S

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 March 31, 2018

☐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: 52,653,118 shares of Common Stock, $0.001 par value per share, as of April 27, 2018.

Paylocity Holding Corporation

Form 10-Q

For the Quarterly Period Ended March 31, 2018

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets	2
Unaudited Consolidated Statements of Operations and Comprehensive Income	3
Unaudited Consolidated Statement of Changes in Stockholders’ Equity	4
Unaudited Consolidated Statements of Cash Flows	5
Notes to the Unaudited Consolidated Financial Statements	6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33
ITEM 4. CONTROLS AND PROCEDURES	33
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	35
ITEM 1A. RISK FACTORS	35
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	53
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	54
ITEM 4. MINE SAFETY DISCLOSURES	54
ITEM 5. OTHER INFORMATION	54
ITEM 6. EXHIBITS	54
SIGNATURES	56

1

PART I

FINANCIAL INFORMATION

Item  1.    Financial Statements

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Balance Sheets

(in thousands, except per share data)

	June 30,		March 31,
	2017		2018
Assets
Current assets:
Cash and cash equivalents	$	103,468	$	129,530
Accounts receivable, net		2,040		3,384
Prepaid expenses and other		14,879		16,921
Total current assets before funds held for clients		120,387		149,835
Funds held for clients		942,459		1,347,522
Total current assets		1,062,846		1,497,357
Long-term prepaid expenses		1,535		1,022
Capitalized internal-use software, net		17,394		20,002
Property and equipment, net		40,756		50,380
Intangible assets, net		8,907		13,457
Goodwill		6,003		9,754
Deferred income tax assets, net		—		18,906
Total assets	$	1,137,441	$	1,610,878
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,046	$	2,371
Accrued expenses		30,301		35,474
Total current liabilities before client fund obligations		32,347		37,845
Client fund obligations		942,459		1,347,522
Total current liabilities		974,806		1,385,367
Deferred rent		14,621		20,963
Deferred income tax liabilities, net		401		—
Total liabilities	$	989,828	$	1,406,330
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 authorized, no shares issued and outstanding at June 30, 2017 and March 31, 2018	$	—	$	—
Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2017 and March 31, 2018; 51,738 shares issued and outstanding at June 30, 2017 and 52,649 shares issued and outstanding at March 31, 2018		52		53
Additional paid-in capital		192,837		209,791
Accumulated deficit		(45,276)		(5,125)
Accumulated other comprehensive loss		—		(171)
Total stockholders’ equity	$	147,613	$	204,548
Total liabilities and stockholders’ equity	$	1,137,441	$	1,610,878

                                      See accompanying notes to unaudited consolidated financial statements.

2

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2017		2018		2017		2018
Revenues:
Recurring fees	$	85,314	$	105,857	$	212,581	$	264,443
Interest income on funds held for clients		1,041		2,719		2,489		6,119
Total recurring revenues		86,355		108,576		215,070		270,562
Implementation services and other		3,918		4,831		8,879		10,349
Total revenues		90,273		113,407		223,949		280,911
Cost of revenues:
Recurring revenues		22,436		26,982		62,255		76,711
Implementation services and other		9,646		11,670		28,569		33,740
Total cost of revenues		32,082		38,652		90,824		110,451
Gross profit		58,191		74,755		133,125		170,460
Operating expenses:
Sales and marketing		21,242		26,004		56,988		68,782
Research and development		6,969		9,058		21,492		27,227
General and administrative		15,100		19,228		43,915		53,338
Total operating expenses		43,311		54,290		122,395		149,347
Operating income		14,880		20,465		10,730		21,113
Other income (expense)		(47)		215		(4)		465
Income before income taxes		14,833		20,680		10,726		21,578
Income tax expense (benefit)		32		(18,497)		164		(18,573)
Net income	$	14,801	$	39,177	$	10,562	$	40,151
Other comprehensive loss, net of tax
Unrealized losses on securities, net of tax		—		(61)		—		(171)
Total other comprehensive loss, net of tax		—		(61)		—		(171)
Comprehensive income	$	14,801	$	39,116	$	10,562	$	39,980
Net income per share:
Basic	$	0.29	$	0.74	$	0.21	$	0.77
Diluted	$	0.27	$	0.71	$	0.20	$	0.73
Weighted-average shares used in computing net income per share:
Basic		51,447		52,615		51,353		52,334
Diluted		54,002		55,030		53,987		54,717

See accompanying notes to unaudited consolidated financial statements.

3

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	—		—		23,345		—		—		23,345
Stock options exercised	772		1		7,161		—		—		7,162
Issuance of common stock upon vesting of     restricted stock units	425		—		—		—		—		—
Issuance of common stock under employee     stock purchase plan	53		—		2,045		—		—		2,045
Net settlement for taxes and/or exercise     price related to equity awards	(339)		—		(15,597)		—		—		(15,597)
Unrealized losses on securities, net of tax	—		—		—		—		(171)		(171)
Net income	—		—		—		40,151		—		40,151
Balances at March 31, 2018	52,649	$	53	$	209,791	$	(5,125)	$	(171)	$	204,548

See accompanying notes to the unaudited consolidated financial statements.

4

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Cash Flows

(in thousands)

	Nine Months Ended
	March 31,
	2017		2018
Cash flows from operating activities:
Net income	$	10,562	$	40,151
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense		18,695		21,891
Depreciation and amortization expense		14,685		20,640
Deferred income tax expense (benefit)		127		(18,603)
Provision for doubtful accounts		47		149
Net accretion of discounts and amortization of premiums on available-for-sale securities		—		(234)
Net realized losses on sales of available-for-sale securities		—		2
Loss on disposal of equipment		225		160
Changes in operating assets and liabilities:
Accounts receivable		(543)		(1,278)
Prepaid expenses and other		(1,802)		(1,678)
Accounts payable		(145)		429
Accrued expenses		1,484		1,762
Tenant improvement allowance		—		5,952
Net cash provided by operating activities		43,335		69,343
Cash flows from investing activities:
Purchases of available-for-sale securities from funds held for clients		—		(126,223)
Proceeds from sales and maturities of available-for-sale securities from funds held for clients		—		51,292
Net change in funds held for clients' cash and cash equivalents		69,281		(328,462)
Capitalized internal-use software costs		(10,073)		(11,442)
Purchases of property and equipment		(13,916)		(9,374)
Lease allowances used for tenant improvements		—		(7,086)
Acquisition of business, net of cash acquired		—		(8,346)
Net cash provided by (used in) investing activities		45,292		(439,641)
Cash flows from financing activities:
Net change in client fund obligations		(69,281)		403,375
Proceeds from employee stock purchase plan		1,823		2,045
Taxes paid related to net share settlement of equity awards		(6,215)		(9,060)
Net cash provided by (used in) financing activities		(73,673)		396,360
Net Change in Cash and Cash Equivalents		14,954		26,062
Cash and Cash Equivalents—Beginning of Period		86,496		103,468
Cash and Cash Equivalents—End of Period	$	101,450	$	129,530
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Purchase of property and equipment and internal-use software, accrued but not paid	$	1,714	$	2,832
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes, net of refunds	$	41	$	17

See accompanying notes to unaudited consolidated financial statements.

5

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 subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 deferred income tax assets and liabilities 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 and nine months ended March 31, 2018 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.

(c)  Funds Held For Clients and Corporate Investments

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.

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 the consolidated statements of operations and comprehensive income. Interest on marketable securities included in funds

6

held for clients is reported as interest income on funds held for clients on the consolidated statements of operations and comprehensive income. 

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 or nine months ended March 31, 2018.

(d)  Income Taxes

Income taxes are accounted for in accordance with ASC 740, Income Taxes, using the asset and liability method. The Company’s provision for income taxes through December 31, 2017 and fiscal 2017 was based on the discrete effective tax rate method. In the third quarter of fiscal 2018 upon the release of the valuation allowance, the Company utilized the annual effective tax rate method to estimate and record tax expense for pre-tax income. 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 tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net-recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

(e)  Recently Adopted Accounting Standards

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, and it resulted in an increase to the Company’s gross net operating loss of $30,783. As of December 31, 2017, the adoption of this standard did not have a material impact on its consolidated financial statements and disclosures due to the Company’s valuation allowance on deferred tax assets. However, during the third quarter of fiscal 2018, the Company released its valuation allowance and as a result, the Company recorded a significant increase in deferred tax assets due to excess tax benefits from employee stock exercises. Refer to Note 9 for additional information on the release of the valuation allowance and the impact of excess tax benefits from employee stock exercises. 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.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) (“ASU 2017-01”) which clarifies the definition of a business. ASU 2017-01 provides guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. It is effective, on a prospective basis, for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted this standard effective January 1, 2018. The adoption of ASU 2017-01 did not have a material impact on the Company’s consolidated financial statements.

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 “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 Act. The Company recognized the

7

income tax effects of the Act in the second and third quarter of fiscal 2018 in accordance with SAB 118. Refer to Note 9 for additional information.

(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 using the full retrospective method.  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 its current treatment of 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. In March 2018, the FASB affirmed its proposed ASU, Leases (Topic 842): Targeted Improvements, which provides an additional transition method allowing an entity to apply the new lease accounting and disclosure requirements only for the year of adoption with the comparative periods continuing to be in accordance with current GAAP. 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 as well as evaluating the transition methods and expects to adopt this new standard in its fiscal year beginning July 1, 2019.

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) 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 $9,346, net of cash acquired. BeneFLEX administers employee benefit plans, including flexible spending accounts, health savings accounts, health reimbursement accounts, COBRA, and others. The Company paid $8,346 upon closing and may be required to pay an additional $1,000 subject to BeneFLEX attaining certain revenue targets and in the absence of indemnity claims. This acquisition expands 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.

8

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 based the preliminary allocation of the purchase price on estimates and assumptions that are subject to change within the purchase price allocation period, which is generally one year from the acquisition date. The primary areas of the purchase price allocation that are not yet finalized relate to the measurement of identifiable intangible assets and the finalization of net working capital adjustments. The Company determined the estimated fair value of identifiable intangible assets acquired primarily by using an income approach.

The following table summarizes the preliminary allocation of the purchase price for BeneFLEX:

Goodwill	$	3,751
Client relationships		5,386
Non-solicitation agreements		240
Net liabilities assumed		(31)
Total Purchase Price	$	9,346

The results from this acquisition have been included in the Company’s consolidated financial statements since the closing of the acquisition. Pro forma information has not been presented because the effect of the acquisition is not material to the Company’s consolidated financial statements. Goodwill will be amortized over a period of 15 years for income tax purposes.   

(4)  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		149
Write-offs		(134)
Balance at March 31, 2018	$	281

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

	June 30,		March 31,
	2017		2018
Capitalized internal-use software	$	49,663	$	62,629
Accumulated amortization		(32,269)		(42,627)
Capitalized internal-use software, net	$	17,394	$	20,002

Amortization of capitalized internal-use software costs is included in Cost of Revenues-Recurring Revenues and amounted to $2,573 and $3,655 for the three months ended March 31, 2017 and 2018, respectively, and $6,207 and $10,358 for the nine months ended March 31, 2017 and 2018, respectively.

9

Property and equipment, net consist of the following:

	June 30,		March 31,
	2017		2018
Office equipment	$	3,591	$	3,880
Computer equipment		24,411		28,526
Furniture and fixtures		7,547		8,837
Software		4,954		5,221
Leasehold improvements		21,426		32,621
Time clocks rented by clients		4,240		4,551
Total		66,169		83,636
Accumulated depreciation		(25,413)		(33,256)
Property and equipment, net	$	40,756	$	50,380

Depreciation expense amounted to $2,629 and $3,189 for the three months ended March 31, 2017 and 2018, respectively, and $7,336 and $9,206 for the nine months ended March 31, 2017 and 2018, respectively.

Goodwill represents the excess of cost over the net tangible and identifiable intangible assets of acquired businesses. Goodwill amounts are not amortized, but rather tested for impairment at least annually. Identifiable intangible assets acquired in business combinations are recorded based on fair value at the date of acquisition and amortized over their estimated useful lives. See Note 3 for further information regarding the acquisition completed during the nine months ended March 31, 2018. 

The following table summarizes changes in goodwill during the nine months ended March 31, 2018:

Balance at June 30, 2017	$	6,003
Additions attributable to current period acquisition		3,751
Balance at March 31, 2018	$	9,754

Intangible assets, net consist of the following:

	June 30,		March 31,		Useful
	2017		2018		Life
Client relationships	$	12,580	$	17,966	9 years
Non-solicitation agreements		360		600	2 - 4 years
Total		12,940		18,566
Accumulated amortization		(4,033)		(5,109)
Intangible assets, net	$	8,907	$	13,457

The increase in client relationships and non-solicitation agreements is related to the acquisition of BeneFLEX as discussed in Note 3. Amortization expense for acquired intangible assets was $380 and $358 for the three months ended March 31, 2017 and 2018 respectively, and $1,142 and $1,076 for the nine months ended March 31, 2017 and 2018, respectively.

Future amortization expense for acquired intangible assets is as follows, as of March 31, 2018:

Remainder of fiscal 2018	$	516
Fiscal 2019		2,056
Fiscal 2020		2,056
Fiscal 2021		2,056
Fiscal 2022		2,041
Thereafter		4,732
Total	$	13,457

10

The components of accrued expenses were as follows:

	June 30,		March 31,
	2017		2018
Accrued payroll and personnel costs	$	25,131	$	25,361
Other		5,170		10,113
Total accrued expenses	$	30,301	$	35,474

(5) Funds Held for Clients and Corporate Investments

Investments consist of the following as of March 31, 2018:

			Gross		Gross
	Amortized		unrealized		unrealized
Type of Issue	cost		gains		losses		Fair value
Funds held for clients' cash and cash equivalents	$	1,272,771	$	—	$	(4)	$	1,272,767
Available-for-sale securities:
Corporate bonds		33,958		3		(168)		33,793
Commercial paper		29,165		—		(16)		29,149
Asset-backed securities		12,041		—		(65)		11,976
Total available-for-sale securities		75,164		3		(249)		74,918
Investments	$	1,347,935	$	3	$	(253)	$	1,347,685

Funds held for clients’ cash and cash equivalents included demand deposit accounts, commercial paper and money market funds as of March 31, 2018.

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

	March 31,
	2018
Funds held for clients	$	1,347,522
Prepaid expenses and other		163
Total investments	$	1,347,685

Available-for-sale securities that have been in an unrealized loss position for a period of less than 12 months as of March 31, 2018 had fair market values as follows:

	Gross
	unrealized
	losses		Fair value
Corporate bonds	$	(168)	$	31,231
Commercial paper		(16)		27,291
Asset-backed securities		(65)		11,976
Total	$	(249)	$	70,498

As the Company started investing funds held for clients in available-for-sale securities during the nine months ended March 31, 2018, no securities have been in an unrealized loss position for more than 12 months. The Company did not make any material reclassification adjustments out of accumulated other comprehensive loss for realized gains and losses on the sale of available-for-sale securities during the three or nine months ended March 31, 2018. Gross realized gains and losses on the sale of available-for-sale securities were immaterial for both the three and nine months ended March 31, 2018.

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 or nine months ended March 31, 2018, nor does it believe that OTTI exists in its

11

portfolio as of March 31, 2018. 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 March 31, 2018.

Expected maturities of available-for-sale securities at March 31, 2018 are as follows:

	Amortized
	cost		Fair value
One year or less	$	53,150	$	53,036
One year to two years		20,410		20,275
Two years to three years		1,604		1,607
Total available-for-sale securities	$	75,164	$	74,918

(6)  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 March 31, 2018 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 March 31, 2018, and the Company did not transfer assets between Levels during the nine months ended March 31, 2018. The Company did not hold any marketable securities at June 30, 2017.

12

The fair value level for the funds held for clients’ cash and cash equivalents and available-for-sale securities as of March 31, 2018 is as follows:

	Total		Level 1		Level 2		Level 3
Funds held for clients' cash and cash equivalents	$	1,272,767	$	1,247,604	$	25,163	$	—
Available-for-sale securities:
Corporate bonds		33,793				33,793
Commercial paper		29,149				29,149
Asset-backed securities		11,976				11,976
Total available-for-sale securities		74,918		—		74,918		—
Investments	$	1,347,685	$	1,247,604	$	100,081	$	—

(7)  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 “Evergreen provision”). 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. The Company’s board of directors determined that, effective January 1, 2018, it would increase the number of common shares in reserve for issuance under the 2014 Plan by 2,367 shares.

As of March 31, 2018, the Company had 13,883 shares allocated to the plans, of which 3,848 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 nine months ended March 31, 2018:

	Number of Shares
Available for grant at July 1, 2017	8,227
January 1, 2018 Evergreen provision increase	2,367
RSUs granted	(884)
Shares withheld in settlement of taxes and/or exercise price	339
Forfeitures	45
Shares removed	(59)
Available for grant at March 31, 2018	10,035

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.

13

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:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2017		2018		2017		2018
Cost of revenue – recurring	$	485	$	728	$	1,621	$	2,084
Cost of revenue – non-recurring