents. The corporation may, to the extentauthorized from time to time by the Board of Directors, grant rights to indemnification, and to theadvancement of related expenses, to any employee or agent of the corporation to the fullest extent ofthe provisions of this Article VII with respect to the indemnification of and advancement of expenses todirectors and officers of the corporation.1.64 Non-Exclusivity of Rights. The rights conferred on any person in this Article VII shallnot be exclusive of any other right which such persons may have or hereafter acquire under any statute,provision of the Certificate of Incorporation, Bylaw, agreement, vote of stockholders or disinteresteddirectors or otherwise.1.65 Indemnification Contracts. The Board of Directors is authorized to enter into acontract with any director, officer, employee or agent of the corporation, or any person serving at therequest of the corporation as a director, officer, employee or agent of another corporation, partnership,joint venture, trust or other enterprise, including employee benefit plans, providing for indemnificationrights equivalent to or, if the Board of Directors so determines, greater than, those provided for in thisArticle VII.1.66 Insurance. The corporation shall maintain insurance to the extent reasonably available,at its expense, to protect itself and any such director, officer, employee or agent of the corporation oranother corporation, partnership, joint venture, trust or other enterprise against any such expense,liability or loss, whether or not the corporation would have the power to indemnify such person againstsuch expense, liability or loss under the Delaware General Corporation Law.1.67 Effect of Amendment. Any amendment, repeal or modification of any provision ofthis Article VII shall not adversely affect any right or protection of an indemnitee or his successor inrespect of any act or omission occurring prior to such amendment, repeal or modification.18 ARTICLE VIIIFORUM FOR ADJUDICATION OF DISPUTES 8.1Forum for Adjudication of Disputes. Unless the corporation consents in writing tothe selection of an alternative forum, the sole and exclusive forum for (i) any derivative action orproceeding brought on behalf of the corporation, (ii) any action asserting a claim of breach of afiduciary duty owed by any current or former director, officer or other employee of the corporation tothe corporation or the corporation’s stockholders, (iii) any action asserting a claim arising pursuant toany provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governedby the internal affairs doctrine (each, an “Action”) shall be a state or federal court located within thestate of Delaware (a “Chosen Court”), in all cases subject to the court’s having personal jurisdictionover the indispensable parties named as defendants. Any person or entity purchasing or otherwiseacquiring any interest in shares of capital stock of the corporation shall be deemed to have notice of andconsented to the provisions of this bylaw. 8.2[RESERVED]. 19 Exhibit 23.1 Consent of Independent Registered Public Accounting FirmThe Board of Directors and Stockholders Paylocity Holding Corporation:We consent to the incorporation by reference in the registration statements (No. 333‑194840, No. 333-201983, No. 333-209520 and No.333-216001) on Form S-8 of Paylocity Holding Corporation and subsidiary (the Company) of our report dated August 11, 2017, withrespect to the consolidated balance sheets of the Company as of June 30, 2016 and 2017, and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for each of the years in the three-year period ended June 30, 2017, and the effectiveness ofinternal control over financial reporting as of June 30, 2017, which report appears in the June 30, 2017 annual report on Form 10‑K ofPaylocity Holding Corporation and subsidiary./s/ KPMG LLPChicago, IllinoisAugust 11, 2017 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TOSECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Steven R. Beauchamp, certify that: 1. I have reviewed this annual report on Form 10-K of Paylocity Holding Corporation (the “Company”) for theyear ended June 30, 2017; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstances under which such statements were made,not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairlypresent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and proceduresto be designed under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period inwhich this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles; c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in thisreport our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periodcovered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s fiscal year ended June 30, 2017 that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal control over financial reporting. Date: August 11, 2017 /s/ Steven R. Beauchamp Name: Steven R. Beauchamp Title President, Chief Executive Officer and ChiefFinancial Officer Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TOSECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Steven R. Beauchamp, certify that: 1. I have reviewed this annual report on Form 10-K of Paylocity Holding Corporation (the “Company”) for theyear ended June 30, 2017; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstances under which such statements were made,not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairlypresent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and proceduresto be designed under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period inwhich this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles; c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in thisreport our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periodcovered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s fiscal year ended June 30, 2017 that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal control over financial reporting. Date: August 11, 2017 /s/ Steven R. Beauchamp Name: Steven R. Beauchamp Title President, Chief Executive Officer and ChiefFinancial Officer Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, the President, Chief Executive Officer and Chief Financial Officer of Paylocity Holding Corporation(the “Company”), does hereby certify under the standards set forth and solely for the purposes of 18 U.S.C. 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of the Company for theyear ended June 30, 2017 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of1934 and information contained in that Form 10-K fairly presents, in all material respects, the financial condition and resultsof operations of the Company. Date: August 11, 2017 /s/ Steven R. Beauchamp Name:Steven R. Beauchamp TitlePresident, Chief Executive Officer and ChiefFinancial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will beretained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, the President, Chief Executive Officer and Chief Financial Officer of Paylocity Holding Corporation(the “Company”), does hereby certify under the standards set forth and solely for the purposes of 18 U.S.C. 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of the Company for theyear ended June 30, 2017 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of1934 and information contained in that Form 10-K fairly presents, in all material respects, the financial condition and resultsof operations of the Company. Date: August 11, 2017 /s/ Steven R. Beauchamp Name:Steven R. Beauchamp TitlePresident, Chief Executive Officer and ChiefFinancial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will beretained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 

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