pcty_Current_Folio

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

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

For the quarterly period ended September 30, 2017

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

For the transition period from to

Commission file number 001-36348

PAYLOCITY HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

46-4066644

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

3850 N. Wilke Road

Arlington Heights, Illinois

60004

(Address of principal executive offices)

(Zip Code)

(847) 463-3200

(Registrant’s telephone number, including area code)

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

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

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

Large Accelerated Filer	☒	Accelerated Filer	☐

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

Emerging Growth Company	☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 52,516,830 shares of Common Stock, $0.001 par value per share, as of October 27, 2017.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Balance Sheets

(in thousands, except per share data)


	June 30,		September 30,
	2017		2017
Assets
Current assets:
Cash and cash equivalents	$	103,468	$	97,399
Accounts receivable, net		2,040		2,565
Prepaid expenses and other		14,879		13,494

Total current assets before funds held for clients		120,387		113,458
Funds held for clients		942,459		941,989

Total current assets		1,062,846		1,055,447
Long-term prepaid expenses		1,535		1,323
Capitalized internal-use software, net		17,394		17,979
Property and equipment, net		40,756		44,968
Intangible assets, net		8,907		8,548
Goodwill		6,003		6,003

Total assets	$	1,137,441	$	1,134,268

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,046	$	1,864
Accrued expenses		30,301		26,728

Total current liabilities before client fund obligations		32,347		28,592
Client fund obligations		942,459		941,989

Total current liabilities		974,806		970,581
Deferred rent		14,621		14,529
Deferred income tax liabilities, net		401		438

Total liabilities	$	989,828	$	985,548
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 authorized, no shares issued and outstanding at June 30, 2017 and September 30, 2017	$	—	$	—
Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2017 and September 30, 2017; 51,738 shares issued and outstanding at June 30, 2017 and 52,075 shares issued and outstanding at September 30, 2017		52		52
Additional paid-in capital		192,837		193,406
Accumulated deficit		(45,276)		(44,733)
Accumulated other comprehensive loss		—		(5)
Total stockholders’ equity	$	147,613	$	148,720
Total liabilities and stockholders’ equity	$	1,137,441	$	1,134,268

See accompanying notes to unaudited consolidated financial statements.

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per share data)


	Three Months Ended
	September 30,
	2016		2017
Revenues:
Recurring fees	$	61,920	$	77,294
Interest income on funds held for clients		717		1,617

Total recurring revenues		62,637		78,911
Implementation services and other		2,385		2,589

Total revenues		65,022		81,500
Cost of revenues:
Recurring revenues		19,103		24,091
Implementation services and other		9,256		10,868

Total cost of revenues		28,359		34,959
Gross profit		36,663		46,541
Operating expenses:
Sales and marketing		18,011		21,180
Research and development		7,301		8,895
General and administrative		13,858		15,951

Total operating expenses		39,170		46,026
Operating income (loss)		(2,507)		515
Other income		39		109

Income (loss) before income taxes		(2,468)		624
Income tax expense		100		81

Net income (loss)	$	(2,568)	$	543

Other comprehensive loss, net of tax
Unrealized losses on securities, net of tax		—		(5)
Total other comprehensive loss, net of tax		—		(5)
Comprehensive income (loss)	$	(2,568)	$	538


Net income (loss) per share:
Basic	$	(0.05)	$	0.01
Diluted	$	(0.05)	$	0.01


Weighted-average shares used in computing net income (loss) per share:
Basic		51,231		51,893
Diluted		51,231		54,610

See accompanying notes to unaudited consolidated financial statements.

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

(in thousands)


	Stockholders’ Equity
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Loss		Equity
Balances at June 30, 2017	51,738	$	52	$	192,837	$	(45,276)	$	—	$	147,613
Stock-based compensation	—		—		7,039		—		—		7,039
Stock options exercised	104		—		1,479		—		—		1,479
Issuance of common stock upon vesting of restricted stock units	406		—		—		—		—		—
Net settlement for taxes and/or exercise price related to equity awards	(173)		—		(7,949)		—		—		(7,949)
Unrealized losses on securities, net of tax	—		—		—		—		(5)		(5)
Net income	—		—		—		543		—		543
Balances at September 30, 2017	52,075	$	52	$	193,406	$	(44,733)	$	(5)	$	148,720

See accompanying notes to the unaudited consolidated financial statements.

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Cash Flows

(in thousands)


	Three Months Ended
	September 30,
	2016		2017

Cash flows from operating activities:

Net income (loss)	$	(2,568)	$	543
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Stock-based compensation expense		5,813		6,606
Depreciation and amortization expense		4,268		6,673
Deferred income tax expense		78		37
Provision for doubtful accounts		(3)		4
Net accretion of discounts and amortization of premiums on available-for-sale securities		—		(108)
Loss on disposal of equipment		28		31
Changes in operating assets and liabilities:
Accounts receivable		(73)		(529)
Prepaid expenses and other		1,289		(305)
Accounts payable		85		(101)
Accrued expenses		(7,034)		(6,304)
Tenant improvement allowance		—		1,656
Net cash provided by operating activities		1,883		8,203

Cash flows from investing activities:
Purchases of available-for-sale securities from funds held for clients		—		(58,844)
Proceeds from sales of available-for-sale securities from funds held for clients		—		421
Net change in funds held for clients’ cash and cash equivalents		468,674		59,001
Capitalized internal-use software costs		(2,887)		(3,751)
Purchases of property and equipment		(2,952)		(2,693)
Lease allowances used for tenant improvements		—		(1,466)
Net cash provided by (used in) investing activities		462,835		(7,332)

Cash flows from financing activities:
Net change in client fund obligations		(468,674)		(470)
Taxes paid related to net share settlement of equity awards		(4,542)		(6,470)
Net cash used in financing activities		(473,216)		(6,940)
Net Change in Cash and Cash Equivalents		(8,498)		(6,069)
Cash and Cash Equivalents—Beginning of Period		86,496		103,468
Cash and Cash Equivalents—End of Period	$	77,998	$	97,399
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Purchase of property and equipment and internal-use software, accrued but not paid	$	1,781	$	4,317
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes, net of refunds	$	16	$	53

See accompanying notes to unaudited consolidated financial statements.

PAYLOCITY HOLDING CORPORATION

Notes to the Unaudited Consolidated Financial Statements

(all amounts in thousands, except per share data)

(1) Organization and Description of Business

Paylocity Holding Corporation (the “Company”), through its wholly owned subsidiary, Paylocity Corporation, is a cloud-based provider of payroll and human capital management software solutions for medium-sized organizations. Services are provided in a Software-as-a-Service (“SaaS”) delivery model utilizing the Company’s cloud-based platform. Payroll services include collection, remittance and reporting of payroll liabilities to the appropriate federal, state and local authorities.

(2) Summary of Significant Accounting Policies

(a) Consolidation and Use of Estimates

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

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

(b) Interim Unaudited Consolidated Financial Information

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

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

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

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

The Company reviews the composition of its portfolio for any available-for-sale security that has a fair value that falls below its amortized cost. If any security fits this criterion, the Company further evaluates whether other-than-temporary impairment exists by considering whether the Company has the intent and ability to retain the security for a period of time sufficient enough to allow for anticipated fair value recovery. The Company did not record any other-than-temporary impairment charges during the three months ended September 30, 2017.

(d) Income Taxes

Differences in the normal relationship between the income tax expense and pre-tax income (loss) materially result from the existence of a valuation allowance recorded against the preponderance of the net deferred tax assets.

(e) Stock-Based Compensation

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

(f) Recently Issued Accounting Standards

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

The Company currently expects to adopt the new standard in its fiscal year beginning July 1, 2018 and is evaluating adoption methods. While the impact the new revenue recognition standard will have on its consolidated financial statements and disclosures has not yet been fully assessed, the Company currently expects that there will be a material impact in the manner in which it treats certain costs of obtaining new contracts (i.e., selling and commission costs). The new standard will require the Company to defer these costs and amortize them versus expensing these costs as incurred. The Company is continuing to evaluate all potential impacts as well as the changes required for systems, processes and internal controls to meet the new standard’s reporting and disclosure requirements.

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

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

From time to time, new accounting pronouncements are issued by the FASB 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) Balance Sheet Information

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

Activity in the allowance for doubtful accounts was as follows:


Balance at June 30, 2017	$	266
Charged to expense		4
Write-offs		(43)
Balance at September 30, 2017	$	227

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


	June 30,		September 30,
	2017		2017
Capitalized internal-use software	$	49,663	$	53,637
Accumulated amortization		(32,269)		(35,658)
Capitalized internal-use software, net	$	17,394	$	17,979

Amortization of capitalized internal-use software costs is included in Cost of Revenues-Recurring Revenues and amounted to $1,684 and $3,389 for the three months ended September 30, 2016 and 2017, respectively.

Property and equipment, net consist of the following:


	June 30,		September 30,
	2017		2017
Office equipment	$	3,591	$	3,790
Computer equipment		24,411		26,766
Furniture and fixtures		7,547		7,570
Software		4,954		4,880
Leasehold improvements		21,426		25,628
Time clocks rented by clients		4,240		4,318
Total		66,169		72,952
Accumulated depreciation		(25,413)		(27,984)
Property and equipment, net	$	40,756	$	44,968

Depreciation expense amounted to $2,203 and $2,925 for the three months ended September 30, 2016 and 2017, respectively.

Intangible assets, net consist of the following:



					Weighted
					Average
	June 30,		September 30,		Useful
	2017		2017		Life
Client relationships	$	12,580	$	12,580	9 years
Non-solicitation agreements		360		360	2 - 3 years
Total		12,940		12,940
Accumulated amortization		(4,033)		(4,392)
Intangible assets, net	$	8,907	$	8,548

Amortization expense for acquired intangible assets was $381 and $359 for the three months ended September 30, 2016 and 2017, respectively.

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


Remainder of fiscal 2018	$	1,068
Fiscal 2019		1,398
Fiscal 2020		1,398
Fiscal 2021		1,398
Fiscal 2022		1,398
Thereafter		1,888
Total	$	8,548

The components of accrued expenses were as follows:


	June 30,		September 30,
	2017		2017
Accrued payroll and personnel costs	$	25,131	$	17,035
Other		5,170		9,693
Total accrued expenses	$	30,301	$	26,728

(4) Funds Held for Clients and Corporate Investments

Investments consist of the following as of September 30, 2017:


			Gross		Gross
	Amortized		unrealized		unrealized
Type of Issue	cost		gains		losses		Fair value
Funds held for clients' cash and cash equivalents	$	883,777	$	—	$	—	$	883,777
Available-for-sale securities:
Corporate bonds		25,339		4		(10)		25,333
Commercial paper		23,500		2		(1)		23,501
Asset-backed securities		9,505		1		(1)		9,505
Total available-for-sale securities		58,344		7		(12)		58,339
Investments	$	942,121	$	7	$	(12)	$	942,116

Funds held for clients’ cash and cash equivalents included demand deposit accounts, commercial paper, corporate bonds and money market funds as of September 30, 2017.

Classification of investments on the consolidated balance sheets is as follows:


	September 30,
	2017
Funds Held for Clients	$	941,989
Prepaids and Other Assets		127
Investments	$	942,116

Available-for-sale securities in the corporate bonds category that have been in an unrealized loss position for a period of less than 12 months as of September 30, 2017 had a fair market value of $14,330 and an unrealized loss of $10. Unrealized losses for asset-backed securities and commercial paper were immaterial as of September 30, 2017. As the Company started investing funds held for clients in available-for-sale securities during the three months ended September 30, 2017, no securities have been in an unrealized loss position for more than 12 months. The Company did not make any reclassification adjustments out of accumulated other comprehensive loss for realized gains and losses on the sale of available-for-sale securities as of September 30, 2017. Realized gains and losses were immaterial for the three months ended September 30, 2017.

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 loss during the three months ended September 30, 2017, nor does it believe that OTTI exists in its portfolio as of September 30, 2017. 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 September 30, 2017.

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


	Amortized
	cost		Fair value
One year or less	$	45,346	$	45,349
One year to two years		10,898		10,891
Two years to three years		2,100		2,099
Total available-for-sale securities	$	58,344	$	58,339

(5) 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, 2017 and September 30, 2017 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 asset-backed securities, corporate bonds and commercial paper. 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 September 30, 2017, and the Company did not transfer assets between Levels during the three months ended September 30, 2017. The Company did not hold any marketable securities at June 30, 2017.

The fair value level for the funds held for clients’ cash and cash equivalents and available-for-sale securities as of September 30, 2017 is as follows:


	Total		Level 1		Level 2		Level 3
Funds held for clients' cash and cash equivalents	$	883,777	$	867,334	$	16,443	$	—
Available-for-sale securities:
Corporate bonds		25,333				25,333
Commercial paper		23,501				23,501
Asset-backed securities		9,505				9,505
Total available-for-sale securities		58,339		—		58,339		—
Investments	$	942,116	$	867,334	$	74,782	$	—

(6) Benefit Plans

(a) Equity Incentive Plan

The Company maintains a 2008 Equity Incentive Plan (the “2008 Plan”) and a 2014 Equity Incentive Plan (the “2014 Plan”) pursuant to which the Company has reserved shares of its common stock for issuance to its employees, directors and non-employee third parties. The 2014 Plan serves as the successor to the 2008 Plan and permits the granting of options to purchase common stock 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 will increase automatically each calendar year, continuing through and including January 1, 2024. The number of shares added each year will be equal to the lesser of (a) four and five tenths percent (4.5%) of the number of shares of common stock of the Company issued and outstanding on the immediately preceding December 31, or (b) an amount determined by the Company’s board of directors.

As of September 30, 2017, the Company had 12,079 shares allocated to the plans, of which 4,519 shares were subject to outstanding options or awards. Generally, the Company issues previously unissued shares for the exercise of stock options or vesting of awards; however, shares previously subject to 2014 Plan grants or awards that are forfeited or net settled at exercise or release may be reissued to satisfy future issuances.

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


		Number of Shares
Available for grant at July 1, 2017		8,227
RSUs granted		(837)
Shares withheld in settlement of taxes and/or exercise price		173
Forfeitures		14
Shares removed		(17)
Available for grant at September 30, 2017		7,560

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 unaudited consolidated statements of operations and comprehensive income (loss):


	Three Months Ended September 30,
	2016		2017
Cost of revenue – recurring	$	543	$	622
Cost of revenue – non-recurring		301		372
Sales and marketing		1,525		1,938
Research and development		794		871
General and administrative		2,650		2,803
Total stock-based compensation expense	$	5,813	$	6,606

In addition, the Company capitalized $372 and $433 of stock-based compensation expense in its capitalized internal-use software costs in the three months ended September 30, 2016 and 2017, respectively.

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.

There were no stock options granted during the three months ended September 30, 2016 or 2017. The table below presents stock option activity during the three months ended September 30, 2017:


	Outstanding Options
				Weighted
		Weighted		average
		average		remaining	Aggregate
	Number of	exercise		contractual	intrinsic
	shares	price		term (years)	value
Balance at July 1, 2017	2,751	$	11.54	5.69	$	92,556
Options forfeited	(4)	$	17.00
Options exercised	(104)	$	14.19
Balance at September 30, 2017	2,643	$	11.42	4.81	$	98,848
Options exercisable at September 30, 2017	2,517	$	10.51	4.69	$	96,426
Options vested and expected to vest at September 30, 2017	2,636	$	11.37	4.81	$	98,722

The total intrinsic value of options exercised was $3,891 and $3,380 during the three months ended September 30, 2016 and 2017, respectively. At September 30, 2017, there was $467 of total unrecognized compensation

cost, net of estimated forfeitures, related to unvested stock options granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.26 years.

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 RSU awards are 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 three months ended September 30, 2017:


	Units	Weighted average grant date fair value
RSU balance at July 1, 2017	1,455	$	39.96
RSUs granted	837	$	45.70
RSUs vested	(406)	$	39.32
RSUs forfeited	(10)	$	39.59
RSU balance at September 30, 2017	1,876	$	42.66
RSUs expected to vest at September 30, 2017	1,598	$	42.45

At September 30, 2017, there was $47,656 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock units granted. That cost is expected to be recognized over a weighted average period of 2.09 years.

(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 September 30, 2017, a total of 824 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 will increase automatically each calendar year, continuing through and including January 1, 2024. The number of shares added each year will be equal to the lesser of (a) 400, (b) seventy-five one hundredths percent (0.75%) of the number of shares of common stock of the Company issued and outstanding on the immediately preceding December 31, or (c) an amount determined by the Company’s board of directors.

The Company recorded compensation expense attributable to the ESPP of $344 and $339 for the three months ended September 30, 2016 and 2017, respectively, which is included in the summary of stock-based compensation expense above. The grant date fair value of the ESPP offering periods was estimated using the following weighted average assumptions:


	Three Months Ended
	September 30,
	2016		2017
Valuation assumptions:
Expected dividend yield	0	%	0	%
Expected volatility	53.4	%	39.1	%
Expected term (years)	0.5		0.5
Risk‑free interest rate	0.28	%	1.02	%

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 $902 and $1,111 for the three months ended September 30, 2016 and 2017, respectively.

(7) Net Income (Loss) Per Share

Basic net income (loss) per common share is computed using the weighted‑average number of common shares outstanding during the period. Diluted net income (loss) 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 (loss) per share:


	Three Months Ended
	September 30,
	2016		2017
Numerator:
Net income (loss)	$	(2,568)	$	543

Denominator:
Weighted-average shares used in computing net income (loss) per share:
Basic		51,231		51,893
Weighted-average effect of potentially dilutive shares:
Employee stock options, restricted stock units and employee stock purchase plan shares		—		2,717
Diluted		51,231		54,610

Net income (loss) per share:
Basic	$	(0.05)	$	0.01
Diluted	$	(0.05)	$	0.01

The following table summarizes the outstanding employee stock options, restricted stock units, and shares purchasable via the employee stock purchase plan 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:


	Three Months Ended
	September 30,
	2016	2017
Employee stock options	3,333	—
Restricted stock units	1,522	816
Employee stock purchase plan shares	51


		Page

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Unaudited Consolidated Balance Sheets		2

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

Unaudited Consolidated Statement of Changes in Stockholders’ Equity		4

Unaudited Consolidated Statements of Cash Flows		5

Notes to the Unaudited Consolidated Financial Statements		6

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		15

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		27

ITEM 4. CONTROLS AND PROCEDURES		27

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		29

ITEM 1A. RISK FACTORS		29

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		47

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		47

ITEM 4. MINE SAFETY DISCLOSURES		47

ITEM 5. OTHER INFORMATION		48

ITEM 6. EXHIBITS		48

SIGNATURES		50