2019
ANNUAL
REPORT
ABOUT
PAYLOCITY
Paylocity is a leading provider of cloud-based payroll and human capital
management (HCM) software solutions. Paylocity’s comprehensive product
suite delivers a unified platform for professionals to make strategic decisions
in the areas of benefits, core HR, payroll, talent, and workforce management,
while cultivating a modern workplace and improving employee engagement.
Headquartered in Schaumburg, Ill., Paylocity has consistently been
recognized nationally for its innovation, culture, and growth.
TECHNOLOGY
EXPERIENCE
Industry-leading, cloud-based
payroll and HCM software provides
clients with a robust, unified
platform to recruit, retain and
engage employees.
Paylocity’s intuitive, user-friendly
platform helps automate daily
HR tasks, while providing a
collaborative, consumer-style work
experience for employees.
SERVICE
INTEGRATION
Flexible service model offers clients
timely, consultative support under
the care of an assigned account
manager and backed by a team of
highly trained experts.
Paylocity connects with other
business systems to effortlessly flow
data across the tools our clients
use most.
CULTURE
ANALYTICS
By using our own technology
to connect, collaborate, and
innovate with each other, Paylocity
is constantly enriching our
award-winning culture.
Robust data analysis and reporting
capabilities that span demographics,
retention insights, turnover trends,
labor costs and more.
* Refer to Financial Highlights and Appendix A for additional details on non-GAAP financial measures.
Schaumburg, IL
Headquarters
3,050
Employees
20,200
Clients
100+ employees
Average client size
$468 million
FY19 Total revenue
26%
FY19 Revenue growth*
28.7%
FY19 Adj. EBITDA margin*
92%+
Revenue retention
21%
Client growth
MESSAGE FROM OUR CHIEF
EXECUTIVE OFFICER
Fellow Shareholders:
Fiscal 2019 marked our 5th year as a publicly traded
company – we are very pleased with what we
accomplished – and we remain excited about continuing to
deliver value for our clients, employees, and shareholders.
We ended the fiscal year with 20,200 clients and total
revenue of $467.6 million, which represented 26%* growth
over fiscal 2018. Our consistent execution and the highly
recurring nature of our business model is evident in our
financial results, as Q4 fiscal 2019 was our 10th straight
quarter with total revenue growth in the mid-twenties. We
also remain committed to driving 20%+ annual revenue
growth, which puts us on a path to achieve $1 billion of
revenue in the coming years. We have also been pleased
with our ability to increase profitability. In fiscal 2019 we
generated adjusted EBITDA of $134.0 million or 28.7%
of revenue, combined with record free-cash flow of
$76.1 million or 16.3% of revenue.
Our industry-leading product suite and commitment to
product development continues to be a leading reason
clients choose Paylocity. While we continue to invest
in our existing product suite, we also invest in new
product development and have expanded our overall
per employee per year (PEPY) in product offering by
100% since 2014. In fiscal 2019, we expanded our PEPY
to $400 through the release of Third-Party Administrative
(TPA) Solutions and our Learning Management System
(LMS) products. TPA Solutions is a product that provides
users with a single, unified access point for payroll, HR
and benefits administration for HSA, FSA, and HRA’s.
Our LMS enables our clients to create and deliver
content to their employees and serves as a platform for
communicating job and compliance related training, as
well as corporate messaging.
Our commitment to product development continues to
be recognized in the marketplace, with Paylocity ranking
highly on multiple G2 Crowd Grid Reports during fiscal
2019, including placing #1 in Satisfaction in six categories
across payroll, HR and benefits administration.
From an operational perspective, our team remains focused
on delivering a world-class service experience to our
20,200 clients, while at the same time implementing a
number of new initiatives to help clients take full advantage
of our robust payroll and HCM platform. This combination
of service and technology allowed us to once again deliver
revenue retention of greater than 92% for fiscal 2019.
We also continue to invest in our salesforce by
adding new sales reps, while also investing in training
initiatives and marketing and channel programs. We
believe there are significant growth opportunities for
our salesforce, as our core target market has more
than 638,000 businesses, putting our current target
addressable market at more than $18 billion.
Beyond our strong financial and operational
performance, I’m also very proud of Paylocity’s culture
as we have won a number of awards this past fiscal year,
including being recognized by Glassdoor as a Best Place
To Work, Battery Ventures as one of the 2019 Highest
Rated Cloud Company, Crain’s Fast 50, and Selling
Power magazine.
As we reflect on our performance in fiscal 2019, I would
like to thank our employees, clients and partners for all of
their contributions!
STEVE BEAUCHAMP
Chief Executive Officer
* Based on pro forma non-GAAP revenue under ASC 606 for FY18. Refer to Appendix A for a reconciliation of GAAP to non-GAAP revenue.
1
PAYLOCITY 2019 ANNUAL REPORT
FINANCIAL
HIGHLIGHTS
CURRENT FINANCIAL TARGETS*
REVENUE
$ millions
Squarely focused on 20%+ annual revenue
growth while demonstrating leverage in our
business model
Revenue Growth YoY
Adjusted Gross Margin
Total R&D Investment
Sales/Marketing
General & Administrative
Adjusted EBITDA
Free Cash Flow
20%+
70-75%
10-15%
20-25%
10-15%
30-35%
15-20%
Note – Financial targets except Revenue Growth based on
percentage of total revenue.
2 7 % C A G R
26%
YoY growth
26%
YoY growth
$457 $468
$364
$372
30%
YoY growth
$288
$300
$220
$231
FY16
FY17
FY18
FY19
Recurring Revenue
Total Revenue
Note - FY18 revenue represents pro forma non-GAAP revenue under
ASC 606; FY18 revenue growth vs. FY17 is on a GAAP basis;
Refer to Appendix A for a reconciliation of GAAP to non-GAAP
financial measures.
ADJUSTED EBITDA*
$ millions
FREE CASH FLOW*
$ millions
6 9 % C A G R
21.5%
Margin
$81
18.7%
Margin
$56
12.3%
Margin
$28
Strong Balance Sheet - $163M Cash &
Invested Corporate Cash
28.7%
Margin
$134
1 0 4 % C A G R
16.3%
Margin
$76
12.9%
Margin
$49
8.1%
Margin
$24
FY17
FY18
FY19
3.7%
Margin
$9
FY16
FY16
FY17
FY18
FY19
* Refer to Appendix A for a reconciliation of GAAP to non-GAAP financial measures.
2
PAYLOCITY 2019 ANNUAL REPORT UNIFIED SUITE OF PAYROLL AND
HCM APPLICATIONS – BUILT FOR
THE MID MARKET
PAYROLL &
HCM
Employee System of Record
Payroll
• SaaS based payroll
• Tax filing, direct
deposit
• Integration with
3rd parties
• On-Demand Pay
Talent
• Performance
management
• Learning
management
• Rewards &
recognition
• On-boarding
• Surveys
Benefits
• Benefit enrollment
Workforce Management
• Time & labor online
& updates
• Advanced
reporting
• TPA Solutions
tracking
• Manage employee
schedules
Core HR
• Single system for
Payroll & HR
• Self service portal
• HR compliance &
record keeping
$400 PEPY
CONSUMER ORIENTED EXPERIENCES
Mobile and Social
Learning
Surveys
Recruiting
Journals
On-Demand Pay
Impressions
Community
3
PAYLOCITY 2019 ANNUAL REPORT EXTERNAL
RECOGNITION
Products for Mid-Market
Fastest Growing Products
Software Companies
2019
Battery Ventures
Highest Rated Cloud
Companies List
2018-2019
Best Place To Work
by Glassdoor
2017-2019
Chicago’s Best and
Brightest Companies
2008-2019
Best Place to Work
by Built in Chicago
2012-2019
Crain’s Fast 50
2013-2019
Best Companies to Sell For by Selling
Power magazine
2015-2019
4
PAYLOCITY 2019 ANNUAL REPORT UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 001- 36348
PAYLOCITY HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
46-4066644
(I.R.S. Employer
Identification Number)
1400 American Lane
Schaumburg, Illinois 60173
(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
Common Stock, par value $0.001 per share
Trading symbol(s)
PCTY
Name of Exchange on which registered
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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of voting stock held by non-affiliates of the registrant as of December 31, 2018, the last day of registrant’s most recently completed second fiscal
quarter, was $2.0 billion (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 2, 2019, there were 53,082,006 shares of the registrant’s common stock issued and outstanding.
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 2020
annual meeting 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.
DOCUMENTS INCORPORATED BY REFERENCE:
PAYLOCITY HOLDING CORPORATION
Form 10-K
For the Year Ended June 30, 2019
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16.
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
1
14
33
33
34
34
35
38
41
56
57
57
57
58
59
59
59
59
59
60
60
63
Forward Looking Statements
PART 1
Except for the historical financial information contained herein, the matters discussed in this report on Form 10-K
(as well as documents incorporated herein by reference) may be considered “forward-looking” statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. All statements, other than statements of historical fact, are statements that could be deemed forward-
looking statements, including, but not limited to, statements regarding our future financial position, business strategy
and plans and objectives 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 to identify forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future
events 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 are
subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in
the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited
to, those discussed in this report, and in particular, the risks discussed under Part 1, Item 1A: “Risk Factors” and those
discussed in other documents we file with the Securities and Exchange Commission. Except as required by law, we do
not intend to update these forward-looking statements publicly or to update the reasons actual results could differ
materially from those anticipated 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
this report and in the documents incorporated in this report may not occur and actual results could differ materially and
adversely from those anticipated or implied in the forward-looking statements. Accordingly, readers are cautioned not to
place 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-use solutions enable our clients to manage their workforces more effectively. Excluding clients acquired as part
of the BeneFLEX acquisition, as of June 30, 2019, we provided our payroll and HCM software solutions to
approximately 20,200 clients across the U.S., which on average had over 100 employees.
Our multi-tenant software platform is highly configurable and includes a unified suite of payroll and HCM
modules, including core HR, workforce management, talent and benefits, for our clients to make strategic decisions all
while promoting a modern workplace and improving employee engagement. Our payroll and HCM modules provide
robust on-demand functionality, reporting and analytics. Our platform provides intuitive self-service functionality for
employees and managers combined with seamless integration across all our solutions. We supplement our
comprehensive software platform with an integrated implementation and client service organization, all of which are
designed to meet the needs of medium-sized organizations.
Effective management of human capital is a core function in all organizations and requires a significant
commitment 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
rapidly changing as employees increasingly become mobile, work remotely and expect an end user experience similar to
that of consumer-oriented Internet applications. Medium-sized organizations operating without the infrastructure,
expertise or personnel of larger enterprises are uniquely pressured in this complex and dynamic environment. Existing
solutions offered by third-party payroll service providers can have limited capabilities and configurability while
1
enterprise-focused software vendors can be expensive and time-consuming to implement and manage. We believe that
medium-sized organizations 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-sized
organizations;
• Modern, intuitive user experience and self-service capabilities that significantly increase employee
engagement;
• 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 risk of errors.
We market and sell our products through our direct sales force. We generate sales leads through a variety of
focused marketing initiatives and from our extensive referral network of 401(k) advisors, benefits administrators,
insurance brokers, third-party administrators and HR consultants. We derive revenue from a client based on the solutions
purchased by the client, the number of client employees and the amount, type and timing of services provided with
respect to those client employees. Our annual revenue retention rate was greater than 92% in each of the fiscal years
2017, 2018 and 2019. Our total revenues increased from $300.0 million in fiscal 2017 to $377.5 million in fiscal 2018,
representing a 26% year-over-year increase and to $467.6 million in fiscal 2019, representing a 24% year-over-year
increase. Our recurring revenues increased from $288.4 million in fiscal 2017 to $363.5 million in fiscal 2018,
representing a 26% year-over-year increase, and to $456.8 million in fiscal 2019, representing a 26% year-over-year
increase. While the majority of our agreements with clients are generally cancellable on 60 days’ or less notice, we also
began entering into term agreements in fiscal 2018, which are generally two years in length. Our recurring revenue
model provides significant visibility into our future operating results.
Industry Background
Effective management of human capital is a core capability for all organizations. Identifying, acquiring and
retaining talent is a priority at all levels of an organization. Likewise, in today’s increasingly complex business and
regulatory environment, organizations are being pressured to manage critical payroll and HCM functions more
effectively, automate manual processes and decrease their operating costs, while at the same time successfully managing
their workforces.
Complex and Dynamic Tax and Regulatory Environment
The tax and regulatory environment in the United States is complex and dynamic. Organizations are subject to a
myriad of benefit, workers compensation, healthcare, tax and other rules, regulations and reporting obligations. In
addition to U.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 reporting requirements with which organizations must comply. Leveraging industry leading technology and service
to meet these demands delivers critical value to organizations.
Growing Demand for Mobility and Enhanced User Experience
Connectivity and mobility are enabling employees to spend less time in traditional office environments and
more time working remotely. This trend increases the demand for advanced and intuitive solutions that improve
collaboration and foster employee engagement, such as remote self-service access to payroll and timesheet reporting, HR
2
and benefits portals and other talent management applications. Given the prominence of consumer-oriented Internet
applications, employees expect the user experience and accessibility of internal systems to be similar to those of the
latest Internet applications, such as LinkedIn, Amazon and Facebook.
Large Market Opportunity for Payroll and HCM Solutions
The market opportunity in the U.S. for payroll and HCM applications and services is driven by the importance
of payroll and HCM solutions to the successful management of organizations. To estimate our addressable market, we
focus our analysis on the number of U.S. medium-sized organizations and the number of their employees. According to
the U.S. Census Bureau, there were over 638,000 firms with 20 to 999 employees in the U.S. in 2016, employing over
45 million people. We estimate that if clients were to buy our entire suite of existing solutions at list prices, they would
spend approximately $400 per employee annually. Based on this analysis, we believe our current target addressable
market is approximately $18 billion. Our existing clients do not typically own our entire suite of solutions, and as we
continue to expand our product offerings, we believe that we have an opportunity to increase 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 service
bureaus and legacy software providers. 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 SaaS solutions to satisfy their software needs. Similarly, we believe organizations are adopting SaaS
applications for payroll and HCM solutions with increasing frequency.
Limitations of Legacy Competitive Solutions
We believe that legacy payroll and HCM solution providers have limitations that cause them to underserve the
unique needs of medium-sized organizations. Existing legacy payroll and HCM solutions include:
• Traditional Payroll Service Providers. Traditional payroll service providers are primarily focused on
delivery of 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. The lack of a unified and configurable employee-facing payroll and HCM suite can
diminish the effectiveness of a system, detract from user experience and limit integration with other
solutions. In addition, we believe that certain traditional payroll service providers often do not provide a
high-quality technology and service experience.
• Enterprise-Focused Payroll and HCM Software Vendors. Enterprise-focused software vendors offer
solutions and services that are designed for the complex needs and structures of very large enterprises. As a
result, their solutions can be expensive, complex and time-consuming to implement, operate and maintain.
• HCM Point Solution Providers. Many HCM point solutions lack integrated payroll functionality. The
implementation and management of multiple point solutions and the reliance on multiple service
organizations can 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 data entry errors.
Given the challenges medium-sized organizations face operating in complex and dynamic environments and the
limited ability of traditional offerings to address these challenges, we believe there is a significant market opportunity for
a comprehensive, unified SaaS solution designed to serve the payroll and HCM needs of medium-sized organizations.
3
Segment Information
Our chief operating decision maker reviews our financial results in total when evaluating financial performance
and for purposes of allocating resources. We have thus determined that we operate in a single cloud-based software
solution reporting segment.
Our Solutions
We are a cloud-based provider of payroll and HCM software solutions for medium-sized organizations. Our
solutions enable medium-sized organizations to more efficiently manage payroll and human capital in their complex and
dynamic operating environments. Excluding clients acquired as part of the BeneFLEX acquisition, as of June 30, 2019,
we provided our payroll and HCM software solutions to approximately 20,200 clients across the U.S., which on average
had over 100 employees.
The key benefits of our solutions include the following:
• Comprehensive Platform Optimized for Medium-Sized Organizations. Our solutions empower finance and
HR professionals in medium-sized organizations to drive strategic human capital decisions by providing
enterprise-grade payroll and HCM modules, including robust reporting and analytics. Our unified platform
fully automates payroll and HCM processes, enabling our clients to focus on core business activities. Our
solutions help our clients attract, retain and manage their employees within a single, comprehensive
system.
• Modern, Intuitive User Experience. Our intuitive, easy-to-use and mobile-centric platform provides
increased accessibility of our solutions and decreased need for training while also providing users with an
engaging mobile and self-service experience.
• Flexible and Configurable Platform. We design our solutions to be flexible and configurable, allowing our
clients to match their use of our software with their specific business processes and workflows. Our
platform has been organically developed from a common code-base, data structure and user interface,
providing a consistent user experience with powerful features that are easily adaptable to our clients’ needs.
Our systems centralize payroll and HCM data, minimizing inconsistent and incomplete information that
can be produced when using multiple databases.
• Highly-Attractive SaaS Solution for Medium-Sized Organizations. Our solutions are cloud-based and
offered on a subscription basis, making them easier and more affordable to implement, operate and update
and thus enabling our clients to focus less on their IT infrastructure and more on their core businesses. Our
software can be operated by a single administrator without the support of an in-house information
technology department. Our multi-tenant and modern architecture allows for frequent software
enhancements thereby enabling our clients to react to a rapidly changing and complex operating
environment. Our platform enables our clients to scale their businesses without having to acquire additional
hardware or to resolve the integration challenges that often result from traditional outsourcing solutions.
•
Seamless Integration with Extensive Ecosystem of Partners. Our platform offers our clients automated data
integration with over 300 related third-party partner systems, such as 401(k), benefits and insurance
provider systems. This integration reduces the complexity and risk of error of manual data transfers and
saves time for our clients and their employees. We integrate data with these related systems through a
secure connection, which significantly decreases the risk of unauthorized third-party access and other
security breaches. Our direct and automated 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 differentiates our partners’ product offerings, strengthening their competitive
positioning in their own markets.
4
Our Strategy
We intend to strengthen and extend our position as a leading provider of cloud-based payroll and HCM
software solutions to 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 provide our payroll and HCM
software solutions to approximately 20,200 clients across the U.S. (excluding clients acquired as part of the
BeneFLEX acquisition) as of June 30, 2019, there are over 638,000 businesses with 20 to 999 employees in
the U.S., employing more than 45 million people, according to the U.S. Census Bureau in 2016. In order to
acquire new clients, we plan to continue growing our sales organization across the U.S.
• Expand Our Product Offerings. We believe a significant part of our leadership position is the result of our
investment and innovation in our product offerings designed for medium-sized organizations. Our average
revenue per client has consistently increased in each of the last three years as we have broadened our
product offerings. We plan to continue to invest in product development efforts that will allow us to offer a
broader selection of products to new and existing clients.
• Extend Technological Leadership. We believe that our organically developed cloud-based multi-tenant
software platform, combined with our unified database architecture, enhances the experience and usability
of our 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 use our solutions with limited training. We plan to continue our technology innovation, as we have
done with our mobile applications, social features and analytics capabilities.
• Further Develop Our Referral Network. We have developed a strong network of referral participants, such
as 401(k) advisors, benefits administrators, insurance brokers, third-party administrators and HR
consultants that recommend our solutions and provide referrals. We believe that our platform’s automated
data integration with over 300 related third-party partner systems is valuable to our referral participants, as
they are able to access payroll and HR data through a single system which decreases complexity and cost
and complements their own product offerings. We plan to increase integration with third-party providers
and expand our referral network to grow our client base and lower our client acquisition costs.
Our Products
Our products include a suite of unified payroll and HCM modules that enable our clients to automate routine
tasks, changes and updates across the employee lifecycle, and to manage complex compliance requirements, while also
providing an engaging experience for administrators and employees. With the foundation of automation and
engagement, we also provide clients with valuable insights to their HR data.
Payroll
Our Payroll module enables clients to automate key payroll processes and manage compliance in an
environment of continued regulatory complexity. Key features of the Payroll module include:
Feature
Payroll Entry
Employee Tax Management
Functionality
• Configurable payroll entry grid allowing easy entry and update of critical Payroll
data
• Real-time updates to open pay cycles
• Support for garnishments, child support, union and other specialized calculations
• Setup, configuration and calculation of all local, state and federal taxes
• Tax validation using geolocation services to ensure accurate tax setup
• Tax filing services
5
Proration and Retro
• Automated identification of scenario changes to employee data that impact pay for
the pay cycle
• Recommended calculations for mid-pay period hires for hourly and salary
employees
• Recommended calculations for backdated changes of pay rates
• Easy-to-use, powerful reporting dashboard enables users to design and create ad-
hoc reports 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 history
• Ability to set up multiple data integrations with a wide array of benefits and
retirement plan providers
Advanced Reporting
Data Integration
Core HR
Paylocity’s Core HR module provides a set of HR capabilities enabling clients to manage HR data in an
effective and timely manner while positively impacting employee engagement and culture. Key features of Core HR
include:
Feature
Employee Record
Management
Configurable Templates
Custom Checklists
HR Compliance
HR Insight and Analytics
Functionality
• Manages payroll deductions for employee benefit plans such as health and 401(k)
• Automated employee time-off requests
• Tracks employee skills, events, education and prior employment
• Stores employee documentation electronically
• Records and tracks company property issued to employees
• Ability to add custom fields to track additional employee related information
• Combination of standard and modifiable templates powered by highly-flexible
drag-and-drop technology
• Includes standard templates to accommodate changes for new hires, job changes,
leave of absences and terminations
• Enables users to configure user interface to efficiently align to organizations’
business processes
• Ability to require additional data, add default values and insert new custom fields
increases accuracy and consistency of data across the platform
• Allows users to track critical steps in hiring and other processes
• Triggers reports and notification emails to track critical steps and informs users
when tasks are complete
• Manage ACA compliance activities
• Family Medical Leave Act (FMLA) tracking
• Facilitate Equal Employment Opportunity (EEO) assessment and filing
• Occupational Safety & Health Administration (OSHA) tracking
• Workers’ compensation tracking and reporting
• I-9 verification
• Provides a year end dashboard to manage IRS deadlines
• 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 export the
information to spreadsheets or other documents
6
Self-Service Portals
• Retention dashboard assists employers in identifying and taking action on at-risk
employees to improve employee retention
• Compliance and reporting
•
Full online and mobile access through virtually any device having Internet access to
payroll, HR and benefits information
Provides the ability for administrators to communicate company news and policy
changes, such as handbook revisions, and to post documents and create custom web
pages to communicate with employees
Provides a single view for managers where they can approve employee changes and
requests, manage outstanding tasks and easily access employee information
Improves communication among managers and HR and payroll and finance
departments
•
•
•
Talent
Paylocity’s Talent modules are designed to bring ease and convenience to processes that attract and retain talent
within an organization. The modules provide an engaging employee experience and enable clients to manage their talent
throughout their employees’ tenures, starting at recruiting and carrying through onboarding, learning and performance
management. Key features of our Talent module include:
Feature
Reviews
360° Feedback
Goals Management
Impressions
Recruiting
Functionality
•
•
•
Provides the ability for employees and managers to complete online reviews, add
comments and sign off on completed reviews
Includes automated workflow at each step of the review process with ability for
HR administrators to review and provide feedback prior to final approval
Provides the ability to access feedback from employees across the organization to
receive input on employee performance and accomplishments
Enables year-round or point-in-time 360° feedback
•
• Manages employee goals and appraisals in a single place to reduce the time
required to navigate between screens
• Allows specific goals to be displayed on the performance review for increased
employee focus and development
• Assigns goals specific to employees based on skill level and other factors
•
Provides employees the ability to recognize each other and provide immediate
feedback
Impression leaderboard is visible to everyone in the organization providing
recognition for top performers
•
• Auto-fills resume information to save time and effort in the candidate’s
•
•
•
application process
Serves as a repository of applicant information and feedback for future reference
and sourcing
Tracks applicants through the lifecycle of the recruiting process, reducing time
spent on the recruiting and talent acquisition process and so that users quickly
know the status of any prospects at critical stages in the process
Integration to allow posting to over 20,000 job boards to reach a broad range of
applicants
• Manage the full employment offer process including automated creation of offer
letters and background check completion
Seamless transition of an employee from recruiting to the Onboarding process
•
7
Onboarding
•
•
Features a mobile-responsive design and attractive, intuitive interface, engaging
new hires in the process
Provides robust event management capabilities, empowering administrators to
proactively manage the onboarding process
• Highly configurable, allowing administrators to tailor tasks and overall experience
Journals
•
•
for new hires
Includes a withholding forms wizard, simplifying the process of completing
important tax-related paperwork, including local W-4 forms
Permits the ability to add customized content including welcome message,
documents, videos and other company specific information
Compensation Management
• Automates the necessary employment eligibility processes including collection of
I-9s and integration with E-Verify
• Captures and tracks ongoing discussions with employees to support performance
•
appraisals
Enables compensation professionals to configure tailored compensation plans and
create automated approval workflows based on organizational pay cycles
• Creates visibility to an executive-level view of organizational and team budgets
Surveys
and payment allocations
Learning Management
System
• Offers managers the ability to manage their budgets and distribute compensation
increases by drilling down into employee performance, pay history and more
• Ability to manage bonus payouts as well as pay increases
•
• Default library of surveys for common tasks like new hire surveys, pulse surveys
Facilitates the collection and summarization of all survey needs
•
and organizational health surveys
Summarizes survey information using analysis to enable clients to gauge
respondent sentiment
• Ability to send confidential surveys
• Ability to generate a general survey link that can be distributed without
•
•
assignment to employees
Provides a cost-effective way to share, assess and track employee knowledge
Enables clients to create their own content using built-in video recording
technology for easy content creation and disbursement
• Ability to assign training courses to employees and manage training assignments
•
through completion with due dates, reminders and reporting
Support for multiple content types, including documents, recorded or uploaded
videos and SCORM content
8
Workforce Management
Paylocity’s Workforce Management modules include time and attendance and scheduling functionality,
enabling clients to effectively collect hourly data for employees, improve productivity and help organizations control
labor costs. Additionally, expense management functionality streamlines and automates expense management processes
by eliminating manual steps involved in filing, approving, and reimbursing expenses. Key features within the Workforce
Management modules include:
Feature
Time Collection
•
Functionality
Time and attendance tracking, including overtime, rounding rules, payroll
policies and labor allocation
Tracks tardiness, absenteeism, and misuse of break or meal periods
•
• Compliance tools to ensure clients have visibility to meal premium and overtime
Schedule Management
Manager Tools
Geo-fencing Mobile
Restriction
Simplified Expense
Management Workflow
Integrated Payments for
Expense Reimbursements
requirements
• Ability to collect time through punching or time recording
•
Support for multiple hardware options including traditional time clocks,
biometric devices and integrated kiosk terminals
• Ability to create and publish employee schedules
•
Enforcement of punching based on schedules
• Ability to manage schedules based on budgeted dollars or total hours
• Mobile schedule views to allow employees easy access to their schedules and
submit time-off requests via the mobile app
• Alerts for missing punches
• Dashboard to enable supervisors to effectively manage their workforces
• Ability to approve time cards and time-off requests via the mobile app
• Ability for employees to punch in and out from their mobile devices
• Geo-fencing capabilities that allow managers to set parameters for where punches
may occur
• Ability to specify the geo-fencing parameters at the individual or group level
•
Flexibility to specify an unlimited number of geo-fenced areas to accommodate a
mobile workforce
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 process
•
Flexibility to process payment as part of the normal payroll cycle or on a separate
payment guideline
Payment utilizes employees’ existing payment choices (direct deposit or check)
•
• Automatically creates general ledger entries to expedite the recording of
Configurable Expense
• Ability to specify approval workflow based on data elements related to specific
employee expenses
Policies
•
employees
Enforcement of reimbursement limits, notes and additional information
requirements
• Allows proxy submitters to enable administrative support for employees when
necessary
• Generate and analyze spend reports
9
Benefits
Paylocity’s Benefits modules provide benefit management solutions that integrate with insurance carrier
systems to provide automated administrative processes allowing users to choose benefit elections and make life event
changes online, summarize benefit elections and perform other similar benefit-related tasks. These modules support
advanced functionality such as premium reconciliation, management of voluntary benefits and advanced reporting, while
seamlessly integrating with Paylocity’s Payroll solution to provide for a fully-automated benefit experience. Key
features of Benefits include:
Feature
Employee Enrollment
Administrative Efficiency
Functionality
• Easy to follow and customizable enrollment process for employees
• Support for annual enrollment as well as the ability to manage changes to benefits
due to life events
• Easy access to view benefit elections
• Allows modeling of payroll deductions and changes for life events to enable
employees to make educated benefit decisions
• Customizable enrollment portal content (text, links, documents, logos)
• 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
Third-Party Administrative (TPA) Solutions
Paylocity’s TPA solutions are designed to modernize the administration of Health Savings Account (HSA),
Flexible Spending Account (FSA), Health Reimbursement Arrangement (HRA), Transportation Management Account
(TMA) and Premium Only Plan (POP) benefits by providing users with a single, unified access point for payroll, HR,
and benefits administration. Our TPA solutions includes mobile and web access, allowing users to see transaction details
and account balances, while having the ability to submit claims from our integrated employee portal. It also eases the
administration of Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage and retiree billing.
Implementation and Client Services
We supplement our comprehensive software platform with an integrated implementation and client service
organization with deep subject matter expertise. Delivering clients a positive experience and a high level of support is an
essential element of our ability to sell our solutions and retain clients.
Implementation and Training Services
Our clients today are primarily medium-sized organizations that are typically migrating to our platform from a
competitive solution or are adopting their first online payroll and HCM solution. These organizations often have limited
internal resources and rely on us to implement their payroll and HCM solutions. We typically implement our product
suite within only three to six weeks. Each client is guided through the implementation process by our knowledgeable
consultants for all implementation matters. We believe our ability to rapidly implement our solutions is principally due
to the combination of our emphasis on engagement with the client, our standardized methodology, our cloud-based
architecture and our highly-configurable, easy-to-use products.
We offer clients the opportunity to utilize on-demand or in-class training designed to provide clients with
general knowledge on our solutions. We also host an annual client conference for clients to learn about new products and
features and allow clients to provide feedback and learn best practices.
10
Client Service
Our client service model is designed to serve and support the needs of our clients and to build loyalty by
developing strong relationships with 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 2017, 2018 and 2019. Each client is
assigned an account management team that serves as the central point of contact for any questions or support needs. We
believe this approach enhances client service by providing clients with knowledgeable resources who understand the
client’s business, respond quickly, and are accountable for the overall client experience. Account managers are
supplemented by teams with deep technical and subject matter expertise who help to expediently and effectively address
client needs. We also proactively solicit client feedback through ongoing surveys from which we receive actionable
feedback that we use to enhance our client service processes. We have also built an online knowledge repository for
clients that provide industry content and Paylocity product and service information.
Tax and Regulatory Services
Our software contains a rules engine designed to make accurate federal, state, and local tax calculations that is
continually updated to support all pertinent legislative changes across U.S. jurisdictions. Our tax filing service provides a
variety of solutions to clients including processing payroll tax deposits, preparing and filing quarterly and annual
employment tax returns and amendments and resolving client employment tax notices.
Clients
Excluding clients acquired as part of the BeneFLEX acquisition, as of June 30, 2019, we provided our payroll
and HCM software solutions to approximately 20,200 clients, all located in the U.S. The rate at which we add clients is
variable period-to-period and is also seasonal as many clients switch solutions during the first calendar quarter of each
year. Clients include for-profit and non-profit organizations across industries including business services, financial
services, healthcare, manufacturing, restaurants, retail, technology and others. For each of the three years ended
June 30, 2017, 2018 and 2019, no client accounted for more than 1% of our revenues.
Sales and Marketing
We market and sell our products and services through our direct sales force. Our direct sales force includes
sales representatives who have defined geographic territories throughout the U.S. We seek to hire experienced sales
representatives wherever they are located and believe we have room to grow the number of sales representatives in each
of our territories.
The sales cycle begins with a sales lead generated by the sales representative, through our third-party referral
network, a client referral, our telemarketing team, our external website, e-mail marketing, or other territory-based
activities. We support our sales force with a marketing program that includes 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, that recommend our solutions and provide referrals. Our referral network has become an increasingly
important component of our sales process, and in fiscal 2019, more than 25% of our new client revenue originated by
referrals from participants in our referral network.
We believe participants in our referral network refer potential clients to us because of the strength of our
products and services, the value we provide our referral partners through our broker portal, the fact that we do not
provide services that compete with our referral networks, and because we offer third parties the ability to integrate their
systems with our platform. Unlike other payroll and HCM solution providers who also provide retirement plans, health
insurance and other products and services competitive with the offerings of the participants in our referral network, we
11
focus only on our core business of providing payroll and HCM solutions. In some cases, we have formalized
relationships in which we are a recommended vendor of these participants. In other cases, relationships are informal. We
typically do not compensate these participants for referrals.
Partner Ecosystem
We have developed a partner ecosystem of third-party systems, such as 401(k), benefits and insurance provider
systems, with whom we provide automated data integration for their clients. These third-party providers require certain
financial, payroll and other employee demographic information from their clients in order to efficiently provide their
respective services. After securing authorization from the client, we exchange data with these providers. In turn, these
third-party providers supply data to us, which allows us to deliver comprehensive HR and benefit management services
to our clients. We believe our partnerships with these third parties are an important part of their service offerings. We
have also developed our solutions to integrate with a variety of other systems used by our clients, such as accounting,
point of sale, banking, expense management, recruiting, background screening and skills assessment solutions.
Paylocity’s automated data integration reduces the complexity and risk of error of manual data transfers and
saves clients and employees time. Direct and automated data transmission improves the accuracy of data and facilitates
data collection in partners’ systems. Having automated data integration with a payroll and HCM provider differentiates
partners’ product offerings, strengthening their competitive positioning in their own markets.
Technology
We offer our solutions on a cloud-based platform that leverages a unified architecture and a common code base
that we organically developed. Clients do not need to install our software in their data centers and can access our
solutions through any mobile device or web browser with Internet access.
• Multi-Tenant Architecture. Our software solutions were designed with a multi-tenant architecture.
This architecture gives us an advantage over many disparate traditional systems, which are less
flexible and require longer and more costly development and upgrade cycles.
• Mobile Focused. We employ mobile-centric principles in our solution design and development. We
believe that the increasing mobility of employees heightens the importance of access to our solutions
through mobile devices, including smart phones and tablets. Our mobile experience provides our
clients and their employees with access to our solutions through virtually any device having Internet
access. We bring the flexibility of a secure, 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 client and employee data, protect against security threats or data breaches and prevent unauthorized
access. We regulate and limit all access to servers and networks at our data centers. Our systems are
monitored for irregular or suspicious activity, and we have dedicated internal staff perform security
assessments for each release. Our systems undergo regular penetration testing and source code reviews
by an independent third-party security firm.
We host our solutions at a third-party facility in Illinois and utilize another third-party facility in Wisconsin for
backup and disaster recovery. We supply the hardware infrastructure and are responsible for the ongoing maintenance of
our equipment at all data center locations.
Competition
The market for payroll and HCM solutions is both fragmented and highly competitive. Our competitors vary for
each of our solutions and primarily include payroll and HR service and software providers, such as Automatic Data
Processing, Inc., Paychex, Inc., Paycom Software, Inc., Paycor, Inc., Ultimate Software Group, Inc. and other local and
regional providers.
12
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
• Access to a wide variety of complementary third-party service providers.
We believe that we compete favorably on these factors within the medium-sized organization market. We
believe our 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 modules, technologies, features
and functionality. We are organized in small product-centric teams that utilize an agile development methodology. We
focus our efforts on developing new modules and core technologies and on further enhancing the usability, functionality,
reliability, performance and flexibility of existing modules.
Research and development costs, including research and development costs that were capitalized, were $44.5
million, $55.7 million and $73.6 million for the years ended June 30, 2017, 2018 and 2019, respectively. Our research
and development personnel are principally located at our headquarters, although we seek to hire highly experienced
personnel wherever they are located.
Intellectual Property
Our success is dependent, in part, on our ability to protect our proprietary technology and other intellectual
property rights. We rely on a combination of trade secrets, copyrights and trademarks, as well as contractual protections
to establish and protect our intellectual property rights. We require our employees, consultants and other third parties to
enter into confidentiality and proprietary rights agreements and control access to software, documentation and other
proprietary information. Although we rely on laws respecting intellectual property rights, including trade secret,
copyright and trademark laws, as well as contractual protections to establish and protect our intellectual property rights,
we believe that factors such as the technological and creative skills of our personnel, creation of new modules, features
and functionality and frequent enhancements to our modules are more essential to establishing and maintaining our
technology leadership position.
13
Despite our efforts to protect our proprietary technology and our intellectual property rights, unauthorized
parties may attempt to misappropriate our rights or to copy or obtain and use our proprietary technology to develop
applications with the same functionality as our modules. Policing unauthorized use of our technology and intellectual
property rights is very difficult.
We expect that providers of payroll and HCM solutions such as ours may be subject to third-party infringement
claims as the market and the number of competitors grows, and the functionality of applications in different industry
segments overlaps. Any of these or other third parties might make a claim of infringement against us at any time.
Employees
As of June 30, 2019, we had approximately 3,050 full-time employees. None of our employees are represented
by a union or are a party to a collective bargaining agreement, and we have not experienced any work stoppages. We
believe we have good relations with our employees and that our employee-focused culture benefits our clients and
supports our growth. Our management team has remained committed to maintaining and improving our culture even as
we grow rapidly, which is evidenced by our consistent receipt of top rankings from our employees as a great place to
work in all of our office locations.
Available Information
Our Internet address is www.paylocity.com and our investor relations website is located at
http://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 and
amendments to those reports as soon as reasonably practicable after such materials are electronically filed with (or
furnished to) the SEC. Information contained on our websites is not incorporated by reference into this Annual Report on
Form 10-K. In addition, the public may read and copy materials we file with the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site, www.sec.gov,
that includes 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 of
these risks, as well as other risks not currently known to us or that are currently considered immaterial. The trading
price of our common stock could decline due to any of the risks and uncertainties described below, and you may lose all
or part of your investment. In assessing these risks, you should also refer to the other information contained in this
Annual Report on Form 10-K, including our consolidated financial statements and related notes.
Our quarterly operating results have fluctuated in the past and may continue to fluctuate, which may cause the value
of our common stock to decline substantially.
Our quarterly operating results may fluctuate due to a variety of factors, many of which are outside of our
control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Moreover, our
stock price might be based on expectations of future performance that are unrealistic or that we might not meet and, if
our revenue or operating results fall below such expectations, the price of our common stock could decline substantially.
Our number of new clients typically increases more during our third fiscal quarter ending March 31 than during
the rest of our fiscal year, primarily because many new clients prefer to start using our payroll and HCM solutions at the
beginning of a calendar year. In addition, client funds and year-end activities are traditionally higher during our third
fiscal quarter. As a result of these factors, our total revenue and expenses have historically grown disproportionately
during our third fiscal quarter as compared to other quarters.
14
In addition to other risk factors listed in this section, some of the important factors that may cause fluctuations
in our quarterly operating results include:
• The extent to which our products achieve or maintain market acceptance;
• Our ability to introduce new products and enhancements and updates to our existing products on a
timely basis;
• Competitive pressures and the introduction of enhanced products and services from competitors;
• Changes in client budgets and procurement policies;
• The amount and timing of our investment in research and development activities and whether such
investments are capitalized or expensed as incurred;
• The number of our clients’ employees;
• Timing of recognition of revenues and expenses;
• Client renewal rates;
• Seasonality in our business;
• Technical difficulties with our products or interruptions in our services;
• Our ability to hire and retain qualified personnel;
• A repeal of or changes to the laws and regulations related to the products and services which we offer;
• Changes in accounting principles; and
• Unforeseen legal expenses, including litigation and settlement costs.
The majority of our agreements with clients do not have a specified term and are generally cancellable by our
clients upon 60 days’ or less notice. In fiscal 2018, the Company also began entering into term agreements, which are
generally two years in length. If a significant number of clients elected to terminate their agreements with us, our
operating results and our business would be adversely affected.
In addition, a significant portion of our operating expenses are related to compensation and other items which
are relatively fixed in the short-term, and we plan expenditures based in part on our expectations regarding future needs
and opportunities. Accordingly, changes in our business or revenue shortfalls could decrease our gross and operating
margins and could cause significant changes in our operating results from period to period. If this occurs, the trading
price of our common stock could fall substantially, either suddenly or over time.
Our operating results for previous fiscal quarters are not necessarily indicative of our operating results for the
full fiscal years or for any future periods. We believe that, due to the underlying factors for quarterly fluctuations,
quarter-to-quarter comparisons of our operations are not necessarily meaningful and that such comparisons should not be
relied upon as indications of future performance.
15
Failure to manage our growth effectively could increase our expenses, decrease our revenue, and prevent us from
implementing our business strategy and sustaining our revenue growth rates.
We have been rapidly growing our revenue and number of clients, and we will seek to do the same for the
foreseeable future. However, the growth in our number of clients puts significant strain on our business, requires
significant capital expenditures and increases our operating expenses. To manage this growth effectively, we must
attract, train, and retain a significant number of qualified sales, implementation, client service, software development,
information technology and management personnel. We also must maintain and enhance our technology infrastructure
and our financial and accounting systems and controls. If we fail to effectively manage our growth or we over-invest or
under-invest in our business, our business and results of operations could suffer from the resultant weaknesses in our
infrastructure, systems or controls. We could also suffer operational mistakes, a loss of business opportunities and
employee losses. If our management is unable to effectively manage our growth, our expenses might increase more than
expected, our revenue could decline or might grow more slowly than expected, and we might be unable to implement
our business strategy. In addition, our revenue growth rates may decline in future periods as a result of various factors,
including our failure to manage our growth effectively, our increased market penetration and the maturation of our
business, slowing demand for our services, and a decrease in the growth of the overall market, among others.
The markets in which we participate are highly competitive, and if we do not compete effectively, our operating
results could be adversely affected.
The market for payroll and HCM solutions is fragmented, highly competitive and rapidly changing. Our
competitors vary for each of our solutions and primarily include payroll and HR service and software providers, such as
Automatic Data Processing, Inc., Paychex, Inc., Paycom Software, Inc., Paycor, Inc., Ultimate Software Group, Inc. and
other local and regional providers.
Several of our competitors are larger, have greater name recognition, longer operating histories and
significantly greater resources than we do. Many of these competitors are able to devote greater resources to the
development, promotion and sale of their products and services. Furthermore, our current or potential competitors may
be acquired by third parties with greater available resources and the ability to initiate or withstand substantial price
competition. As a result, our competitors may be able to develop products and services better received by our markets or
may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies,
regulations or client requirements.
In addition, current and potential competitors have established, and might in the future establish, partner or
form other cooperative relationships with vendors of complementary products, technologies or services to enable them to
offer new products and services, to compete more effectively or to increase the availability of their products in the
marketplace. New competitors or relationships might emerge that have greater market share, a larger client base, more
widely adopted proprietary technologies, greater marketing expertise, greater financial resources, and larger sales forces
than we have, which could put us at a competitive disadvantage. In light of these advantages, current or potential clients
might accept competitive offerings in lieu of purchasing our offerings. We expect intense competition to continue for
these reasons, and such competition could negatively impact our sales, profitability or market share.
If we do not continue to innovate and deliver high-quality, technologically advanced products and services, we will
not remain competitive and our revenue and operating results could suffer.
The market for our solutions is characterized by rapid technological advancements, changes in client
requirements, frequent new product introductions and enhancements and changing industry standards. The life cycles of
our products are difficult to estimate. Rapid technological changes and the introduction of new products and
enhancements by new or existing competitors could undermine our current market position.
Our success depends in substantial part on our continuing ability to provide products and services that medium-
sized organizations will find superior to our competitors’ offerings and will continue to use. We intend to continue to
invest significant resources in research and development in order to enhance our existing products and services and
introduce new high-quality products that clients will want. If we are unable to predict user preferences or industry
16
changes, or if we are unable to modify our products and services on a timely basis or to effectively bring new products to
market, our sales may suffer.
In addition, we may experience difficulties with software development, industry standards, design, or marketing
that could delay or prevent our development, introduction or implementation of new solutions and enhancements. The
introduction of new solutions by competitors, the emergence of new industry standards or the development of entirely
new technologies to replace existing offerings could render our existing or future solutions obsolete.
We may not have sufficient resources to make the necessary investments in software development and we may
experience difficulties that could delay or prevent the successful development, introduction or marketing of new
products or enhancements. In addition, our products or enhancements may not meet the increasingly complex client
requirements of the marketplace or achieve market acceptance at the rate we expect, or at all. Any failure by us to
anticipate or respond adequately to technological advancements, client requirements and changing industry standards, or
any significant delays in the development, introduction or availability of new products or enhancements, could
undermine our current market position.
If we are unable to release periodic updates on a timely basis to reflect changes in tax, benefit and other laws and
regulations that our products help our clients address, the market acceptance of our products may be adversely
affected and our revenues could decline.
Our solutions are affected by changes in tax, benefit and other laws and regulations and generally must be
updated regularly to maintain their accuracy and competitiveness. Although we believe our SaaS platform provides us
with flexibility to release updates in response to these changes, we cannot be certain that we will be able to make the
necessary changes to our solutions and release updates on a timely basis, or at all. Failure to do so could have an adverse
effect on the functionality and market acceptance of our solutions. Changes in tax, benefit and other laws and regulations
could require us to make significant modifications to our products or delay or cease sales of certain products, which
could result in reduced revenues or revenue growth and our incurring substantial expenses and write-offs.
If we fail to manage our technical operations infrastructure, including operation of our data centers, our existing
clients may experience service outages and our new clients may experience delays in the deployment of our modules.
We have experienced significant growth in the number of users, transactions and data that our operations
infrastructure supports. We seek to maintain sufficient excess capacity in our data centers and other operations
infrastructure to meet the needs of all of our clients. We also seek to maintain excess capacity to facilitate the rapid
provision of new client deployments and the expansion of existing client deployments. In addition, we need to properly
manage our technological operations infrastructure in order to support version control, changes in hardware and software
parameters and the evolution of our modules. However, the provision of new hosting infrastructure requires significant
lead time. We have experienced, and may in the future experience, website disruptions, outages and other performance
problems. These problems may be caused by a variety of factors, including infrastructure changes, human or software
errors, viruses, security attacks, fraud, spikes in client usage and denial of service issues. In some instances, we may not
be able to identify the cause or causes of these performance problems within an acceptable period of time. If we do not
accurately predict our infrastructure requirements, our existing clients may experience service outages that may subject
us to financial penalties, financial liabilities and client losses. If our operations infrastructure fails to keep pace with
increased sales, clients may experience delays as we seek to obtain additional capacity, which could adversely affect our
reputation and our revenues.
In addition, our ability to deliver our cloud-based modules depends on the development and maintenance of
Internet infrastructure by third parties. This includes maintenance of a reliable network backbone with the necessary
speed, data capacity, bandwidth capacity, and security. Our services are designed to operate without interruption.
However, we have experienced and expect that we will experience future interruptions and delays in services and
availability from time to time. In the event of a catastrophic event with respect to one or more of our systems, we may
17
experience an extended period of system unavailability, which could negatively impact our relationship with clients. To
operate without interruption, both we and our clients must guard against:
• Damage from fire, power loss, natural disasters and other force majeure events outside our control;
• Communications failures;
• Software and hardware errors, failures and crashes;
• Security breaches, computer viruses, hacking, worms, malware, ransomware, denial-of-service attacks
and similar disruptive problems; and
• Other potential interruptions.
We also rely on computer hardware purchased or leased and software licensed from third parties in order to
offer our services. These licenses and hardware are generally commercially available on varying terms. However, it is
possible that this hardware and software might not continue to be available on commercially reasonable terms, or at all.
Any loss of the right to use any of this hardware or software could result in delays in the provisioning of our services
until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated.
Furthermore, our payroll modules is essential to our clients’ timely payment of wages to their employees. Any
interruption in our service may affect the availability, accuracy or timeliness of these programs and could damage our
reputation, cause our clients to terminate their use of our software, require us to indemnify our clients against certain
losses due to our own errors and prevent us from gaining additional business from current or future clients.
We host our solutions at a third-party facility in Franklin Park, Illinois and utilize another third-party facility in
Kenosha, Wisconsin for backup and disaster recovery. We also may decide to employ additional offsite data centers in
the future to accommodate growth. Problems faced by our data center locations, with the telecommunications network
providers with whom we or they contract, or with the systems by which our telecommunications providers allocate
capacity among their clients, including us, could adversely affect the availability and processing of our solutions and
related services and the experience of our clients. If our data centers are unable to keep up with our growing needs for
capacity, this could have an adverse effect on our business and cause us to incur additional expense. In addition, any
financial difficulties faced by our third-party data center’s operator or any of the service providers with whom we or they
contract may have negative effects on our business, the nature and extent of which are difficult to predict. Any changes
in service levels at our third-party data center or any errors, defects, disruptions or other performance problems with our
modules could adversely affect our reputation and may damage our clients’ stored files or result in lengthy interruptions
in our services. Interruptions in our services might reduce our revenues, subject us to potential liability or other expenses
or adversely affect our renewal rates.
In addition, while we own, control and have access to our servers and all of the components of our network that
are located in our backup data centers, we do not control the operation of these facilities. The operators of our third party
data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If
we are unable to renew these agreements on commercially reasonable terms, or if the data center operators are acquired,
we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur costs
and experience service interruption in doing so.
If our security measures are breached or unauthorized access to client data or funds is otherwise obtained, our
solutions may be perceived as not being secure, clients may reduce the use of or stop using our solutions and we may
incur significant liabilities.
Our solutions involve the storage and transmission of our clients’ and their employees’ proprietary and
confidential information. This information includes bank account numbers, tax return information, social security
numbers, benefit information, retirement account information, payroll information, system passwords, and in the case of
our benefit administration solution, BeneFLEX, health information protected by the Health Insurance Portability and
18
Accountability Act of 1996, as amended, or HIPAA. In addition, we collect and maintain personal information on our
own employees in the ordinary course of our business. Finally, our business involves the storage and transmission of
funds from the accounts of our clients to their employees, taxing and regulatory authorities and others. As a result,
unauthorized access or security breaches of our systems or the systems of our clients could result in the unauthorized
disclosure of confidential information, theft, litigation, indemnity obligations and other significant liabilities. Because
the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified
until they are employed, we may be unable to anticipate these techniques or to implement adequate preventative
measures in advance. As cyber threats continue to evolve, we are focused on ensuring that our operating environments
safeguard and protect personal and business information. We may be required to invest significant additional resources
to comply with evolving cybersecurity regulations and to modify and enhance our information security and controls, and
to investigate and remediate any security vulnerabilities. While we have security measures and controls in place to
protect confidential information, prevent data loss, theft and other security breaches, including penetration tests of our
systems by independent third parties, if our security measures are breached, our business could be substantially harmed
and we could incur significant liabilities. The costs of investigating, mitigating, and reporting such a breach to affected
individuals (if required) can be substantial. In addition, if a high-profile security breach occurs with respect to an
industry peer, our clients and potential clients may generally lose trust in the security of payroll and HCM modules. 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 (including,
in the case of our benefit administration solution, BeneFLEX, penalties for failure to comply with HIPAA) or other
actions or liabilities which could materially and adversely affect our business and operating results.
There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or
would otherwise protect us from any such liabilities or damages with respect to any particular claim related to a breach
or unauthorized access. We also cannot be sure that our existing general liability insurance coverage and coverage for
errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover
one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of
one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our
insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements,
could have a material adverse effect on our business, financial condition and results of operations.
Because of the way we recognize our revenue and our expenses over varying periods, changes in our business may
not be immediately reflected in our financial statements.
We recognize the majority of our revenue as services are performed. The amount of revenue we recognize in
any particular period is derived in significant part based on the number of employees of our clients served by our
solutions. As a result, our revenue is dependent in part on the success of our clients. The effect on our revenue of
significant changes in sales of our solutions or in our clients’ businesses may not be fully reflected in our results of
operations until future periods.
We recognize our expenses over varying periods based on the nature of the expense. When a client terminates
its relationship with us, we may not have derived enough revenue from that client to cover associated implementation
costs. Our expenses fluctuate as a percentage of revenue, and changes in our business generally may not be immediately
reflected in our results of operations.
If we fail to adequately expand our direct sales force with qualified and productive persons, we may not be able to
grow our business effectively.
We primarily sell our products and implementation services through our direct sales force. To grow our
business, we intend to focus on growing our client base for the foreseeable future. Our ability to add clients and to
achieve revenue growth in the future will depend upon our ability to grow and develop our direct sales force and on their
ability to productively sell our solutions. Identifying and recruiting qualified personnel and training them in the use of
our software requires significant time, expense and attention. The amount of time it takes for our sales representatives to
be fully-trained and to become productive varies widely. In addition, if we hire sales representatives from competitors or
19
other companies, their former employers may attempt to assert that these employees have breached their legal
obligations, resulting in a diversion of our time and resources.
If our sales organization does not perform as expected, our revenues and revenue growth could suffer. In
addition, if we are unable to hire, develop and retain talented sales personnel, if our sales force becomes less efficient as
it grows or if new sales representatives are unable to achieve desired productivity levels in a reasonable period of time,
we may not be able to grow our client base and revenues and our sales and marketing expenses may increase.
If our referral network participants reduce their referrals to us, we may not be able to grow our client base or
revenues in the future.
Referrals from third-party service providers, including 401(k) advisors, benefits administrators, insurance
brokers, third-party administrators and HR consultants, represent a significant source of potential clients for our products
and implementation services. For example, we estimate that more than 25% of our new sales in fiscal 2019 were referred
to us from our referral network participants. In most cases, our relationships with referral network participants are
informal, although in some cases, we have formalized relationships where we are a recommended vendor for their
clients.
Participants in our referral network are generally under no contractual obligation to continue to refer business to
us, and we do not intend to seek contractual relationships with these participants. In addition, these participants are
generally not compensated for referring potential clients to us, and may choose to instead refer potential clients to our
competitors. Our ability to achieve revenue growth in the future will depend, in part, upon continued referrals from our
network.
There can be no assurance that we will be successful in maintaining, expanding or developing our referral
network. If our relationships with participants in our referral network were to deteriorate or if any of our competitors
enter into strategic relationships with our referral network participants, sales leads from these participants could be
reduced or cease entirely. If we are not successful, we may lose sales opportunities and our revenues and profitability
could suffer.
If the market for cloud-based payroll and HCM solutions among medium-sized organizations develops more slowly
than we expect or declines, our business could be adversely affected.
We believe that the market for cloud-based payroll and HCM solutions is not as mature among medium-sized
organizations as the market for outsourced services or on-premise software and services. It is not certain that cloud-
based solutions will achieve and sustain high levels of client demand and market acceptance. Our success will depend to
a substantial extent on the widespread adoption by medium-sized organizations of cloud-based computing in general,
and of payroll and other HCM modules in particular. It is difficult to predict client adoption rates and demand for our
solutions, the future growth rate and size of the cloud-based market or the entry of competitive solutions. The expansion
of the cloud-based market depends on a number of factors, including the cost, performance, and perceived value
associated with cloud-based computing, as well as the ability of cloud-based solutions to address security and privacy
concerns. If other cloud-based providers experience security incidents, loss of client data, disruptions in delivery or other
problems, the market for cloud-based applications as a whole, including our solutions, may be negatively affected. If
cloud-based payroll and HCM solutions do not achieve widespread adoption among medium-sized organizations, or
there is a reduction in demand for cloud-based computing caused by a lack of client acceptance, technological
challenges, weakening economic conditions, security or privacy concerns, competing technologies and products,
decreases in corporate spending or otherwise, it could result in a loss of clients, decreased revenues and an adverse
impact on our business.
20
We typically pay client employees and may pay taxing authorities amounts due for a payroll period before a client’s
electronic funds transfers are finally settled to our account. If client payments are rejected by banking institutions or
otherwise fail to clear into our accounts, we may require additional sources of short-term liquidity and our operating
results could be adversely affected.
Our payroll processing business involves the movement of significant funds from the account of a client to
employees and relevant taxing authorities. For example, in fiscal 2019 we processed over $134 billion in payroll
transactions. Though we debit a client’s account prior to any disbursement on its behalf, due to Automated Clearing
House, or ACH, banking regulations, funds previously credited could be reversed under certain circumstances and
timeframes after our payment of amounts due to employees and taxing and other regulatory authorities. There is
therefore a risk that the employer’s funds will be insufficient to cover the amounts we have already paid on its behalf.
While such shortage and accompanying financial exposure has only occurred in very limited instances in the past, should
clients default on their payment obligations in the future, we might be required to advance substantial amounts of funds
to cover such obligations. In such an event, we may be required to seek additional sources of short-term liquidity, which
may not be available on reasonable terms, if at all, and our operating results and our liquidity could be adversely affected
and our banking relationships could be harmed.
Adverse changes in economic or political conditions could adversely affect our operating results and our business.
Our recurring revenues are based in part on the number of our clients’ employees. As a result, we are subject to
risks arising from adverse changes in economic and political conditions. The state of the economy and the rate of
employment, which deteriorated in the recent broad recession, may deteriorate again in the future. If the current
economic climate begins to decline, many clients may reduce their number of employees and delay or reduce technology
purchases. This could also result in reductions in our revenues and sales of our products, longer sales cycles, increased
price competition and clients’ purchasing fewer solutions than they have in the past. Any of these events would likely
harm our business, results of operations, financial condition and cash flows from operations.
Trade, monetary and fiscal policies, and political and economic conditions may substantially change, and credit
markets may experience periods of constriction and volatility. When there is a slowdown in the economy, employment
levels and interest rates may decrease with a corresponding impact on our businesses. Clients may react to worsening
conditions by reducing their spending on payroll and other HCM solutions or renegotiating their contracts with us. We
have agreements with various large banks to execute ACH and wire transfers as part of our client payroll and tax
services. While we have contingency plans in place for bank failures, a failure of one of our banking partners or a
systemic shutdown of the banking industry could result in the loss of client funds or impede us from accessing and
processing funds on our clients’ behalf, and could have an adverse impact on our business and liquidity.
If the banks that currently provide ACH and wire transfers fail to properly transmit ACH or terminate their
relationship with us or limit our ability to process funds or we are not able to increase our ACH capacity with our
existing and new banks, our ability to process funds on behalf of our clients and our financial results and liquidity
could be adversely affected.
We currently have agreements with eleven banks to execute ACH and wire transfers to support our client
payroll, benefit and tax services. If one or more of the banks fails to process ACH transfers on a timely basis, or at all,
then our relationship with our clients could be harmed and we could be subject to claims by a client with respect to the
failed transfers. In addition, these banks have no obligation to renew their agreements with us on commercially
reasonable terms, if at all. If these banks terminate their relationships with us or restrict the dollar amounts of funds that
they will process on behalf of our clients, their doing so may impede our ability to process funds and could have an
adverse impact on our financial results and liquidity.
21
We depend on our senior management team and other key employees, and the loss of these persons or an inability to
attract and retain highly skilled employees, including product development and other technical persons, could
adversely affect our business.
Our success depends largely upon the continued services of our key executive officers, including Steven R.
Beauchamp, our Chief Executive Officer. We also rely on our leadership team in the areas of research and development,
sales, services and general and administrative functions. From time to time, there may be changes in our executive
management team resulting from the hiring or departure of executives, which could disrupt our business. While we have
employment agreements with our executive officers, including Mr. Beauchamp, these employment agreements do not
require them to continue to work for us for any specified period and, therefore, they could terminate their employment
with us at any time. The loss of one or more of our executive officers or key employees could have an adverse effect on
our business.
We believe that to grow our business and be successful, we must continue to develop products that are
technologically-advanced, are highly integrable with third-party services, provide significant mobility capabilities and
have pleasing and intuitive user experiences. To do so, we must attract and retain highly qualified personnel, particularly
employees with high levels of experience in designing and developing software and Internet-related products and
services. Competition for these personnel in the greater Chicago area and elsewhere is intense. If we fail to attract new
personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely
harmed. We follow a practice of hiring the best available candidates wherever located, but as we grow our business, the
productivity of our product development and other research and development may be adversely affected. In addition, if
we hire employees from competitors or other companies, their former employers may attempt to assert that these
employees have breached their legal obligations, resulting in a diversion of our time and resources.
The sale and support of products and the performance of related services by us entail the risk of product or service
liability claims, which could significantly affect our financial results.
Clients use our products in connection with the preparation and filing of tax returns and other regulatory
reports. If any of our products contain errors that produce inaccurate results upon which users rely, or cause users to
misfile or fail to file required information, we could be subject to liability claims from users. Our agreements with our
clients typically contain provisions intended to limit our exposure to such claims, but such provisions may not be
effective in limiting our exposure. Contractual limitations we use may not be enforceable and may not provide us with
adequate protection against product liability claims in certain jurisdictions. A successful claim for product or service
liability brought against us could result in substantial cost to us and divert management’s attention from our operations.
Privacy concerns and laws or other domestic regulations may increase the cost of our solutions or reduce the
effectiveness of our modules and adversely affect our business.
Our clients collect, use and store personal or identifying information regarding their employees and their family
members in our solutions. Federal and state government bodies and agencies have adopted, are considering adopting, or
may adopt laws and regulations regarding the collection, use, storage and disclosure of such personal information. In
addition, HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and its
implementing regulations, applies to our benefit administration solution, BeneFLEX, as a business associate. The costs
of compliance with, and other burdens imposed by, such laws and regulations that are applicable to our clients’
businesses may limit the use and adoption of our modules and reduce overall demand, or lead to significant fines,
penalties or liabilities for any noncompliance with such privacy laws. Even the perception of privacy concerns, whether
or not valid, may inhibit market adoption of our solutions.
Additionally, we expect that existing laws, regulations, and standards may be interpreted in new and differing
manners in the future, and may be inconsistent among jurisdictions. Future laws, regulations, standards, and other
obligations, and changes in the interpretation of existing laws, regulations, standards, and other obligations could result
in increased regulation, increased costs of compliance and penalties for non-compliance, and limitations on data
collection, use, disclosure, and transfer for Paylocity and our clients. For example, in 2016, the European Union (“EU”)
and United States agreed to a framework for data transferred from the EU to the United States, called the Privacy Shield,
22
but this new framework has been challenged by private parties and may face additional challenges by national regulators
or additional private parties. Additionally, in 2016 the EU adopted a new regulation governing data privacy called the
General Data Protection Regulation (“GDPR”), which became effective in May 2018. The GDPR establishes new
requirements applicable to the handling of personal data and imposes penalties for non-compliance of up to 4% of
worldwide revenue. California also recently enacted legislation, the California Consumer Privacy Act of 2018, that will
afford consumers expanded privacy protections when it goes into effect on January 1, 2020. Legislators have stated that
they intend to propose amendments to this legislation, and it remains unclear what, if any, modifications will be made to
this legislation or how it will be interpreted. All of these legislative and regulatory initiatives may adversely affect our
clients’ ability to process, handle, store, use and transmit demographic and personal information regarding their
employees and family members, which could reduce demand for our solutions.
In addition to government activity, privacy advocacy groups and the technology and other industries are
considering various new, additional or different self-regulatory standards that may place additional burdens on us. If the
processing of personal information were to be curtailed in this manner, our products would be less effective, which may
reduce demand for our modules and adversely affect our business.
If third parties we work with violate applicable laws or regulations or our policies, such violations may also put
our clients’ content at risk and could in turn have an adverse effect on our business. Any significant change to applicable
laws, regulations, or industry practices regarding the collection, use, retention, security, or disclosure of our clients’
content, or regarding the manner in which the express or implied consent of clients for the collection, use, retention, or
disclosure of such content is obtained, could increase our costs and require us to modify our services and features,
possibly in a material manner, which we may be unable to complete, and may limit our ability to store and transmit
client data or develop new services and features.
Our business could be adversely affected if we do not effectively implement and service our solutions or if we are
unable to accommodate increased demand for our implementation and client services resulting from growth in our
business.
Our ability to deliver our payroll and HCM solutions depends on our ability to effectively implement and to
transition to, and train our clients on, our solutions. We generally do not recognize any revenue from new clients until
they process their first payroll. Further, the majority of our agreements with our clients are generally terminable by the
clients on 60 days’ or less notice. If a client is not satisfied with our implementation services, the client could terminate
its agreement with us before we have recovered our costs of implementation services, which would adversely affect our
results of operations and cash flows. In addition, negative publicity related to our client relationships, regardless of its
accuracy, may further damage our business by affecting our ability to compete for new business with current and
prospective clients.
Once our modules are deployed, our clients depend on our client service organization to resolve issues relating
to our solutions. The majority of our clients are medium-sized organizations with limited personnel and resources to
address payroll and other HCM related issues. These clients rely on us more so than larger companies with greater
internal resources and expertise. High-quality client services are important for the successful marketing and sale of our
products and for the retention of existing clients. If we do not help our clients quickly resolve issues and provide
effective ongoing support, our ability to sell additional products to existing clients would suffer and our reputation with
existing or potential clients would be harmed. Our sales process is highly dependent on our modules and business
reputation and on positive recommendations from our existing clients. Any failure to maintain high-quality client
services, or a market perception that we do not maintain high-quality client services, could adversely affect our
reputation, our ability to sell our solutions to existing and prospective clients, and our business, operating results and
financial position.
In addition, we may be unable to respond quickly enough to accommodate increased client demand for
implementation and client services driven by our growth. In order to ensure that we have sufficient employees to
implement and service our solutions, we must closely coordinate hiring of personnel with our projected sales for a
particular period. Because our sales cycle is typically only three to six weeks long, we may not be successful in
coordinating hiring of implementation and client service personnel to meet increased demand for our services. Increased
23
demand for services without a corresponding staffing increase of qualified personnel could adversely affect the quality
of services provided to our clients, and our business and our reputation could be harmed.
Our software might not operate properly, which could damage our reputation, give rise to claims against us, or divert
application of our resources from other purposes, any of which could harm our business and operating results.
Our payroll and HCM software is complex and may contain or develop undetected defects or errors,
particularly when first introduced or as new versions are released. Despite extensive testing, from time to time we have
discovered defects or errors in our products. In addition, because changes in employer and legal requirements and
practices relating to benefits are frequent, we discover defects and errors in our software and service processes in the
normal course of business compared against these requirements and practices. Material performance problems or defects
in our products and services might arise in the future, which could have an adverse impact on our business and client
relationship and subject us to claims.
Moreover, software development is time-consuming, expensive and complex. Unforeseen difficulties can arise.
We might encounter technical obstacles, and it is possible that we discover problems that prevent our products from
operating properly. If they do not function reliably or fail to achieve client expectations in terms of performance, clients
could cancel their agreements with us and/or assert liability claims against us. This could damage our reputation, impair
our ability to attract or maintain clients and harm our results of operations.
Defects and errors and any failure by us to identify and address them could result in delays in product
introductions and updates, loss of revenue or market share, liability to clients or others, failure to achieve market
acceptance or expansion, diversion of development and other resources, injury to our reputation, and increased service
and maintenance costs. Defects or errors in our product or service processes might discourage existing or potential
clients from purchasing from us. Correction of defects or errors could prove to be impossible or impracticable. The costs
incurred in correcting any defects or errors or in responding to resulting claims or liability might be substantial and could
adversely affect our operating results.
Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in
our systems could result in data loss or corruption, or cause the information that we collect to be incomplete or contain
inaccuracies that our clients, their employees and taxing and other regulatory authorities regard as significant. The costs
incurred in correcting any errors or in responding to regulatory authorities or to resulting claims or liability might be
substantial and could adversely affect our operating results.
We maintain insurance, but our insurance may be inadequate or may not be available in the future on acceptable
terms, or at all. In addition, our policy may not cover all claims made against us and defending a suit, regardless of its
merit, could be costly and divert management’s attention.
Our clients might assert claims against us in the future alleging that they suffered damages due to a defect,
error, or other failure of our product or service processes. A product liability claim and errors or omissions claim could
subject us to significant legal defense costs and adverse publicity regardless of the merits or eventual outcome of such a
claim.
Corporate investments and client funds that we hold are subject to market, interest rate, credit and liquidity risks. The
loss of these funds could have an adverse impact on our business.
We invest portions of excess cash and cash equivalents and funds held for our clients in liquid, investment-
grade marketable securities such as corporate bonds, commercial paper, asset-backed securities, U.S. treasury securities,
money market securities, and other cash equivalents. We follow an established investment policy and set of guidelines to
monitor and help mitigate our exposure to liquidity and credit risks. Nevertheless, our corporate investments and client
fund assets are subject to general market, interest rate, credit, and liquidity risks. These risks may be exacerbated,
individually or in unison, during periods of unusual financial market volatility. Any loss of or inability to access client
funds could have an adverse impact on our cash position and results of operations and could require us to obtain
additional sources of liquidity.
24
In addition, funds held for clients are deposited in consolidated accounts on behalf of our clients, and as a
result, the aggregate amounts in the accounts exceed the applicable federal deposit insurance limits. We believe that
since such funds are deposited in trust on behalf of our clients, the Federal Deposit Insurance Corporation, or the FDIC,
would treat those funds as if they had been deposited by each of the clients themselves and insure each client’s funds up
to the applicable deposit insurance limits. If the FDIC were to take the position that it is not obligated to provide deposit
insurance for our clients’ funds or if the reimbursement of these funds were delayed, our business and our clients could
be materially harmed.
If we are required to collect sales and use taxes in additional jurisdictions, we might be subject to liability for past
sales and our future sales may decrease. Adverse tax laws or regulations could be enacted or existing laws could be
applied to us or our clients, which could increase the costs of our services and adversely impact our business.
The application of federal, state, and local tax laws to services provided electronically is evolving. New income,
sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time (possibly with
retroactive effect), and could be applied solely or disproportionately to services provided over the Internet. These
enactments could adversely affect our sales activity due to the inherent cost increase the taxes would represent and
ultimately result in a negative impact on our operating results and cash flows.
In addition, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified
or applied adversely to us (possibly with retroactive effect), which could require us or our clients to pay additional tax
amounts, as well as require us or our clients to pay fines or penalties and interest for past amounts.
For example, we might lose sales or incur significant expenses if states successfully impose broader guidelines
on state sales and use taxes. A successful assertion by one or more states requiring us to collect sales or other taxes on
our software or provision of our services could result in substantial tax liabilities for past transactions and otherwise
harm our business. Each state has different rules and regulations governing sales and use taxes, and these rules and
regulations are subject to varying interpretations that change over time. We review these rules and regulations
periodically and, when we believe we are subject to sales and use taxes in a particular state, we may voluntarily engage
state tax authorities in order to determine how to comply with that state’s rules and regulations. We cannot assure you
that we will not be subject to sales and use taxes or related penalties for past sales in states where we currently believe no
such taxes are required.
Vendors of services, like us, are typically held responsible by taxing authorities for the collection and payment
of any applicable sales and similar taxes. If one or more taxing authorities determines that taxes should have, but have
not, been paid with respect to our services, we might be liable for past taxes in addition to taxes going forward. Liability
for past taxes might also include substantial interest and penalty charges. Our clients typically pay us for applicable sales
and similar taxes. Nevertheless, our clients might be reluctant to pay back taxes and might refuse responsibility for
interest or penalties associated with those taxes. If we are required to collect and pay back taxes and the associated
interest and penalties, and if our clients fail or refuse to reimburse us for all or a portion of these amounts, we will incur
unplanned expenses that may be substantial. Moreover, imposition of such taxes on us going forward will effectively
increase the cost of our services to our clients and might adversely affect our ability to retain existing clients or to gain
new clients in the areas in which such taxes are imposed.
Any future litigation against us could be costly and time-consuming to defend.
We may become subject, from time to time, to legal proceedings and claims that arise in the ordinary course of
business such as claims brought by our clients in connection with commercial disputes, employment claims made by our
current or former employees, or lawsuits related to breaches of personal information. Litigation might result in
substantial costs and may divert management’s attention and resources, which might seriously harm our business, overall
financial condition, and operating results. Insurance might not cover such claims, might not provide sufficient payments
to cover all the costs to resolve one or more such claims and might not continue to be available on terms acceptable to
us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby harming our
25
operating results and leading analysts or potential investors to lower their expectations of our performance, which could
reduce the trading price of our stock.
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology
and our brand.
Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of
copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our
proprietary rights in our products and services. Our proprietary technologies are not covered by any patent or patent
application. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to
protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our
intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and
use information that we regard as proprietary to create products and services that compete with ours. Some license
provisions protecting against unauthorized use, copying, transfer and disclosure of our products may be unenforceable
under the laws of certain jurisdictions and foreign countries.
We enter into confidentiality and invention assignment agreements with our employees and consultants and
enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances.
No assurance can be given that these agreements will be effective in controlling access to and distribution of our
products and proprietary information. The confidentiality agreements on which we rely to protect certain technologies
may be breached and may not be adequate to protect our proprietary technologies. Further, these agreements do not
prevent our competitors from independently developing technologies that are substantially equivalent or superior to our
solutions. In addition, we depend, in part, on technology of third parties licensed to us for our solutions, and the loss or
inability to maintain these licenses or errors in the software we license could result in increased costs, reduced service
levels or delayed sales of our solutions.
In order to protect our intellectual property rights, we may be required to spend significant resources, including
cybersecurity resources, to monitor and protect these rights. Our intellectual property could be wrongfully acquired as a
result of a cyberattack or other wrongful conduct by employees or third parties. Litigation may be necessary in the future
to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our
intellectual property rights could be costly, time consuming and distracting to management and could result in the
impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property
rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our
intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as
well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the
implementation of our solutions, impair the functionality of our solutions, delay introductions of new solutions, result in
our substituting inferior or more costly technologies into our solutions, or injure our reputation. In addition, we may be
required to license additional technology from third parties to develop and market new solutions, and we cannot assure
you that we could license that technology on commercially reasonable terms, or at all. Although we do not expect that
our inability to license this technology in the future would have a material adverse effect on our business or operating
results, our inability to license this technology could adversely affect our ability to compete.
We may be sued by third parties for alleged infringement of their proprietary rights.
There is considerable patent and other intellectual property development activity in our industry. Our success
depends, in part, upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a
number of other entities and individuals, may own or claim to own intellectual property relating to our industry. From
time to time, third parties may claim that we are infringing upon their intellectual property rights, and we may be found
to be infringing upon such rights. In the future, others may claim that our modules and underlying technology infringe or
violate their intellectual property rights. However, we may be unaware of the intellectual property rights that others may
claim cover some or all of our technology or services. Any claims or litigation could cause us to incur significant
expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty
payments, prevent us from offering our services, or require that we comply with other unfavorable terms. We may also
be obligated to indemnify our clients or business partners or pay substantial settlement costs, including royalty
26
payments, in connection with any such claim or litigation and to obtain licenses, modify applications, or refund fees,
which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property
could be costly and time-consuming and divert the attention of our management and key personnel from our business
operations.
The use of open source software in our products and solutions may expose us to additional risks and harm our
intellectual property rights.
Some of our products and solutions use or incorporate software that is subject to one or more open source
licenses. Open source software is typically freely accessible, usable and modifiable. Certain open source software
licenses require a user who intends to distribute the open source software as a component of the user’s software to
disclose publicly part or all of the source code to the user’s software. In addition, certain open source software licenses
require the user of such software to make any derivative works of the open source code available to others on potentially
unfavorable terms or at no cost.
The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign
courts. Accordingly, there is a risk that those licenses could be construed in a manner that imposes unanticipated
conditions or restrictions on our ability to commercialize our solutions. In that event, we could be required to seek
licenses from third parties in order to continue offering our products or solutions, to re-develop our products or solutions,
to discontinue sales of our products or solutions, or to release our proprietary software code under the terms of an open
source license, any of which could harm our business. Further, given the nature of open source software, it may be more
likely that third parties might assert copyright and other intellectual property infringement claims against us based on our
use of these open source software programs.
While we monitor the use of all open source software in our products, solutions, processes and technology and
try to ensure that no open source software is used in such a way as to require us to disclose the source code to the related
product or solution when we do not wish to do so, it is possible that such use may have inadvertently occurred in
deploying our proprietary solutions. In addition, if a third-party software provider has incorporated certain types of open
source software into software we license from such third party for our products and solutions without our knowledge, we
could, under certain circumstances, be required to disclose the source code to our products and solutions. This could
harm our intellectual property position and our business, results of operations and financial condition.
If third-party software used in our products is not adequately maintained or updated, our business could be materially
adversely affected.
Our products utilize certain software of third-party software developers. Although we believe that there are
alternatives for these products, any significant interruption in the availability of such third-party software could have an
adverse impact on our business unless and until we can replace the functionality provided by these products at a similar
cost. Additionally, we rely, to a certain extent, upon such third parties’ abilities to enhance their current products, to
develop new products on a timely and cost-effective basis and to respond to emerging industry standards and other
technological changes. We may be unable to replace the functionality provided by the third-party software currently
offered in conjunction with our products in the event that such software becomes obsolete or incompatible with future
versions of our products or is otherwise not adequately maintained or updated.
Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish
the demand for our modules, and could have a negative impact on our business.
The future success of our business depends upon the continued use of the Internet as a primary medium for
commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in
the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial
medium. Changes in these laws or regulations could require us to modify our modules in order to comply with these
changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for
accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-
27
related commerce or communications generally, resulting in reductions in the demand for Internet-based applications
such as ours.
In addition, the use of the Internet as a business tool could be adversely affected due to delays in the
development or adoption of new standards and protocols to handle increased demands of Internet activity, security,
reliability, cost, ease of use, accessibility, and quality of service. The performance of the Internet and its acceptance as a
business tool has been adversely affected by “viruses,” “worms” and similar malicious programs, and the Internet has
experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the
Internet is adversely affected by these issues, demand for our modules could suffer.
Furthermore, the availability or performance of our modules could be adversely affected by a number of factors,
including clients’ inability to access the Internet, the failure of our network or software systems, security breaches or
variability in user traffic for our services. For example, our clients access our solutions through their Internet service
providers. If a service provider fails to provide sufficient capacity to support our modules or otherwise experiences
service outages, such failure could interrupt our clients’ access to our solutions, adversely affect their perception of our
modules’ reliability and reduce our revenues. In addition to potential liability, if we experience interruptions in the
availability of our modules, our reputation could be adversely affected and we could lose clients.
Changes in regulatory laws or requirements applicable to our software and services could impose increased costs on
us, delay or prevent our introduction of new products and services, and impair the function or value of our existing
products and services.
Our products and services may become subject to increasing regulatory requirements, and as these requirements
proliferate, we may be required to change or adapt our products and services to comply. Changing regulatory
requirements might render our products and services obsolete or might block us from developing new products and
services. This might in turn impose additional costs upon us to comply or to further develop our products and services. It
might also make introduction of new products and services more costly or more time-consuming than we currently
anticipate. It might even prevent introduction by us of new products or services or cause the continuation of our existing
products or services to become more costly. For example, the adoption of new money transmitter or money services
business statutes in jurisdictions or changes in regulators’ interpretation of existing state and federal money transmitter
or money services business statutes or regulations, could subject us to registration or licensing or limit business activities
until we are appropriately licensed. These occurrences could also require changes to the manner in which we conduct
some aspects of our business or invest client funds, which could adversely impact interest income from investing client
funds. Should any state or federal regulators make a determination that we have operated as an unlicensed money
services business or money transmitter, we could be subject to civil and criminal fines, penalties, costs, legal fees,
reputational damage or other negative consequences. In addition, if the Affordable Care Act, or ACA, is repealed or
modified in whole or in part, or if implementation of certain aspects of the ACA is delayed, such repeal, modification or
delay could adversely impact the revenue we currently generate from our ACA Compliance solution as well as overall
gross margins. Any of these regulatory implementations or changes could have an adverse effect on our business,
operating results or financial condition.
We might require additional capital to support business growth, and this capital might not be available.
We intend to continue to make investments to support our business growth and might require additional funds
to respond to business challenges or opportunities, including the need to develop new products and services or enhance
our existing services, enhance our operating infrastructure, and acquire complementary businesses and technologies.
Accordingly, we might need to engage in equity or debt financings to secure additional funds. In addition, we will need
to expand our ACH capacity as we grow our business.
If we raise additional funds through further issuances of equity or convertible debt securities, our existing
stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and
privileges superior to those of holders of our common stock. Any debt financing or ACH facility secured by us in the
future could involve restrictive covenants relating to our capital-raising activities and other financial and operational
28
matters, which might make it more difficult for us to obtain additional capital and to pursue business opportunities and to
grow our business. In addition, we might not be able to obtain additional financing on terms favorable to us, if at all. If
we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to
continue to support our business growth and to respond to business challenges could be significantly limited.
Our services present the potential for embezzlement, identity theft, or other similar illegal behavior by our associates
with respect to third parties.
Certain services offered by us involve collecting payroll information from individuals, and this frequently
includes information about their checking accounts. Our services also involve the use and disclosure of personal and
business information that could be used to impersonate third parties, commit identity theft, or otherwise gain access to
their data or funds. If any of our associates take, convert, or misuse such funds, documents or data, we could be liable for
damages, and our business reputation could be damaged or destroyed. Moreover, if we fail to adequately prevent third
parties from accessing personal and/or business information and using that information to commit identity theft, we
might face legal liabilities and other losses than can have a negative impact on our business.
We rely on a third-party shipping provider to deliver printed checks to our clients, and therefore our business could
be negatively impacted by disruptions in the operations of this third-party provider.
We rely on third-party couriers such as the United Parcel Service, or UPS, to ship printed checks to our clients.
Relying on UPS and other third-party couriers puts us at risk from disruptions in their operations, such as employee
strikes, inclement weather and their ability to perform tasks on our behalf. If UPS or other third-party couriers fail to
perform their tasks, we could incur liability or suffer damages to our reputation, or both. If we are forced to use other
third-party couriers, our costs could increase and we may not be able to meet shipment deadlines. Moreover, we may not
be able to obtain terms as favorable as those we currently use, which could further increase our costs. These
circumstances may negatively impact our business, financial condition and results of operations.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in
the United States.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial
Accounting Standards Board, or FASB, the Securities and Exchange Commission, or SEC, and various bodies formed to
promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a
significant effect on our reported financial results including increased volatility, and could affect the reporting of
transactions completed before the announcement of a change. Our accounting policies that have been or may be affected
by changes in accounting principles include, but are not limited to, revenue recognition and accounting for leases.
We may acquire other companies or technologies, which could divert our management’s attention, result in
additional dilution to our stockholders and otherwise disrupt our operations and adversely affect our operating
results.
We have acquired and may in the future seek to acquire or invest in other businesses or technologies. The
pursuit of potential acquisitions or investments may divert the attention of management and cause us to incur various
expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.
In addition, we have limited experience in acquiring other businesses. We may not be able to integrate the
acquired personnel, operations and technologies successfully, or effectively manage the combined business following the
acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors,
including:
•
Inability to integrate or benefit from acquired technologies or services in a profitable manner;
• Unanticipated costs or liabilities associated with the acquisition;
29
•
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
infrastructure of the acquired business;
• Difficulty converting the clients of the acquired business onto our modules and contract terms,
including disparities in the revenues, licensing, support or professional services model of the acquired
company;
• Diversion of management’s attention from other business concerns;
• Adverse effects to our existing business relationships with business partners and clients as a result of
the acquisition;
• The potential loss of key employees;
• Use of resources that are needed in other parts of our business; and
• Use of substantial portions of our available cash to consummate the acquisition.
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired
goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our
acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this
impairment assessment process, which could adversely affect our results of operations.
Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could
adversely affect our operating results. In addition, if an acquired business fails to meet our expectations, our operating
results, business and financial position may suffer.
Risks Related to Ownership of Our Common Stock
Insiders have substantial control over us, which may limit our stockholders’ ability to influence corporate matters
and delay or prevent a third party from acquiring control over us.
As of August 2, 2019, our directors, executive officers and holders of more than 5% of our common stock,
together with their respective affiliates, beneficially owned, in the aggregate, approximately 36.3% of our outstanding
common stock. This significant concentration of ownership may adversely affect the trading price for our common stock
because investors often perceive disadvantages in owning stock in companies with controlling stockholders. In addition,
these stockholders will be able to exercise influence over all matters requiring stockholder approval, including the
election of directors and approval of corporate transactions, such as a merger or other sale of our company or its assets.
This concentration of ownership could limit the ability of our other stockholders to influence corporate matters and may
have the effect of delaying or preventing a change in control, including a merger, consolidation, or other business
combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to
obtain control, even if that change in control would benefit our other stockholders.
Our stock price may be subject to wide fluctuations.
The trading price of our common stock could be subject to wide fluctuations in response to various factors,
some of which are beyond our control. These factors include those discussed in this “Risk Factors” section of this
Annual Report on Form 10-K and others such as:
• Our operating performance and the operating performance of similar companies;
30
• 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 or
negative recommendations or withdrawal of research coverage by securities analysts;
• The public’s reaction to our press releases, our other public announcements and our filings with the
SEC;
• Sales of our common stock by our directors, executive officers and affiliates;
• Adverse market reaction to any indebtedness we may incur or securities we may issue in the future;
• Short sales, hedging and other derivative transactions in our common stock;
• Threatened or actual litigation;
• Other events or factors, including changes in general conditions in the United States and global
economies or financial markets (including acts of God, war, incidents of terrorism, or other
destabilizing events and the resulting responses to them).
In addition, the stock market in general and the market for Internet-related companies in particular, have
experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating
performance of those companies. Securities class action litigation has often been instituted against companies following
periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted
against us, could result in substantial costs, divert our management’s attention and resources, and harm our business,
operating results, and financial condition.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return
on your investment will depend on appreciation in the price of our common stock.
We have not declared or paid dividends on our common stock in the past three fiscal years and do not currently
intend to do so for the foreseeable future. We currently intend to invest our future earnings to fund our growth and other
corporate initiatives. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable
future, and the success of an investment in shares of our common stock will depend upon future appreciation in its value,
if any. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at
which our stockholders purchased their shares.
Future sales of shares of our common stock by existing stockholders could depress the market price of our common
stock.
As of August 2, 2019, we had an aggregate of 53,082,006 outstanding shares of common stock. The 17,362,750
shares sold in our initial public offering, follow-on offering and secondary offering can be freely sold in the public
market without restriction. The remaining shares can be freely sold in the public market, subject in some cases to volume
and other restrictions under Rule 144 and 701 under the Securities Act of 1933, as amended, and various agreements.
In addition, we have registered 17,853,893 shares of common stock that we have issued and may issue under
our equity plans. These shares can be freely sold in the public market upon issuance, subject in some cases to volume
and other restrictions under Rules 144 and 701 under the Securities Act, and various vesting agreements. In addition,
some of our employees, including some of our executive officers, have entered into 10b5-1 trading plans regarding sales
of shares of our common stock. These plans provide for sales to occur from time to time. If any of these additional
31
shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock
could decline.
Also, in the future, we may issue additional securities in connection with investments and acquisitions. The
amount of our common stock issued in connection with an investment or acquisition could constitute a material portion
of our then outstanding stock. Due to these factors, sales of a substantial number of shares of our common stock in the
public market could occur at any time. These sales, or the perception in the market that the holders of a large number of
shares intend to sell shares, could reduce the market price of our common stock.
If we are unable to maintain effective internal controls over financial reporting, investors may lose confidence in the
accuracy and completeness of our financial reports and the market price of our common stock may be negatively
affected.
As a public company, we are required to maintain internal controls over financial reporting and to report any
material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley
Act, requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and
provide a management report on the internal controls over financial reporting. In addition, the Sarbanes-Oxley Act
requires that our management report on the internal controls over financial reporting be attested to by our independent
registered public accounting firm. If we have a material weakness in our internal controls over financial reporting, we
may not detect errors on a timely basis and our financial statements may be materially misstated. Compliance with these
public company requirements has made some activities more time-consuming, costly and complicated. If we identify
material weaknesses in our internal controls over financial reporting, if we are unable to assert that our internal controls
over financial reporting are effective, or if our independent registered public accounting firm is unable to express an
opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the
accuracy and completeness of our financial reports and the market price of our common stock could be negatively
affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the
SEC or other regulatory authorities, which could require additional financial and management resources.
We have incurred and will continue to incur significantly increased costs and devote substantial management time as
a result of operating as a public company.
As a public company, we have incurred and will continue to incur significant legal, accounting and other
expenses. For example, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, and are required to comply with the applicable requirements of the Sarbanes-Oxley Act
and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently
implemented by the SEC and the NASDAQ Global Select Market including the establishment and maintenance of
effective disclosure and financial controls and changes in corporate governance practices. Compliance with these
requirements has increased our legal and financial compliance costs and has made some activities more time consuming
and costly. In addition, our management and other personnel have been required to divert attention from operational and
other business matters to devote substantial time to these public company requirements. In particular, we have incurred
and will continue to incur significant expenses as well as devote substantial management effort toward ensuring ongoing
compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. Although we have hired additional
employees to comply with these requirements, we may need to hire additional accounting and financial staff with
appropriate public company experience and technical accounting knowledge to comply with any regulatory changes.
If securities or industry analysts do not continue to publish research or publish unfavorable or misleading research
about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry
analysts publish about us or our business. If one or more of the analysts who covers us downgrades our stock or
publishes unfavorable or misleading research about our business, our stock price would likely decline. If one or more of
these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the
market for our stock and demand for our stock could decrease, which could cause our stock price or trading volume to
decline.
32
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay, or prevent a change in
control of our company and may affect the trading price of our common stock.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law,
which apply to us, may discourage, delay or prevent a change in control by prohibiting us from engaging in a business
combination with an interested stockholder for a period of three years after the stockholder becomes an interested
stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our amended and
restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a change in our
management or control over us that stockholders may consider favorable. Our amended and restated certificate of
incorporation and bylaws:
• Authorize the issuance of “blank check” convertible preferred stock that could be issued by our board
of directors to thwart a takeover attempt;
• Establish a classified board of directors, as a result of which the successors to the directors whose
terms have expired will be elected to serve from the time of election and qualification until the third
annual meeting following their election;
• Require that directors only be removed from office for cause and only upon a supermajority
stockholder vote;
• Provide that vacancies on the board of directors, including newly-created directorships, may be filled
only by a majority vote of directors then in office rather than by stockholders;
• Prevent stockholders from calling special meetings; and
• Prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the
stockholders.
Our bylaws provide that the state and federal courts located within the state of Delaware are the sole and exclusive
forums for certain legal actions involving the company or our directors, officers and employees.
On February 2, 2016, we amended our bylaws to designate the state and federal courts located within the state
of Delaware as the sole and exclusive forums for claims arising derivatively, pursuant to the Delaware General
Corporation Law or governed by the internal affairs doctrine. The choice of forum provision is expressly authorized by
the Delaware General Corporation Law, which was amended so that companies would not have to litigate internal claims
in more than one jurisdiction. If a court were to find the exclusive forum provision contained in our bylaws to be
inapplicable or unenforceable, we may incur additional costs associated with resolving such extra-forum claims, which
could adversely affect our business and financial condition. This bylaws provision, therefore, may dissuade or
discourage claimants from initiating lawsuits or claims against us or our directors and officers in forums other than
Delaware.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of June 30, 2019, our corporate headquarters occupied approximately 316,000 square feet in Schaumburg,
Illinois under leases with final expiration in October 2032. We also utilize office spaces consisting of approximately
72,000 square feet in Lake Mary, Florida and approximately 39,000 square feet in Meridian, Idaho as other major
operations centers. We lease other smaller facilities across the U.S. that serve as data centers, sales offices and
distribution centers.
For additional information regarding obligations under operating leases, see Note 10 of the Notes to the
Consolidated Financial Statements included in Part II, Item 8: “Financial Statements and Supplementary Data” of this
Annual Report on Form 10-K.
33
Item 3. Legal Proceedings.
From time to time, we may become involved in litigation related to claims arising from the ordinary course of
our business. We believe that there are no claims or actions pending or threatened against us, the ultimate disposition of
which would have a material adverse effect on us.
Item 4. Mine Safety Disclosures.
Not applicable.
34
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our common stock is listed on the NASDAQ Global Select Market under the symbol “PCTY”. The following
table sets forth for the periods indicated the high and low intra-day sale prices per share of our common stock as reported
on the NASDAQ Global Select Market:
Year ended June 30, 2018
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year ended June 30, 2019
88.47 $ 56.78
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
81.30 $ 53.46
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
92.50 $ 56.70
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 103.80 $ 82.81
49.49 $ 42.54
53.96 $ 44.11
57.16 $ 41.15
64.21 $ 47.29
High
Low
On August 2, 2019, the last reported sale price of our common stock on the NASDAQ Global Select Market was
$99.68 per share, and there were 15 holders of record of our common stock. The actual number of holders of common
stock is greater than these numbers of record holders and includes stockholders who are beneficial owners, but whose
shares are held in street name by brokers and nominees. The number of holders of record also does not include
stockholders whose shares may be held 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
existing shareholders sold an aggregate of 2,735,083 of such shares. The offer and sale of all of the shares in the IPO
were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-193661), which
was declared effective by the SEC on March 18, 2014.
With the proceeds of the IPO, we repaid amounts outstanding under a note issued by us to Commerce Bank &
Trust Company on March 9, 2011, which totaled $1.1 million, paid $9.4 million for the purchase of substantially all of
the assets of BFKMS Inc., and paid $9.5 million for the purchase of substantially all of the assets of Synergy Payroll
LLC.
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
$26.25 per share, before underwriting discounts and commissions. We sold 750,000 of such shares and existing
shareholders sold an aggregate of 4,210,000 of such shares. The offer and sale of all of the shares in the follow-on
offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-200448)
which was declared effective by the SEC on December 11, 2014. There have been no material changes in the planned
use of proceeds from the follow-on offering as described in the final prospectus filed with the SEC pursuant to Rule
424(b) on December 12, 2014.
35
Use 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
$29.75 per share, before underwriting discounts and commissions. The offer and sale of all of the shares in the secondary
offering were registered under the Securities Act pursuant to a registration statement on Form S-3 (File No. 333-206941)
which was declared effective by the SEC on September 25, 2015. The Company did not receive any proceeds from the
sale of common stock, as all the shares were sold by shareholders of the Company.
Dividend Policy
We have not declared or paid dividends on our common stock since our IPO. Neither Delaware law nor our
amended and restated certificate of incorporation requires our board of directors to declare dividends on our common
stock. Any future determination to declare cash dividends on our common stock will be made at the discretion of our
board of directors and will depend on our financial condition, results of operations, capital requirements, general
business conditions and other factors that our board of directors may deem relevant. We do not anticipate paying cash
dividends on our common stock for the foreseeable future.
Equity Compensation Plan Information
Information regarding the securities authorized for issuance under our equity compensation plans will be included
in our Proxy Statement relating to our 2020 annual meeting of stockholders to be filed with the SEC within 120 days
after the end of our fiscal year ended June 30, 2019, 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
not be deemed “filed” with the SEC or “soliciting material” under the Securities Exchange Act of 1934 and shall not be
incorporated 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
cumulative return 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, 2019. The graph assumes that
$100 was invested at the beginning of the period in our common stock and in each of the comparative indices, and the
36
reinvestment of any dividends. Historical stock price performance should not be relied upon as an indication of future
stock price performance.
Comparison of Cumulative Total Return
400.00
380.00
360.00
340.00
320.00
300.00
280.00
260.00
240.00
220.00
200.00
180.00
160.00
140.00
120.00
100.00
80.00
PCTY
S&P 500 Index
S&P 1500 Application Software Index
37
Item 6. Selected Financial Data.
Consolidated Selected Financial Data
You should read the following selected consolidated financial data together with our consolidated financial
statements and related notes included elsewhere in this Annual Report on Form 10-K and the information under the
section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our fiscal
year ends on June 30. The statements of operations data presented below have been derived from our audited
consolidated financial statements. Historical results are not necessarily indicative of future results.
Consolidated Statements of Operations Data:
Revenues:
2015
Year Ended June 30,
2017
(in thousands, except per share data)
2018
2016
2019
Recurring fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 142,168 $ 217,416 $ 284,817 $ 354,432 $ 436,955
19,881
Interest income on funds held for clients . . . . . . . . . . . . . . . . . .
456,836
Total recurring revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,797
Implementation services and other . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
467,633
Cost of revenues:
1,901
144,069
8,629
152,698
2,688
220,104
10,597
230,701
3,631
288,448
11,562
300,010
9,093
363,525
14,002
377,527
Recurring revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation services and other . . . . . . . . . . . . . . . . . . . . . .
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
46,366
24,530
70,896
81,802
66,131
31,954
98,085
132,616
85,399
38,588
123,987
176,023
104,009
45,188
149,197
228,330
125,211
28,640
153,851
313,782
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (13,972) $ (3,851) $
Net income (loss) per share:
61,832
26,736
47,598
136,166
(3,550)
(124)
(3,674)
177
43,035
19,864
32,824
95,723
(13,921)
54
(13,867)
105
77,506
29,098
62,123
168,727
7,296
73
7,369
651
112,599
50,329
94,630
257,558
56,224
1,822
58,046
4,223
6,718 $ 38,598 $ 53,823
95,484
37,645
79,252
212,381
15,949
802
16,751
(21,847)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(0.28) $
(0.28) $
(0.08) $
(0.08) $
0.13 $
0.12 $
0.74 $
0.70 $
1.02
0.97
Weighted average shares used in computing net income (loss)
per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50,127
50,127
50,913
50,913
51,415
54,057
52,425
54,887
52,914
55,414
Other Financial Data:
Adjusted Gross Profit(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87,226 $ 141,029 $ 189,272 $ 247,193 $ 336,247
Adjusted Recurring Gross Profit(1) . . . . . . . . . . . . . . . . . . . . . . . . $ 101,876 $ 161,184 $ 214,825 $ 276,857 $ 352,225
8,238 $ 28,398 $ 56,190 $ 81,297 $ 134,047
Adjusted EBITDA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
38
2015
2016
As of June 30,
2017
(in thousands)
2018
2019
Consolidated Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 81,258 $
Corporate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Client fund obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
69,296
591,219
720,548
591,219
107,580
86,496 $ 103,468 $ 137,193 $ 132,476
29,314
140,141
1,394,469
1,803,941
1,394,469
307,964
732
107,395
1,225,614
1,507,599
1,225,614
212,824
—
88,040
942,459
1,137,441
942,459
147,613
—
68,986
1,239,622
1,390,689
1,239,622
119,572
(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 of items we do not consider indicative of our ongoing operating performance. However, Adjusted Gross
Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA are not measurements of financial performance
under generally accepted accounting principles in the United States, or GAAP, and these metrics may not be
comparable to similarly-titled measures of other companies.
We define Adjusted Gross Profit as gross profit before amortization of capitalized internal-use software costs and
stock-based compensation expense and employer payroll taxes related to stock releases and option exercises. We
define Adjusted Recurring Gross Profit as total recurring revenues after cost of recurring revenues and before
amortization of capitalized internal-use software costs and stock-based compensation expense and employer payroll
taxes related to stock releases and option exercises. We define Adjusted EBITDA as net income (loss) before
interest expense, income tax expense (benefit), depreciation and amortization expense, stock-based compensation
expense and employer payroll taxes related to stock releases and option exercises, acquisition-related costs and lease
exit costs.
We disclose Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA, which are non-GAAP
measures, because we believe these metrics assist investors and analysts in comparing our performance across
reporting periods 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, and we present them to enhance investors’ understanding of our operating performance and cash
flows.
Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA have limitations as analytical tools.
Some of 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
have to 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
Adjusted EBITDA differently than we do, limiting their usefulness as a comparative measure.
Additionally, stock-based compensation will continue to be an element of our overall compensation strategy,
although we exclude it from Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA as an
expense when evaluating our ongoing operating performance for a particular period.
39
Because of these limitations, you should not consider Adjusted Gross Profit as an alternative to gross profit,
Adjusted Recurring Gross Profit as an alternative to total recurring revenues, or Adjusted EBITDA as an alternative
to net income (loss) or net cash provided by operating activities, in each case as determined in accordance with
GAAP. We compensate for these limitations by relying primarily on our GAAP results, and we use Adjusted Gross
Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA only as supplemental information.
Directly comparable GAAP measures to Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted
EBITDA are gross profit, total recurring revenues and net income (loss), respectively. We reconcile Adjusted Gross
Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA as follows:
2015
2016
Year Ended June 30,
2017
(in thousands)
2018
2019
Reconciliation from Gross Profit to Adjusted
Gross Profit
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 81,802 $ 132,616 $ 176,023 $ 228,330 $ 313,782
Amortization of capitalized internal-use software
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,606
5,446
9,447
14,315
16,921
Stock-based compensation expense and employer
payroll taxes related to stock releases and option
exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,544
Adjusted Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87,226 $ 141,029 $ 189,272 $ 247,193 $ 336,247
3,802
2,818
4,548
2,967
Reconciliation from Total Recurring Revenues to
Adjusted Recurring Gross Profit
2015
2016
Year Ended June 30,
2017
(in thousands)
2018
2019
Total recurring revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 144,069 $ 220,104 $ 288,448 $ 363,525 $ 456,836
(125,211)
Cost of recurring revenues . . . . . . . . . . . . . . . . . . . . . . .
331,625
Recurring gross profit . . . . . . . . . . . . . . . . . . . . . . . .
(104,009)
259,516
(85,399)
203,049
(46,366)
97,703
(66,131)
153,973
Amortization of capitalized internal-use software
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,606
5,446
9,447
14,315
16,921
Stock-based compensation expense and employer
payroll taxes related to stock releases and option
exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,679
Adjusted Recurring Gross Profit . . . . . . . . . . . . . . . . $ 101,876 $ 161,184 $ 214,825 $ 276,857 $ 352,225
1,765
2,329
3,026
1,567
Reconciliation from Net Income to Adjusted
EBITDA
2015
2016
Year Ended June 30,
2017
(in thousands)
2018
2019
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (13,972) $ (3,851) $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . . . . . . . . .
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
105
8,609
(5,258)
—
177
13,873
10,199
6,718 $ 38,598 $ 53,823
—
4,223
34,564
92,610
—
(21,847)
30,202
46,953
—
651
21,027
28,396
Stock-based compensation expense and employer
payroll taxes related to stock releases and option
exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease exit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,014
—
423
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,238 $ 28,398 $ 56,190 $ 81,297 $ 134,047
13,496
—
—
27,794
—
—
18,199
—
—
31,817
191
2,336
(2) Working capital is defined as total current assets minus total current liabilities.
40
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.” Such
forward-looking statements are based on current expectations and assumptions that are subject to risks and
uncertainties. Our actual results could differ materially from those anticipated by us in these forward-looking statements
as a result of various factors, including those discussed below and under Part I, Item 1A. “Risk Factors.”
Overview
We are a cloud-based provider of payroll and human capital management (“HCM”) software solutions for
medium-sized organizations, which we define as those having between 20 and 1,000 employees. Our comprehensive and
easy-to-use solutions enable our clients to manage their workforces more effectively. Our product suite delivers a unified
platform for professionals to make strategic decisions in the areas of payroll, core HR, workforce management, talent
and benefits, all while promoting a modern workplace and improving employee engagement.
Effective management of human capital is a core function in all organizations and requires a significant
commitment of resources. Our solutions were specifically designed to meet the payroll and HCM needs of medium-sized
organizations. We designed our cloud-based platform to provide a unified suite of modules using a multi-tenant
architecture. Our solutions are highly flexible and configurable and feature a modern, intuitive user experience. Our
platform offers automated data integration with over 300 related third-party systems, such as 401(k), benefits and
insurance provider systems.
Our payroll solution was the first of our current offerings introduced into the market. We believe payroll is the
most critical system of record for medium-sized organizations and an essential gateway to other HCM functionalities.
We have invested in, and we intend to continue to invest in, research and development to expand our product offerings
and advance our platform.
We believe there is a significant opportunity to grow our business by increasing our number of clients and we
intend to invest in our business to achieve this purpose. We market and sell our solutions through our direct sales force.
We have increased our sales and marketing expenses as we have added sales representatives and related sales and
marketing personnel. We intend to continue to grow our sales and marketing organization across new and existing
geographic territories. In addition to growing our number of clients, we intend to grow our revenue over the long term by
increasing the number and quality of products that clients purchase from us. To do so, we must continue to enhance and
grow the number of solutions we offer to advance our platform.
We believe that delivering a positive service experience is an essential element of our ability to sell our
solutions and retain our clients. We seek to develop deep relationships with our clients through our unified service
model, which has been designed to meet the service needs of mid-market organizations. We expect to continue to invest
in and grow our implementation and client service organization as our client base grows.
We believe we have the opportunity to continue to grow our business over the long term, and to do so we have
invested, and intend to continue to invest, across our entire organization. These investments include increasing the
number of personnel across all functional areas, along with improving our solutions and infrastructure to support our
growth. The timing and amount of these investments vary based on the rate at which we add new clients, add new
personnel and scale our application development and other activities. Many of these investments will occur in advance
of experiencing any direct benefit from them, which will make it difficult to determine if we are effectively allocating
our resources. We expect these investments to increase our costs on an absolute basis, but as we grow our number of
clients and our related revenues, we anticipate that we will gain economies of scale and increased operating leverage. As
a result, we expect our gross and operating margins will improve over the long term.
As our business has grown, we have become increasingly subject to the risks arising from adverse changes in
domestic and global economic conditions. If general economic conditions were to deteriorate, including declines in
private sector employment growth and business productivity, increases in the unemployment rate and changes in interest
41
rates, we may experience delays in our sales cycles, increased pressure from prospective clients to offer discounts and
increased pressure from existing clients to renew expiring recurring revenue agreements for lower amounts.
Paylocity Holding Corporation is a Delaware corporation, which was formed in November 2013. Our business
operations, excluding interest earned on certain cash holdings and expenses associated with certain secondary stock
offerings, have historically been, and are currently, conducted by its wholly owned subsidiaries, and the financial results
presented herein 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 our performance, identify trends affecting our business, formulate financial projections and make strategic
decisions.
Recurring Revenue Growth
Our recurring revenue model and high annual revenue retention rates provide significant visibility into our
future operating results and cash flow from operations. This visibility enables us to better manage and invest in our
business. Total recurring revenue, which is comprised of recurring fees and interest income on funds held for clients,
increased from $288.4 million in fiscal 2017 to $363.5 million in fiscal 2018, representing a 26% year-over-year
increase. Total recurring revenue increased from $363.5 million in fiscal 2018 to $456.8 million in fiscal 2019,
representing a 26% year-over-year increase. Total recurring revenue represented 96% of total revenue in fiscal 2017 and
2018 and 98% of total revenue in fiscal 2019.
Client Count Growth
We believe there is a significant opportunity to grow our business by increasing our number of clients.
Excluding clients acquired as part of the BeneFLEX acquisition, we have increased the number of clients using our
payroll and HCM software solutions from approximately 14,550 as of June 30, 2017 to approximately 20,200 as of
June 30, 2019, representing a compound annual growth rate of approximately 18%. The table below sets forth the total
number of clients using our payroll and HCM software solutions for the periods indicated, rounded to the nearest fifty.
Client Count . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended June 30,
2018
16,700
2017
14,550
2019
20,200
The rate at which we add clients is highly variable period-to-period and highly seasonal as many clients switch
solutions during the first calendar quarter of each year. Although many clients have multiple divisions, segments or
locations, 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
calculate our annual revenue retention rate as our total revenue for the preceding 12 months, less the annualized value of
revenue lost during the preceding 12 months, divided by our total revenue for the preceding 12 months. We calculate the
annualized value of revenue lost by summing the recurring fees paid by lost clients over the previous twelve months
prior to their termination if they have been a client for a minimum of twelve months. For those lost clients who became
clients within the last twelve months, we sum the recurring fees for the period that they have been a client and then
annualize the amount. We exclude interest income on funds held for clients from the revenue retention calculation. We
believe that our annual revenue retention rate is an important metric to measure overall client satisfaction and the general
quality of our product and service offerings.
42
Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA
We disclose Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA because we use
them to evaluate our performance, and we believe Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted
EBITDA assist in the comparison of our performance across reporting periods by excluding certain items that we do not
believe are indicative of our core operating performance. We believe these metrics are used in the financial community,
and we present them to enhance investors’ understanding of our operating performance and cash flows.
Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA are not measurements of
financial performance under generally accepted accounting principles in the United States (“GAAP”), and you should
not consider Adjusted Gross Profit as an alternative to gross profit, Adjusted Recurring Gross Profit as an alternative to
total recurring revenues, or Adjusted EBITDA as an alternative to net income or net cash provided by operating
activities, in each case as determined in accordance with GAAP. In addition, our definition of Adjusted Gross Profit,
Adjusted Recurring Gross Profit and Adjusted EBITDA may be different than the definition utilized for similarly-titled
measures used by other companies.
We define Adjusted Gross Profit as gross profit before amortization of capitalized internal-use software costs
and stock-based compensation expense and employer payroll taxes related to stock releases and option exercises. We
define Adjusted Recurring Gross Profit as total recurring revenues after cost of recurring revenues and before
amortization of capitalized internal-use software costs and stock-based compensation expense and employer payroll
taxes related to stock releases and option exercises. We define Adjusted EBITDA as net income before interest expense,
income tax expense (benefit), depreciation and amortization expense, stock-based compensation expense and employer
payroll taxes related to stock releases and option exercises, acquisition-related costs and lease exit costs. The table below
sets forth our Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA for the periods presented.
Adjusted Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 189,272 $ 247,193 $ 336,247
Adjusted Recurring Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 214,825 $ 276,857 $ 352,225
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,190 $ 81,297 $ 134,047
For a further discussion of Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA,
including a reconciliation of Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA to GAAP,
see Part II, Item 6: “Consolidated Selected Financial Data.”
2017
Year Ended June 30,
2018
(in thousands)
2019
Basis of Presentation
Revenues
Recurring Fees
We derive the majority of our revenues from recurring fees attributable to our cloud-based payroll and HCM
software solutions. Recurring fees for each client generally include a base fee in addition to a fee based on the number of
client employees and the number of products a client uses. We also charge fees attributable to our preparation of W-2
documents and annual required filings on behalf of our clients. Over the past three years, our client size has been on
average over 100 employees. We derive revenue from a client based on the solutions purchased by the client, the number
of client employees as well as the amount, type and timing of services provided with respect to those client employees.
As such, the number of client employees on our system is not a good indicator of our financial results in any period.
Recurring fees attributable to our cloud-based payroll and HCM solutions accounted for approximately 95%, 94% and
94% of our total revenues during the years ended June 30, 2017, 2018 and 2019, respectively.
While the majority of our agreements with clients are generally cancellable by the client on 60 days’ notice or
less, we also began entering into term arrangements in fiscal 2018, which are generally over two years in length. Our
agreements do not include general rights of return and do not provide clients with the right to take possession of the
43
software supporting the services being provided. We recognize recurring fees in the period in which services are
provided and the related performance obligations have been satisfied.
Interest Income on Funds Held for Clients
We earn interest income on funds held for clients. We collect funds for employee payroll payments and related
taxes in advance of remittance to employees and taxing authorities. Prior to remittance to employees and taxing
authorities, we earn interest on these funds through demand deposit accounts with financial institutions with which we
have automated clearing house, or ACH, arrangements. We also earn interest by investing a portion of funds held for
clients in highly liquid, investment-grade marketable securities.
Implementation Services and Other
Implementation services and other revenues primarily consist of implementation fees charged to new clients for
professional services provided to implement our payroll and HCM solutions. Implementations of our payroll solutions
typically require only three to four weeks at which point the new client’s payroll is first processed using our solution. We
implement additional HCM products as requested by clients and leverage the data within our payroll solution to
accelerate our implementation processes. With the adoption of Topic 606, we defer and amortize implementation fees
related to our proprietary products over a period generally up to 24 months, which previously were recognized upon
completion. Refer to Note 2 of the Notes to the Consolidated Financial Statements included in Part II, Item 8: “Financial
Statements and Supplementary Data” for additional information regarding the adoption of Topic 606.
Cost of Revenues
Cost of Recurring Revenues
Cost of recurring revenues is generally expensed as incurred and includes costs to provide our payroll and other
HCM solutions primarily consisting of employee-related expenses, including wages, stock-based compensation, bonuses
and benefits, relating to the provision of ongoing client support, payroll tax filing and distribution of printed checks and
other materials. These costs also include amortization of capitalized internal-use software costs, delivery costs and
computing costs, as well as bank fees associated with client fund transfers. We expect to realize cost efficiencies over 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 recurring
revenues. We amortized $9.4 million, $14.3 million and $16.9 million of capitalized internal-use software costs in fiscal
2017, 2018 and 2019, respectively.
Cost of Implementation Services and Other
Cost of implementation services and other consists primarily of employee-related expenses, including wages,
stock-based compensation, bonuses and benefits involved in the implementation of our payroll and other HCM solutions
for new and existing clients. With the adoption of Topic 606, cost of implementation services related to our proprietary
products are capitalized and amortized over a period of 7 years, which previously were expensed as incurred. We intend
to grow our business through acquisition of new clients, and doing so will require increased personnel to implement our
solutions. Therefore, our cost of implementation services and other is expected to increase in absolute dollars for the
foreseeable future. Refer to Note 2 of the Notes to the Consolidated Financial Statements included in Part II, Item 8:
“Financial Statements and Supplementary Data” for additional information regarding the adoption of Topic 606.
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of employee-related expenses for our direct sales and marketing
staff, including wages, commissions, stock-based compensation, bonuses, benefits, marketing expenses and other related
44
costs. With the adoption of Topic 606, we capitalize certain selling and commission costs related to new contracts or
purchases of additional services by our existing clients, which were previously expensed as incurred. Commissions are
typically paid within two months after the start of service. Bonuses paid to sales staff for attainment of certain annual
performance criteria are accrued in the fiscal year and are subsequently paid annually in the first fiscal quarter of the
following year. We generally recognize these costs over a period of 7 years. Refer to Note 2 of the Notes to the
Consolidated Financial Statements included in Part II, Item 8: “Financial Statements and Supplementary Data” for
additional information regarding the adoption of Topic 606.
We will seek to grow our number of clients for the foreseeable future and therefore our sales and marketing
expense is expected to continue to increase in absolute dollars as we grow our sales organization and expand our
marketing activities.
Research and Development
Research and development expenses consist primarily of employee-related expenses for our research and
development and product management staff, including wages, stock-based compensation, bonuses and benefits.
Additional expenses include costs related to the development, maintenance, quality assurance and testing of new
technologies and ongoing refinement of our existing solutions. Research and development expenses, other than internal-
use software costs qualifying for capitalization, are expensed as incurred.
We capitalize a portion of our development costs related to internal-use software. The timing of our capitalized
development projects may affect the amount of development costs expensed in any given period. The table below sets
forth the amounts of capitalized and expensed research and development expenses for each of fiscal 2017, 2018 and
2019.
2017
Year Ended June 30,
2018
(in thousands)
2019
Capitalized portion of research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,414 $ 18,015 $ 23,313
Expensed portion of research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50,329
Total research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,512 $ 55,660 $ 73,642
37,645
29,098
We expect to grow our research and development efforts as we continue to broaden our product offerings and
extend our technological leadership by investing in the development of new technologies and introducing them to new
and existing clients. We expect research and development expenses to continue to increase in absolute dollars but to vary
as a percentage of total revenue on a period-to-period basis.
General and Administrative
General and administrative expenses consist primarily of employee-related costs, including wages, stock-based
compensation, bonuses and benefits for our administrative, finance, accounting, and human resources departments.
Additional expenses include consulting and professional fees, occupancy costs, insurance and other corporate expenses.
We expect our general and administrative expenses to continue to increase in absolute dollars as our company continues
to grow.
Other Income
Other income generally consists of interest income related to interest earned on our cash and cash equivalents
and corporate investments, net of losses on disposals of property and equipment.
45
Results of Operations
The following table sets forth our statements of operations data for each of the periods indicated.
Consolidated Statements of Operations Data:
Revenues:
2017
Year Ended June 30,
2018
(in thousands)
2019
Recurring fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 284,817 $ 354,432 $ 436,955
19,881
Interest income on funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
456,836
Total recurring revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,797
Implementation services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
467,633
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues:
9,093
363,525
14,002
377,527
3,631
288,448
11,562
300,010
Recurring revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
85,399
38,588
123,987
176,023
104,009
45,188
149,197
228,330
125,211
28,640
153,851
313,782
112,599
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50,329
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94,630
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
257,558
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56,224
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,822
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,046
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,223
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,718 $ 38,598 $ 53,823
95,484
37,645
79,252
212,381
15,949
802
16,751
(21,847)
77,506
29,098
62,123
168,727
7,296
73
7,369
651
46
The following table sets forth our statements of operations data as a percentage of total revenue for each of the
periods indicated.
Year Ended June 30,
2018
2017
2019
Consolidated Statements of Operations Data:
Revenues:
Recurring fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income on funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recurring revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues:
Recurring revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comparison of Fiscal Years Ended June 30, 2017, 2018 and 2019
95 %
1 %
96 %
4 %
100 %
94 %
2 %
96 %
4 %
100 %
94 %
4 %
98 %
2 %
100 %
28 %
13 %
41 %
59 %
26 %
10 %
21 %
57 %
2 %
0 %
2 %
0 %
2 %
28 %
12 %
40 %
60 %
25 %
10 %
21 %
56 %
4 %
0 %
4 %
(6)%
10 %
27 %
6 %
33 %
67 %
24 %
11 %
20 %
55 %
12 %
0 %
12 %
0 %
12 %
Revenues
($ in thousands)
Recurring fees . . . . . . . . . . . . . . . . . . . . .
Percentage of total revenues . . . . . . .
Interest income on funds held for
clients . . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of total revenues . . . . . . .
Implementation services and other . . . . .
Percentage of total revenues . . . . . . .
Recurring Fees
2017
$ 284,817
Year Ended June 30,
2018
$ 354,432
2019
$ 436,955
Change from
2017 to 2018
%
$
Change from
2018 to 2019
$
$ 69,615 24 % $ 82,523
%
23 %
95 %
94 %
94 %
$
3,631
$ 9,093
$ 19,881
$ 5,462 150 % $ 10,788 119 %
1 %
2 %
4 %
$ 11,562
$ 14,002
$ 10,797
$ 2,440 21 % $ (3,205)
(23)%
4 %
4 %
2 %
Recurring fees for the year ended June 30, 2019 increased by $82.5 million, or 23%, to $437.0 million from
$354.4 million for the year ended June 30, 2018. Recurring fees increased primarily as a result of incremental revenues
from new and existing clients. Excluding clients acquired as part of the BeneFLEX acquisition, the number of clients
using our payroll and HCM software solutions at June 30, 2019 increased by 21% to approximately 20,200 from
approximately 16,700 at June 30, 2018.
Recurring fees for the year ended June 30, 2018 increased by $69.6 million, or 24%, to $354.4 million from
$284.8 million for the year ended June 30, 2017. Recurring fees increased primarily as a result of incremental revenues
from new and existing clients. Excluding clients acquired as part of the BeneFLEX acquisition, the number of clients
47
using our payroll and HCM software solutions at June 30, 2018 increased by 15% to approximately 16,700 from
approximately 14,550 at June 30, 2017.
Interest Income on Funds Held for Clients
Interest income on funds held for clients for the year ended June 30, 2019 increased by $10.8 million, or 119%,
to $19.9 million from $9.1 million for the year ended June 30, 2018. Interest income on funds held for clients increased
primarily as a result of higher average interest rates, increased average daily balances for funds held due to the addition
of new clients to our client base and interest income from investing a larger portion of our funds held for clients in
marketable securities.
Interest income on funds held for clients for the year ended June 30, 2018 increased by $5.5 million, or 150%,
to $9.1 million from $3.6 million for the year ended June 30, 2017. Interest income on funds held for clients increased
primarily as a result of higher average interest rates, increased average daily balances for funds held due to the addition
of new clients to our client base and interest income from investing a portion of our funds held for clients in marketable
securities starting in July 2017.
Implementation Services and Other
Implementation services and other revenue for the year ended June 30, 2019 decreased by $3.2 million, or 23%,
to $10.8 million from $14.0 million for the year ended June 30, 2018. Implementation services and other revenue
decreased primarily due to the change in the treatment of implementation fees related to our proprietary products.
Historically, we recognized implementation fees upon completion. Starting July 1, 2018, we concluded that
implementation fees related to our proprietary products are not separate performance obligations, and as a result, the
related implementation fees are deferred and amortized generally over a period up to 24 months. Refer to Note 2 of the
Notes to the Consolidated Financial Statements included in Part II, Item 8: “Financial Statements and Supplementary
Data” for additional information.
Implementation services and other revenue for the year ended June 30, 2018 increased by $2.4 million, or 21%,
to $14.0 million from $11.6 million for the year ended June 30, 2017 primarily due to the changes in the number of new
clients and product mix year over year.
Cost of Revenues
($ in thousands)
2017
Cost of recurring revenues . . . . . . . . . . $ 85,399
Year Ended June 30,
2018
$ 104,009
Change from
2017 to 2018
Change from
2018 to 2019
$
2019
$ 125,211
$
$ 18,610
%
22 % $ 21,202
%
20 %
Percentage of recurring revenues . .
Recurring gross margin . . . . . . . . . . . . .
Cost of implementation services and
30 %
70 %
29 %
71 %
27 %
73 %
other . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,588
Percentage of implementation
$ 45,188
$ 28,640
$ 6,600
17 % $ (16,548)
(37)%
services and other . . . . . . . . . . . . .
Implementation gross margin . . . . . . . .
334 %
(234)%
323 %
(223) %
265 %
(165) %
Cost of Recurring Revenues
Cost of recurring revenues for the year ended June 30, 2019 increased by $21.2 million, or 20%, to
$125.2 million from $104.0 million for the year ended June 30, 2018. Cost of recurring revenues increased primarily as a
result of the continued growth of our business, in particular, $10.4 million in additional employee-related costs resulting
from additional personnel necessary to provide services to new and existing clients, $7.5 million in delivery and other
processing-related fees and $2.6 million in increased internal-use software amortization. Recurring gross margin
increased from 71% in fiscal 2018 to 73% in fiscal 2019.
48
Cost of recurring revenues for the year ended June 30, 2018 increased by $18.6 million, or 22%, to
$104.0 million from $85.4 million for the year ended June 30, 2017. Cost of recurring revenues increased primarily as a
result of the continued growth of our business, in particular, $8.6 million in additional employee-related costs resulting
from additional personnel necessary to provide services to new and existing clients, $4.9 million in increased internal-
use software amortization and $4.4 million in delivery and other processing-related fees. Recurring gross margin was
70% and 71% for fiscal 2017 and fiscal 2018, respectively.
Cost of Implementation Services and Other
Cost of implementation services and other for the year ended June 30, 2019 decreased by $16.5 million, or
37%, to $28.6 million from $45.2 million for the year ended June 30, 2018. The decrease in cost of implementation
services and other was primarily due to the deferral and amortization of certain implementation costs over a period of 7
years related to our proprietary products upon the adoption of Topic 606 on July 1, 2018, partially offset by additional
employee-related costs resulting from additional personnel. Refer to Note 2 of the Notes to the Consolidated Financial
Statements included in Part II, Item 8: “Financial Statements and Supplementary Data” for additional information
regarding the adoption of Topic 606.
Cost of implementation services and other for the year ended June 30, 2018 increased by $6.6 million, or 17%,
to $45.2 million from $38.6 million for the year ended June 30, 2017. The increase in cost of implementation services
and other was primarily the result of $6.1 million of additional employee-related costs resulting from additional
personnel necessary to implement our solutions for new and existing clients during fiscal 2018.
Operating Expenses
($ in thousands)
Sales and Marketing
2017
Sales and marketing . . . . . . . . . . . . . . . . . . $ 77,506
Percentage of total revenues . . . . . . . . . . . .
26 %
Year Ended June 30,
2018
$ 95,484
2019
$ 112,599
25 %
24 %
Change from
2017 to 2018
Change from
2018 to 2019
$
$ 17,978
%
$
23 % $ 17,115
%
18 %
Sales and marketing expenses for the year ended June 30, 2019 increased by $17.1 million, or 18%, to
$112.6 million from $95.5 million for the year ended June 30, 2018. The increase in sales and marketing expense was
primarily the result of $14.2 million of additional employee-related costs from the expansion of our sales team net of the
deferral and amortization of certain selling and commissions costs over a period of 7 years related to the adoption of
Topic 606 on July 1, 2018. Refer to Note 2 of the Notes to the Consolidated Financial Statements included in Part II,
Item 8: “Financial Statements and Supplementary Data” for additional information regarding the adoption of Topic 606.
Sales and marketing expenses for the year ended June 30, 2018 increased by $18.0 million, or 23%, to
$95.5 million from $77.5 million for the year ended June 30, 2017. The increase in sales and marketing expense was
primarily the result of $15.7 million of additional employee-related costs from the expansion of our sales team
(including management, sales engineers, direct sales, sales administration and sales lead generation support) and $1.0
million of additional stock-based compensation associated with our equity incentive plan.
49
Research and Development
2017
Research and development . . . . . . . . . . . . . . . $ 29,098
Percentage of total revenues . . . . . . . . . . . . . .
10 %
Year Ended June 30,
2018
$ 37,645
2019
$ 50,329
10 %
11 %
Change from
2017 to 2018
Change from
2018 to 2019
$
$ 8,547
%
$
29 % $ 12,684
%
34 %
Research and development expenses for the year ended June 30, 2019 increased by $12.7 million, or 34%, to
$50.3 million from $37.6 million for the year ended June 30, 2018. The increase in research and development expenses
was primarily the result of $14.3 million of additional employee-related costs related to additional development
personnel and $2.3 million of additional stock-based compensation associated with our equity incentive plan, partially
offset by higher year-over-year capitalized internal-use software costs of $5.3 million.
Research and development for the year ended June 30, 2018 increased by $8.5 million, or 29%, to $37.6 million
from $29.1 million for the year ended June 30, 2017. The increase in research and development expenses was primarily
the result of $9.6 million of additional employee-related costs related to additional development personnel and $0.9
million of additional stock-based compensation associated with our equity incentive plan, partially offset by higher year-
over-year capitalized internal-use software costs of $2.8 million.
General and Administrative
2017
General and administrative . . . . . . . . . . $ 62,123
Percentage of total revenues . . . . . . . . .
21 %
Year Ended June 30,
2018
$ 79,252
2019
$ 94,630
21 %
20 %
Change from
2017 to 2018
$
$ 17,129
%
Change from
2018 to 2019
$
%
19 %
28 % $ 15,378
General and administrative expenses for the year ended June 30, 2019 increased by $15.4 million, or 19%, to
$94.6 million from $79.3 million for the year ended June 30, 2018. The increase in general and administrative expense
was primarily the result of $7.5 million of additional employee-related costs and $5.7 million in additional stock-based
compensation associated with our equity incentive plan.
General and administrative expenses for the year ended June 30, 2018 increased by $17.1 million, or 28%, to
$79.3 million from $62.1 million for the year ended June 30, 2017. The increase in general and administrative expense
was primarily the result of $6.6 million of additional employee-related costs related to additional personnel, $4.8 million
of increased occupancy costs incurred as a result of our requirement for additional office space, $2.3 million of costs
incurred as a result of our early lease exit as explained in Note 10 of the Notes to the Consolidated Financial Statements
included in Part II, Item 8: “Financial Statements and Supplementary Data” and $4.2 million in additional stock-based
compensation associated with our equity incentive plan, partially offset by the prior year impact related to modified
equity awards of $2.9 million as explained in Note 13 of the Notes to the Consolidated Financial Statements included in
Part II, Item 8: “Financial Statements and Supplementary Data”.
Other Income
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73
Percentage of total revenues . . . . . . . . . . . . . . . . . . . . .
0 %
$ 802
0 %
0 %
Year Ended June 30,
2018
2017
Change from
2017 to 2018
Change from
2018 to 2019
%
$
2019
$ 1,822
$
$ 729
%
999 % $ 1,020
127 %
Other income for the year ended June 30, 2019 increased by $1.0 million as compared to the year ended
June 30, 2018. The increase in other income was primarily due to interest income from investing a portion of our excess
cash and cash equivalents in marketable securities starting in July 2018, partially offset by loss on the disposal of
property and equipment.
50
Other income for the year ended June 30, 2018 increased by $0.7 million as compared to the year ended
June 30, 2017. The increase in other income was primarily due to higher average interest rates as well as higher average
daily balances for our cash and cash equivalents.
Income Tax Expense (Benefit)
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . $ 651
Percentage of total revenues . . . . . . . . . . . . . . . . . . .
0 %
(6)%
0 %
2017
Year Ended June 30,
2018
$ (21,847)
2019
$ 4,223
$ (22,498) *
$
%
$
$ 26,070
%
*
Change from
2017 to 2018
Change from
2018 to 2019
* Not Meaningful
The difference in income tax expense (benefit) for the year ended June 30, 2019 as compared to the year ended
June 30, 2018 was primarily due to $41.3 million higher pre-tax income in the year ended June 30, 2019 in addition to a
non-recurring tax benefit of $22.8 million generated by the release of our valuation allowance during the year ended
June 30, 2018.
The difference in income tax expense (benefit) of $22.5 million for the year ended June 30, 2018 as compared
to the year ended June 30, 2017 was primarily due to a $22.8 million tax benefit from the release of the valuation
allowance and a $10.5 million benefit from excess benefits realized from employee stock exercises, partially offset by
$8.6 million in tax expense from the Tax Cuts and Jobs Act of 2017 and the annual provision for income taxes of $4.6
million.
See Note 11 of the Notes to Consolidated Financial Statements included in Part II, Item 8: “Financial
Statements and Supplementary Data” of this Annual Report on Form 10-K for further details on the components of
income tax and a reconciliation of 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 accordance
with GAAP, we apply various accounting policies that require our management to make estimates, judgments and
assumptions that affect the amounts reported in our financial statements. We consider the policies discussed below
critical to understanding our financial statements, as their application places the most significant demands on
management’s judgment. Management bases its estimates, judgments and assumptions on historical experience, current
economic and industry conditions and on various other factors deemed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Because the use of estimates is an integral part of the financial reporting process,
actual results could differ and such differences could be material.
Revenue Recognition
We adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“Topic
606”) effective as of July 1, 2018 using the modified retrospective method of transition, which limited the application of
the new standard only to contracts that were not completed as of the effective date. Under Topic 606, we recognize
revenue when we transfer control of goods or services to our customers in an amount that reflects the consideration to
which we expect to be entitled to for those goods or services.
We derive our revenue from contracts with clients predominantly from recurring and non-recurring service fees.
Recurring fees are derived from payroll and HR related services including time and attendance, employee administration
and benefits enrollment and administration services. Payroll services are delivered on a weekly, biweekly, semi-monthly,
or monthly basis depending upon the payroll frequency of the client and on an annual basis if a client selects W-2
preparation and processing services. HR related services are typically delivered on a monthly basis.
51
The majority of our recurring fees are satisfied over time as services are provided. The performance obligations
related to payroll services are satisfied upon the processing of a client’s payroll with the fee charged and collected based
on a per employee per payroll frequency fee. The performance obligations related to time and attendance services and
HR related services are satisfied over time each month with the fee charged and collected based on a per employee per
month fee. For subscription based fees which can include payroll, time and attendance and HR related services, we
recognize the applicable recurring fees over time each month with the fee charged and collected based on a per employee
per month fee. We believe that the total fees charged to our clients is indicative of the standalone selling price as these
fees are within the range of prices typically charged for our services to our clients. Even though our subscription-based
services include multiple performance obligations, we do not believe it is meaningful to determine the standalone selling
price for each service separately since these services are delivered and related revenue recognized within the same
period.
We have certain optional performance obligations that are satisfied at a point in time including the sales of time
clocks and W-2 preparation services.
Non-recurring service fees consist mainly of nonrefundable implementation fees, which involve setting the
client up in, and loading data into, our cloud-based modules. These implementation activities are considered set-up
activities. We have determined that the nonrefundable upfront fees provide certain clients with a material right to renew
the contract. Implementation fees are deferred and amortized generally over a period up to 24 months.
Capitalized Internal-Use Software Costs
We apply ASC 350-40, Intangibles—Goodwill and Other—Internal-Use Software, to the accounting for costs
of internal-use software. Software development costs are capitalized when module development begins, it is probable
that the project will be completed, 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. We
also capitalize certain costs related to specific upgrades and enhancements when it is probable the expenditures will
result in significant additional functionality. The capitalization policy provides for the capitalization of certain payroll
costs for employees 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 or 36-month period. We evaluate
the useful lives of these assets on an annual basis and test for impairments whenever events or changes in circumstances
occur that could impact the recoverability of these assets. There were no impairments to capitalized internal-use software
during the years ended June 30, 2017, 2018 or 2019. We capitalized $15.4 million, $18.0 million, and $23.3 million of
internal-use software costs for the years ended June 30, 2017, 2018 and 2019, respectively, including stock-based
compensation costs of $1.8 million, $2.0 million and $2.8 million for the years ended June 30, 2017, 2018 and 2019,
respectively. We amortized $9.4 million, $14.3 million, and $16.9 million of capitalized internal-use software costs for
the years ended June 30, 2017, 2018 and 2019, respectively. In fiscal 2017, fiscal 2018 and fiscal 2019, we developed
significant additional functionality in several of our modules. This development resulted in an increase in capitalized
internal-use software costs in fiscal 2019 as compared to fiscal 2018 and in fiscal 2018 as compared to fiscal 2017.
Goodwill and Intangible Assets
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business
combination that are not individually identified and separately recognized. Goodwill is not amortized, but instead is
tested for impairment at the reporting unit level. If the fair value of the reporting unit is less than its carrying amount, we
would record an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
We perform our annual impairment review of goodwill in our fiscal fourth quarter or when a triggering event occurs
between annual impairment tests. No impairment was recorded in fiscal 2017, 2018 or 2019 as a result of our qualitative
assessments over our single reporting segment.
52
Intangible assets are comprised primarily of client relationship acquisitions and are reported net of accumulated
amortization on the consolidated balance sheets. Client relationships use the straight-line method of amortization over a
seven to nine-year time frame, while the non-solicitation agreements uses the straight-line method of amortization over
two to four year life of the agreements. Amortization expense associated with our intangible assets was $1.5 million,
$1.7 million and $2.3 million during the years ended June 30, 2017, 2018 and 2019, respectively. We test intangible
assets for potential impairment when events or changes in circumstances indicate that the carrying value of such assets
may not be recoverable. There were no such events or changes in circumstances during the years ended June 30, 2017,
2018 or 2019.
Income Taxes
We account for federal income taxes under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date.
Deferred tax assets may be reduced by a valuation allowance to the extent we determine it is more likely than
not that some portion or all of the deferred tax assets will not be realized. The valuation of deferred tax assets requires
judgment in assessing the likely future tax consequences of events that have been recognized in our financial statements
or tax returns and future profitability. Our accounting for deferred tax consequences represents the best estimate of those
future events.
In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the
likelihood of realization of the deferred tax assets. The weight given to positive and negative evidence is commensurate
with the extent to which the evidence may be objectively verified. Based on the amount of positive evidence present
from cumulative income in recent years, we released a substantial portion of our valuation allowance during the year
ended June 30, 2018.
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.
Liquidity and Capital Resources
Our primary liquidity needs are related to the funding of general business requirements, including working
capital requirements, research and development, and capital expenditures. The share repurchase program completed
during the first quarter of fiscal 2019 was funded by our cash flows from operations. As of June 30, 2019, our principal
source of liquidity was $132.5 million of cash and cash equivalents and $30.0 million of total corporate investments. In
July 2018, we started investing portions of our excess cash and cash equivalents in highly liquid, investment-grade
marketable securities. These investments consist of commercial paper, asset-backed debt securities, corporate debt
issuances and U.S. Treasury securities with credit quality ratings of A-1 or higher. We believe that our investments in
unrealized loss positions as of June 30, 2019 were not other-than-temporarily impaired, nor has any event occurred
subsequent to that date that would change that conclusion.
In order to grow our business, we intend to increase our personnel and related expenses and to make significant
investments in our platform, data centers and general infrastructure. The timing and amount of these investments will
vary based on the rate at which we can add new clients and new personnel and the scale of our module development,
data centers and other activities. Many of these investments will occur in advance of our experiencing any direct benefit
from them, which could negatively impact our liquidity and cash flows during any particular period and may make it
difficult to determine if we are effectively allocating our resources. However, we expect to fund our operations, capital
expenditures and other investments principally with cash flows from operations, and to the extent that our liquidity needs
exceed our cash from operations, we would look to our cash on hand and corporate investments and utilize our credit
53
facility that we recently entered into in July 2019 to satisfy those needs. Refer to Note 17 of the Notes to the
Consolidated Financial Statements included in Part II, Item 8: “Financial Statements and Supplementary Data” for
additional detail on the credit agreement.
Funds held for clients and client fund obligations will vary substantially from period to period as a result of the
timing of payroll and tax obligations due. Our payroll processing activities involve the movement of significant funds
from accounts of employers to employees and relevant taxing authorities. Though we debit a client’s account prior to
any disbursement on its behalf, there is a delay between our payment of amounts due to employees and taxing and other
regulatory authorities and when the incoming funds from the client to cover these amounts payable actually clear into
our operating accounts. We currently have agreements with eleven banks to execute ACH and wire transfers to support
our client payroll and tax services. We believe we have sufficient capacity under these ACH arrangements to handle
transaction volumes for the foreseeable future.
We believe our current cash and cash equivalents, corporate investments and cash flow from operations will be
sufficient to meet our working capital, capital expenditure, share repurchases, if any, 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:
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash flows from investing activities:
Purchases of available-for-sale securities and other . . . . . . . . . . . . . . . . . .
Proceeds from sales and maturities of available-for-sale securities . . . . .
Capitalized internal-use software costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease allowances used for tenant improvements . . . . . . . . . . . . . . . . . . . . .
Acquisition of business, net of cash and funds held for clients' cash
2017 (1)
61,980 $
Year Ended June 30,
2018 (1)
97,866 $ 115,032
2019
—
—
(13,641)
(21,338)
(2,845)
(196,597)
73,044
(15,638)
(21,676)
(11,754)
(250,685)
246,243
(20,142)
(11,280)
(7,480)
and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(37,824)
(6,658)
(179,279)
—
(43,344)
Cash flows from financing activities:
Net change in client fund obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . .
Taxes paid related to net share settlement of equity awards . . . . . . . . . . . .
Excess tax benefits from stock-based compensation . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . .
(297,163)
—
—
34
3,677
(11,342)
447
(304,347)
281,467
—
—
—
4,304
(10,554)
—
275,217
168,855
(1,000)
(34,991)
85
5,982
(24,207)
—
114,724
Net change in cash, cash equivalents and funds held for clients' cash
and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (280,191) $ 193,804 $ 186,412
(1) Certain amounts have been reclassified to reflect the adoption of Accounting Standards Update (“ASU”) No. 2016-18,
“Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).”
Operating Activities
Net cash provided by operating activities was $62.0 million, $97.9 million and $115.0 million for the years
ended June 30, 2017, 2018 and 2019, respectively.
54
The increase in net cash provided by operating activities from fiscal 2018 to fiscal 2019 was primarily due to
improved operating results after adjusting for non-cash items including stock-based compensation expense, depreciation
and amortization expense and deferred income tax expense (benefit), partially offset by changes in operating assets and
liabilities, mostly driven by changes in deferred contract costs and tenant improvement allowances. The increase in net
cash provided by operating activities from fiscal 2017 to fiscal 2018 was primarily due to improved operating results
after adjusting for non-cash items, including stock-based compensation expense and depreciation and amortization
expense partially offset by the change in deferred income tax related to non-cash tax adjustments. Refer to Note 11 of the
Notes to Consolidated Financial Statements included in Part II, Item 8: “Financial Statements and Supplementary Data”
for additional detail related to the change in deferred income tax. The increase was also due to an additional $8.9 million
received for tenant improvement allowances.
Investing Activities
Net cash used in investing activities was $37.8 million, $179.3 million and $43.3 million, for the years ended
June 30, 2017, 2018 and 2019, respectively. The net cash used in investing activities is significantly impacted by the
timing of purchases and sales and maturities of investments as we invest a portion of the funds held for clients in highly
liquid, investment-grade marketable securities. The amount of funds held for clients invested will vary based on timing
of client funds collected and payments due to client employees and taxing and other regulatory authorities. Beginning in
July 2018, we also began investing portions of our excess cash in marketable securities.
The change in net cash used in investing activities from fiscal 2018 to fiscal 2019 was primarily due to an
increase in proceeds from sales and maturities of available-for-sale securities of $173.2 million, partially offset by an
increase in purchases of available-for-sale securities and other of $54.1 million during the year ended June 30, 2019 as
compared to the year ended June 30, 2018. Other changes in net cash used in investing activities were primarily due to
$6.7 million in costs related to the acquisition of BeneFLEX during the year ended June 30, 2018 and decreases in
purchases of property and equipment and lease allowances used for tenant improvements of $10.4 million and $4.3
million, respectively. The change in net cash used in investing activities from fiscal 2017 to fiscal 2018 was primarily
due to $196.6 million in purchases of available-for-sale securities and other, partially offset by $73.0 million in sales and
maturities available-for-sales securities as we started investing during fiscal 2018 for the first time. Other changes in
investing activities were primarily due to an additional $8.9 million in lease allowances used for tenant improvements
and $6.7 million in net cash used to acquire BeneFLEX during fiscal 2018.
Financing Activities
Net cash provided by (used in) financing activities was $(304.3) million, $275.2 million and $114.7 million for
the years ended June 30, 2017, 2018 and 2019, respectively. The change in net cash provided by (used in) financing
activities from fiscal 2018 to fiscal 2019 was primarily the result of a decrease of $112.6 million due to the timing of
client funds collected and related remittance of those funds to client employees and taxing authorities, $35.0 million in
repurchases of common shares during fiscal 2019 and $13.7 million in additional taxes paid related to net share
settlement of equity awards. The change in net cash provided by (used in) financing activities from fiscal 2017 to fiscal
2018 was primarily the result of an increase of $578.6 million due to the timing of client funds collected and related
remittance of those funds to client employees and taxing authorities, partially offset by $0.8 million increase in taxes
paid related to net share settlement of equity awards.
55
Contractual Obligations and Commitments
Our principal commitments consist of operating lease obligations. The following table summarizes our
contractual obligations at June 30, 2019:
2021-2022 2023-2024 Thereafter
Operating lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 108,178 $ 10,449 $ 20,650 $ 17,678 $ 59,401
—
Unconditional purchase obligations . . . . . . . . . . . . . . . . . . . . .
$ 119,047 $ 15,439 $ 26,529 $ 17,678 $ 59,401
10,869
5,879
4,990
Total
—
Payment Due By Fiscal Period
2020
Capital Expenditures
We expect to continue to invest in capital spending as we continue to grow our business and expand and
enhance our operating facilities, data centers and technical infrastructure. Future capital requirements will depend on
many factors, including our rate of sales growth. In the event that our sales growth or other factors do not meet our
expectations, we may eliminate or curtail capital projects in order to mitigate the impact on our use of cash. Capital
expenditures were $21.3 million, $21.7 million and $11.3 million for the years ended June 30, 2017, 2018 and 2019,
respectively, exclusive of capitalized internal-use software costs of $13.6 million, $15.6 million, and $20.1 million for
the same periods, respectively. We also spent $2.8 million, $11.8 million and $7.5 million in fiscal 2017, fiscal 2018,
and fiscal 2019, respectively, on capital expenditures for which we received reimbursement for tenant improvement
allowances.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that may be material to investors.
New Accounting Pronouncements
Refer to Note 2 of the Notes to the Consolidated Financial Statements included in Part II, Item 8: “Financial
Statements 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 our
business. These risks primarily include interest rate and certain other exposures as well as risks relating to changes in the
general economic conditions in the United States. We have not used, nor do we intend to use, derivatives to mitigate the
impact of interest rate or other exposure or for trading or speculative purposes.
Interest Rate Risk
As of June 30, 2019, we had cash and cash equivalents of $132.5 million, total corporate investments of $30.0
million and funds held for clients of $1,394.5 million. We deposit our cash and cash equivalents and significant portions
of our funds held for clients in demand deposit accounts with various financial institutions. We invest portions of our
excess cash and cash equivalents and funds held for clients in marketable securities including commercial paper,
corporate bonds, asset-backed securities and U.S. treasury securities which were classified as available-for-sale
securities as of June 30, 2019. Our investment policy is focused on generating higher yields from these investments
while preserving liquidity and capital. However, as a result of our investing activities, we are exposed to changes in
interest rates that may materially affect our financial statements.
In a falling rate environment, a decline in interest rates would decrease our interest income earned on both cash
and cash equivalents and funds held for clients. An increase in the overall interest rate environment may cause the
56
market value of our investments in fixed rate available-for-sale securities to decline. If we are forced to sell some or all
of these securities at lower market values, we may incur investment losses. However, because we classify all marketable
securities as available-for-sale, no gains or losses are recognized due to changes in interest rates until such securities are
sold or decreases in fair value are deemed to be other-than-temporary. We have not recorded any other-than-temporary
impairment losses to date.
Based upon a sensitivity model that measures market value changes caused by interest rate fluctuations, an
immediate 25-basis point increase in interest rates would have resulted in a decrease in the market value of our available-
for-sale securities by $0.1 million as of June 30, 2019. A 25-basis point decrease in interest rates would have resulted in
a $0.1 million increase in the market value of our available-for-sale securities as of June 30, 2019. Fluctuations in the
value of our available-for-sale securities caused by changes in interest rates are recorded in other comprehensive income
and are only realized if we sell the underlying securities.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of
operations. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to
fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial
condition and results of operations.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is incorporated by reference to the consolidated financial statements and
accompanying notes set forth on pages F-1 through F-32 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 Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a
company’s management, including its principal executive and principal financial officers, as appropriate to allow timely
decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2019, the end of the period covered
by this Annual Report on Form 10-K. Based upon such evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were effective as of such date.
Management’s Report on Internal Control Over Financial Reporting and Attestation Report of the Registered Public
Accounting Firm
Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for
establishing 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
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:
57
(i) pertain to the maintenance 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 in accordance with U.S. GAAP, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized 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 and
Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting
as of June 30, 2019, based on the framework in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework). Based on this evaluation under the
Internal Control—Integrated Framework our Chief Executive Officer and Chief Financial Officer have concluded that
our internal control over financial reporting was effective as of June 30, 2019.
Our independent registered public accounting firm, which has audited our financial statements, has also audited
the effectiveness of our internal control over financial reporting as of June 30, 2019, as stated in their report, which is
included in Item 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, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. Effective July 1, 2018, we adopted Accounting Standard Codification Topic 606, Revenue from
Contracts with Customers (“ASC 606”). Changes were made to the relevant business processes and the related control
activities in order to monitor and maintain appropriate controls over financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide
reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our
disclosure 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 only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances
of fraud, if any, within the Company have been detected.
Item 9B. Other Information.
None.
58
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information required by Part III, Item 10, will be included in our Proxy Statement relating to our 2020 annual
meeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended June 30, 2019,
and is incorporated herein by reference.
Item 11. Executive Compensation
Information required by Part III, Item 11, will be included in our Proxy Statement relating to our 2020 annual
meeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended June 30, 2019,
and is incorporated 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 2020 annual
meeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended June 30, 2019,
and is incorporated 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 2020 annual
meeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended June 30, 2019,
and is incorporated 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 2020 annual
meeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended June 30, 2019,
and is incorporated herein by reference.
59
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, 2018 and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-5
Consolidated Statements of Operations and Comprehensive Income for the years ended June 30, 2017,
2018 and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-6
Consolidated Statements of Changes in Stockholders’ Equity for the years ended June 30, 2017, 2018
and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-7
Consolidated Statements of Cash Flows for the years ended June 30, 2017, 2018 and 2019 . . . . . . . . . . . . . . . .
F-8
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-9
(2) Exhibits.
The information required by this Item is set forth on the Exhibit Index immediately following this page.
Item 16. Form 10-K Summary
None.
60
Exhibit
Number
2.1
3.1
3.2
4.1
EXHIBIT INDEX
Exhibit Description
Form File No.
Exhibit
Filing Date
Incorporated by Reference
Share Exchange Agreement, dated November 7, 2013.
S-1
333-193661 2.1
January 30, 2014
First Amended and Restated Certificate of Incorporation of the
S-1/A
333-193661 3.2
February 14, 2014
Registrant.
Amended and Restated By-Laws of the Registrant.
10-K
001-36348
3.2
August 11, 2017
Amended and Restated Investor Rights Agreement, dated June 29,
S-1
333-193661 4.1
January 30, 2014
2012.
10.1
Form of Indemnification Agreement for directors and officers.
S-1
333-193661 10.2 January 30, 2014
10.2†
10.2.1†
10.2.2†
10.3†
10.4†
10.5†
2008 Equity Incentive Plan and forms of agreement thereunder.
S-1
333-193661 10.3 January 30, 2014
First Amendment to the 2008 Equity Incentive Plan, dated August 5,
S-1
333-193661 10.3.1 January 30, 2014
2010.
Second Amendment to the 2008 Equity Incentive Plan, dated
S-1
333-193661 10.3.2 January 30, 2014
June 29, 2012.
2014 Equity Incentive Plan and forms of agreement thereunder.
S-1/A
333-193661 10.4 February 14, 2014
Third Amended and Restated Executive Employment Agreement
between Paylocity Corporation and Steven R. Beauchamp, dated
February 7, 2014.
S-1/A
333-193661 10.5 February 14, 2014
Second Amended and Restated Executive Employment Agreement
S-1/A
333-193661 10.7 February 14, 2014
between Paylocity Corporation and Michael R. Haske, dated
February 7, 2014.
10.6
Office Lease between 3850 Wilke LLC and Paylocity Corporation,
S-1
333-193661 10.8 January 30, 2014
dated January 12, 2007.
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, 2014
10.7.3
Multi-Tenant Office Lease Agreement, dated June 1, 2016, by and
between 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
10.10†
Executive Employment Agreement between Paylocity Corporation
10-K
001-36348
10.11 August 12, 2016
and Mark S. Kinsey, dated May 1, 2015.
61
Exhibit
Number
Exhibit Description
Form File No.
Exhibit
Filing Date
Incorporated by Reference
10.11†
Executive Employment Agreement between Paylocity Corporation
8-K
001-36348
10.1 August 9, 2016
and Edward W. Gaty, dated August 8, 2016.
10.12†
Executive Employment Agreement between Paylocity Corporation
10-Q
001-36348
10.1
November 3, 2017
and Toby J. Williams, dated September 18, 2017.
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.
10-K
001-36348
21.1
August 10, 2018
23.1*
Consent of KPMG LLP, Independent Registered Public Accounting
Firm.
24.1*
Power of Attorney (see page 64 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**
32.2**
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 of 2002.
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 The Sarbanes-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 or arrangement.
Filed herewith.
*
** Furnished herewith.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 9, 2019
PAYLOCITY HOLDING CORPORATION
By:
/s/ Steven R. Beauchamp
Steven R. Beauchamp
Chief Executive Officer (Principal Executive
Officer) and Director
63
SIGNATURES AND POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Steven R. Beauchamp and Toby
J. Williams, and each of them, with full power of substitution and resubstitution and full power to act without the other,
as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the
name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to
this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and
agents or any of them or their or his substitute or substitutes may lawfully do or cause 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 following
persons on behalf of the registrant and in the capacities indicated.
Signature
Title
Date
/s/ Steven R. Beauchamp
Steven R. Beauchamp
/s/ Toby J. Williams
Toby J. Williams
/s/ Andrew Cappotelli
Andrew Cappotelli
/s/ Steven I. Sarowitz
Steven I. Sarowitz
/s/ Virginia G. Breen
Virginia G. Breen
/s/ Ellen Carnahan
Ellen Carnahan
/s/ Jeffrey T. Diehl
Jeffrey T. Diehl
/s/ Andres D. Reiner
Andres D. Reiner
/s/ Ronald V. Waters, III
Ronald V. Waters, III
Chief Executive Officer (Principal Executive
Officer) and Director
August 9, 2019
Chief Financial Officer (Principal Financial
Officer)
August 9, 2019
Chief Accounting Officer (Principal Accounting
Officer)
August 9, 2019
Chairman of the Board of Directors
August 9, 2019
August 9, 2019
August 9, 2019
August 9, 2019
August 9, 2019
August 9, 2019
Director
Director
Director
Director
Director
64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of June 30, 2018 and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Operations and Comprehensive Income for the years ended June 30, 2017, 2018
and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Changes in Stockholders’ Equity for the years ended June 30, 2017, 2018 and 2019 . . F-7
Consolidated Statements of Cash Flows for the years ended June 30, 2017, 2018 and 2019 . . . . . . . . . . . . . . . . . . . . F-8
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Page
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Paylocity Holding Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Paylocity Holding Corporation and subsidiaries (the
Company) as of June 30, 2019 and 2018, the related consolidated statements of operations and comprehensive income,
stockholders’ equity, and cash flows for each of the years in the three-year period ended June 30, 2019, and the related
notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over
financial reporting as of June 30, 2019, based on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for
each of the years in the three-year period ended June 30, 2019, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of June 30, 2019 based on criteria established in Internal Control – Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for
revenues and related costs for the year ended June 30, 2019 due to the adoption of Accounting Standards Update
No. 2014-09, Revenue from Contracts with Customers (Topic 606), effective July 1, 2018.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Item 9A, Controls and Procedures.
Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the
Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
F-2
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated
financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate
to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way
our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical
audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which
they relate.
Evaluation of implementation services
As discussed in Note 2(s) to the Company’s consolidated financial statements, the Company determined that
implementation services for its proprietary products are not a separate performance obligation under Topic 606 for
contracts entered into after July 1, 2018. This determination required the Company to apply significant judgment in
evaluating whether the implementation services provide an incremental benefit to the customer when considering
the inability of third parties to perform the Company’s implementation services.
We identified the determination that the implementation services are not a separate performance obligation as a
critical audit matter. The principal considerations included the degree of subjectivity involved in assessing the
incremental benefit to the customer, if any, and determining that third parties were no longer able to perform such
implementation services.
The primary procedures we performed to address this critical audit matter included the following. We tested certain
internal controls over the Company’s revenue recognition process, including controls to assess if the accounting
policy determinations are reflective of the actual underlying business transactions. We obtained and inspected
internal and external documentation to assess if third parties were able to perform implementation services
subsequent to June 30, 2018. We also evaluated the Company’s conclusion that no incremental benefit is provided
to the customer, through inspection of internal documentation and consideration of relevant publicly available
information about the Company and its competitors.
Determination of capitalized internal-use software development costs
As discussed in Notes 2(g) and 6 to the consolidated financial statements, the Company capitalizes certain internal-
use software costs related to new products as well as existing products when those costs will result in significant
additional functionality. The Company’s capitalized internal-use software asset, net of accumulated amortization,
F-3
was $27 million as of June 30, 2019. The Company capitalized $23 million of internal-use software costs during the
year ended June 30, 2019.
We identified the determination of capitalized internal-use software development costs as a critical audit matter
because of the degree of subjectivity involved in assessing which projects met the capitalization criteria.
The primary procedures we performed to address this critical audit matter included the following. We tested certain
internal controls over the Company’s process to capitalize internal-use software development costs, including
controls over the determination of which software development projects met the capitalization criteria. We
evaluated the Company’s current year software project capitalization conclusions, and discussed the objective and
status of the software projects with IT department management to assess those conclusions. We also assessed the
reliability of the Company’s conclusions through confirmations with a sample of individual software developers
regarding the nature of their development activities.
We have served as the Company’s auditor since 2013.
/s/ KPMG LLP
Chicago, Illinois
August 9, 2019
F-4
PAYLOCITY HOLDING CORPORATION
Consolidated Balance Sheets
(in thousands, except per share data)
As of June 30,
2018
2019
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Corporate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred contract costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
137,193 $
732
3,453
—
11,248
132,476
29,314
4,358
21,677
13,895
Total current assets before funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
152,626
1,225,614
201,720
1,394,469
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized internal-use software, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred contract costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,378,240
21,094
62,029
13,002
9,590
—
1,504
22,140
1,596,189
27,486
70,056
10,751
9,590
81,422
1,975
6,472
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,507,599 $ 1,803,941
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,990 $
42,241
3,954
57,625
Total current liabilities before client fund obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Client fund obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45,231
1,225,614
61,579
1,394,469
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,270,845
22,812
1,118
—
1,456,048
31,263
1,723
6,943
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,294,775 $ 1,495,977
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 authorized, no shares issued and outstanding
at June 30, 2018 and June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
—
Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2018 and
June 30, 2019; 52,758 shares issued and outstanding at June 30, 2018 and 53,075
shares issued and outstanding at June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
207,982
99,817
112
307,964
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,507,599 $ 1,803,941
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
53
219,588
(6,678)
(139)
212,824 $
See accompanying notes to consolidated financial statements.
F-5
PAYLOCITY HOLDING CORPORATION
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share data)
For the Years Ended June 30,
2018
2019
2017
Revenues:
Recurring fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income on funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 284,817 $ 354,432 $ 436,955
19,881
3,631
9,093
Total recurring revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
288,448
11,562
363,525
14,002
456,836
10,797
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues:
300,010
377,527
467,633
Recurring revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85,399
38,588
104,009
45,188
125,211
28,640
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
123,987
176,023
149,197
228,330
153,851
313,782
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77,506
29,098
62,123
95,484
37,645
79,252
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
168,727
7,296
73
212,381
15,949
802
112,599
50,329
94,630
257,558
56,224
1,822
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,369
651
16,751
(21,847)
58,046
4,223
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,718 $
38,598 $
53,823
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities, net of tax . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
—
6,718 $
(139)
(139)
38,459 $
251
251
54,074
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.13 $
0.12 $
0.74 $
0.70 $
1.02
0.97
Weighted-average shares used in computing net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51,415
54,057
52,425
54,887
52,914
55,414
See accompanying notes to consolidated financial statements.
F-6
PAYLOCITY HOLDING CORPORATION
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands)
Stockholders' Equity
Common Stock
Paid-in
Shares Amount Capital
Retained
Earnings
Accumulated
Additional
Other
(Accumulated Comprehensive Stockholders’
Total
Deficit)
Income (Loss)
Equity
Balances at June 30, 2016 . . . . . . . . . . . . . . . 51,132 $
Stock-based compensation . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . .
Issuance of common stock upon vesting
—
691
51 $ 171,515 $ (51,994) $
—
1
28,507
8,550
—
—
of restricted stock units . . . . . . . . . . . . . . . .
255
—
—
Issuance of common stock under employee
stock purchase plan . . . . . . . . . . . . . . . . . . .
127
—
3,677
Net settlement for taxes and/or exercise
price related to equity awards . . . . . . . . . . .
(467)
—
(19,859)
Excess tax benefits from stock-based
—
—
—
compensation . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at June 30, 2017 . . . . . . . . . . . . . . . 51,738 $
Stock-based compensation . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . .
Issuance of common stock upon vesting of
—
839
—
—
447
—
—
6,718
—
—
52 $ 192,837 $ (45,276) $
—
1
32,378
8,001
—
—
restricted stock units . . . . . . . . . . . . . . . . . . .
452
—
—
Issuance of common stock under employee
stock purchase plan . . . . . . . . . . . . . . . . . . .
108
—
4,304
—
—
— $ 119,572
28,507
—
8,551
—
—
—
—
3,677
—
(19,859)
447
—
—
6,718
— $ 147,613
32,378
—
8,002
—
—
—
—
4,304
Net settlement for taxes and/or exercise
price related to equity awards . . . . . . . . . . .
Unrealized losses on securities, net of tax . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at June 30, 2018 . . . . . . . . . . . . . . . 52,758 $
Cumulative effect of change in accounting
(379)
—
—
(17,932)
—
—
—
—
—
53 $ 219,588 $
—
—
38,598
(6,678) $
—
(139)
—
(17,932)
(139)
38,598
(139) $ 212,824
policy (adoption of Topic 606) . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . .
Issuance of common stock upon vesting of
—
—
378
—
—
—
—
41,525
4,882
52,672
—
—
restricted stock units . . . . . . . . . . . . . . . . . . .
660
—
—
Issuance of common stock under employee
stock purchase plan . . . . . . . . . . . . . . . . . . .
116
—
5,982
—
—
Net settlement for taxes and/or exercise
—
—
—
—
—
52,672
41,525
4,882
—
5,982
price related to equity awards . . . . . . . . . . .
Repurchases of common shares . . . . . . . . . . .
Unrealized gains on securities, net of tax . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at June 30, 2019 . . . . . . . . . . . . . . . 53,075 $
(395)
(442)
—
—
(29,004)
(34,991)
—
—
—
—
—
—
53 $ 207,982 $
—
—
—
53,823
99,817 $
—
—
251
—
(29,004)
(34,991)
251
53,823
112 $ 307,964
See accompanying notes to consolidated financial statements.
F-7
PAYLOCITY HOLDING CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net accretion of discounts and amortization of premiums on available-for-sale securities . .
Net realized losses on sales of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred contract costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tenant improvement allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended June 30,
2017(1)
2018(1)
2019
6,718 $
38,598 $
53,823
26,734
21,027
152
113
—
—
253
(472)
—
(2,074)
219
6,465
2,845
61,980
30,354
30,202
(21,870)
296
(443)
2
227
(1,494)
—
(2,141)
740
11,641
11,754
97,866
38,765
34,564
4,134
283
(2,230)
—
454
(1,188)
(34,992)
389
(75)
13,625
7,480
115,032
Cash flows from investing activities:
Purchases of available-for-sale securities and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales and maturities of available-for-sale securities . . . . . . . . . . . . . . . . . . . .
Capitalized internal-use software costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease allowances used for tenant improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of business, net of cash and funds held for clients' cash and cash equivalents . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
(13,641)
(21,338)
(2,845)
—
(37,824)
(196,597)
73,044
(15,638)
(21,676)
(11,754)
(6,658)
(179,279)
(250,685)
246,243
(20,142)
(11,280)
(7,480)
—
(43,344)
Cash flows from financing activities:
Net change in client fund obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes paid related to net share settlement of equity awards . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents . . . . .
Cash, cash equivalents and funds held for clients' cash and cash equivalents—beginning of
(297,163)
—
—
34
3,677
(11,342)
447
(304,347)
(280,191)
281,467
—
—
—
4,304
(10,554)
—
275,217
193,804
168,855
(1,000)
(34,991)
85
5,982
(24,207)
—
114,724
186,412
year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,239,731
Cash, cash equivalents and funds held for clients' cash and cash equivalents—end of year . . . . . $ 1,045,927 $1,239,731 $ 1,426,143
Supplemental Disclosure of Non-Cash Investing and Financing Activities
1,326,118
1,045,927
Build-out allowances received from landlords . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Purchase of property and equipment and internal-use software, accrued but not paid . . . . . . $
— $
667 $
1,956 $
659 $
1,264
4,260
Supplemental Disclosure of Cash Flow Information
Cash paid (refunds received) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
28 $
(53) $
412
Reconciliation of cash, cash equivalents and funds held for clients' cash and cash equivalents
to the Consolidated Balance Sheets
103,468 $ 137,193 $ 132,476
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,293,667
Funds held for clients' cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,102,538
942,459
Total cash, cash equivalents and funds held for clients' cash and cash equivalents . . . . . . . . . . . $ 1,045,927 $1,239,731 $ 1,426,143
(1) Certain amounts have been reclassified to reflect the adoption of Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows
(Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).”
See accompanying notes to consolidated financial statements.
F-8
PAYLOCITY HOLDING CORPORATION
Notes to the Consolidated Financial Statements
(all amounts in thousands, except per share data)
(1) Organization and Description of Business
Paylocity Holding Corporation (the “Company”) is a cloud-based provider of payroll and human capital
management software solutions for medium-sized organizations. Services are provided in a Software-as-a-Service
(“SaaS”) delivery model utilizing the Company’s cloud-based platform. The Company’s comprehensive product suite
delivers a unified platform that allows clients to make strategic decisions in the areas of payroll, core HR, workforce
management, talent and benefits.
(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
and regulations of the United States Securities and Exchange Commission (the “SEC”).
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting
principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require
the exercise of judgment. Accounting estimates used in the preparation of these consolidated financial statements change
as new events occur, as more experience is acquired, as additional information is obtained and as the operating
environment changes.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
All intercompany accounts and transactions have been eliminated in consolidation.
The Company began investing corporate funds in available-for-sale securities during the first quarter of fiscal
2019, and as a result, reclassified $732 as of June 30, 2018 from Prepaid expenses and other on the consolidated balance
sheets to Corporate investments in order to conform to the current year’s presentation.
(b) Concentrations of Risk
The Company regularly maintains cash balances that exceed Federal Depository Insurance Corporation limits.
No individual client represents 10% or more of total revenues. For all periods presented, 100% of total revenues were
generated by 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 when
purchased to be cash equivalents.
(d) Funds Held For Clients, Corporate Investments and Client Fund Obligations
The Company obtains funds from clients in advance of performing payroll and payroll tax filing services on
behalf of those clients. Funds held for clients represent assets that are used solely for the purposes of satisfying the
obligations to remit funds relating to payroll and payroll tax filing services. The Company has classified funds held for
clients as a current asset since these funds are held solely for the purposes of satisfying the client fund obligations. Funds
held for clients is primarily comprised of cash and cash equivalents invested in demand deposit accounts. The Company
also invests a portion of its funds held for clients and corporate funds in marketable securities.
Marketable securities classified as available-for-sale are recorded at fair value on the consolidated balance
sheets. Unrealized gains and losses, net of applicable income taxes, are reported as other comprehensive income (loss) in
F-9
the consolidated statements of operations and comprehensive income. Interest on marketable securities included in funds
held for clients is reported as interest income on funds held for clients and interest on corporate investments is reported
as other income on the consolidated statements of operations and comprehensive income, respectively.
The Company reviews the composition of its portfolio for any available-for-sale security that has a fair value
that falls below its amortized cost. If any security fits this criterion, the Company further evaluates whether other-than-
temporary impairment exists by considering whether the Company has the intent and ability to retain the security for a
period of time sufficient enough to allow for anticipated fair value recovery. The Company did not record any other-
than-temporary impairment charges during the years ended June 30, 2018 or 2019.
Client fund obligations represent the Company’s contractual obligations to remit funds to satisfy clients’ payroll
and tax payment obligations and are recorded in the accompanying balance sheets at the time that the Company obtains
funds from clients. The client fund obligations represent liabilities that will be repaid within one year of the balance
sheet date.
(e) Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade
accounts receivable are included in net cash provided by operating activities in the statements of cash flows. The
Company maintains an allowance for doubtful accounts reflecting estimated potential losses in its accounts receivable
portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account
current market conditions and the Company’s clients’ financial conditions, the amount of receivables in dispute, the
current receivables aging and current payment patterns. The Company reviews its allowance for doubtful accounts
quarterly. Past due balances over 60 days and over a specified amount are reviewed individually for collectability. All
other balances are reviewed on a pooled basis. Account balances are charged off against the allowance after all
commercially reasonable means of collection have been exhausted and the potential for recovery is considered remote.
The Company 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,
2019
2018
2017
Balance at the beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 193 $ 266 $ 375
283
Charged to expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(185)
Balance at the end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 266 $ 375 $ 473
296
(187)
113
(40)
(f) Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist primarily of prepaid licensing fees, prepaid insurance premiums,
deposits with vendors, and time clocks available for sale or lease.
(g) 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 module development begins, it is probable that the project will
be completed, 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
capitalizes certain costs related to specific upgrades and enhancements when it is probable the expenditures will result in
significant additional functionality. The capitalization policy provides for the capitalization of certain payroll costs for
employees who are 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 or 36-month period. Management evaluates the useful lives of these assets on an annual basis and
F-10
tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these
assets.
(h) Property and Equipment and Long-Lived Assets
Property and equipment are stated at cost. Depreciation on property and equipment is calculated on the straight-
line method over the estimated useful lives of the assets, generally three to seven years for most classes of assets, or over
the term of the related lease for leasehold improvements.
Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived
asset or asset group to be tested for possible impairment, the Company first compares the undiscounted cash flows
expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived
asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that
the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including
discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
(i) Intangible Assets, Net of Accumulated Amortization
Intangible assets are comprised primarily of acquired client relationships and are reported net of accumulated
amortization on the consolidated balance sheets. Client relationships use the straight-line method of amortization over a
seven or nine-year time frame from the date of acquisition, while non-solicitation agreements use the straight-line
method of amortization over the term of the related agreements. The Company tests intangible assets for potential
impairment when events or changes in circumstances indicate that the carrying value of such assets may not be
recoverable.
(j) Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business
combination that are not individually identified and separately recognized. Goodwill is not amortized, but instead is
tested for impairment at the reporting unit level. If the fair value of the reporting unit is less than its carrying amount,
the Company would record an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value, but the loss recognized should not exceed the amount of goodwill allocated to the reporting unit.
The Company performs its annual impairment review of goodwill in its fiscal fourth quarter or when a
triggering event occurs between annual impairment tests. No impairment was recorded in fiscal 2017, 2018 or 2019 as a
result of the Company’s qualitative assessments over its single reporting segment.
(k) 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 the total payments due over the lease term, divided by the number of months of the lease term. Build-out
allowances are recorded as part of leasehold improvements and the incentive is amortized over the lease term against
depreciation. The difference between recorded rent expense and the amount paid is included in Accrued expenses and
Deferred rent in the accompanying consolidated balance sheets.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date.
Deferred tax assets may be reduced by a valuation allowance to the extent we determine it is more likely than
not that some portion or all of the deferred tax assets will not be realized. Management judgment is required in
F-11
determining the period in which the reversal of a valuation allowance should occur. The Company is required to consider
all available evidence, both positive and negative, such as historical levels of income and future forecasts of taxable
income among other items, in determining whether a full or partial release of its valuation allowance is required. The
Company is also required to schedule future taxable income in accordance with accounting standards that address
income taxes to assess the appropriateness of a valuation allowance, which further requires the exercise of significant
management judgment. The Company’s accounting for deferred tax consequences represents the best estimate of those
future events.
The Company recognizes 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. When applicable, the Company records interest and penalties as an element of income tax expense.
Refer to Note 11 for additional information on income taxes.
(m) Revenue Recognition
The Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with
Customers (“Topic 606”), effective as of July 1, 2018. Topic 606 requires revenue to be recognized when an entity
transfers control of goods or services to a customer in an amount that reflects the consideration to which a company also
expects to be entitled to for those goods or services. To achieve this core principle, the Company recognizes revenue
from contracts with customers based on the following five steps:
Identify the contract with a customer;
Identify the performance obligations in the contract;
1)
2)
3) Determine the transaction price;
4) Allocate the transaction price to performance obligations in the contract; and
5) Recognize revenue when or as the Company satisfies a performance obligation.
The Company derives its revenue from contracts predominantly from recurring and non-recurring service fees.
While the majority of its agreements are generally cancellable by the client on 60 days’ notice or less, the Company
began entering into term arrangements in fiscal 2018, which are generally two years in length. Recurring fees are derived
from payroll, timekeeping, and HR-related cloud-based computing services as follows:
• Payroll processing and related services, including payroll reporting and tax filing services are delivered
on a weekly, biweekly, semi-monthly, or monthly basis depending upon the payroll frequency of the
client and on an annual basis if a client selects W-2 preparation and processing services,
• Time and attendance reporting services, including time clock rentals, are delivered on a monthly basis,
and
• Cloud-based HR software solutions, including employee administration and benefits enrollment and
administration, are delivered on a monthly basis.
The majority of the Company’s recurring fees are satisfied over time as services are provided. The performance
obligations related to payroll services are satisfied upon the processing of the client’s payroll with the fee charged and
collected based on a per employee per payroll frequency fee. The performance obligations related to time and attendance
services and HR related services are satisfied over time each month with the fee charged and collected based on a per
employee per month fee. For subscription based fees which can include payroll, time and attendance, and HR related
services, the Company recognizes the applicable recurring fees over time each month with the fee charged and collected
based on a per employee per month fee.
The Company has certain optional performance obligations that are satisfied at a point in time including the
sales of time clocks and W-2 services.
Non-recurring service fees consist mainly of nonrefundable implementation fees, which involve setting the
client up in, and loading data into, the Company’s cloud-based modules. These implementation activities are considered
F-12
set-up activities. The Company has determined that the nonrefundable upfront fees provide certain clients with a material
right to renew the contract. Implementation fees are deferred and amortized generally over a period up to 24 months.
Sales taxes collected from clients and remitted to governmental authorities where applicable are accounted for
on a net basis and therefore are excluded from revenues in the statements of operations and comprehensive income.
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 components of providing these services.
The following table, consistent with the presentation on the consolidated statements of operations and
comprehensive income, disaggregates revenue by recurring fees and implementation services and other, representing the
major categories of revenue:
Recurring fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Implementation services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues from contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
436,955
10,797
447,752
Year Ended
June 30, 2019
Deferred revenue
The timing of revenue recognition for recurring revenue is consistent with the timing of invoicing as they occur
simultaneously upon the client payroll-processing period or by month. As such, the Company does not recognize
contract assets or liabilities related to recurring revenue.
The nonrefundable upfront fees related to implementation services are invoiced with the client’s first payroll
period. The Company defers and amortizes these nonrefundable upfront fees generally over a period up to 24 months
based on the type of contract. The following table summarizes the changes in deferred revenue (i.e. contract liability)
related to these nonrefundable upfront fees as follows:
Balance at beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferral of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended
June 30, 2019
—
13,254
(6,965)
6,289
Deferred revenue related to these nonrefundable upfront fees are recorded within accrued expenses and other
long-term liabilities on the consolidated balance sheets. The Company expects to recognize these deferred revenue
balances of $4,738 in fiscal 2020, $1,418 in fiscal 2021, and $133 thereafter.
Deferred contract costs
The Company defers certain selling and commission costs that meet the capitalization criteria under ASC 340-
40, which were expensed as incurred prior to the adoption of Topic 606. The Company also capitalizes certain costs to
fulfill a contract related to its proprietary products if they are identifiable, generate or enhance resources used to satisfy
future performance obligations and are expected to be recovered under ASC 340-40. As discussed in Note 2(s), the
Company determined that implementation services related to its proprietary products are not separate performance
obligations for contracts entered into after July 1, 2018. Implementation fees are treated as nonrefundable upfront fees
and the related implementation costs are required to be capitalized and amortized over the expected period of benefit,
which is the period in which the Company expects to recover the costs and enhance its ability to satisfy future
performance obligations.
The Company utilizes the portfolio approach to account for both the cost of obtaining a contract and the cost of
fulfilling a contract. These capitalized costs are amortized over the expected period of benefit, which has been
determined to be over 7 years based on the Company’s average client life and other qualitative factors, including rate of
F-13
technological changes. The Company does not incur any additional costs to obtain or fulfill contracts upon renewal. The
Company recognizes additional selling and commission costs and fulfillment costs when an existing client purchases
additional services. These additional costs only relate to the additional services purchased and do not relate to the
renewal of previous services.
The following tables present the deferred contract costs balances and the related amortization expense for these
deferred contract costs:
For the Year Ended June 30, 2019
Costs to obtain a new contract . . . . . . . . . . . . . . . . . . . . $
Costs to fulfill a contract . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
68,107 $
—
68,107 $
Beginning
Balance
Capitalized
Costs
30,994 $
22,739
53,733 $
Amortization
Ending
Balance
(16,998) $
(1,743)
(18,741) $
82,103
20,996
103,099
Deferred contract costs are recorded within deferred contract costs and long-term deferred contract costs on the
consolidated balance sheets. Amortization of deferred contract costs is recorded in Implementation services and other
cost of revenue, Sales and marketing, and General and administrative in the consolidated statements of operations and
comprehensive income.
Remaining Performance Obligations
The Company has applied the practical expedients as allowed under Topic 606 and elects not to disclose the
value of unsatisfied performance obligations for contracts that have an original expected duration of one year or less and
contracts for which the variable consideration is allocated entirely to wholly unsatisfied performance obligations. The
Company’s remaining performance obligations related to minimum monthly fees on its term based contracts was
approximately $43,181 as of June 30, 2019, which will be generally recognized over the next 24 months.
(n) Cost of Revenues
Cost of revenues consists primarily of the cost of recurring revenues and implementation services. Cost of
recurring revenues consist primarily of costs to provide recurring services and support to the Company’s clients and
includes amortization of capitalized internal-use software. The Company expenses these costs when incurred. Cost of
implementation services and other consist primarily of costs to provide implementation and other services. Such costs
were previously expensed when incurred, but after the adoption of Topic 606 and ASC 340-40, cost of revenues for
implementation services for the Company’s proprietary products are amortized over a period of 7 years.
(o) Advertising
Advertising costs are expensed as incurred. Advertising costs amounted to $199, $179 and $283 for the years
ended June 30, 2017, 2018 and 2019, respectively.
(p) Stock-Based Compensation
The Company recognizes all employee stock-based compensation as a cost in the financial statements. Equity-
classified awards, including those under the 2014 Employee Stock Purchase Plan (“ESPP”), are measured at the grant
date fair value of the award and expense is recognized, net of assumed forfeitures, on a straight-line basis over the
requisite service period for each separately vesting portion of the award. For stock options and estimated shares
purchasable under the ESPP, the Company estimates grant date fair value using the Black-Scholes option-pricing model
and periodically updates the assumed forfeiture rates for actual experience over their vesting term or the term of the
ESPP purchase period.
(q) Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other
sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.
Legal costs incurred in connection with loss contingencies are expensed as incurred.
F-14
(r) Segment Information
The Company’s chief operating decision maker reviews the financial results of the Company in total when
evaluating financial performance and for purposes of allocating resources. The Company has thus determined that it
operates in a single cloud-based software solution reporting segment.
(s) Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606
supersedes a majority of existing revenue recognition guidance under GAAP, and requires companies to recognize
revenue when it transfers goods or services to a customer in an amount that reflects the consideration to which a
company expects to be entitled. The standard also provides guidance on the recognition of costs related to obtaining and
fulfilling a contract under Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers. The Company
adopted the new standard, including subsequent amendments and Subtopic 340-40, effective as of July 1, 2018 using the
modified retrospective method of transition, which limited the application of the new standard only to contracts that
were not completed as of the effective date. The adoption of Topic 606 did not have a material impact in the timing or
amount of revenue recognized. However, it did have a material impact on its consolidated balance sheet due to the
deferral of costs of obtaining and fulfilling a contract as detailed below. The Company has updated its control framework
for new internal controls and has updated existing controls relating to the new standard.
Under the legacy revenue standard through fiscal 2018, the Company accounted for implementation and
recurring services each as a separate unit of account. The Company was able to establish standalone value for
implementation services as supported by the activity of third-party resellers and other vendors that performed certain
implementation services. The Company observed that third party implementation activity had continued to decrease over
time and at the same time, the Company had invested in proprietary modules and processes that impact implementation
activities. The Company determined that from July 1, 2018 forward it no longer had a sufficient basis to establish
standalone value of implementations for its proprietary products due to the culmination of the changes to the Company’s
modules and processes that eliminated the ability of third parties to perform implementation services. Similarly, the
Company determined that these implementation services are not a separate performance obligation under Topic 606 for
contracts entered into after July 1, 2018 and the associated implementation fees are treated as nonrefundable upfront fees
which are deferred and amortized over a period of time instead of recognized upon completion. The Company
recognized $2,191, net of deferred taxes, of contract assets for implementation fees related to open contracts as of July 1,
2018, which began when the Company was still able to establish standalone value for implementation activities. This
adjustment was recorded through retained earnings (accumulated deficit) in the statement of changes in stockholder’s
equity upon adoption on July 1, 2018.
The Company also finalized the treatment of costs of obtaining and fulfilling a new contract under the new
standard. The Company is now required to defer these costs and amortize them over the expected period of benefit,
which it has determined to be 7 years. The Company recognized the cumulative effect related to the deferral of the costs
of obtaining new contracts of $50,481, net of deferred taxes, which was recorded through retained earnings (accumulated
deficit) in the statement of changes in stockholder’s equity upon adoption on July 1, 2018.
F-15
The cumulative effect of the changes made to the July 1, 2018 balance sheet due to the adoption of Topic 606
were as follows:
As Reported
Adjustments
June 30, 2018 due to Topic 606
Balances at
July 1, 2018
Balance Sheet
Assets
Deferred contract costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred contract costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders' Equity
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
11,248
—
1,504
22,140
14,783 $
1,730
53,324
1,226
(18,391)
14,783
12,978
53,324
2,730
3,749
(6,678)
52,672
45,994
The following table summarizes the impact from the adoption of Topic 606 on the Company’s consolidated
statements of operations and comprehensive income:
Year Ended June 30, 2019
As Reported Balances under
(Topic 606)
ASC 605
Impact from
Adoption
Statement of Operations
Revenues
Recurring fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Implementation services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of Revenues
Implementation services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
436,955 $
10,797
438,685 $
4,786
(1,730)
6,011
28,640
49,252
(20,612)
112,599
94,630
4,223
53,823
126,331
95,278
(5,964)
24,737
(13,732)
(648)
10,187
29,086
The following table summarizes the impact from the adoption of Topic 606 on the Company’s consolidated
balance sheet:
June 30, 2019
As Reported Balances under
(Topic 606)
ASC 605
Impact from
Adoption
Balance Sheet
Assets
Deferred contract costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred contract costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders' Equity
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,677 $
13,895
81,422
1,975
6,472
57,625
1,723
6,943
— $
12,823
—
1,821
28,107
54,541
10,818
—
21,677
1,072
81,422
154
(21,635)
3,084
(9,095)
6,943
99,817
18,059
81,758
F-16
The following table summarizes the impact from the adoption of Topic 606 on the Company’s consolidated
statement of cash flows:
Year Ended June 30, 2019
As Reported Balances under Impact from
ASC 605
(Topic 606)
Adoption
Statement of Cash Flows
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating
53,823 $
24,737 $ 29,086
activities:
Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Deferred contract costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,134
(6,053)
10,187
(34,992)
389
13,625
115,032
—
(1,341)
19,636
115,032
(34,992)
1,730
(6,011)
—
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash: a
consensus of the FASB Emerging Issues Task Force (“ASU 2016-18”), which requires that the statement of cash flows
explain the change during a reporting period in total of cash, cash equivalents, and amounts generally described as
restricted cash and restricted cash equivalents. Effective July 1, 2018, the Company adopted ASU 2016-18 on a
retrospective basis and now includes funds held for clients’ cash and cash equivalents as a component of total cash, cash
equivalents and funds held for clients’ cash and cash equivalents in the consolidated statement of cash flows. As a result,
the Company reclassified certain amounts previously reported on the statement of cash flows for the years ending June
30, 2017 and 2018 to conform to the requirements of the new standard. The adoption of this standard had no impact to
the Company’s balance sheets, statements of operations and comprehensive income or statements of changes in
stockholders’ equity.
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) (“ASU 2018-05”) which
incorporates the SEC’s Staff Accounting Bulletin 118 (“SAB 118”) issued on December 22, 2017. SAB 118 provides for
a provisional measurement period for entities to finalize their accounting for certain income tax effects related to the Tax
Cuts and Jobs Act (the “Tax Act”), not to exceed one year from enactment of the new tax law. Entities are permitted to
utilize reasonable estimates until they have finished analyzing the effects of the Tax Act. The Company recognized
provisional income tax effects of the Tax Act during fiscal 2018 in accordance with SAB 118, and completed its
accounting under the Tax Act in December 2018. Refer to Note 11 for additional information.
(t) Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize leases on-
balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use
model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with
a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern
and classification of expense recognition in the income statement.
The Company plans to adopt the new standard when it is effective on July 1, 2019 using the modified
retrospective method and the transition relief guidance provided by the FASB in ASU 2018-11. Consequently, financial
information will not be updated and the disclosures required under the new standard will not be provided for dates and
periods before July 1, 2019. The Company plans to elect the package of practical expedients and not reassess prior
conclusions on whether contracts are or contain a lease, lease classification, and initial direct costs. In addition, the
Company plans to adopt the lessee practical expedient to combine lease and non-lease components for all asset classes.
The Company will also elect to not recognize right-of-use assets and lease liabilities for leases with a term of 12 months
or less.
While the Company continues to assess all of the effects of adoption, it currently believes the most significant
effects relate to (1) the recognition of new ROU assets and lease liabilities on the balance sheet for operating leases; and
(2) providing significant new disclosures about leasing activities. Upon adoption, the Company expects to recognize
lease liabilities ranging between $82,000 and $87,000.
F-17
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework
– Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends the
requirements for fair value measurement disclosures. ASU 2018-13 removes, modifies or adds certain disclosure
requirements under GAAP. This standard is effective for fiscal years beginning after December 15, 2019, with early
adoption permitted. Any new disclosure requirements must be applied on a prospective basis in the interim and annual
periods of initial adoption; all removed or modified requirements must be applied retrospectively to all periods
presented. The Company plans to adopt this standard at the effective date and does not expect any material impact from
adoption.
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies
that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes
that the impact of other recently issued standards that are not yet effective will not have a material impact on the
Company’s consolidated financial statements upon adoption.
(3) Corporate Investments and Funds Held for Clients
Corporate investments and funds held for clients consist of the following:
June 30, 2018
Type of Issue
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Funds held for clients' cash and cash equivalents . . . . . . . . . . . . . . .
Available-for-sale securities:
Gross
unrealized unrealized
Gross
Amortized
cost
137,193 $
1,102,541
gains
losses
Fair value
— $
—
— $
(3)
137,193
1,102,538
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale securities (1) . . . . . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,363,725 $
50,703
37,508
25,901
9,879
123,991
(4)
(134)
(55)
(2)
(195)
3
50,702
8
37,382
1
25,847
—
9,877
12
123,808
12 $ (198) $ 1,363,539
(1) Included within the fair value of total available-for-sale securities above is $732 of corporate investments
and $123,076 of funds held for clients.
June 30, 2019
Type of Issue
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Funds held for clients' cash and cash equivalents . . . . . . . . . . . . . . . .
Available-for-sale securities:
Gross
unrealized unrealized
Gross
Amortized
cost
132,478 $
1,293,673
gains
losses
Fair value
— $
—
(2) $
(6)
132,476
1,293,667
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale securities (2) . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,556,816 $
63,397
27,044
26,488
13,736
130,665
33
59
55
21
168
168 $
(2)
63,428
(4)
27,099
(3)
26,540
-
13,757
(9)
130,824
(17) $ 1,556,967
(2) Included within the fair value of total available-for-sale securities above is $30,022 of corporate
investments and $100,802 of funds held for clients.
F-18
The Company began investing corporate funds in available-for-sale securities during the first quarter of fiscal
2019 and as a result, reclassified $732 as of June 30, 2018 from Prepaid expenses and other on the consolidated balance
sheets to Corporate investments in order to conform to the current year’s presentation. Cash and cash equivalents and
funds held for clients’ cash and cash equivalents included demand deposit accounts, money market funds, commercial
paper and short-term U.S. treasury securities as of June 30, 2018 and 2019.
Classification of investments on the consolidated balance sheets is as follows:
June 30,
2019
132,476
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
29,314
Corporate investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,394,469
Funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
708
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,363,539 $ 1,556,967
June 30,
2018
137,193 $
732
1,225,614
—
Available-for-sale securities that have been in an unrealized loss position for a period of less and greater than 12
months are as follows:
Securities in an
unrealized loss
position for less
than 12 months
June 30, 2018
Securities in an
unrealized loss
position for greater
than 12 months
Total
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . $
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . .
U.S. treasury securities . . . . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . . . . . . . $
Gross
unrealized
losses
Gross
unrealized
losses
Gross
unrealized
losses
Fair value
(4) $ 23,657 $
29,122
17,960
4,933
(134)
(55)
(2)
(195) $ 75,672 $
Fair value
— $
—
—
—
— $
— $
—
—
—
— $
Fair value
(4) $ 23,657
29,122
17,960
4,933
(195) $ 75,672
(134)
(55)
(2)
Securities in an
unrealized loss
position for less
than 12 months
June 30, 2019
Securities in an
unrealized loss
position for greater
than 12 months
Total
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . $
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . . . . . . . . $
Gross
unrealized
losses
Gross
unrealized
losses
Gross
unrealized
losses
Fair value
(2) $ 19,055 $
(1)
(1)
(4) $ 20,941 $
1,500
386
Fair value
— $
— $
(3)
(2)
(5) $ 6,659 $
3,701
2,958
Fair value
(2) $ 19,055
(4)
5,201
(3)
3,344
(9) $ 27,600
The Company did not make any material reclassification adjustments out of accumulated other comprehensive
income (loss) for realized gains and losses on the sale of available-for-sale securities during the years ended
June 30, 2018 or 2019. Gross realized gains and losses on the sale of available-for-sale securities were immaterial for the
years ended June 30, 2018 and 2019.
The Company regularly reviews the composition of its portfolio to determine the existence of other-than-
temporary-impairment (“OTTI”). The Company did not recognize any OTTI charges in accumulated other
comprehensive income (loss) during the years ended June 30, 2018 or 2019, nor does it believe that OTTI exists in its
portfolio as of June 30, 2019. The Company plans to retain the securities in an unrealized loss position for a period of
time sufficient enough to recover their amortized cost basis or until their maturity date. The Company believes that the
unrealized losses on these securities were not due to deterioration in credit risk. The securities in an unrealized loss
position held an A-1 rating or better as of June 30, 2019.
F-19
Expected maturities of available-for-sale securities at June 30, 2019 are as follows:
Fair value
One year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 123,116 $ 123,238
One year to two years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,586
Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130,665 $ 130,824
7,549
Amortized
cost
(4) Fair Value Measurement
The Company applies the fair value measurement and disclosure provisions of ASC 820, Fair Value
Measurements and Disclosures, and ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value.
The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair value are as follows:
• Level 1—Quoted prices in active markets for identical assets and liabilities.
• Level 2—Quoted prices in active markets for similar assets and liabilities, or other inputs that are
observable for the asset or liability, either directly or indirectly, for substantially the full term of the
financial instrument.
• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to
the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow
methodologies and similar techniques that use significant unobservable inputs.
The Company measures any cash and cash equivalents, accounts receivable, accounts payable and client fund
obligations at fair value on a recurring basis using Level 1 inputs. The Company considers the recorded value of these
financial assets and liabilities to approximate the fair value of the respective assets and liabilities at June 30, 2018 and
June 30, 2019 based upon the short-term nature of these assets and liabilities.
Marketable securities, consisting of securities classified as available-for-sale as well as certain cash equivalents,
are recorded at fair value on a recurring basis using Level 2 inputs obtained from an independent pricing service.
Available-for-sale securities include commercial paper, corporate bonds, asset-backed securities and US treasury
securities. The independent pricing service utilizes a variety of inputs including benchmark yields, broker/dealer quoted
prices, reported trades, issuer spreads as well as other available market data. The Company, on a sample basis, validates
the pricing from the independent pricing service against another third-party pricing source for reasonableness. The
Company has not adjusted any prices obtained by the independent pricing service, as it believes they are appropriately
valued. There were no available-for-sale securities classified in Level 3 of the fair value hierarchy at June 30, 2018 or
2019, and the Company did not transfer assets between Levels during the years ended June 30, 2018 or 2019.
F-20
The fair value level for the Company’s cash and cash equivalents and available-for-sale securities is as follows:
June 30, 2018
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Funds held for clients' cash and cash equivalents . . . . . . . . .
Available-for-sale securities:
Total
137,193 $
Level 1
137,193 $
Level 2
Level 3
— $
1,102,538
1,076,414
26,124
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,363,539 $ 1,213,607 $ 149,932 $
50,702
37,382
25,847
9,877
123,808
50,702
37,382
25,847
9,877
123,808
—
—
—
—
—
June 30, 2019
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Funds held for clients' cash and cash equivalents . . . . . . . . .
Available-for-sale securities:
Total
132,476 $
Level 1
116,387 $
1,293,667
1,244,856
Level 2
16,089 $
48,811
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,556,967 $ 1,361,243 $ 195,724 $
63,428
27,099
26,540
13,757
130,824
63,428
27,099
26,540
13,757
130,824
—
—
—
—
—
—
—
—
—
—
—
—
—
Level 3
—
—
—
—
—
—
—
—
(5) Business Combinations
In March 2018, the Company acquired substantially all the assets of BeneFLEX HR Resources, Inc.
(“BeneFLEX”), a third party employee benefits administrator, for $7,658, net of cash and funds held for clients’ cash
and cash equivalents acquired. BeneFLEX administers employee benefit plans, including flexible spending accounts,
health savings accounts, health reimbursement accounts, COBRA, and others. The Company paid $6,658 upon closing
and paid an additional $1,000 in fiscal 2019 based on BeneFLEX having attained certain revenue targets. This
acquisition expanded the portfolio of services available to the Company’s clients by allowing it to provide additional
benefit administration solutions to its clients, prospects, and broker partners.
The Company accounts for business combinations in accordance with ASC 805 (Business Combinations). The
Company recorded the acquisition using the acquisition method of accounting and recognized assets at their fair value as
of the date of acquisition. The Company determined the fair value of identifiable intangible assets acquired primarily by
using an income approach.
The following table summarizes the allocation of the purchase price for BeneFLEX:
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Client relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-solicitation agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
At March 8, 2018
3,587
5,550
240
(1,719)
7,658
F-21
The results from this acquisition have been included in the Company’s consolidated financial statements since
the closing of the acquisition. Pro forma information was not presented because the effect of the acquisition was not
material to the Company’s consolidated financial statements. Goodwill associated with this acquisition is amortized over
a period of 15 years for income tax purposes. Direct costs related to the acquisitions were recorded as General and
administrative expenses as incurred.
(6) Capitalized Internal-Use Software
Capitalized internal-use software and accumulated amortization were as follows:
Capitalized internal-use software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,678 $ 90,991
(63,505)
Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized internal-use software, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,094 $ 27,486
(46,584)
Amortization of capitalized internal-use software amounted to $9,447, $14,315 and $16,921 for the years ended
June 30, 2017, 2018 and 2019, respectively and is included in Cost of revenues—Recurring revenues.
Year ended June 30,
2019
2018
(7) Property and Equipment
The major classes of property and equipment are as follows as of June 30:
Year ended June 30,
2019
2018
4,406
3,743 $
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
36,798
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,857
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,332
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,350
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,679
Time clocks rented by clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108,422
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(38,366)
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,029 $ 70,056
29,768
10,382
5,965
36,366
4,534
90,758
(28,729)
Depreciation expense amounted to $10,068, $14,192 and $15,392 for the years ended June 30, 2017, 2018 and
2019, respectively.
(8) Goodwill and Intangible Assets
There were no changes to goodwill between the year ended June 30, 2018 and June 30, 2019. The Company’s
amortizable intangible assets and estimated useful lives are as follows:
Client relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-solicitation agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
June 30,
2018
18,130 $
600
18,730
(5,728)
13,002 $
Useful
Life
June 30,
2019
18,130 7 - 9 years
600 2 - 4 years
18,730
(7,979)
10,751
F-22
Amortization expense for acquired intangible assets was $1,512, $1,695 and $2,251 for the years ended
June 30, 2017, 2018 and 2019, respectively. Future amortization expense for acquired intangible assets is as follows, as
of June 30, 2019:
Year ending June 30,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,251
2,251
2,232
2,118
1,356
543
$ 10,751
(9) Accrued Expenses
The components of accrued expenses are as follows:
Accrued payroll and personnel costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Lease exit obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year ended June 30,
2019
2018
39,095
31,206 $
1,482
2,143
5,572
654
11,476
8,238
57,625
42,241 $
(10) Leases
The Company primarily leases office space in Illinois, Florida, Idaho and other U.S. states under non-
cancellable operating leases expiring on various dates from August 2019 through October 2032. The leases provide for
increasing annual base rents and oblige the Company to fund its proportionate share of operating expenses and, in certain
cases, real estate taxes. The Company also leases various types of office and production related equipment under non-
cancellable operating leases expiring on various dates from July 2019 through July 2024.
In June 2016, the Company entered into a lease for approximately 310 rentable square feet of office space
located in Schaumburg, Illinois. The Company currently utilizes the leased premises as its headquarters, relocating from
its previous headquarters in Arlington Heights, Illinois in the fourth quarter of fiscal 2018. In connection with relocating
to its new headquarters, the Company ceased using approximately 126 rentable square feet of its former headquarters in
fiscal 2018 and fiscal 2019 and exited the office space lease prior to the lease’s contractual termination. The Company
recognized $2,336 and $423 in early lease exit costs during the years ended June 30, 2018 and 2019, respectively, that
are included in General and administrative expense in its consolidated statements of operations and comprehensive
income.
In February 2017, the Company entered into a lease for approximately 62 rentable square feet of office space
located in Meridian, Idaho. The Company uses the leased premises to accommodate the continued expansion of its
employee base in the western region of the United States. The lease provided for phased delivery and commencement
dates and the Company commenced Phase I on July 2, 2018. The Company expects to commence Phase II on February
1, 2020 with the actual commencement date subject to timely delivery of the premises by the landlord. Under the terms
of the lease, the Company receives a tenant improvement allowance equal to $50.00 per rentable square foot and a 3-
month rent abatement period for each lease phase. The lease began on the Phase I commencement date (July 2, 2018)
and will end on July 31, 2028 with four subsequent five-year renewal options.
F-23
The following table is a summary of the changes in the remaining lease obligation related to the former
headquarters, which is recorded in accrued expenses and other long-term liabilities on the consolidated balance sheet.
The difference between the lease exit costs recognized in General and administrative expense as discussed above and the
remaining lease obligation relates to the write-off of deferred rent recorded in prior periods.
Balance at June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,261
611
(2,336)
111
1,647
Minimum rent payments under operating leases are recognized on a straight-line basis over the term of the lease
including any periods of free rent and future rent increases. Rental expense for operating leases, including amortization
of leasehold improvements, was $8,571, $12,293 and $13,698 for the years ended June 30, 2017, 2018 and 2019,
respectively.
Future minimum lease payments under non-cancellable operating leases (with initial or remaining lease terms
in excess of one year) as of June 30, 2019 are:
Year ending June 30,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Later years, through 2032 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
10,449
11,150
9,500
8,840
8,838
59,401
$ 108,178
(11) Income Taxes
(a) Income Taxes
Income tax expense (benefit) for the years ended June 30, 2017, 2018 and 2019 consists of the following:
Current taxes
U.S. federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
500
294 $
364
—
90
Deferred taxes:
U.S. federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
137
14
5,449
(15,167)
(1,316)
(7,338)
651 $ (21,847) $ 4,223
2017
Year ended June 30,
2018
2019
F-24
(b) Tax Rate Reconciliation
Income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate
of 34% for the years ended June 30, 2017, and 27.55% for the year ended June 30, 2018 and 21% for the year ended
June 30, 2019 to pretax income (loss) as a result of the following:
Income tax expense (benefit) at statutory federal rate . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (reduction) in income taxes resulting from:
Research and development credit, net of federal income tax benefit . . . . . . . . . . .
Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of Tax Cuts and Jobs Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local income taxes, net of federal income tax benefit . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended June 30,
2018
27.6 %
2017
34.0 %
2019
21.0 %
(13.9)
9.3
(18.3)
—
—
(2.7)
0.4
8.8 % (130.4)%
(6.6)
4.6
(136.0)
51.5
(58.3)
(13.5)
0.3
(3.0)
1.3
0.3
—
(10.4)
(2.0)
0.1
7.3 %
The effective tax rate for the years ended June 30, 2018 and 2019 was (130.4)% and 7.3%, respectively, on pre-
tax income of $16,751 and $58,046, respectively. The increase in the effective tax rate is primarily due to the increase to
pre-tax income and non-recurring $22,771 benefit resulting from the release of the valuation allowance in fiscal year
2018, partially offset by the reduced federal rate and non-recurring detriment of $8,626 from tax reform in fiscal year
2018.
(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
deferred tax liabilities at June 30, 2018 and 2019 are presented below.
Year ended June 30,
2019
2018
Deferred tax assets:
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal and state tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,177 $
2,709
10,833
10,775
7,674
271
146
33,585
(355)
33,230
1,963
4,250
10,373
9,980
11,977
385
94
39,022
(502)
38,520
Deferred tax liabilities:
Deferred contract costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,140 $
—
(4,711)
(6,379)
(11,090)
(27,116)
(6,294)
(5,581)
(38,991)
(471)
Succeeding multiple years of recording a full valuation allowance, the Company concluded in the third quarter
of fiscal 2018, that all of the valuation allowance for the Company’s U.S. federal deferred tax assets and substantially all
state deferred tax assets was no longer needed. This was primarily due to three years’ cumulative income through the
third quarter of fiscal 2018 and the forecast of future taxable income. At March 31, 2018, based on the evaluation of
positive and negative evidence, management believed it was more likely than not that the net deferred tax assets could be
realized for all federal and substantially all state purposes. Accordingly, the Company recognized a non-recurring tax
benefit of $22,771 related to the valuation allowance reversal. As of June 30, 2019, the Company continues to maintain a
F-25
valuation allowance of $502 for certain state tax benefits which may not be realized. Such assessment may change in the
future as further evidence becomes available.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. The Tax Act
reduced the U.S. federal corporate income tax rate from 35% to 21%. Following the passage of the Tax Act and in
accordance with ASC 740, companies were required to re-measure deferred tax balances using the new enacted tax rates.
During fiscal year 2018, the Company recorded a one-time net $8,626 tax expense to revalue its net deferred tax assets
to the newly enacted federal statutory rate. The Company generally expects to benefit from the lower statutory rates
provided by the Tax Act.
In December 2017, the staff of the SEC issued guidance under Staff Accounting Bulletin No. 118 (later
codified into ASU 2018-05), “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” allowing taxpayers
to record provisional amounts for reasonable estimates when they do not have the necessary information available,
prepared or analyzed in reasonable detail to complete their accounting for certain income tax effects of the Tax Act. The
SEC also issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax
Act to finalize the related tax impacts. The Company’s analysis was completed during the second quarter of fiscal 2019
with no additional adjustments made.
At June 30, 2019, the Company has gross net operating loss carryforwards for federal income tax purposes of
approximately $41,810, of which $40,018 expire from 2029 to 2038. The Company has gross net operating loss
carryforwards for state income tax purposes of approximately $19,636, of which $18,435 expire from 2020 to 2039. The
remaining $2,993 federal and state net operating loss carryforwards have an indefinite utilization period. The Company
also has gross federal and state research and development tax credit and other state credit carryforwards of
approximately $11,977, which expire between 2020 and 2039.
The Company had no unrecognized tax benefits as of June 30, 2017, 2018 and 2019, 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 net operating loss carryforwards and tax credits unutilized from such years or utilized in a period
remaining open for audit under normal statute of limitations relating to income tax liabilities. The Company, including
its domestic subsidiary, files a consolidated federal income tax return. For years before fiscal year ended June 30, 2016,
the Company is no longer subject to U.S. federal examination; however, the Internal Revenue Service (IRS) has the
ability to review years prior to fiscal year 2016 to the extent the Company utilized tax attributes carried forward from
those prior years. 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
holders have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with
respect to such shares.
(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,
directors and non-employee third parties. The 2014 Plan serves as the successor to the 2008 Plan and permits the
granting of restricted stock units and other equity incentives at the discretion of the compensation committee of the
Company’s board of directors. No new awards have been or will be issued under the 2008 Plan since the effective date
of the 2014 Plan. Outstanding awards under the 2008 Plan continue to be subject to the terms and conditions of the 2008
Plan. The number of shares of common stock reserved for issuance under the 2014 Plan may increase each calendar
year, continuing through and including January 1, 2024. The number of shares added each year may be equal to the
lesser of (a) four and five tenths percent (4.5%) of the number of shares of common stock of the Company issued and
F-26
outstanding 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 it would not increase the number of shares in reserve for
issuance under the 2014 Plan as of January 1, 2019.
As of June 30, 2019, the Company had 13,097 shares allocated to the plans, of which 3,338 shares were subject
to outstanding options or awards. Generally, the Company issues previously unissued shares for the exercise of stock
options or vesting of awards; however, shares previously subject to 2014 Plan grants or awards that are forfeited or net
settled at exercise or release may be reissued to satisfy future issuances.
The following table summarizes the changes in the number of shares available for grant under the Company’s
equity incentive plans during the year ended June 30, 2019:
Available for grant at July 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares withheld in settlement of taxes and/or exercise price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares removed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available for grant at June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Shares
10,030
(782)
395
192
(76)
9,759
Shares removed represents forfeitures of shares and shares withheld in settlement of taxes and/or payment of
exercise price related to grants made under the 2008 Plan. As noted above, no new awards will be issued under the 2008
Plan.
Stock-based compensation expense related to stock options, restricted stock units (“RSUs”), and the Employee
Stock Purchase Plan (as described below) is included in the following line items in the accompanying consolidated
statements of operations and comprehensive income:
Year ended June 30,
2018
2017
2019
Cost of revenue – recurring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,162 $ 2,830 $ 3,388
1,639
Cost of revenue – implementation services and other . . . . . . . . . . . . . . . . . . . . . . . . . .
7,631
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,325
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,782
Total stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,734 $ 30,354 $ 38,765
1,357
6,287
3,086
13,842
1,388
7,295
3,748
15,093
In addition, the Company capitalized $1,773, $2,024 and $2,760 of stock-based compensation expense in its
capitalized internal-use software costs in the years ended June 30, 2017, 2018 and 2019, respectively.
In June 2017, Peter McGrail ceased to serve as the Company’s Chief Financial Officer, but continued to serve
as an employee of the Company. In connection with Mr. McGrail’s modified employment arrangement, the
compensation committee 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 were subject to time-based vesting became fully-vested
upon his death in August 2017. Additionally, any performance-based restricted stock unit (“PSU”) awards held by Mr.
McGrail will continue to vest and settle based upon actual achievement of previously-established performance metrics,
with Mr. McGrail receiving a pro-rata share of the PSU awards based on the number of days Mr. McGrail was employed
over the vesting period. As a result of these award modifications, the Company recognized $2,925 in additional stock-
based compensation expense for the fiscal year ended June 30, 2017, which was included in General and administrative
expense in the Company’s consolidated statements of operations and comprehensive income.
Under the 2008 and 2014 Plans, the exercise price of each option cannot be less than the fair value of a share of
common stock on the grant date. The options typically vest ratably over a three or four year period and expire 10 years
from the grant date. Stock-based compensation expense for the fair value of the options at their grant date is recognized
ratably over the vesting schedule for each separately vesting portion of the award.
F-27
The Company values stock options using the Black-Scholes option-pricing model, which requires the input of
subjective assumptions, including the risk-free interest rate, expected life, expected stock price volatility and dividend
yield. The risk-free interest rate assumption is based upon observed interest rates for U.S. Treasury securities consistent
with the expected term of the Company’s employee stock options. The expected life represents the period of time the
stock options are expected to be outstanding and is based on the simplified method. Under the simplified method, the
expected life of an option is presumed to be the mid-point between the vesting date and the end of the contractual term.
As the Company has a limited history of trading as a public company, the Company utilizes the simplified method due to
the lack of sufficient historical 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 over the estimated expected life of the stock options. The Company assumed no dividend yield
because it does not expect to pay dividends in the near future, which is consistent with the Company’s history of not
paying dividends.
Stock option activity during the periods indicated is as follows:
Outstanding Options
Balance at July 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercisable at June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options vested and expected to vest at June 30, 2019 . . . . . . . . . . . . . . . .
Weighted
average
Weighted
average
exercise
price
Number of
shares
1,907 $ 12.40
(378) $ 12.92
(4) $ 20.78
1,525 $ 12.24
1,497 $ 11.82
1,524 $ 12.24
remaining Aggregate
contractual
term (years)
intrinsic
value
5.00 $ 88,595
3.95 $ 124,373
3.91 $ 122,770
3.95 $ 124,362
There were no stock options granted during the years ended June 30, 2017, 2018 or 2019. The total intrinsic
value of options exercised during the years ended June 30, 2017, 2018 and 2019 was $20,802, $34,083 and $24,920,
respectively. At June 30, 2019, total unrecognized compensation cost, net of estimated forfeitures, related to unvested
stock options granted under the Plan was immaterial.
The Company may also grant RSUs under the 2014 Plan with terms determined at the discretion of the
compensation committee of the Company’s board of directors. RSUs generally vest over three or four years following
the grant date. Certain RSU awards have time-based vesting conditions while other RSUs vest based on the achievement
of certain revenue and Adjusted EBITDA targets in future fiscal years. The following table represents restricted stock
unit activity during the year ended June 30, 2019:
RSU balance at July 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSU balance at June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs expected to vest at June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted
average
grant date
fair value
Units
1,879 $
782 $
(660) $
(188) $
1,813 $
1,689 $
43.39
67.13
41.52
48.83
53.78
53.67
At June 30, 2019, there was $36,226 of total unrecognized compensation cost, net of estimated forfeitures,
related to unvested restricted stock units granted. That cost is expected to be recognized over a weighted average period
of 1.85 years.
The total excess income tax benefits for stock-based compensation arrangements was $15,130, $33,443 and
$41,195 for the years ended June 30, 2017, 2018 and 2019, respectively, and were recognized through income tax
expense.
F-28
(b) Employee Stock Purchase Plan
Under the Company’s Employee Stock Purchase Plan (“ESPP”), the Company can grant stock purchase rights
to all eligible employees during specific offering periods not to exceed twenty-seven months. Each offering period will
begin on the trading day closest to May 16 and November 16 of each year. Shares are purchased through employees’
payroll deductions, up to a maximum of 10% of employees’ compensation for each purchase period, at a purchase price
equal to 85% of the lesser of the fair market value of the Company’s common stock at the first trading day of the
applicable offering period or the purchase date. Participants may purchase up to $25 worth of common stock or 2 shares
of common stock in any one year. The ESPP is considered compensatory and results in compensation expense.
As of June 30, 2019, a total of 995 shares of common stock were reserved for future issuances under the ESPP.
The number of shares of common stock reserved for issuance under the ESPP may increase each calendar year,
continuing through and including January 1, 2024. The number of shares added each year may be equal to the lesser of
(a) 400, (b) seventy-five one hundredths percent (0.75%) of the number of shares of common stock of the Company
issued and outstanding on the immediately preceding December 31, or (c) an amount determined by the Company’s
board of directors. The Company’s board of directors determined that it would not increase the number of shares in
reserve for issuance under the ESPP as of January 1, 2019.
The Company issued a total of 116 shares upon the completion of its six-month offering periods ending
November 15, 2018 and May 15, 2019. The Company recorded compensation expense attributable to the ESPP of
$1,263, $1,331 and $1,949 for the years ended June 30, 2017, 2018 and 2019, respectively, which is included in the
summary of stock-based compensation expense above. The grant date fair value of the ESPP offering periods was
estimated using the following weighted average assumptions:
2017
Year ended June 30,
2018
2019
Valuation assumptions:
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0 %
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38.9 - 53.4 % 28.3 - 39.1 % 33.5 - 38.6 %
Expected term (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.28 - 1.02 % 1.02 - 2.10 % 2.10 - 2.48 %
0 %
0 %
0.5
0.5
0.5
(c) 401(k) Plan
The Company maintains a 401(k) plan with a matching provision that covers all eligible employees. The
Company matches 50% of employees’ contributions up to 8% of their gross pay. Contributions were $3,667, $4,632 and
$5,693 for the years ended June 30, 2017, 2018 and 2019, respectively.
(14) Commitments and Contingencies
(a) Employment Agreements
The Company has employment agreements with certain of its key officers. The agreements allow for minimum
annual compensation increases, participation in equity incentive plans and bonuses for annual performance as well as
certain change of control events as defined in the agreements.
(b) Litigation
On July 12, 2019, a former employee filed a class and collective action complaint under federal and state law
alleging that certain employees of the Company were misclassified as salaried exempt employees. The complaint seeks
unpaid overtime and other damages. This claim is still in its earliest stages and the Company is unable to estimate any
reasonably possible loss, or range of loss, with respect to these matters. The Company intends to vigorously defend
against this lawsuit.
F-29
From time to time, the Company is subject to litigation arising in the ordinary course of business. Many of these
matters are covered in whole or in part by insurance. In the opinion of the Company’s management, the ultimate
disposition of any matters currently outstanding or threatened will not have a material adverse effect on the Company’s
financial position, results of operations, or liquidity. However, these matters are subject to inherent uncertainties and
could materially impact the Company’s financial position, results of operations, or liquidity based on the final
disposition of these matters.
(15) Net Income Per Share
Basic net income per share is computed using the weighted-average number of common shares outstanding
during the period. Diluted net income per share is computed using the weighted-average number of common shares
outstanding during the period and, if dilutive, potential common shares outstanding during the period. The Company’s
potential common shares consist of the incremental common shares issuable upon the exercise of stock options, the
release of restricted 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 per share:
Year ended June 30,
2018
2017
2019
Numerator:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,718 $ 38,598 $ 53,823
Denominator:
Weighted-average shares used in computing net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51,415
52,425
52,914
Weighted-average effect of potentially dilutive shares:
Employee stock options, restricted stock units and employee stock purchase
plan shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,642
54,057
2,462
54,887
2,500
55,414
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.13 $
0.12 $
0.74 $
0.70 $
1.02
0.97
The following table summarizes the outstanding employee stock options, restricted stock units and employee
stock purchase plan shares as of the balance sheet date that were excluded from the diluted per share calculation for the
periods presented because to include them would have been anti-dilutive:
Year ended June 30,
2018
2019
2017
Employee stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock purchase plan shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
145
627
14
786
—
92
—
92
—
69
13
82
In August 2018, the Company announced that its board of directors approved a program to repurchase up to
$35,000 of the Company’s common stock, with authorization through August 14, 2019. During the first quarter of fiscal
2019, the Company completed the repurchase program and repurchased 442 shares for $34,991. All shares of common
stock repurchased were retired.
F-30
(16) Selected Quarterly Financial Data (unaudited)
The following tables set forth selected unaudited quarterly statements of operations data for the years ended
June 30, 2018 and 2019.
September 30, December 31,
Quarter Ended
2017
2017
March 31, 2018 June 30, 2018
Consolidated Statements of Operations Data
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income (loss) per share:
81,500 $
46,541 $
515 $
543 $
86,004 $
49,164 $
133 $
431 $
113,407 $
74,755 $
20,465 $
39,177 $
96,616
57,870
(5,164)
(1,553)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.01 $
0.01 $
0.01 $
0.01 $
0.74 $
0.71 $
(0.03)
(0.03)
Weighted-average shares used in computing net income (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51,893
54,610
52,502
54,818
52,615
55,030
52,699
52,699
September 30, December 31,
Quarter Ended
2018
2018
March 31, 2019 June 30, 2019
Consolidated Statements of Operations Data
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income per share:
100,504 $
64,562 $
3,776 $
9,852 $
107,204 $
69,134 $
7,027 $
5,704 $
139,552 $
99,807 $
36,212 $
28,026 $
120,373
80,279
9,209
10,241
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.19 $
0.18 $
0.11 $
0.10 $
0.53 $
0.51 $
0.19
0.18
Weighted-average shares used in computing net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52,865
55,487
52,842
55,081
52,934
55,465
53,017
55,692
(17) Subsequent Events
In July 2019, the Company entered into a five-year revolving credit agreement with PNC Bank, National
Association and other lenders, which is secured by substantially all of the Company’s assets, subject to certain
restrictions. The revolving credit agreement provides for a senior revolving credit facility, under which the Company
may borrow up to $250,000, which may be increased to up to $375,000, subject to obtaining additional lender
commitments and satisfying other requirements. The revolving credit facility is scheduled to mature in July 2024, and no
amounts have been drawn to date.
Borrowings under the senior revolving credit facility will generally bear interest, at the Company’s option, at a
rate per annum determined by reference to either the London Interbank Offered Rate (“LIBOR”) (or a replacement index
for the LIBOR rate) or an adjusted base rate, in each case plus an applicable margin ranging from 0.875% to 1.375% and
0.0% to 0.375%, respectively, based on the then-applicable net senior secured leverage ratio. In addition, the Company is
required to pay certain fees, including (i) a quarterly commitment fee at a rate ranging from 0.10% to 0.175% per annum
on the daily amount of the undrawn portion of the revolving commitments under the Facility, based on the then-
applicable net senior secured leverage ratio, and (ii) a letter of credit fronting fee at a rate of 0.125% per annum on the
daily amount available to be drawn under each letter of credit and a letter of credit participation fees at a rate ranging
from 0.875% to 1.375% per annum on the daily undrawn amount of all outstanding letters of credit and unreimbursed
disbursements relating to letters of credit, based on the then-applicable net senior secured leverage ratio.
The proceeds from any borrowings under the revolving credit facility are to be used to fund working capital,
capital expenditures and general corporate purposes, including permitted acquisitions, permitted investments, permitted
distributions and share repurchases.
F-31
The Company may generally borrow, prepay and reborrow under the revolving credit facility and terminate or
reduce the lenders’ commitments at any time prior to revolving credit facility expiration without a premium or a penalty,
other than customary “breakage” costs with respect to LIBOR revolving loans.
Under the revolving credit agreement, the Company is required to maintain a maximum net total leverage ratio of
not greater than 4.00 to 1.00, a maximum net senior secured leverage ratio of not greater than 3.50 to 1.00 and a
minimum interest coverage ratio of not less than 3.00 to 1.00. Additionally, the revolving credit agreement contains
customary affirmative and negative covenants, including covenants limiting the ability of the Company to, among other
things, grant liens, incur or guaranty debt, effect certain mergers, make investments, dispose of assets, enter into certain
transactions, including swap agreements, pay dividends or distributions on their capital stock, make changes in fiscal
year or organizational documents, grant negative pledges and enter into transactions with affiliates, in each case subject
to customary exceptions for similar credit facilities.
F-32
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The 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, No. 333-216001, and No. 333-222959) on Form S-8 of Paylocity Holding Corporation and subsidiaries (the
Company) of our report dated August 9, 2019, with respect to the consolidated balance sheets of the Company as of June
30, 2018 and 2019, the related consolidated statements of operations and comprehensive income, changes in
stockholders’ equity, and cash flows for each of the years in the three-year period ended June 30, 2019, and the related
notes (collectively, the consolidated financial statements), and the effectiveness of internal control over financial
reporting as of June 30, 2019, which report appears in the June 30, 2019 annual report on Form 10-K of Paylocity
Holding Corporation.
Our report on the consolidated financial statements refers to a change in method of accounting for revenues and related
costs as a result of the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers.
Chicago, Illinois
August 9, 2019
/s/ KPMG LLP
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 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
the year ended June 30, 2019;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material 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,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (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
procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s fiscal year ended June 30, 2019 that has materially affected, or is reasonably
likely to 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
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control
over financial 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 a
significant role in the registrant’s internal control over financial reporting.
Date: August 9, 2019
Name:
Title: Chief Executive Officer (Principal Executive
/s/ Steven R. Beauchamp
Steven R. Beauchamp
Officer) and Director
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Toby J. Williams, certify that:
1. I have reviewed this annual report on Form 10-K of Paylocity Holding Corporation (the “Company”) for
the year ended June 30, 2019;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material 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,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (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
procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s fiscal year ended June 30, 2019 that has materially affected, or is reasonably
likely to 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
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control
over financial 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 a
significant role in the registrant’s internal control over financial reporting.
Date: August 9, 2019
Name:
Title: Chief Financial Officer (Principal Financial
/s/ Toby J. Williams
Toby J. Williams
Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
The undersigned, the Chief Executive 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 adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of the Company for the year ended June 30, 2019
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information
contained in that Form 10-K fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Date: August 9, 2019
Name:
Title: Chief Executive Officer (Principal Executive
/s/ Steven R. Beauchamp
Steven R. Beauchamp
Officer) and Director
A signed original of this written statement required by Section 906 has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
The undersigned, the 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 adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of the Company for the year ended June 30, 2019
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information
contained in that Form 10-K fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Date: August 9, 2019
Name:
Title: Chief Financial Officer (Principal Financial
/s/ Toby J. Williams
Toby J. Williams
Officer)
A signed original of this written statement required by Section 906 has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
APPENDIX A
RECONCILIATION OF GAAP TO
NON-GAAP FINANCIAL MEASURES
CURRENT FINANCIAL TARGETS
We are unable to reconcile the forward-looking non-GAAP financial measures of Adjusted Gross Margin, Total R&D
Investment, Sales/Marketing, General & Administrative, Adjusted EBITDA and Free Cash Flow to their directly
comparable GAAP financial measures because the information which is needed to complete a reconciliation is
unavailable at this time without unreasonable effort.
REVENUE
$ in Millions
Reconciliation of GAAP to non-GAAP Revenue:
Recurring fees
Interest income on funds held for clients
Total recurring revenues
Implementation services and other
Total revenue
ADJUSTED EBITDA
$ in Millions
Reconciliation from net income (loss) to Adjusted EBITDA:
Net income (loss)
Interest expense
Income tax expense (benefit)
Depreciation and amortization expense
EBITDA
Stock-based compensation expense and employer payroll taxes related to stock
releases and option exercises
Acquisition-related costs(2)
Lease exit costs(3)
Adjusted EBITDA
Twelve Months Ended June 30, 2018
As reported
Non-GAAP
Adjustments(1) As adjusted
$354.4
9.1
363.5
14.0
$377.5
$ —
—
—
(5.5)
$(5.5)
$354.4
9.1
363.5
8.5
$372.0
For the Year Ended June 30,
2016
2017
2018
2019
$ (3.9) $ 6.7 $ 38.6 $ 53.8
—
4.2
34.6
92.6
—
(21.8)
30.2
47.0
—
0.7
21.0
28.4
—
0.2
13.9
10.2
18.2
—
—
$28.4
27.8
—
—
41.0
31.8
—
0.2
0.4
2.3
$56.2 $ 81.3 $134.0
(1) As adjusted implementation revenue as if we recognized implementation revenue ratably over a period of up to 24 months for fiscal 2018.
(2) Acquisition-related costs: Includes legal, accounting and other professional fees as well as various other costs directly associated with acquisitions.
(3) Lease exit costs: Includes the acceleration of rent and other expenses associated with the remaining lease term on our previous headquarters as
a result of the transition to the Company’s new headquarters in Schaumburg, Illinois.
FREE CASH FLOW
$ in Millions
Reconciliation of Free Cash Flow:
Net cash provided by operating activities
Capitalized internal-use software costs
Purchases of property and equipment
Lease allowances used for tenant improvements
Free Cash Flow
A-1
PAYLOCITY 2019 ANNUAL REPORT
For the Year Ended June 30,
2016
2017
2018
2019
$ 33.0 $ 62.0 $ 97.9 $115.0
(20.1)
(11.3)
(7.5)
$ 8.5 $ 24.3 $ 48.8 $ 76.1
(13.6)
(21.3)
(2.8)
(15.6)
(21.7)
(11.8)
(8.4)
(16.1)
-
1400 American Lane Schaumburg, IL 60173paylocity.com investors.paylocity.com