UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

________________________________________________________________________

Form 10-Q

________________________________________________________________________

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

For the quarterly period ended March 31, 2022

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

For the transition period from to

Commission file number 001-36348

________________________________________________________________________

PAYLOCITY HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

________________________________________________________________________

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

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

(847) 463-3200

(Registrant’s telephone number, including area code)

________________________________________________________________________

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	PCTY	The NASDAQ Global Select Market LLC

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

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

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

Large Accelerated Filer	x	Accelerated Filer	o
Non-Accelerated Filer	o	Smaller Reporting Company	o
		Emerging Growth Company	o

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 55,124,761 shares of Common Stock, $0.001 par value per share, as of April 29, 2022.

Paylocity Holding Corporation

Form 10-Q

For the Quarterly Period Ended March 31, 2022

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	20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34
ITEM 4. CONTROLS AND PROCEDURES	35
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	36
ITEM 1A. RISK FACTORS	36
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	36
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	36
ITEM 4. MINE SAFETY DISCLOSURES	36
ITEM 5. OTHER INFORMATION	36
ITEM 6. EXHIBITS	36
SIGNATURES	38

1

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Balance Sheets

(in thousands, except per share data)

	June 30, 2021		March 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	202,287	$	96,465
Corporate investments	4,456		—
Accounts receivable, net	6,267		17,794
Deferred contract costs	44,230		54,735
Prepaid expenses and other	15,966		23,430
Total current assets before funds held for clients	273,206		192,424
Funds held for clients	1,759,677		4,324,567
Total current assets	2,032,883		4,516,991
Capitalized internal-use software, net	45,018		57,713
Property and equipment, net	59,835		64,004
Operating lease right-of-use assets	43,984		50,808
Intangible assets, net	13,027		48,245
Goodwill	33,650		102,183
Long-term deferred contract costs	170,663		209,580
Long-term prepaid expenses and other	4,223		7,910
Deferred income tax assets	11,602		21,804
Total assets	$	2,414,885	$	5,079,238
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,230	$	5,051
Accrued expenses	103,109		108,820
Total current liabilities before client fund obligations	107,339		113,871
Client fund obligations	1,759,677		4,324,567
Total current liabilities	1,867,016		4,438,438
Long-term operating lease liabilities	67,201		71,178
Other long-term liabilities	1,958		2,422
Deferred income tax liabilities	1,780		1,781
Total liabilities	$	1,937,955	$	4,513,819
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 authorized, no shares issued and outstanding at June 30, 2021 and March 31, 2022	$	—	$	—
Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2021 and March 31, 2022; 54,594 shares issued and outstanding at June 30, 2021 and 55,120 shares issued and outstanding at March 31, 2022	55		55
Additional paid-in capital	241,718		256,204
Retained earnings	235,091		310,722
Accumulated other comprehensive income (loss)	66		(1,562)
Total stockholders' equity	$	476,930	$	565,419
Total liabilities and stockholders’ equity	$	2,414,885	$	5,079,238

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 March 31,				Nine Months Ended March 31,
	2021		2022		2021		2022
Revenues:
Recurring and other revenue	$	184,927	$	244,962	$	465,195	$	620,827
Interest income on funds held for clients	1,126		1,008		2,981		2,877
Total revenues	186,053		245,970		468,176		623,704
Cost of revenues	57,326		75,538		160,248		209,608
Gross profit	128,727		170,432		307,928		414,096
Operating expenses:
Sales and marketing	40,055		52,752		115,504		154,856
Research and development	18,458		25,670		56,443		74,024
General and administrative	31,071		44,632		87,038		119,448
Total operating expenses	89,584		123,054		258,985		348,328
Operating income	39,143		47,378		48,943		65,768
Other expense	(207)		(311)		(843)		(800)
Income before income taxes	38,936		47,067		48,100		64,968
Income tax expense (benefit)	2,102		12,221		(10,836)		(10,663)
Net income	$	36,834	$	34,846	$	58,936	$	75,631
Other comprehensive loss, net of tax	(126)		(1,218)		(536)		(1,628)
Comprehensive income	$	36,708	$	33,628	$	58,400	$	74,003
Net income per share:
Basic	$	0.68	$	0.63	$	1.09	$	1.38
Diluted	$	0.65	$	0.62	$	1.05	$	1.34
Weighted-average shares used in computing net income per share:
Basic	54,415		55,114		54,244		54,996
Diluted	56,414		56,367		56,338		56,437

See accompanying notes to unaudited consolidated financial statements.

3

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

(in thousands)

	Three Months Ended March 31, 2021
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	Shares	Amount
Balances at December 31, 2020	54,370	$	54	$	221,525	$	186,374	$	265	$	408,218
Stock-based compensation	—	—		16,663		—		—		16,663
Stock options exercised	104	—		545		—		—		545
Issuance of common stock upon vesting of restricted stock units	14	—		—		—		—		—
Net settlement for taxes and/or exercise price related to equity awards	(37)	—		(7,525)		—		—		(7,525)
Unrealized losses on securities, net of tax	—	—		—		—		(126)		(126)
Net income	—	—		—		36,834		—		36,834
Balances at March 31, 2021	54,451	$	54	$	231,208	$	223,208	$	139	$	454,609

	Three Months Ended March 31, 2022
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Shares	Amount
Balances at December 31, 2021	55,105	$	55	$	231,106	$	275,876	$	(344)	$	506,693
Stock-based compensation	—	—		26,498		—		—		26,498
Stock options exercised	9	—		160		—		—		160
Issuance of common stock upon vesting of restricted stock units	13	—		—		—		—		—
Net settlement for taxes and/or exercise price related to equity awards	(7)	—		(1,560)		—		—		(1,560)
Unrealized losses on securities, net of tax	—	—		—		—		(1,218)		(1,218)
Net income	—	—		—		34,846		—		34,846
Balances at March 31, 2022	55,120	$	55	$	256,204	$	310,722	$	(1,562)	$	565,419

	Nine Months Ended March 31, 2021
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	Shares	Amount
Balances at June 30, 2020	53,792	$	54	$	227,907	$	164,272	$	675	$	392,908
Stock-based compensation	—	—		48,896		—		—		48,896
Stock options exercised	338	—		2,477		—		—		2,477
Issuance of common stock upon vesting of restricted stock units	622	—		—		—		—		—
Issuance of common stock under employee stock purchase plan	60	—		6,100		—		—		6,100
Net settlement for taxes and/or exercise price related to equity awards	(361)	—		(54,172)		—		—		(54,172)
Unrealized losses on securities, net of tax	—	—		—		—		(536)		(536)
Net income	—	—		—		58,936		—		58,936
Balances at March 31, 2021	54,451	$	54	$	231,208	$	223,208	$	139	$	454,609

	Nine Months Ended March 31, 2022
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount
Balances at June 30, 2021	54,594	$	55	$	241,718	$	235,091	$	66	$	476,930
Stock-based compensation	—	—		75,726		—		—		75,726
Stock options exercised	204	—		1,972		—		—		1,972
Issuance of common stock upon vesting of restricted stock units	549	—		—		—		—		—
Issuance of common stock under employee stock purchase plan	53	—		7,216		—		—		7,216
Net settlement for taxes and/or exercise price related to equity awards	(280)	—		(70,428)		—		—		(70,428)
Unrealized losses on securities, net of tax	—	—		—		—		(1,628)		(1,628)
Net income	—	—		—		75,631		—		75,631
Balances at March 31, 2022	55,120	$	55	$	256,204	$	310,722	$	(1,562)	$	565,419

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,
	2021		2022
Cash flows from operating activities:
Net income	$	58,936	$	75,631
Adjustments to reconcile net income to net cash provided by operating activities
Stock-based compensation expense	46,947		70,197
Depreciation and amortization expense	32,070		36,419
Deferred income tax benefit	(10,656)		(10,882)
Provision for credit losses	213		238
Net accretion of discounts and amortization of premiums on available-for-sale securities	315		342
Amortization of debt issuance costs	127		136
Other	545		286
Changes in operating assets and liabilities:
Accounts receivable	(4,495)		(9,654)
Deferred contract costs	(39,621)		(49,205)
Prepaid expenses and other	(2,531)		(9,418)
Accounts payable	1,592		141
Accrued expenses and other	2,318		1,163
Net cash provided by operating activities	85,760		105,394
Cash flows from investing activities:
Purchases of available-for-sale securities	—		(215,538)
Proceeds from sales and maturities of available-for-sale securities	82,488		85,875
Capitalized internal-use software costs	(21,664)		(26,285)
Purchases of property and equipment	(8,155)		(15,355)
Acquisitions of businesses, net of cash acquired	(14,992)		(107,576)
Other investing activities	—		(2,500)
Net cash provided by (used in) investing activities	37,677		(281,379)
Cash flows from financing activities:
Net change in client fund obligations	724,610		2,564,829
Borrowings under credit facility	—		50,000
Repayment of credit facility	(100,000)		(50,000)
Proceeds from exercise of stock options	146		—
Proceeds from employee stock purchase plan	6,100		7,216
Taxes paid related to net share settlement of equity awards	(51,828)		(68,509)
Payment of debt issuance costs	(56)		(64)
Net cash provided by financing activities	578,972		2,503,472
Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents	702,409		2,327,487
Cash, cash equivalents and funds held for clients' cash and cash equivalents—beginning of period	1,492,133		1,945,881
Cash, cash equivalents and funds held for clients' cash and cash equivalents—end of period	$	2,194,542	$	4,273,368
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Purchases of property and equipment, accrued but not paid	$	—	$	1,251
Liabilities assumed for acquisitions	$	281	$	4,470
Supplemental Disclosure of Cash Flow Information
Cash paid for interest	$	820	$	257
Refunds received for income taxes	$	(222)	$	(115)
Reconciliation of cash, cash equivalents and funds held for clients' cash and cash equivalents to the Consolidated Balance Sheets
Cash and cash equivalents	$	175,453	$	96,465
Funds held for clients' cash and cash equivalents	2,019,089		4,176,903
Total cash, cash equivalents and funds held for clients' cash and cash equivalents	$	2,194,542	$	4,273,368

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”) is a cloud-based provider of payroll and human capital management software solutions. 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, comprised of payroll, human capital management, workforce management, talent management, benefits, modern workforce solutions and analytics & insights, delivers a unified platform that allows clients to make strategic decisions while promoting a modern workplace and improving employee engagement.

(2) Summary of Significant Accounting Policies

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

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

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

(b) Interim Unaudited Consolidated Financial Information

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

(c) 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 is based on the annual effective rate method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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

6

(d) Recently Issued Accounting Standards

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

(3) Revenue

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

Disaggregation of revenue

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	2021		2022		2021		2022
Recurring fees	$	178,711	$	236,657	$	448,864	$	599,513
Implementation services and other	6,216		8,305		16,331		21,314
Total revenues from contracts	$	184,927	$	244,962	$	465,195	$	620,827

Deferred revenue

The timing of revenue recognition for recurring revenue is consistent with the timing of invoicing as they occur simultaneously based on the client’s payroll frequency or by month for subscription-based fees. 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:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2021		2022		2021		2022
Balance at beginning of the period	$	7,065	$	9,341	$	8,434	$	8,734
Deferral of revenue	5,821		9,105		11,811		18,865
Revenue recognized	(4,097)		(6,044)		(11,456)		(15,197)
Balance at end of the period	$	8,789	$	12,402	$	8,789	$	12,402

Deferred revenue related to these nonrefundable upfront fees are recorded within Accrued expenses and Other long-term liabilities on the Unaudited Consolidated Balance Sheets. The Company expects to recognize these deferred revenue balances of $4,982 in fiscal 2022, $6,127 in fiscal 2023 and $1,293 in fiscal 2024 and thereafter.

7

Deferred contract costs

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

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

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

	Three Months Ended March 31, 2021
	Beginning Balance		Capitalized Costs		Amortization		Ending Balance
Costs to obtain a new contract	$	125,817	$	17,315	$	(7,390)	$	135,742
Costs to fulfill a contract	55,657		8,872		(2,607)		61,922
Total	$	181,474	$	26,187	$	(9,997)	$	197,664

	Three Months Ended March 31, 2022
	Beginning Balance		Capitalized Costs		Amortization		Ending Balance
Costs to obtain a new contract	$	155,564	$	22,256	$	(9,182)	$	168,638
Costs to fulfill a contract	86,115		13,825		(4,263)		95,677
Total	$	241,679	$	36,081	$	(13,445)	$	264,315

	Nine Months Ended March 31, 2021
	Beginning Balance		Capitalized Costs		Amortization		Ending Balance
Costs to obtain a new contract	$	113,575	$	43,026	$	(20,859)	$	135,742
Costs to fulfill a contract	44,468		24,376		(6,922)		61,922
Total	$	158,043	$	67,402	$	(27,781)	$	197,664

	Nine Months Ended March 31, 2022
	Beginning Balance		Capitalized Costs		Amortization		Ending Balance
Costs to obtain a new contract	$	145,718	$	48,922	$	(26,002)	$	168,638
Costs to fulfill a contract	69,175		37,865		(11,363)		95,677
Total	$	214,893	$	86,787	$	(37,365)	$	264,315

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

8

Remaining Performance Obligations

The balance of the Company’s remaining performance obligations related to minimum monthly fees on its term-based contracts was approximately $49,698 as of March 31, 2022, which will be generally recognized over the next 24 months. This balance excludes the value of unsatisfied performance obligations for contracts that have an original expected duration of one year or less and contracts for which the variable consideration is allocated entirely to wholly unsatisfied performance obligations.

4) Business Combinations

On August 31, 2021, the Company entered into an Equity Purchase Agreement (the “Purchase Agreement”) with Blue Marble Payroll, LLC (“Blue Marble”) and its equity holders and acquired all of the issued and outstanding equity interests of Blue Marble for cash consideration of $60,961, subject to customary purchase price adjustments. Blue Marble’s payroll platform enables U.S.-based companies to manage payroll for employees outside the U.S. in line with complex local and country-specific requirements across many countries. This acquisition enables the Company to better serve its clients in managing their international workforces through a unified solution to pay employees, automate processes and stay compliant with regulations in other countries.

An entity affiliated with Steven I. Sarowitz, the Chairman of the board of directors and the largest shareholder of the Company, was the largest equity holder of Blue Marble. The board of directors of the Company appointed the Audit Committee, which is comprised solely of directors who are independent of the management of Blue Marble, the Blue Marble equity holders and the Company, to evaluate, assess and negotiate on its behalf the terms and conditions in the Purchase Agreement. The Audit Committee and the disinterested directors of the Company’s board of directors unanimously approved the Purchase Agreement and transactions specified within it.

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

	August 31, 2021
Proprietary technology	$	21,200
Client relationships	3,000
Trade names	1,200
Goodwill	34,776
Other assets acquired	2,659
Liabilities assumed	(1,874)
Total purchase price	$	60,961

On January 18, 2022, the Company acquired all of the shares outstanding of Cloudsnap, Inc., ("Cloudsnap") through a merger for cash consideration of $50,002, which was paid upon closing. Cloudsnap is a provider of a flexible, low-code solution for integrating disparate business applications. This transaction enables the Company to deliver modern integrations and seamless data sharing between critical systems more efficiently and effectively, while helping to unify and automate business processes across clients' HR, finance, benefits, and other systems.

The preliminary allocation of the purchase price for Cloudsnap is as follows:

	January 18, 2022
Proprietary technology	$	15,800
Goodwill	33,757
Other assets acquired	3,041
Liabilities assumed	(2,596)
Total purchase price	$	50,002

The Company accounts for business combinations in accordance with ASC 805, Business Combinations. The Company applied the acquisition method of accounting and recorded the assets acquired and liabilities assumed at their respective estimated fair values as of the dates of the acquisitions with the excess consideration paid recorded as goodwill. The fair values of assets acquired and liabilities assumed are currently provisional and are subject to change over the

9

measurement periods as the Company continues to evaluate and analyze the estimates and assumptions used in the valuation. The measurement periods will end no later than one year from the respective acquisition dates.

The results from these acquisitions have been included in the Company’s consolidated financial statements since the closing of the acquisitions and are not material to the Company. Pro forma information is not presented because the effects of the acquisitions are not material to the Company’s consolidated financial statements. The goodwill related to these transactions is primarily attributable to the assembled workforce and growth opportunities from the expansion and enhancement of the Company’s product offerings. The goodwill associated with the Blue Marble acquisition is deductible for income tax purposes. The goodwill associated with the Cloudsnap acquisition is not deductible for income tax purposes. Direct costs related to the acquisitions were immaterial and were expensed as incurred as General and administrative in the Unaudited Consolidated Statements of Operations and Comprehensive Income.

(5) Balance Sheet Information

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

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

Balance at June 30, 2021	$	800
Charged to expense	238
Write-offs	(183)
Balance at March 31, 2022	$	855

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

	June 30, 2021		March 31, 2022
Capitalized internal-use software	$	150,922	$	182,140
Accumulated amortization	(105,904)		(124,427)
Capitalized internal-use software, net	$	45,018	$	57,713

Amortization of capitalized internal-use software costs is included in Cost of revenues and amounted to $6,005 and $6,308 for the three months ended March 31, 2021 and 2022, respectively, and $17,273 and $18,523 for the nine months ended March 31, 2021 and 2022, respectively.

Property and equipment, net consist of the following:

	June 30, 2021		March 31, 2022
Office equipment	$	5,211	$	4,365
Computer equipment	45,420		54,172
Furniture and fixtures	13,104		12,791
Software	6,641		8,278
Leasehold improvements	46,814		47,255
Time clocks rented by clients	5,399		6,423
Total	122,589		133,284
Accumulated depreciation	(62,754)		(69,280)
Property and equipment, net	$	59,835	$	64,004

Depreciation expense amounted to $3,966 and $4,098 for the three months ended March 31, 2021 and 2022, respectively, and $11,985 and $11,914 for the nine months ended March 31, 2021 and 2022, respectively.

10

The following table summarizes changes in goodwill during the nine months ended March 31, 2022:

	March 31, 2022
Balance at June 30, 2021	$	33,650
Additions attributable to acquisitions	68,533
Balance at March 31, 2022	$	102,183

Refer to Note 4 for further details on current year acquisitions.

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

	June 30, 2021		March 31, 2022		Weighted average useful life (years)
Proprietary technology	$	6,129	$	43,129	6.0
Client relationships	19,200		22,200		7.8
Non-solicitation agreements	1,600		1,600		3.1
Trade names	440		1,640		5.0
Total	27,369		68,569
Accumulated amortization	(14,342)		(20,324)
Intangible assets, net	$	13,027	$	48,245

Amortization expense for acquired intangible assets was $1,028 and $2,630 for the three months ended March 31, 2021 and 2022, respectively, and $2,812 and $5,982 for the nine months ended March 31, 2021 and 2022, respectively.

Future amortization expense for acquired intangible assets as of March 31, 2022 is as follows:

Remainder of fiscal 2022	$	2,770
Fiscal 2023	10,948
Fiscal 2024	9,943
Fiscal 2025	8,888
Fiscal 2026	7,269
Thereafter	8,427
Total	$	48,245

The components of accrued expenses were as follows:

	June 30, 2021		March 31, 2022
Accrued payroll and personnel costs	$	73,969	$	67,965
Operating lease liabilities	7,549		8,270
Deferred revenue	9,442		14,326
Other	12,149		18,259
Total accrued expenses	$	103,109	$	108,820

11

(6) Corporate Investments and Funds Held for Clients

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

	June 30, 2021
Type of Issue	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Cash and cash equivalents	$	202,287	$	—	$	—	$	202,287
Funds held for clients' cash and cash equivalents	1,743,594		—		—		1,743,594
Available-for-sale securities:
Corporate bonds	13,390		70		—		13,460
Asset-backed securities	7,062		17		—		7,079
Total available-for-sale securities (1)	20,452		87		—		20,539
Total investments	$	1,966,333	$	87	$	—	$	1,966,420

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

	March 31, 2022
Type of Issue	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Cash and cash equivalents	$	96,465	$	—	$	—	$	96,465
Funds held for clients' cash and cash equivalents	4,176,903		—		—		4,176,903
Available-for-sale securities:
Commercial paper	49,440		—		(113)		49,327
Corporate bonds	54,607		1		(1,289)		53,319
Asset-backed securities	8,082		—		(135)		7,947
Certificates of deposit	23,785		—		(50)		23,735
U.S treasury securities	4,036		—		(90)		3,946
U.S government agency securities	7,000		—		(372)		6,628
Other	2,823		—		(61)		2,762
Total available-for-sale securities (2)	149,773		1		(2,110)		147,664
Total investments	$	4,423,141	$	1	$	(2,110)	$	4,421,032

(2) All available-for-sale securities are included in funds held for clients.

Cash and cash equivalents and funds held for clients’ cash and cash equivalents include demand deposit accounts and money market funds at June 30, 2021 and March 31, 2022.

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

	June 30, 2021		March 31, 2022
Cash and cash equivalents	$	202,287	$	96,465
Corporate investments	4,456		—
Funds held for clients	1,759,677		4,324,567
Total investments	$	1,966,420	$	4,421,032

12

Available-for-sale securities that have been in an unrealized loss position for a period of less than 12 months as of March 31, 2022 had fair market value as follows:

	March 31, 2022
	Securities in an unrealized loss position for less than 12 months
	Gross unrealized losses		Fair Value
Commercial paper	$	(113)	$	49,327
Corporate bonds	(1,289)		51,909
Asset-backed securities	(135)		7,826
Certificates of deposit	(50)		22,734
U.S. treasury securities	(90)		3,946
U.S. government agency securities	(372)		6,628
Other	(61)		2,762
Total available-for-sale securities	$	(2,110)	$	145,132

There were no available-for-sale securities in an unrealized loss position at June 30, 2021. As a result, no securities have been in an unrealized loss position for more than 12 months as of March 31, 2022.

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

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

Expected maturities of available-for-sale securities at March 31, 2022 are as follows:

	Amortized cost		Fair value
One year or less	$	98,775	$	98,392
One year to two years	26,988		26,369
Two years to three years	20,000		19,138
Three years to five years	4,010		3,765
Total available-for-sale securities	$	149,773	$	147,664

(7) Fair Value Measurement

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

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

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

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

13

The Company measures certain cash and cash equivalents, accounts receivable, accounts payable and client fund obligations at fair value on a recurring basis using Level 1 inputs. The Company considers the recorded value of these financial assets and liabilities to approximate the fair value of the respective assets and liabilities at June 30, 2021 and March 31, 2022 based upon the short-term nature of these assets and liabilities.

Marketable securities, consisting of securities classified as available-for-sale as well as certain cash equivalents, are recorded at fair value on a recurring basis using Level 2 inputs obtained from an independent pricing service. Available-for-sale securities include commercial paper, corporate bonds, asset-backed securities, certificate of deposit, U.S. treasury securities, U.S. government agency and other securities. The independent pricing service utilizes a variety of inputs including benchmark yields, broker/dealer quoted prices, reported trades, issuer spreads as well as other available market data. The Company, on a sample basis, validates the pricing from the independent pricing service against another third-party pricing source for reasonableness. The Company has not adjusted any prices obtained by the independent pricing service, as it believes they are appropriately valued. There were no available-for-sale securities classified in Level 3 of the fair value hierarchy at June 30, 2021 or March 31, 2022.

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

	June 30, 2021
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	202,287	$	202,287	$	—	$	—
Funds held for clients' cash and cash equivalents	1,743,594		1,743,594		—		—
Available-for-sale securities:
Corporate bonds	13,460		—		13,460		—
Asset-backed securities	7,079		—		7,079		—
Total available-for-sale securities	20,539		—		20,539		—
Total investments	$	1,966,420	$	1,945,881	$	20,539	$