S-1/A 1 d68712ds1a.htm S-1/A S-1/A
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Registration No. 333-255498

As filed with the Securities and Exchange Commission on July 12, 2021

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2 to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Paycor HCM, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7372   83-1813909
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
 

(I.R.S. Employer

Identification No.)

4811 Montgomery Road

Cincinnati, Ohio 45212

Telephone: (800) 381-0053

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Raul Villar Jr.

Chief Executive Officer

4811 Montgomery Road

Cincinnati, Ohio 45212

(800) 381-0053

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Robert M. Hayward, P.C.

Robert E. Goedert, P.C.

Kevin M. Frank
Kirkland & Ellis LLP
300 North LaSalle
Chicago, Illinois 60654
(312) 862-2000

 

Arthur D. Robinson, Esq.

Xiaohui (Hui) Lin, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, NY 10017

(212) 455-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ☐

If this Form is filed to registered additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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      Accelerated Filer  
Non-accelerated filer      Smaller Reporting Company  
     Emerging Growth Company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Amount to be
Registered(1)
  Proposed Maximum
Offering Price Per
Share(2)
 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee(3)

Common Stock, par value $0.001 per share

  21,275,000   $21.00   $446,775,000   $48,743.15

 

 

(1)

Includes shares of common stock subject to the underwriters’ option to purchase additional shares.

(2)

Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

(3)

The registrant previously paid a registration fee of $10,910 in relation to its filing of its initial Registration Statement on Form S-1 (No. 333-255498) on April 26, 2021. The registrant has paid the remaining registration fee of $37,833.15 herewith.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated July 12, 2021

18,500,000 Shares

 

 

LOGO

Common Stock

 

 

This is an initial public offering of shares of common stock of Paycor HCM, Inc. We are offering 18,500,000 shares of our common stock.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $18.00 and $21.00. We have applied to list our common stock on The Nasdaq Global Select Market under the symbol “PYCR.”

One or more entities affiliated with, advised by or that serve as investment adviser to certain investors in our Series A preferred stock, (i) Neuberger Berman Investment Advisers LLC (“Neuberger”), (ii) ClearBridge Investments, LLC (“ClearBridge”) and (iii) Franklin Templeton, have indicated a non-binding interest in purchasing up to an aggregate of $75 million, $50 million and $25 million, respectively, of shares of our common stock being offered in this offering at the initial public offering price. Because none of these indications of interest are an agreement or commitment by such entities to purchase shares, one or more of these entities may ultimately choose to purchase more, less or no shares in this offering. The underwriters will receive the same discount with respect to any of our shares of common stock purchased by one or more funds affiliated with or advised by Neuberger, ClearBridge and/or Franklin Templeton as they will from any other shares of common stock sold to the public in this offering.

We are an “emerging growth company” as defined under the federal securities laws, and as such, we have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 25 to read about factors you should consider before buying shares of our common stock.

Immediately after this offering, assuming an offering size as set forth above, funds controlled by our equity sponsor, Apax Partners L.P., will beneficially own approximately 82.4% of our outstanding common stock (or 81.1% of our outstanding common stock if the underwriters’ option to purchase additional shares is exercised in full). As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. See “Management—Corporate Governance—Controlled Company Status.”

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per
Share
     Total  

Initial public offering price

   $                    $                

Underwriting discount(1)

   $        $    

Proceeds, before expenses, to Paycor HCM, Inc.

   $        $    

 

(1)

See “Underwriting” for a description of compensation payable to the underwriters.

We have granted the underwriters an option for a period of 30 days after the date of this prospectus to purchase up to an additional 2,775,000 shares of common stock from us at the initial public offering price less the underwriting discounts and commissions.

The underwriters expect to deliver the shares of common stock against payment in New York, New York on                 , 2021.

(Lead bookrunners listed in alphabetical order)

 

Goldman Sachs & Co. LLC   J.P. Morgan
Jefferies    Credit Suisse    Deutsche Bank Securities
Baird
  Cowen
    JMP Securities
      Needham & Company
        Raymond James
          Stifel
            Truist Securities

Fifth Third Securities

  Roberts & Ryan

 

 

Prospectus dated                , 2021


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LOGO

Paycor


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LOGO

Paycor
Empowers leaders to
Develop Winning Teams


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LOGO

Paycor
HCM Software Built for Leaders
EMPLOYEE EXPERIENCE Employee Engagement LEARNING MANAGEMENT EMPLOYEE SURVEYS
TALENT MANAGEMENT Talent Management RECRUITING PERFORMANCE MANAGEMENT GOALS AND OKRS 1_ON_1 COACHING COMPENSATION MANAGEMENT
BENEFITS ADMINISTRATION Benefits Administration BENEFITS PLAN SELECTION
WORKFORCE MANAGEMENT Workforce Management SCHEDULING TIME AND LABOR MANAGEMENT
HCM Cor for Leaders ONBOARDING . HR . PAYROLL RECOGNITION . MOBILE . ACA REPORTING . ANALYTICS


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PROSPECTUS SUMMARY

     1  

RISK FACTORS

     25  

FORWARD-LOOKING STATEMENTS

     59  

USE OF PROCEEDS

     61  

DIVIDEND POLICY

     62  

CAPITALIZATION

     63  

DILUTION

     65  

SELECTED CONSOLIDATED FINANCIAL DATA

     67  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     70  

BUSINESS

     103  

MANAGEMENT

     118  

EXECUTIVE COMPENSATION

     125  

PRINCIPAL SHAREHOLDERS

     137  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     139  

DESCRIPTION OF CERTAIN INDEBTEDNESS AND OTHER OBLIGATIONS

     142  

DESCRIPTION OF CAPITAL STOCK

     145  

SHARES ELIGIBLE FOR FUTURE SALE

     152  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     155  

UNDERWRITING

     160  

LEGAL MATTERS

     168  

EXPERTS

     168  

WHERE YOU CAN FIND MORE INFORMATION

     168  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide you. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.

For investors outside of the United States, neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about, and to observe any restrictions relating to, this offering and the distribution of this prospectus outside of the United States.

Through and including                , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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Basis of Presentation

Our fiscal year ends on June 30. Unless otherwise noted, any reference to a year preceded by the word “fiscal” refers to the fiscal year ended June 30 of that year. For example, references to “fiscal 2020” refer to the fiscal year ended June 30, 2020. Any reference to a year not preceded by “fiscal” refers to a calendar year.

Paycor HCM, Inc., a Delaware corporation (“Paycor HCM”), was incorporated in August 2018 to serve as a holding company in connection with Apax Partners’ (as defined below) acquisition of the Company (the “Apax Acquisition”). As Paycor HCM did not have any previous operations, Paycor, Inc., a Delaware corporation (“Predecessor Paycor”), is viewed as the predecessor to Paycor HCM and its consolidated subsidiaries. Accordingly, this prospectus includes certain historical consolidated financial and other data for Predecessor Paycor for periods prior to the completion of the Apax Acquisition. The Apax Acquisition closed on November 2, 2018. The financial information for the period after November 2, 2018, represents the consolidated financial information of Paycor HCM and its subsidiaries, including Predecessor Paycor, which is referred to as the “Successor” company. Prior to November 2, 2018, the consolidated financial statements include the accounts of Predecessor Paycor and its subsidiaries, which is referred to herein as the “Predecessor” company. References to the “Successor 2019 Period” refer to the period from November 2, 2018 through June 30, 2019, following the Apax Acquisition. References to the “Predecessor 2019 Period” refer to the period from July 1, 2018 through November 1, 2018, prior to the Apax Acquisition.

As a result of the Apax Acquisition, which is discussed further in Note 4 to our audited consolidated financial statements included herein, Paycor HCM was determined to be the accounting acquirer and Predecessor Paycor’s historical assets and liabilities are reflected at fair value as of November 2, 2018, the closing date of the Apax Acquisition.

As a result of the Apax Acquisition, the results of operations and financial position of the Predecessor and Successor are not directly comparable.

In connection with the completion of this offering, we will effect a 1,517.18-for-1 stock split with respect to our common stock and holders of the Series A preferred stock have agreed that all shares of our Series A preferred stock will automatically convert into shares of our common stock on a 1-for-1 basis. We refer to these actions as the “Reorganization Transactions.” In this prospectus, we include certain metrics on an “as adjusted” basis to give effect to the Reorganization Transactions.

As used throughout this prospectus, the following terms have the meanings as set forth below:

 

   

“We,” “us,” “our,” “the Company,” “Paycor,and similar references refer to Paycor HCM, Inc., and unless otherwise stated, all of its subsidiaries.

 

   

“Apax Partners,” “Apax,” or “our Sponsor” refers to Apax Partners L.P., a global private equity firm, collectively, with its affiliates.

 

   

“LTV/CAC” refers to the Company’s lifetime value to customer acquisition cost ratio, which is calculated as (i) total recurring bookings multiplied by adjusted gross margin excluding interest income and depreciation and amortization and divided by one minus the gross revenue retention in a given period, and (ii) divided by the sum of gross sales and marketing and implementation expense before capitalization and amortization, less one-time implementation bookings in the same period.

 

   

Metropolitan statistical areas” refers to the metropolitan statistical areas delineated by the United States Office of Management and Budget as in effect as of the date of this prospectus.

 

   

“Net revenue retention” refers to the current quarterly period recurring revenue for the cohort of customers at the beginning of the prior year quarterly period, divided by the recurring revenue in the prior year reporting period for that same cohort. In calculating the net revenue retention for a period longer than a quarter, such as a fiscal year, we use the weighted average of the retention rates (calculated in accordance with the preceding sentence) for each applicable quarter included in such period.

 

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Pride Aggregator” refers to Pride Aggregator, L.P., the parent of Paycor HCM, Inc.

 

   

Pride Midco” refers to Pride Midco Inc., a direct subsidiary of Paycor HCM, Inc.

 

   

“Recurring revenue” refers to, with respect to any period, all recurring service revenues attributable to payroll, workforce management, and HR-related cloud-based computing services.

 

   

“Tier 1 markets” refers to the 15 most populous metropolitan statistical areas in the United States.

 

   

“Tier 2 markets” refers to the 15 most populous metropolitan statistical areas in the United States other than Tier 1 markets.

 

   

“Tier 3 markets” refers to the 20 most populous metropolitan statistical areas in the United States other than Tier 1 markets and Tier 2 markets.

 

   

Total bookings” with respect to any period is defined as the aggregate year-one values of all new customer contracts acquired during such period, including new sales to existing clients. Total bookings includes both recurring fees and implementation services.

Certain amounts, percentages, and other figures presented in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals, dollars, or percentage amounts of changes may not represent the arithmetic summation or calculation of the figures that precede them.

Market and Industry Data

Unless otherwise indicated, information in this prospectus concerning economic conditions, our industry, our markets, and our competitive position is based on a variety of sources, including information from independent industry analysts and publications, as well as our own estimates and research. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the information presented in this prospectus is generally reliable, forecasts, assumptions, expectations, beliefs, estimates, and projections involve risk and uncertainties and are subject to change based on various factors, including those described under “Forward-Looking Statements” and “Risk Factors.”

Trademarks, Service Marks, and Trade Names

We own or have rights to use various trademarks, service marks, and trade names that we use in connection with the operation of our business. We use our “Paycor” trademark and related design marks in this prospectus. This prospectus may also contain trademarks, service marks, and trade names of third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names, or products in this prospectus is not intended to, and does not imply a relationship with, or endorsement or sponsorship by us. Solely for convenience, the trademarks, service marks, and trade names referred to in this prospectus may appear without the ®, TM, or SM symbols, but the omission of such references is not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable owner of these trademarks, service marks, and trade names.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. For a more complete understanding of us and this offering, you should read and carefully consider the entire prospectus, including the more detailed information set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes. Some of the statements in this prospectus are forward-looking statements. See “Forward-Looking Statements.”

Unless the context otherwise requires, the terms “Paycor,” the “Company,” “our company,” “we,” “us,” and “our” in this prospectus refer to Paycor HCM, Inc. and, where appropriate, its consolidated subsidiaries. The term “Apax Partners” or “our Sponsor” refers to Apax Partners L.P., a global private equity firm, collectively, with its affiliates.

Mission

Paycor empowers leaders to develop winning teams.

Overview

Paycor is a leading Software-as-a-Service provider of human capital management solutions for small and medium-sized businesses. Our unified, cloud-native platform is built to empower business leaders by producing actionable, real-time insights to drive workforce optimization. Our comprehensive suite of solutions enables organizations to streamline human capital management (“HCM”) and payroll workflows and achieve regulatory compliance while serving as the single, secure system of record for all employee data. Our highly flexible, scalable, and extensible platform offers award-winning ease-of-use with an intuitive user experience and deep third-party integrations, all augmented by industry-specific domain expertise. Over 28,000 customers across all 50 states trust Paycor to help their leaders develop winning teams.

People management has evolved significantly over the last 30 years from an administrative, payroll-centric cost center to a highly strategic function focused on talent management and employee engagement. To be competitive in today’s environment, organizations are increasingly reliant on this function as they seek to leverage people analytics to identify trends and track performance across their workforce. However, most existing HCM solutions lack the comprehensive functionality, ease-of-use, and integration capabilities needed to facilitate effective people management. These limitations are particularly problematic for small and medium sized businesses (“SMBs”) which often lack the technical, financial, and people resources of larger organizations.

Our unified, cloud-native platform is purpose-built to provide business leaders with the tools they need to optimize all aspects of people management, including:

 

   

Core HCM and Payroll. A powerful calculation engine that enables real-time changes to drive fast and accurate payroll processing. Robust workflows and approval capabilities assist leaders with expediting and automating their most common tasks.

 

   

Workforce Management. Flexible time entry, overtime calculations, and scheduling capabilities with real-time payroll synchronization allowing leaders to manage costs and increase productivity.


 

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Benefits Administration. Advanced decision support to help leaders streamline and optimize their company’s benefits administration and spend with superior carrier connectivity and the ability to setup complex plans.

 

   

Talent Management. Integrated compensation and performance management capabilities, including advanced goal management paired with employee-manager one-on-ones, empowering leaders to drive employee professional growth and corporate alignment.

 

   

Employee Engagement. Interactive learning tools and AI-powered surveys that use natural language processing to surface actionable, easy-to-understand insights from feedback allowing leaders to solve issues like turnover and low morale.

Our easy-to-use platform incorporates intuitive analytics functionality, enabling SMBs to automate and simplify mission-critical people management processes and enhance visibility into their business operations. Our platform is architected for extensibility and features an open API led interoperability engine that allows customers to easily connect their people data with third-party applications to create a seamlessly integrated digital ecosystem. Our products are supported by a differentiated implementation process and vibrant community of users, which together ensure customers can take full advantage of our platform.

We market and sell our solutions through direct sales teams, leveraging our strong demand generation engine and broker partnerships. Our highly efficient and multi-pronged go-to-market strategy is a key driver of our growth, which is evidenced by our LTV/CAC of 5.0x for the nine months ended March 31, 2021 and 3.8x as of the twelve months ending June 30, 2020. We primarily target companies with 10 to 1,000 employees, with this segment of the SMB market accounting for 81% of our recurring billing for the fiscal year ended June 30, 2020. For this ‘target segment’ of our customer base the LTV/CAC was 5.6x for the nine months ended March 31, 2021. We intend to grow our customer base by accelerating the expansion of our sales coverage and broker networks in both new and existing markets, with a focus on Tier 1 markets where we see substantial opportunity. We also intend to grow our customer base through our industry focused product and go-to-market strategy. We market our products via a bundled pricing strategy where we charge customers on a per-employee-per-month (“PEPM”) or per-employee-per-payroll basis and have demonstrated success at driving growth through the expansion of our Core HCM and Payroll product bundle. We intend to continue to expand our product suite and further cross-sell products into our existing customer base.

During the nine months ended March 31, 2021 and 2020, our revenues were $264.8 million and $254.5 million, respectively, representing year-over-year growth of 4%. During the nine months ended March 31, 2021 and 2020, our recurring and other revenues were $263.4 million and $245.4 million, respectively, representing 99% and 96% of our total revenue, respectively. During the nine months ended March 31, 2021 and 2020, we generated net losses of $46.2 million and $47.2 million, respectively, and losses from operations of $57.0 million and $64.8 million, respectively, representing operating margins of (21.5)% and (25.5)%, respectively. During the nine months ended March 31, 2021 and 2020, we generated Adjusted Operating Income of $47.8 million and $34.9 million, respectively, representing margins of 18.0% and 13.7%, respectively. See the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” section for additional information on our non-GAAP metrics.

During the fiscal year ended June 30, 2020, the Successor 2019 Period, and the Predecessor 2019 Period, our revenues were $327.9 million, $201.9 million, and $89.6 million, respectively, representing year-over-year growth in revenues of 13%. During the fiscal year ended June 30, 2020, the Successor 2019 Period, and the Predecessor 2019 Period, our recurring and other revenues were $317.6 million, $191.9 million, and $86.3 million, respectively, representing 97%, 95%, and 96% of our total revenue, respectively. During the fiscal year ended June 30, 2020, the Successor 2019 Period, and the Predecessor 2019 Period, we generated net losses of $67.3 million, $72.8 million, and $14.9 million, respectively, and losses from operations of $94.7 million,


 

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$88.7 million and $16.6 million, respectively, representing operating margins of (28.9)%, (43.9)% and (18.5)%, respectively. During the fiscal year ended June 30, 2020, the Successor 2019 Period, and the Predecessor 2019 Period, we generated Adjusted Operating Income of $46.3 million, $36.9 million, and $5.0 million, respectively, representing margins of 14.1%, 18.3%, and 5.6%, respectively. See the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” section for additional information on our non-GAAP metrics.

Industry Background

Human capital management is an evolving necessity for organizations, with several key trends that have shaped today’s environment.

The Evolution of People Management

Over the last 30 years, the demands of business leaders, employees, and people management strategies have significantly evolved in response to shifting demographics, employee expectations, and technological capabilities. As a result, the importance of people management has been elevated from a payroll-centric cost center to a highly strategic function focused on talent management as a critical component of business competitiveness. The COVID-19 pandemic has further reinforced this strategic shift. The HR function has been pivotal as companies strive to maintain morale and productivity for remote workforces. Considering these evolving demands, HCM technology has been forced to transform to replace manual processes with strategic platforms that surface business insights, enabling leaders to make data-driven decisions.

In the late 2000s, the emergence of Software-as-a-Service (“SaaS”) brought about two key developments: HCM solutions shifting to focus on digitizing old processes and organizations increasingly using point solutions. This led to more system fragmentation, an overcomplicated user experience, and increased total costs. At the same time, the separation between work and life began to blur, driving an increased need for employee engagement tools.

To address this lack of engagement, many HCM solution providers targeted their product development efforts at enhancing the employee experience. Such providers did this by developing employee portals to drive engagement, similar to social media platforms, but found that employees were not seeking this from their employers. Other unsuccessful attempts to drive engagement included adding gamification attributes to influence behavior, such as encouraging employees to complete compliance training. These product features overlooked the importance of business leaders as the primary users of HCM platforms and as the people most influential in achieving positive employee engagement.

Complex Regulatory Environment

The ever-evolving regulatory landscape continues to place a burden on small businesses. As a result, businesses continue to demand HCM platforms that enable them to maintain a robust compliance framework and abstract the complexity of regulatory changes, such as responding to special employee leave provisions.

Growing Importance of People Analytics

In recent years, businesses have begun to appreciate the value they could derive from stronger data analytics capabilities. SMB leaders are increasingly willing to invest in data-driven decision-making tools to improve their business performance. An IDC survey found that analyzing data and employee engagement had the highest level of third-party investment. In addition, a survey by Gartner showed that 64% of participants ranked improvement of reporting quality and people analytics as their main HR objective when evaluating HCM solutions. SMBs have


 

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a particular need for all-in-one solutions considering their unique capacity constraints, such as single person HR departments and limited in-house legal and IT support.

Unique Needs of SMBs

SMBs demand solutions that have the following key characteristics:

 

   

Ease of Implementation. The ability to get mission critical solutions up and running seamlessly and successfully without overburdening company resources.

 

   

Ease of Use. Intuitive design and simple workflows for leaders and their teams.

 

   

Full Suite of Solutions. Fully integrated platform to serve as a single system of record for all HCM functions with built-in critical capabilities such as compliance, mobility, analytics, and security.

 

   

Highly Scalable Cloud-based Platform. Flexible solutions built to meet the needs of organizations as they grow in size and complexity.

 

   

Industry-specific Focus. Solutions, integrations, and support tailored to unique industry needs.

Limitations of Existing Solutions

The vast majority of SMBs still rely on legacy solutions to fulfill their HCM technology requirements. These offerings are typically provided by national and regional payroll service bureaus or in-house solutions built on top of generic enterprise resource planning (“ERP”) systems. In addition to these legacy solutions, advancements in cloud technology have led to the emergence of other competing SaaS-based HCM offerings. Both legacy and other competing SaaS offerings possess significant limitations in addressing the full HCM needs of SMBs. These limitations include:

 

   

Incomplete HCM Solutions Lacking in Product Breadth and Depth. Many existing HCM platforms offer incomplete product suites that deliver only a portion of the capabilities required by SMBs or offer ‘full suites’ comprised of products with limited functionality, forcing SMBs to use multiple products from multiple vendors or continue to manage processes manually outside of their HCM solution.

 

   

Lack a Unified Approach. Many existing HCM ‘suites’ are comprised of a patchwork of stand-alone applications with limited integration. As a result, SMBs are forced to rely on manual, redundant, and error-prone processes to manage and track employee data, which can often lead to untimely payroll, poor employee engagement, and significant compliance issues.

 

   

Difficult to Integrate with Third-Party Systems. Most existing HCM solutions are built on inflexible, closed technology architectures, and are not designed to communicate with external applications. This inhibits organizations’ ability to establish flexible digital ecosystems capable of addressing the evolving needs of a growing business.

 

   

Lack Robust Analytics Capabilities. Existing SMB solutions lack tools which are both sophisticated and easy-to-use to access, aggregate, analyze, and act on employee data in real-time. As a result, SMBs are unable to efficiently derive actionable workforce insights and make critical, informed decisions to improve the way they hire, manage, and develop people.

 

   

‘One Size Fits All’ Approach. Certain industry verticals have unique people management requirements. Most existing HCM solutions provide generic out-of-the-box functionality and limited configurability, with professional service teams that often lack vertical expertise. As a result, SMBs struggle to address evolving industry-specific people management needs and reporting requirements with existing HCM solutions.


 

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Difficult to Use. Many existing solutions have arcane, inflexible user interfaces that lack the intuitive, consumer-like feel of modern SaaS applications. These solutions are often difficult for both employees and leaders to use effectively without significant training. As a result, people leaders are often forced to revert to time-consuming manual processes to execute simple HR tasks and assist with tedious employee troubleshooting.

 

   

Not Designed for Business Leaders. Many existing HCM solutions were built with engagement functionality specifically designed for employees, not business leaders who have the most influence over employee engagement. These solutions often lack the end-to-end functionality and powerful analytics required by business leaders for effective people management.

Our Solution and Key Strengths

We offer a unified, cloud-native platform, purpose-built to address the comprehensive people management needs of SMB leaders. Our intuitive, easy-to-use platform enables SMBs to easily automate and simplify the most mission-critical people management processes and enhance visibility into organizations’ human capital to drive employee engagement and data-driven decisions. The key strengths of our platform include:

 

   

Comprehensive Suite of HCM Solutions Architected to Meet the Full Range of an SMB’s Needs. Our comprehensive HCM suite delivers industry-leading functionality. This empowers business leaders to achieve strategic goals through differentiated people management. The key components of our HCM solutions include Core HCM and Payroll, Workforce Management, Benefits Administration, Talent Management, and Employee Engagement.

 

   

Uniquely Unified Platform Enabling Differentiated Analytics. Our platform leverages a modern cloud architecture and robust API led interoperability engine. We deliver a unified user and data experience that serves as the single source of truth for our customers’ employee data. Our platform allows for seamless access to people data across applications and the visibility to extract meaningful business insights from employee information in real-time. This unified data architecture automates error-prone manual processes, empowering business leaders to shift their focus to strategic initiatives that drive long term business value.

 

   

Open, Cloud-native Architecture Enables Differentiated Platform Extensibility. Our SaaS platform is flexible, scalable, and extensible, allowing us to continuously expand the breadth and depth of our product suite without compromising the unified user experience for both employers and employees. Our single instance, multitenant deployment enables us to deliver frequent, silent updates to maintain a consistent user experience on the latest version of our software. The extensibility of our platform allows for easy integrations to various technologies both within and outside of the HCM ecosystem, such as connections to benefits platforms to support our broker partnerships and integrations to industry-specific ERP systems.

 

   

Industry-specific Functionality and Expertise. We provide SMBs with a combination of industry-specific product configurations, pre-built integrations with sought-after third-party solutions, and served by professionals with industry-specific training. Our HCM platform is configurable and flexibly designed to address a broad cross-section of vertical-specific use cases. Our solutions are supported by a proprietary implementation program and vibrant community of users, which together ensure customers can take full advantage of our industry-specific functionality.

 

   

Powerful Analytics to Deliver Actionable Insights. We enable real-time visibility into an organization’s people data through a comprehensive set of out-of-the-box analytics capabilities. Our powerful analytics allow SMBs to cost-effectively transform data into trends and predictions to benchmark, understand, and easily report on their workforce. With predictive analytics and robust


 

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benchmarking tools, our platform enables SMBs to make strategic, data-driven decisions to improve recruiting, labor cost management, employee performance, diversity and inclusion, and employee retention.

 

   

Designed for Business Leaders. Effective business leadership is critical to maximizing employee engagement and successful business performance. Our platform is purpose-built to provide business leaders with the tools they need to optimize every aspect of people management. With our end-to-end HCM functionality and deep analytics capabilities, business leaders can streamline people management functions, surface actionable insights, facilitate successful hiring, meaningfully engage their employees, and focus people management on strategic initiatives that drive business value.

Our Market Opportunity

We estimate our current annual recurring market opportunity is $26 billion in the U.S. and we expect the opportunity to grow as the number of SMBs increases and we continue to expand our product portfolio. To estimate our market opportunity, we identified the number of companies in the U.S. with an employee count between 10 and 1,000. Based on data from the U.S. Bureau of Labor Statistics as of January 27, 2021, there were over 1.3 million businesses with between 10 to 1,000 employees, totaling 61.2 million employees within our target demographic. We then applied our $35 total list PEPM rate as of June 30, 2020 for our full suite of products including Core HCM and Payroll, Workforce Management, Benefits Administration, Talent Management, and Employee Engagement to derive our current total addressable market opportunity of $26 billion.

Growth Strategy

We intend to capitalize on our market opportunity with the following key growth strategies:

 

   

Expand Sales Coverage. We believe there is substantial opportunity to continue to broaden our customer base. We intend to drive new customer additions by expanding our sales coverage in the markets where we have a sales presence and into new markets over the next two years.

 

   

Accelerate Broker Channel Partnerships. Benefits brokers are trusted advisors to SMBs and are influential in the HCM selection process. We will continue to work with our existing broker partners and intend to expand our broker network through regional and national partnerships to drive customer acquisition.

 

   

Expand Industry-specific Functionality and Leadership. SMBs in certain industries require unique functionality for their people management needs. We designed our platform to be easily configurable for industry-specific applications in key verticals. We will continue to expand our solutions and expertise in both existing and new key industries.

 

   

Expand Product Penetration within Existing Customer Base. Our PEPM is increasing as we continue to grow our HCM product bundle. Our customers typically start with our core HR and payroll solution, eventually expanding their usage of our platform over time. We intend to accelerate this trend going forward and have a significant opportunity to further penetrate our existing customer base.

 

   

Continue to Innovate and Add New Solutions. We intend to continue to invest significantly in research and development, particularly regarding the functionality of our platform, to sustain and advance our product leadership.

 

   

Pursue Strategic M&A. We have successfully acquired and integrated several businesses that complement and enhance our software and technology capabilities. We will continue to take a disciplined approach to identifying and evaluating potential acquisitions.


 

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Recent Developments

Series A Preferred Stock Issuance

In December 2020 and January 2021, we completed private placements of shares of our Series A preferred stock with certain institutional investors, which generated net proceeds of approximately $270 million. We issued an aggregate of 7,715 shares of Series A preferred stock, or 11,705,044 shares after giving effect to the 1,517.18-for-1 stock split we will effect in connection with this offering. Each share of the Series A preferred stock has an initial liquidation preference of $35,000, subject to adjustment in accordance with our Amended and Restated Certificate of Incorporation. The proceeds from the issuance of our Series A preferred stock were used to redeem certain Class A and Class A-1 Units of Pride Aggregator and for general corporate purposes, including to finance a recent acquisition. See “Certain Relationships and Related Party Transactions—Related Party Transactions—Redemption Agreement and Intercompany Promissory Note with Pride Aggregator.” In connection with the completion of this offering, the holders of the Series A preferred stock have agreed that the Series A preferred stock will automatically convert into shares of our common stock on a 1-to-1 basis.

Entry into the New Senior Secured Credit Facilities

On June 11, 2021, we entered into a new credit agreement (the “New Credit Agreement”) with PNC Bank, National Association (“PNC”), Fifth Third Bank, National Association, and the other lenders party thereto, providing a senior secured $100.0 million revolving credit facility (the “New Credit Facility” and the loans thereunder, the “New Loans”), of which $44.5 million was initially drawn at the closing date. The New Credit Facility includes an “accordion” feature that allows us, under certain circumstances following an initial public offering, to increase the size of the New Credit Facility by an amount up to $300.0 million.

In connection with the entry into the New Credit Agreement, we used the proceeds therefrom to repay in full all amounts outstanding under the 2019 Credit Facility (as defined below), including the 2019 Term Loan (as defined below), and the Headquarters Loan (as defined below), and for working capital and other general corporate purposes.

The New Loans have variable interest rates. The interest rate on the New Loans equals, at our option, either, (i) in the case of ABR borrowings, the highest of (a) the PNC prime rate, (b) the Federal Funds Rate plus 50 basis points, and (c) the adjusted LIBOR with a maturity of one month, plus 100 basis points (“ABR”) or (ii) in the case of LIBOR borrowings, the LIBOR rate, plus, in each case, an applicable margin of (A) prior to an initial public offering, (i) in the case of ABR borrowings, 95 basis points per annum and (ii) in the case of LIBOR borrowings, 195 basis points per annum or (B) following an initial public offering, (i) in the case of ABR borrowings, 37.5 basis points per annum or (ii) in the case of LIBOR borrowings, 137.5 basis points per annum, in each case, with step downs based on achievement of certain total leverage ratios. For more information relating to the New Credit Facility, see the section entitled “Description of Certain Indebtedness and Other Obligations—New Senior Secured Credit Facilities.”

Estimated Selected Recent Operating Results (Preliminary and Unaudited)

Presented below is outlook financial information, including non-GAAP financial measures, for the three months and year ended June 30, 2021. We are in the process of finalizing our results as of and for the three months and the fiscal year ended June 30, 2021; accordingly, these results are subject to change. We have presented below certain preliminary results representing our estimates as of and for the three months and the fiscal year ended June 30, 2021, which are based only on currently available information and do not present all necessary information for an understanding of our financial condition as of June 30, 2021 or our results of operations for the fiscal year ended June 30, 2021. This financial information has been prepared by and is the responsibility of our management and are subject to revisions based on our procedures and controls associated


 

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with the completion of our financial reporting, including all the customary reviews and approvals, and completion by our independent registered public accounting firm of its audit of such financial statements for the fiscal year ended June 30, 2021. Our independent registered public accounting firm has not audited, reviewed or performed any procedures with respect to this preliminary financial data or the accounting treatment thereof and does not express an opinion or any other form of assurance with respect thereto. The preparation and the audit of our consolidated financial statements as of and for the fiscal year ended June 30, 2021 will not be completed until subsequent to this offering. While we are currently unaware of any items that would require us to make adjustments to the financial information set forth below, it is possible that we or our independent registered public accounting firm may identify such items as we complete the preparation of our financial statements as of and for the fiscal year ended June 30, 2021 and our auditors complete their procedures for the audit of our consolidated financial statements, and any resulting changes could be material. Accordingly, undue reliance should not be placed on these preliminary estimates. These preliminary estimates are not necessarily indicative of any future period and should be read together with “Risk Factors,” “Forward-Looking Statements” and our consolidated financial statements and related notes included in this registration statement. Adjusted Gross Profit, Adjusted Operating Income and any metrics derived therefrom are supplemental measures that are not calculated and presented in accordance with GAAP.

Three Months Ended June 30, 2021

 

     Three Months Ended
June 30, 2021
    % Change
Three Months Ended June 30,
2021 versus June 30, 2020
 
     Low     High     Low     High  

(in millions, except percentages)

        

Consolidated Statement of Operations Data:

        

Total Revenues

   $ 86.7     $ 87.7       18     20

Gross Profit

     44.5       45.3       14     16

Gross Profit Margin

     51.3     51.6     (210 ) bps      (177 ) bps 

Loss from Operations

     (33.3     (32.7     *       *  

Other Financial Data(1):

        

Adjusted Gross Profit(2)

   $ 56.1     $ 56.9       9     11

Adjusted Gross Profit Margin(2)

     64.6     64.8     (527 ) bps      (509 ) bps 

Adjusted Operating Income(3)

     (0.8     (0.2     *       *  

Adjusted Operating Income Margin(3)

     (0.9 )%      (0.2 )%      (1,642 ) bps      (1,572 ) bps 

Other Selected Data:

        

Bookings

   $ 31.2     $ 31.2       79     79

 

*

Percentages not meaningful. Loss from operations for the three months ended June 30, 2020 was $29.9 million.

 

(1)

Adjusted Gross Profit, Adjusted Operating Income and any metrics derived therefrom are non-GAAP measures and should not be considered as alternatives to measures prepared in accordance with GAAP such as gross profit and operating income. Reconciliations of each of these metrics to the most comparable GAAP measure are set forth in the notes below. For more information on these measures and why we believe they are useful to investors, see “Management’s Discussion and Analysis of Financial Condition and Result of Operations—Non-GAAP Financial Measures.”


 

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(2)

Adjusted Gross Profit is defined as gross profit, before amortization of intangible assets, stock-based compensation expenses, and certain corporate expenses, in each case that are included in costs of recurring revenues. We define Adjusted Gross Profit Margin as Adjusted Gross Profit divided by total revenues.

 

     Three Months Ended
June 30, 2021
    Three Months Ended
June 30, 2020
 
     Low     High        

(in millions)

      

Gross Profit*

   $ 44.5     $ 45.3     $ 39.2  

Gross Profit Margin

     51.3 %      51.6 %      53.4 % 

Amortization expense**

     11.6       11.6       11.3  

Corporate adjustments***

                 0.8  

Adjusted Gross Profit*

   $ 56.1     $ 56.9     $ 51.3  

Adjusted Gross Profit Margin

     64.6 %      64.8 %      69.9 % 

 

  *

Gross Profit and Adjusted Gross Profit are burdened by depreciation expense of $0.7 million and $0.7 million, amortization of capitalized software of $4.2 million and $2.3 million and amortization of deferred contract costs of $3.2 million and $1.9 million for the three months ended June 30, 2021 and 2020, respectively.

  **

Amortization expense includes amortization of stock-based compensation and intangible assets.

  ***

Corporate adjustments for the three months ended June 30, 2020 relate to costs associated with implementing certain expense saving initiatives as a result of the COVID-19 pandemic.

(3)

Adjusted Operating Income is defined as loss from operations before amortization of acquired intangible assets, stock-based award and liability incentive award compensation expenses, and other certain corporate expenses, such as costs related to acquisitions. We define Adjusted Operating Income Margin as Adjusted Operating Income divided by total revenues.

 

     Three Months Ended
June 30, 2021
    Three Months Ended
June 30, 2020
 
     Low     High        

(in millions)

      

Loss from Operations

   $ (33.3   $ (32.7   $ (29.9

Operating Margin

     (38.4 )%      (37.3 )%      (40.7 )% 

Amortization expense*

     30.6       30.6       35.2  

Liability incentive award compensation expense

                 0.3  

Corporate adjustments**

     1.9       1.9       5.8  

Adjusted Operating Income

   $ (0.8   $ (0.2   $ 11.4  

Adjusted Operating Income Margin

     (0.9 )%      (0.2 )%      15.5

 

  *

Amortization expense includes amortization of stock-based compensation and intangible assets.

  **

Corporate Adjustments for the three months ended June 30, 2021 relate to certain costs associated with our efforts to become a public company, including the implementation of a new enterprise-resource planning system and professional, consulting, and other costs, of $1.7 million, and transaction expenses and costs associated with the 7Geese Acquisition totaling $0.2 million. Corporate adjustments for the three months ended June 30, 2020 relate to certain costs related to the transition of the new executive leadership team and closure of a standalone facility of $1.9 million, costs associated with our efforts to become a public company, including the implementation of a new enterprise-resource planning system and professional, consulting and other costs of $0.5 million and costs related to implementing certain expense savings initiatives as a result of the COVID-19 pandemic totaling $3.4 million.


 

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We expect total revenues to increase 18% to 20% for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily as a result of an increase in customers as well as an increase in the average number of employees per customer as many customers have started re-hiring since they terminated or furloughed employees in response to the COVID-19 pandemic during the three months ended June 30, 2020.

We expect gross profit to increase 14% to 16% for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily due to an increase in revenue, and partially offset by additional employee related costs to support new customers.

We expect Adjusted Gross Profit to increase 9% to 11% for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily due to an increase in revenue, and partially offset by additional employee related costs to support new customers.

We expect loss from operations to increase $2.8 million to $3.4 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily due to continued investment in employee related costs to support new customers, expand our sales coverage, and develop our products, and partially offset by an increase in revenue.

We expect Adjusted Operating Income to decrease $11.6 million to $12.2 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily due to continued investment in employee related costs to support new customers, expand our sales coverage, and develop our products, and partially offset by an increase in revenue.

We expect Bookings to increase approximately 79% for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily due to the continued geographic expansion of our sales team and expanding broker referral relationships. Booking performance for the three months ended June 30, 2020 was negatively affected by the impact of the COVID-19 pandemic.

Fiscal Year Ended June 30, 2021

 

     Fiscal Year Ended
June 30, 2021
    % Change
Fiscal Year Ended June 30, 2021
versus June 30, 2020
 
     Low     High     Low     High  

(in millions, except percentages)

        

Consolidated Statement of Operations Data:

        

Total Revenues

   $ 351.5     $ 352.5       7     7

Gross Profit

   $ 196.7     $ 197.6       5     5

Gross Profit Margin

     56.0     56.0     (142 ) bps      (136 ) bps 

Loss from Operations

   $ (90.4   $ (89.8     *       *  

Other Financial Data(1):

        

Adjusted Gross Profit(2)

   $ 243.4     $ 244.2       4     5

Adjusted Gross Profit Margin(2)

     69.2     69.3     (193 ) bps      (190 ) bps 

Adjusted Operating Income(3)

   $ 47.0     $ 47.6       2     3

Adjusted Operating Income Margin(3)

     13.4     13.5     (75 ) bps      (62 ) bps 

Other Selected Data:

        

Bookings

   $ 115.1     $ 115.1       43     43

 

*

Percentages not meaningful. Loss from operations for the Fiscal Year Ended June 30, 2020 was $94.7 million.

 

(1)

Adjusted Gross Profit, Adjusted Operating Income and any metrics derived therefrom are non-GAAP measures and should not be considered as alternatives to measures prepared in accordance with GAAP such


 

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  as gross profit and operating income. Reconciliations of each of these metrics to the most comparable GAAP measure are set forth in the notes below. For more information on these measures and why we believe they are useful to investors, see “Management’s Discussion and Analysis of Financial Condition and Result of Operations—Non-GAAP Financial Measures.”
(2)

Adjusted Gross Profit is defined as gross profit, before amortization of intangible assets, stock-based compensation expenses, and certain corporate expenses, in each case that are included in costs of recurring revenues. We define Adjusted Gross Profit Margin as Adjusted Gross Profit divided by total revenues.

 

     Fiscal Year Ended
June 30, 2021
    Fiscal Year Ended
June 30, 2020
 
     Low     High        

(in millions)

      

Gross Profit*

   $ 196.7     $ 197.6     $ 188.2  

Gross Profit Margin

     56.0 %      56.0 %      57.4 % 

Amortization expense**

     46.6       46.6       43.5  

Corporate adjustments***

                 1.7  

Adjusted Gross Profit*

   $ 243.4     $ 244.2     $ 233.4  

Adjusted Gross Profit Margin

     69.2 %      69.3 %      71.2 % 

 

  *

Gross Profit and Adjusted Gross Profit are burdened by depreciation expense of $2.6 million and $2.5 million, amortization of capitalized software of $13.8 million and $6.9 million and amortization of deferred contract costs of $10.6 million and $5.7 million for the fiscal years ended June 30, 2021 and 2020, respectively.

  **

Amortization expense includes amortization of stock-based compensation and intangible assets.

  ***

Corporate Adjustments for the fiscal year ended June 30, 2020 primarily related to certain costs related to the transition of the new executive leadership team and closure of a standalone facility of $0.7 million and $0.9 million of costs related to implementing certain expense saving initiatives as a result of the COVID-19 pandemic.

(3)

Adjusted Operating Income is defined as loss from operations before amortization of acquired intangible assets, stock-based award and liability incentive award compensation expenses, and other certain corporate expenses, such as costs related to acquisitions. We define Adjusted Operating Income Margin as Adjusted Operating Income divided by total revenues.

 

     Fiscal Year Ended
June 30, 2021
    Fiscal Year Ended
June 30, 2020
 
     Low     High        

(in millions)

      

Loss from Operations

   $ (90.4   $ (89.8   $ (94.7

Operating Margin

     (25.7 )%      (25.5 )%      (28.9 )% 

Amortization expense*

     129.8       129.8       125.8  

Liability incentive award compensation expense

     (0.2     (0.2     3.1  

Corporate adjustments**

     7.7       7.7       12.1  

Adjusted Operating Income

   $ 47.0     $ 47.6     $ 46.2  

Adjusted Operating Income Margin

     13.4 %      13.5 %      14.1 % 

 

  *

Amortization expense includes amortization of stock-based compensation and intangible assets.

  **

Corporate Adjustments for the fiscal year ended June 30, 2021 relate to certain costs related to the transition of the new executive leadership team and closure of a standalone facility of $1.0 million, as


 

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  well as costs associated with our efforts to become a public company, including the implementation of a new enterprise-resource planning system and professional, consulting, and other costs, of $6.0 million, and transaction expenses and costs associated with the 7Geese Acquisition and other acquisitions totaling $0.7 million. Corporate Adjustments for the fiscal year ended June 30, 2020 relate to certain costs related to the transition of the new executive leadership team and closure of a standalone facility of $6.0 million, costs associated with our efforts to become a public company, including the implementation of a new enterprise-resource planning system and professional, consulting, and other costs, of $2.7 million, and costs related to implementing certain expense savings initiatives as a result of the COVID-19 pandemic totaling $3.4 million.

We expect total revenues to increase approximately 7% for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 primarily as a result of an increase in customers, partially offset by a decline in the average number of employees per customer for the fiscal year ended June 30, 2021 primarily driven by customers terminating or furloughing employees in response to the COVID-19 pandemic.

We expect gross profit to increase approximately 5% for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 primarily due to an increase in revenue, and partially offset by additional employee related costs to support new customers.

We expect adjusted gross profit to increase 4% to 5% for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020, primarily due to an increase in revenues, and partially offset by additional employee-related costs to support new customers.

We expect loss from operations to decrease 4% to 5% for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 primarily due to an increase in revenue, and partially offset by continued investment in employee related costs to support new customers, expand our sales coverage, and develop our products.

We expect Adjusted Operating Income to increase 2% to 3% for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 primarily due to an increase in revenue, and partially offset by continued investment in employee related costs to support new customers, expand our sales coverage, and develop our products.

We expect Bookings to increase approximately 43% for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 primarily due to the continued geographic expansion of our sales team and expanding broker referral relationships.

Summary of Risks Related to our Business, Regulation, our Indebtedness, our Common

Stock and this Offering

There are a number of risks related to our business, regulation, our indebtedness, our common stock, and this offering that you should consider before you decide to participate in this offering. Some of the principal risks related to our business include the following:

 

   

Our ability to manage our growth effectively.

 

   

The expansion and retention of our direct sales force with qualified and productive persons and the related effects on the growth of our business.

 

   

The impact on customer expansion and retention if implementation, user experience, customer service, or performance relating to our solutions is not satisfactory.

 

   

Our ability to innovate and deliver high-quality, technologically advanced products and services.


 

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Our relationships with third parties.

 

   

The proper operation of our software.

 

   

Future acquisitions of other companies’ businesses, technologies, or customer portfolios.

 

   

The continued service of our key executives.

 

   

Our ability to attract and retain qualified personnel, including software developers and skilled IT, sales, marketing, and operation personnel.

 

   

Payments made to employees and taxing authorities due for a payroll period before a customer’s electronic funds transfers are settled to our account.

 

   

The potential breach of our security measures and the unauthorized access to our customers’ or their employees’ personal data and the resulting effects thereof which may include lawsuits, fines, or other regulatory action, significant costs related to remediation, negative perceptions regarding the security of our solutions, and reduction or cessation of customers’ use of our solutions.

 

   

Damage, failure, or disruption of our SaaS delivery model, data centers, or our third-party providers’ services.

 

   

Our ability to protect our intellectual and proprietary rights.

 

   

The use of open source software in our applications.

 

   

The growth of the market for cloud-based HCM and payroll software among SMBs.

 

   

The competitiveness of our market generally.

 

   

The impact of COVID-19.

 

   

Our customers’ dependence on our solutions to comply with applicable laws.

 

   

Changes in laws, regulations, or requirements applicable to our software and services.

 

   

The impact of privacy, data protection, tax and other laws and regulations.

 

   

Our ability to maintain effective internal controls over financial reporting.

 

   

The other factors set forth under “Risk Factors.”

These and other risks are more fully described in the section entitled “Risk Factors” in this prospectus. If any of these risks actually occurs, our business, financial condition, results of operations, cash flows, and prospects could be materially and adversely affected. As a result, you could lose all or part of your investment in our common stock.

Our Sponsor

We have a valuable relationship with our equity sponsor, Apax Partners. Apax Partners is a leading global private equity advisory firm. For more than four decades, Apax Partners has built specialist expertise across four industry sectors: Tech, Services, Healthcare, and eConsumer. To date, Apax Partners has raised and advised funds with aggregate commitments of more than $60 billion. The Apax funds have a strong track record of investing in the technology and telecommunications sector, having committed €8.4 billion of equity across multiple geographies, including the U.S., Europe, and Asia. Funds advised by Apax Partners provide long-term equity financing to build and strengthen world-class companies.


 

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Corporate Structure

The following chart summarizes our corporate structure as of the date of this prospectus after giving effect to the Reorganization Transaction, this offering and the use of proceeds therefrom. This chart is provided for illustrative purposes only and does not represent all legal entities affiliated with, or all subsidiaries of, the Company:

 

LOGO

 

(1)

Represents common stock ownership on an as-converted basis. In connection with the completion of this offering, the holders of the Series A preferred stock have agreed that the Series A preferred stock will automatically convert into shares of our common stock on a 1-to-1 basis.

(2)

All outstanding Midco Redeemable Preferred Stock is expected to be redeemed in connection with the completion of this offering.


 

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Certain Agreements with our Existing Investors

Immediately following this offering, Pride Aggregator, an investment vehicle affiliated with Apax Partners, will beneficially own approximately 82.4% of our common stock (or 81.1% of our outstanding common stock if the underwriters’ option to purchase additional shares is exercised in full). We will enter into a Director Nomination Agreement with Apax Partners (the “Director Nomination Agreement”) that provides Apax Partners the right to designate (i) all of the nominees for election to our board of directors (the “Board”) for so long as Apax Partners beneficially owns at least 40% of the total number of shares of our common stock beneficially owned by it upon completion of this offering, as adjusted for any reorganization, recapitalization, stock dividend, stock split, reverse stock split, or similar changes in the Company’s capitalization (the “Original Amount”); (ii) 40% of the nominees for election to our Board for so long as Apax Partners beneficially owns less than 40% but at least 30% of the Original Amount; (iii) 30% of the nominees for election to our Board for so long as Apax Partners beneficially owns less than 30% but at least 20% of the Original Amount; (iv) 20% of the nominees for election to our Board for so long as Apax Partners beneficially owns less than 20% but at least 10% of the Original Amount; and (v) one of the nominees for election to our Board for so long as Apax Partners beneficially owns at least 5% of the Original Amount, which could result in representation on our Board that is disproportionate to Apax Partners’ beneficial ownership. If Pride Aggregator is dissolved after this offering, then Apax Partners will be permitted to cause the rights of Pride Aggregator to be assigned to it or one or more of its Affiliates (as defined in the Director Nomination Agreement). See “Certain Relationships and Related Party Transactions—Related Party Transactions—Director Nomination Agreement.”

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We will remain an emerging growth company until the earliest of (1) the last day of the fiscal year following the fifth anniversary of the completion of this offering, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the date on which we are deemed to be a large accelerated filer (this means the market value of common stock that is held by non-affiliates exceeds $700.0 million as of the end of the second quarter of that fiscal year) or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

   

Emerging growth companies are not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”).

 

   

A requirement to present only two years of audited financial statements, plus unaudited condensed consolidated financial statements for any interim period and related discussion in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

   

Reduced disclosure obligations regarding executive compensation in periodic reports, proxy statements, and registration statements.

 

   

Exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We have elected to take advantage of certain of the reduced disclosure obligations regarding financial statements (such as not being required to provide audited financial statements for the fiscal year ended June 30, 2018) in this prospectus and executive compensation in this prospectus and expect to elect to take advantage of


 

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other reduced burdens in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

The JOBS Act also permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt-in” to this extended transition period for complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that comply with such new or revised accounting standards on a non-delayed basis.

General Corporate Information

We were incorporated in August 2018 as Pride Parent, Inc. to serve as a holding company in connection with the Apax Acquisition. In April 2021, we changed our name to Paycor HCM, Inc. Our principal executive offices are located at 4811 Montgomery Road, Cincinnati, Ohio 45212. Our telephone number is (800) 381-0053. Our website address is www.paycor.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock. We are a holding company and all of our business operations are conducted through our subsidiaries.


 

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THE OFFERING

 

Issuer

Paycor HCM, Inc.

 

Common Stock Offered by Us

18,500,000 shares.

 

Option to Purchase Additional Shares from Us

2,775,000 shares.

 

Common Stock to be Outstanding After this Offering

171,302,784 shares (or 174,077,784 shares if the underwriters’ option to purchase additional shares is exercised in full), after giving effect to the Reorganization Transactions.

 

Use of Proceeds

We estimate that our net proceeds from this offering will be approximately $338.2 million, or approximately $388.9 million if the underwriters’ option to purchase additional shares is exercised in full, assuming an initial public offering price of $19.50 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discount. Additional other expenses of issuance and distribution are estimated to be approximately $5.2 million.

 

 

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock, and enable access to the public equity markets for us and our shareholders. We expect to use approximately $260.0 million of the net proceeds of this offering to fund the redemption of the Midco Redeemable Preferred Stock (as defined below) by Pride Midco at a redemption price of 101% of the liquidation preference thereof and the remainder of such net proceeds will be used for general corporate purposes. An affiliate of Apax Partners currently owns $25 million of Midco Redeemable Preferred Stock and we expect such affiliate will receive approximately $32.5 million in proceeds as a result of the redemption of the Midco Redeemable Preferred Stock. At this time, other than the redemption of the Midco Redeemable Preferred Stock, we have not specifically identified a large single use for which we intend to use the net proceeds and, accordingly, we are not able to allocate the net proceeds among any of these potential uses in light of the variety of factors that will impact how such net proceeds are ultimately utilized by us. We will have broad discretion in the application of these proceeds. The Midco Redeemable Preferred Stock accrues dividends at a rate of the London interbank offered rate (“LIBOR”) plus 8.875%, which rate will decrease to LIBOR plus 8.375% beginning November 3, 2021. The dividends are payable, or are compounded, quarterly on March 31, June 30, September 30 and December 31 of each year. Additionally, Pride Midco may, at its option, redeem for cash any or all of the then outstanding Midco Redeemable Preferred Stock, in whole at any time or in part from time to time, at (i) a redemption


 

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price per share equal to 101.0% prior to and including November 1, 2021; and 100.0% on November 2, 2021 and thereafter, plus (ii) the amount of all accrued dividends for the then current and all prior dividend payment periods.

  See “Use of Proceeds” for additional information.

 

Controlled Company

After this offering, assuming an offering size as set forth in this section, Apax Partners will beneficially own, through its control of Pride Aggregator, approximately 82.4% of our common stock (or 81.1% of our common stock if the underwriters’ option to purchase additional shares is exercised in full). As a result, we expect to be a controlled company within the meaning of the corporate governance standards of The Nasdaq Global Select Market (“Nasdaq”). See “Management—Corporate Governance—Controlled Company Status.”

 

Director Nomination Agreement

In connection with the completion of this offering, we expect to enter into a director nomination agreement that will provide Apax Partners with certain rights to nominate members of our Board. See “Certain Relationships and Related Party Transactions—Director Nomination Agreement.”

 

Registration Rights Agreement

We have entered into a registration rights agreement with Pride Aggregator and certain other stockholders pursuant to which we have provided such parties with certain registration rights. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

 

Indications of Interest

One or more entities affiliated with, advised by or that serve as investment adviser to certain investors in our Series A preferred stock, (i) Neuberger, (ii) ClearBridge and (iii) Franklin Templeton, have indicated a non-binding interest in purchasing up to an aggregate of $75 million, $50 million and $25 million, respectively, of shares of our common stock being offered in this offering at the initial public offering price. Because none of these indications of interest are an agreement or commitment by such entities to purchase shares, one or more of these entities may ultimately choose to purchase more, less or no shares in this offering. The underwriters will receive the same discount with respect to any of our shares of common stock purchased by one or more funds affiliated with or advised by Neuberger, ClearBridge and/or Franklin Templeton as they will from any other shares of common stock sold to the public in this offering.

 

Risk Factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

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Dividends

We do not currently anticipate paying dividends on our common stock. Any declaration and payment of future dividends to holders of our common stock will be at the sole discretion of our Board and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends, and other considerations that our Board deem relevant. Because we are a holding company and have no direct operations, we will only be able to pay dividends from our available cash on hand and any funds we receive from our subsidiaries. Certain of our debt agreements limit the ability of certain of our subsidiaries to pay dividends. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends. See “Dividend Policy.”

 

Directed share program

At our request, the underwriters have reserved up to 740,000 shares of common stock, or 4% of the shares of common stock to be offered by this prospectus for sale, at the initial public offering price, through a directed share program. Shares purchased through the directed share program will not be subject to a lock-up restriction, except in the case of shares purchased by any of our directors or officers. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.

 

Proposed Trading Symbol

“PYCR”.

The number of shares of common stock to be outstanding following this offering is based on 171,302,784 shares of common stock outstanding as of June 30, 2021 after giving effect to the Reorganization Transactions and excludes:

 

   

13.8 million shares of common stock reserved for future issuance under our 2021 Omnibus Incentive Plan (the “2021 Plan”), which will be adopted in connection with this offering; in connection with this offering, we intend to grant awards under the 2021 Plan representing approximately 2.2 million shares, based on an assumed initial public offering price of $19.50, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus; these awards would consist of approximately 1.1 million RSUs and 1.1 million options with an exercise price equal to the initial public offering price; see “Executive Compensation—Executive Compensation Arrangements to be Adopted in Connection with this Offering—Equity Award Grants.”

 

   

3.1 million shares of common stock reserved for future issuance under our Employee Stock Purchase Plan (“ESPP”), which will be adopted in connection with this offering.

 

   

Any shares of common stock issuable upon settlement of Pride Aggregator’s outstanding Long Term Incentive Plan units (“LTIP Units”). As of June 30, 2021, approximately 1,642,000 shares of common stock would be issuable upon such settlement, based on an assumed initial public offering price of $19.50, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus, and a $1.00 increase or decrease in the assumed initial public offering price would increase or decrease the total shares of common stock issuable upon such settlement by approximately 40,000.


 

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Unless otherwise indicated, all information in this prospectus assumes:

 

   

The filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, each in connection with the closing of this offering.

 

   

No exercise by the underwriters of their option to purchase up to 2,775,000 additional shares of common stock from us.

 

   

No transfer of common stock from Pride Aggregator to the holders of Series A preferred stock upon the completion of this offering. Pride Aggregator expects to transfer approximately 198,900 shares of common stock (based on an initial public offering price of $19.50, which is the midpoint of the range set forth on the cover of this prospectus) to the former holders of the Series A preferred stock for no additional consideration upon the completion of this offering. The actual number of shares of common stock to be transferred by Pride Aggregator to the holders of the Series A preferred stock is based on the anti-dilution formula in the designations relating to the Series A preferred stock in our existing certificate of incorporation.


 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our consolidated financial data. For accounting purposes, the terms “Predecessor” and “Successor” used below and throughout this prospectus refer to the periods prior and subsequent to the Apax Acquisition on November 2, 2018, respectively. See “Basis of Presentation.” As a result of the Apax Acquisition, the results of operations and financial position of the Predecessor and Successor are not directly comparable.

The summary consolidated statement of operations data and summary consolidated statement of cash flows data for the period from July 1, 2018 to November 1, 2018 relate to the Predecessor and are derived from the audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statement of operations data and summary consolidated statement of cash flows data for the period from November 2, 2018 to June 30, 2019 and for the fiscal year ended June 30, 2020 and the summary consolidated balance sheet data as of June 30, 2020 relate to the Successor and are derived from the audited consolidated financial statements that are included elsewhere in this prospectus. The summary consolidated statement of operations data and summary consolidated statement of cash flows data for the nine months ended March 31, 2020 and 2021 and the summary consolidated balance sheet data as of March 31, 2021 relate to the Successor and are derived from our unaudited condensed consolidated financial statements that are included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for the fair statement of our unaudited interim consolidated financial statements. Our results for any interim period are not necessarily indicative of results that may be expected for any full fiscal year.

You should read the summary historical financial data below in conjunction with the sections titled “Basis of Presentation,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.


 

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    Successor     Predecessor  
(in thousands, except per share data)   Nine Months
Ended
March 31,
2021
    Nine Months
Ended
March 31,
2020
    Fiscal Year
Ended
June 30,
2020
    Period from
November 2,
2018 to
June 30,
2019
    Period from
July 1, 2018 to
November 1,
2018
 
    (Unaudited)                    

Consolidated Statement of Operations Data:

         

Revenue:

         

Recurring and other revenue

  $ 263,372     $ 245,357     $ 317,620     $ 191,881     $ 86,262  

Interest income on funds held for clients

    1,392       9,192       10,289       9,977       3,343  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    264,764       254,549       327,909       201,858       89,605  

Cost of revenues

    112,506       105,501       139,683       77,566       31,939  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    152,258       149,048       188,226       124,292       57,666  

Operating expenses:

         

Sales and marketing

    75,864       74,970       99,998       56,660       30,479  

General and administrative

    106,914       102,964       137,071       127,862       31,069  

Research and development

    26,507       35,918       45,866       28,428       12,695  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    209,285       213,852       282,935       212,950       74,243  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (57,027     (64,804     (94,709     (88,658     (16,577

Other income (expense):

         

Interest expense

    (1,847     (1,403     (1,780     (1,119     (1,036

Other

    320       6,438       9,004       423       175  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before benefit for income taxes

    (58,554     (59,769     (87,485     (89,354     (17,438

Income tax benefit

    (12,344     (12,619     (20,182     (16,531     (2,517
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (46,210     (47,150     (67,303     (72,823     (14,921
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Paycor HCM, Inc.

  $ (64,110   $ (64,931   $ (90,193   $ (88,518   $ (14,921
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data(1):

         

Net loss per share:

         

Basic and diluted

  $ (656.70   $ (649.31   $ (901.93   $ (885.18  
 

 

 

   

 

 

   

 

 

   

 

 

   

Weighted-average shares used in computing net loss per share:

         

Basic and diluted

    97,624       100,000       100,000       100,000    

 

(1)

See Note 13 of our unaudited condensed consolidated financial statements for the nine months ended March 31, 2021 and 2020 and Note 15 to our audited consolidated financial statements for the year ended June 30, 2020, Successor 2019 and Predecessor 2019 periods appearing elsewhere in this prospectus for an explanation of the method used to calculate our basic and diluted net loss per share and the weighted-average number of shares used in the computation of the per share amounts.

 

    Successor     Predecessor  
(in thousands)   Nine
Months
Ended
March 31,
2021
    Nine
Months
Ended
March 31,
2020
    Fiscal Year
Ended
June 30,
2020
    Period from
November 2,
2018 to
June 30,
2019
    Period from
July 1, 2018 to
November 1,
2018
 
    (Unaudited)                    
 

Consolidated Statement of Cash Flow Data:

         

Net cash provided by (used in) operating activities

  $ 26,185     $ (1,791   $ 88     $ (11,584   $ (1,003

Net cash (used in) provided by investing activities

  $ (43,810   $ (24,194   $ 121,529     $ (772,039   $ 90,100  

Net cash provided by (used in) financing activities

  $ 202,049     $ 126,526     $ (20,880   $ 1,152,334     $ (283,506

 

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     Successor  
     March 31, 2021      June 30,
2020
 
(in thousands)    Actual     Pro Forma
As Adjusted (2)
     Actual  
     (Unaudited)     (Unaudited)         

Consolidated Balance Sheet Data

       

Cash and cash equivalents

   $ 19,364     $ 98,967      $ 828  

Funds held for clients(3)

     823,123       823,123        614,115  

Working capital(4)

     (5,434     73,857        (19,865

Total assets

     2,209,241       2,287,861        2,007,783  

Client fund obligations(5)

     822,551       822,551        613,151  

Total debt

     43,769       49,100        24,435  

Total liabilities

     1,051,991       1,057,634        821,123  

Redeemable noncontrolling interest(6)

     245,041       —          233,335  

Stockholder’s equity

     912,209       1,230,227        953,325  

 

(2)

Reflects (i) amounts outstanding under our New Credit Facility as of June 30, 2021 and the repayment of all outstanding indebtedness under our 2019 Credit Facility and Headquarters Facility; (ii) the conversion of all shares of our Series A preferred stock into common stock on a 1-for-1 basis; (iii) implementation of a 1,517.18-for-1 stock split with respect to our common stock; and (iv) our sale of 18,500,000 shares of common stock in this offering at an assumed initial public offering price of $19.50 per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and the application of $260.0 million of the net proceeds from this offering to redeem the Midco Redeemable Preferred Stock as set forth under “Use of Proceeds.” See “Capitalization.” Additional other expenses of issuances and distribution are estimated to be approximately $5.2 million.

(3)

Consists of cash and cash equivalents and debt-security investments relating to obtaining funds from clients in advance of performing payroll and payroll tax filing services on behalf of our clients.

(4)

We define working capital as total current assets (including funds held for clients) less total current liabilities (including client fund obligations).

(5)

Represents the Company’s contractual obligations to remit funds to satisfy clients’ payroll and tax payment obligations within one year of the balance sheet date.

(6)

Refers to the Midco Redeemable Preferred Stock, the shares of which accrue dividends at a rate of LIBOR plus 8.875%, which rate will decrease to LIBOR plus 8.375% beginning November 3, 2021. The dividends are payable, or are compounded, quarterly on March 31, June 30, September 30, and December 31 of each year. Additionally, the Company may, at its option, redeem for cash any or all of the then outstanding Midco Redeemable Preferred Stock, in whole at any time or in part from time to time, at (i) a redemption price per share equal to 101.0% prior to and including November 1, 2021; and 100.0% on November 2, 2021 and thereafter, plus (ii) the amount of all accrued dividends for the then current and all prior dividend payment periods.


 

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     Successor     Predecessor  
(in thousands)    Nine Months
Ended
March 31,
2021
    Nine Months
Ended
March 31,
2020
    Fiscal Year
Ended
June 30,
2020
    Period from
November 2,
2018 to
June 30,
2019
    Period from
July 1, 2018 to
November 1,
2018
 

Other Financial Data (unaudited):

          

Gross Profit Margin

     57.5     58.6     57.4     61.6     64.4

Adjusted Gross Profit(7)

   $ 187,327     $ 182,089   $ 233,377     $ 152,211     $ 58,464  

Adjusted Gross Profit Margin(7)

     70.8     71.5     71.2     75.4     65.2

Adjusted Operating Income(7)

   $ 47,768     $ 34,900     $ 46,263     $ 36,940     $ 4,977  

Adjusted Operating Income Margin(7)

     18.0     13.7     14.1     18.3     5.6

Adjusted Net Income Attributable to Paycor HCM, Inc.(7)

   $ 33,434     $ 23,883     $ 35,093     $ 22,636     $ 1,460  

 

(7)

Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Operating Income and Adjusted Net Income Attributable to Paycor HCM are non-GAAP measures and should not be considered as alternatives to measures prepared in accordance with GAAP such as gross profit, operating income and net loss attributable to Paycor HCM. Adjusted Gross Profit is defined as gross profit, before amortization of intangible assets, stock-based compensation expenses, and certain corporate expenses, in each case that are included in costs of recurring revenues. We define Adjusted Gross Profit Margin as Adjusted Gross Profit divided by total revenues. Adjusted Operating Income is defined as loss from operations before amortization of acquired intangible assets, stock-based award and liability incentive award compensation expenses, and other certain corporate expenses, such as costs related to acquisitions, including the Apax Acquisition. We define Adjusted Operating Income Margin as Adjusted Operating Income divided by total revenues. We define Adjusted Net Income Attributable to Paycor HCM, Inc. as Net Loss Attributable to Paycor HCM, Inc. before the accretion of redeemable noncontrolling interests, amortization of acquired intangible assets, stock-based award and liability incentive award compensation expenses, gain on the extinguishment of debt, and other certain corporate expenses, such as costs related to acquisitions, including the Apax Acquisition. For a reconciliation of each of these measures to the most comparable GAAP measure, see “Management’s Discussion and Analysis of Financial Condition and Result of Operations—Non-GAAP Financial Measures.”


 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto, before deciding to invest in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. If any of the following risks occur, our business, financial condition, operating results, and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose all or part of your investment. The ongoing COVID-19 pandemic may also have the effect of heightening many of the risks described in this “Risk Factors” section.

Because of the following factors, as well as other factors affecting our businesses, financial condition, operating results, and prospects, past financial performance should not be considered a reliable indicator of future performance, and investors should not rely on historical trends to anticipate trends or results in the future.

Risks Relating to Our Business, Products, and Operations

Failure to manage our growth effectively could increase our expenses, decrease our revenue, and prevent us from implementing our business strategy, and sustaining our revenue growth rates.

We have been rapidly growing our revenue and number of customers, and we will seek to do the same for the foreseeable future. However, the growth in our number of customers puts significant strain on our business, requires significant capital expenditures, and increases our operating expenses. To manage this growth effectively, we must attract, train, and retain a substantial number of qualified sales, implementation, customer service, software development, information technology, and management personnel. We also must maintain and enhance our technology infrastructure and our financial and accounting systems and controls. If we fail to effectively manage our growth, or we over-invest or under-invest in our business, our business and results of operations could suffer from the resultant weaknesses in our infrastructure, systems, or controls. We could also suffer operational mistakes, a loss of business opportunities, and employee losses. If our management is unable to effectively manage our growth, our expenses might increase more than expected, our revenue could decline or might grow more slowly than expected, and we might be unable to implement our business strategy. In addition, our revenue growth rates may decline in future periods because of several factors, including our failure to manage our growth effectively, our increased market penetration and the maturation of our business, slowing demand for our services, reductions in the number of employees by our customers, reductions in the number of our customers, public health issues such as the COVID-19 pandemic, or a decrease in the growth of the overall market, among other factors.

Additionally, we rely on the expansion of our relationships with our third-party partners as we grow our solutions. Our agreements with third parties are typically non-exclusive and do not prohibit them from working with our competitors. Our competitors may be effective in providing incentives to these same third parties to favor their products or services. In addition, acquisitions of our partners by our competitors could result in a reduction in the number of our current and potential customers, as our partners may no longer facilitate the adoption of our applications by potential customers after an acquisition by any of our competitors.

If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace or to grow our revenues could be impaired, which could have a material adverse effect on our business, financial condition, and results of operations. Even if we are successful, we cannot assure you that these relationships will result in increased customer usage of our applications or increased revenues.

 

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If we fail to adequately expand and retain our direct sales team with qualified and productive persons, or if our direct sales efforts are not successful, we may not be able to grow our business effectively.

We primarily sell our products and implementation services through our direct sales team. Generating new customer relationships with SMBs, our primary customer base, depends heavily on a qualified and trained sales team. To grow our business, we intend to focus on growing our direct sales force and our customer base for the foreseeable future. Our ability to add customers and to achieve revenue growth in the future will depend upon our ability to grow and develop our direct sales force and on our direct sale force’s ability to productively sell our solutions. Identifying and recruiting qualified personnel and training them in the use of our software requires considerable time, expense, and attention. Recruiting and developing sales personnel in locations where we do not have experience hiring and selling our products may be more difficult than we anticipate. The amount of time it takes for our sales representatives to be fully trained and to become productive varies widely. Some of our sales personnel do not successfully generate new business with customers even after significant investment by us in recruiting, hiring and training them, and we incur expenses to replace them. In addition, if we hire sales personnel from competitors or other companies, their former employers may attempt to assert that these employees have breached their legal obligations, resulting in a diversion of our time and resources.

Our ability to achieve significant revenue growth in the future will depend on the success of our direct sales force and our ability to adapt our sales efforts to address the evolving markets for our products. If our sales organization does not perform as expected, our revenues and revenue growth could suffer. In addition, if we are unable to hire, develop, and retain talented sales personnel, if our sales team becomes less efficient as it grows or if new sales representatives are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to grow our customer base and revenues and our sales and marketing expenses may increase.

Our business, operating results, financial condition, or reputation could be adversely affected if our customers are not satisfied with our implementation, user experience, or customer service, or if our solutions fail to perform properly.

Our business depends on our ability to satisfy our customers, both with respect to our applications and the technical support provided to help our customers use the applications that address the needs of their businesses. We use implementation and customer services teams to implement and configure our solutions and provide support to our customers. Customers’ support requests span numerous subjects, and the volume of such requests can be high, particularly during peak periods (such as open enrollment season), which may result in long wait times to contact us for support. If a customer is not satisfied with the quality of our solutions, the applications delivered, or the timeliness or quality of support provided, we could incur additional costs to address the situation, our profitability might be negatively affected, and the customer’s dissatisfaction with our implementation or support service could harm our ability to sell additional applications to that customer. In addition, our sales process is highly dependent on the reputation of our solutions and applications and on positive recommendations from our existing customers. Our customers have no obligation to continue to use our applications and may choose not to continue to use our applications at the same or higher level of service, if at all. Moreover, our customers generally have the right to cancel their agreements with us for any or no reason by providing 30 days’ prior written notice. In the past, some of our customers have elected not to continue to use our applications. Any failure to maintain a high-quality user experience and customer support, or a market perception that we do not maintain high-quality support, could adversely affect customer retention, our reputation, our ability to sell our applications to existing and prospective customers, and, as a result, our business, operating results, or financial condition.

Further, our solutions are inherently complex and may in the future contain or develop undetected defects or errors. Any defects in our applications could adversely affect our reputation, impair our ability to sell our applications in the future, and result in significant costs to us. The costs incurred in correcting any application defects may be substantial and could adversely affect our business, operating results, or financial condition. Any defects in functionality or defects that cause interruptions in the availability of our applications could result in:

 

   

Loss or delayed market acceptance and sales of our applications.

 

   

Termination of service agreements or loss of customers.

 

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Credits, refunds, or other liability to customers, including reimbursements for any fees or penalties assessed by regulatory agencies.

 

   

Breach of contract, breach of warranty, or indemnification claims against us, which may result in litigation.

 

   

Diversion of development and service resources.

 

   

Increased scrutiny of our solutions from regulatory agencies.

 

   

Injury to our reputation.

Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our applications could result in data loss, data corruption, or cause the information that we collect to be incomplete or contain inaccuracies that our customers regard as significant. Our customers might assert claims against us in the future alleging that they suffered damages due to a defect, error, or other failure of our solutions. Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover all claims made against us, and defending a suit, regardless of its merit, could be costly and divert management’s attention. Any failures in the performance of our solutions could harm our reputation and our ability to retain existing customers and attract new customers, which would have an adverse impact on our business, operating results, or financial condition. See “—Risks Relating to Our Business, Products and Operations—Our software might not operate properly, which could damage our reputation, give rise to claims against us, or divert application of our resources from other purposes, any of which could harm our business and operating results.”

If we do not continue to innovate and deliver high-quality, technologically advanced products and services, we will not remain competitive, and our revenue and operating results could suffer.

The market for our solutions is characterized by rapid technological advancements, changes in customer requirements, frequent new product introductions and enhancements, and changing industry standards. The life cycles of our products are difficult to estimate. Rapid technological changes and the introduction of new products and enhancements by new or existing competitors could undermine our current market position.

Our success depends in substantial part on our continuing ability to provide products and services that SMBs will find superior to our competitors’ offerings and will continue to use. Our future success will depend upon our ability to anticipate and to adapt to changes in technology and industry standards, and to effectively develop, to introduce, to market, and to gain broad acceptance of new product and service enhancements incorporating the latest technological advancements. In addition, because our solutions are designed to operate on a variety of systems, we will need to continuously modify and enhance our solutions to keep pace with changes in internet-related hardware, iOS, and other software, and communication, browser, and database technologies. We intend to continue to invest significant resources in research and development to enhance our existing products and services and introduce new high-quality products that customers will want. If we are unable to predict user preferences or industry changes, or if we are unable to modify our products and services on a timely basis or to effectively bring new products to market, our sales may suffer. In addition, investment in product development often involves a long return on investment cycle. We have made and expect to continue to make significant investments in product development. We may expend significant time and resources developing and pursuing sales of a particular enhancement or application that may not result in revenues in the anticipated time frame or at all, or may not result in revenue growth sufficient to offset increased expenses. Furthermore, uncertainties about the timing and nature of new functionality, or new functionality to existing platforms or technologies, could increase our research and development expenses. Any failure of our applications to operate effectively with future network platforms and technologies could reduce the demand for our applications, result in customer dissatisfaction, and have a material adverse effect on our business, financial condition, and results of operations.

 

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In addition, we may experience difficulties with software development, industry standards, design, or marketing that could delay or prevent our development, introduction or implementation of new solutions and enhancements. The introduction of new solutions by competitors, the emergence of new industry standards, or the development of entirely new technologies to replace existing offerings could render our existing or future solutions obsolete.

We may not have sufficient resources to make the necessary investments in software development and we may experience difficulties that could delay or prevent the successful development, introduction, or marketing of new products or enhancements. In addition, our products or enhancements may not meet the increasingly complex customer requirements of the marketplace or achieve market acceptance at the rate we expect, or at all. Any failure by us to anticipate or respond adequately to technological advancements, customer requirements, and changing industry standards, or any significant delays in the development, introduction, or availability of new products or enhancements, could undermine our current market position.

Our business depends in part on the success of our relationships with third parties.

We rely on third-party couriers, financial and accounting processing systems, and various financial institutions, to deliver payroll checks and tax forms, perform financial services in connection with our applications, such as providing automated clearing house (“ACH”) and wire transfers as part of our payroll and tax payment services, and to provide technology and content support, manufacture time clocks, and process background checks. We anticipate that we will continue to depend on various third-party relationships to grow our business, provide technology and content support, manufacture time clocks, process background checks, and deliver payroll checks and tax forms. Identifying, negotiating, and documenting relationships with these third parties and integrating third-party content and technology requires considerable time and resources. Our agreements with third parties typically are non-exclusive and do not prohibit them from working with our competitors. In addition, these third parties may not perform as expected under our agreements, and we may have disagreements or disputes with such third parties, which could negatively affect our brand and reputation. A global economic slowdown could also adversely affect the businesses of our third-party providers, hindering their ability to provide the services on which we rely. Further, a disruption of the Federal Reserve Bank’s services, including ACH processing, could negatively affect our payroll and expense reimbursement services by delaying direct deposits and other financial transactions across the United States. If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenues could be impaired, and our business, operating results, or financial condition could be adversely affected. Even if we are successful, these relationships may not result in improved operating results.

Our software might not operate properly, which could damage our reputation, give rise to claims against us, or divert application of our resources from other purposes, any of which could harm our business and operating results.

Our payroll and HCM software is complex and may contain or develop undetected defects or errors, particularly when first introduced or as new versions and updates are released. Despite extensive testing, from time to time we have discovered defects or errors in our products. In addition, because changes in employer and legal requirements are frequent, we discover defects and errors in our software and service processes in the normal course of business compared against these requirements and practices. Material performance problems or defects in our products and services might arise in the future, which could have an adverse impact on our business and customer relationship and subject us to claims.

Defects and errors and any failure by us to identify and address them could result in delays in product introductions and updates, loss of revenue or market share, liability to customers or others, failure to achieve market acceptance or expansion, diversion of development and other resources, injury to our reputation, and increased service and maintenance costs. Defects or errors in our product or service processes might discourage existing or potential customers from purchasing from us. Correction of defects or errors could prove to be

 

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impossible or impracticable. The costs incurred in correcting any defects or errors or in responding to resulting claims or liability might be substantial and could adversely affect our operating results.

Because of the large amount of data that we collect and manage, it is possible that errors in our systems could result in data loss or corruption, or cause the information that we collect to be incomplete or contain inaccuracies that our customers, their employees and taxing and other regulatory authorities regard as significant. The costs incurred in correcting any errors or in responding to regulatory authorities or to resulting claims or liability might be substantial and could adversely affect our operating results.

We may continue to acquire other companies’ businesses, technologies, or customer portfolios, which could divert our management’s attention, result in additional dilution to our stockholders and otherwise disrupt our operations and adversely affect our operating results.

We have acquired and may in the future seek to acquire or invest in other businesses, technologies, or customer portfolios. The pursuit of potential acquisitions or investments may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated.

Successful integration involves many challenges, and we may have difficulty integrating acquired personnel, operations, and technologies of acquired companies, or effectively managing the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:

 

   

Inability to integrate or benefit from acquired technologies or services in a profitable manner.

 

   

Unanticipated costs or liabilities associated with the acquisition.

 

   

Incurrence of acquisition-related costs.

 

   

Difficulty integrating the accounting systems, operations, and personnel of the acquired business.

 

   

Difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business.

 

   

Difficulty converting the customers of the acquired business onto our platform and contract terms, including disparities in the revenues, licensing, support, or professional services model of the acquired company.

 

   

Diversion of management’s attention from other business concerns.

 

   

Adverse effects to our existing business relationships with business partners and customers because of the acquisition.

 

   

The potential loss of key employees.

 

   

Difficulty obtaining acquisition financing on attractive terms, or at all.

 

   

Use of resources that are needed in other parts of our business.

 

   

Use of substantial portions of our available cash to consummate the acquisition.

In addition, a significant portion of the purchase price of acquisitions may be allocated to acquired goodwill and other intangible assets on our balance sheet, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations.

Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could increase our interest expense and adversely affect our operating results on a total or per-share basis. In addition, if an acquired business fails to meet our expectations, our operating results, business, and financial position may suffer.

 

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We are dependent on the continued service of our key executives and, if we fail to retain such key executives, our business could be adversely affected.

We believe that our success depends in part on the continued services of our senior management team, including Raul Villar Jr., our Chief Executive Officer, Adam Ante, our Chief Financial Officer, Chuck Mueller, our Chief Revenue Officer, and other executive officers. Our business could be adversely affected if we fail to retain these key executives. Except with Mr. Villar Jr., Mr. Ante and Mr. Mueller, we do not have employment agreements with our executive officers or other key personnel that require them to continue to work for us for any specified period, and, therefore, they could terminate their employment with us at any time. Although the employment arrangements of certain of our key executives contain non-competition restrictions, our business could nonetheless be adversely affected if a key executive leaves Paycor and attempts to compete with us. In addition, we have not purchased key person life insurance on any members of our executive team.

If we are unable to attract and retain qualified personnel, including software developers and skilled IT, sales, marketing, and operational personnel, our ability to develop and market new and existing products, as well as acquire and retain customers, and, in turn, increase our revenue and profitability could be adversely affected.

Our future success is dependent on our ability to continue to enhance and introduce new applications. As a result, we are heavily dependent on our ability to attract and retain qualified software developers and IT personnel with the requisite education, background, and industry experience. In addition, to continue to execute our growth strategy, we must also attract and retain qualified sales, marketing, and operational personnel capable of supporting a larger and more diverse customer base. The software industry is characterized by a high level of employee mobility and aggressive recruiting among competitors. This competition for qualified personnel may be amplified by new immigration laws or policies that could limit software companies’ ability to recruit internationally. Although such changes in immigration laws or policies would not have a significant direct impact on our workforce, the ensuing increase in demand for software developers and IT personnel could impair our ability to attract or retain skilled employees and/or significantly increase our costs to do so. Furthermore, identifying and recruiting qualified personnel and training them in the use of our applications requires considerable time, expense, and attention, and it can take a substantial amount of time before our employees are fully trained and productive. Additionally, to the extent we hire employees that are subject to non-competition agreements with prior employers, they and we may be subject to litigation to enforce such agreements, which may divert their and our attention and resources and ultimately result in their inability to remain employed by us. Certain of our employees have been or are a party to litigation of non-competition agreements, which we have agreed to defend. The loss of the services of a significant number of employees could be disruptive to our development efforts, which may adversely affect our business by causing us to lose customers, increase operating expenses, or divert management’s attention to recruit replacements for the departed employees.

We may pay employees and taxing authorities amounts due for a payroll period before a customer’s electronic funds transfers are finally settled to our account. If customer payments are rejected by banking institutions or otherwise fail to clear into our accounts, we may require additional sources of short-term liquidity or incur a loss and our operating results could be adversely affected.

Our payroll processing application moves significant funds from the account of a customer to employees and relevant taxing authorities. For larger funding amounts, we typically require customers to transfer the funds to us via fed wire, but we sometimes process payroll prior to confirmation of receipt of such funds. For smaller funding amounts, we debit a customer’s account prior to any disbursement on its behalf, and due to ACH banking regulations, funds previously credited could be reversed under certain circumstances and time frames after our payment of amounts due to employees and taxing and other regulatory authorities. There is therefore a risk that the customer’s funds will be insufficient to cover the amounts we have already paid on its behalf. While such shortage and accompanying financial exposure has only occurred in very limited circumstances in the past, should customers default on their payment obligations in the future, we might be required to advance substantial funds to cover such obligations. Additionally, if our customers enter into bankruptcy or liquidation proceedings

 

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following such a default, we may be treated as an unsecured creditor and incur related expenses or fail to obtain the full amount of such obligation, resulting in a loss. For example, we have in the past had customers enter into Chapter 11 bankruptcy proceedings following a failure to fund payroll that we advanced. In such an event, we may incur a negative impact to our cash position and be required to seek additional sources of short-term liquidity, which may not be available on reasonable terms, if at all, and our operating results and our liquidity could be adversely affected, and our banking relationships could be harmed.

Our financial results may continue to fluctuate due to many factors, some of which may be beyond our control.

Our results of operations, including our revenues, costs of revenues, administrative expenses, operating income, cash flow, and deferred revenue, may vary significantly in the future, and the results of any one period should not be relied upon as an indication of future performance. Fluctuations in our financial results may negatively impact the value of our common stock. Our financial results may fluctuate because of a variety of factors, many of which are outside of our control, and as a result, may not fully reflect the underlying performance of our business. Factors that may cause our financial results to fluctuate from period to period include, without limitation:

 

   

Our ability to attract new customers or sell additional applications to our existing customers.

 

   

The number of new customers and their employees, as compared to the number of existing customers and their employees in a particular period.

 

   

The mix of customers between small and mid-sized organizations.

 

   

The extent to which we retain existing customers and the expansion or contraction of our relationships with them.

 

   

The mix of applications sold during a period.

 

   

Changes in our pricing policies or those of our competitors.

 

   

Seasonal factors affecting payroll processing, demand for our applications, or potential customers’ purchasing decisions.

 

   

The amount and timing of operating expenses, including those related to the maintenance and expansion of our business, operations, and infrastructure.

 

   

The timing and success of new applications introduced by us and the timing of expenses related to the development of new applications and technologies.

 

   

The timing and success of current and new competitive products and services offered by our competitors.

 

   

Economic conditions affecting our customers, including their ability to outsource HCM solutions and hire employees.

 

   

Business disruptions caused by pandemics such as the COVID-19 pandemic.

 

   

Changes in laws, regulations, or policies affecting our customers’ legal obligations and, as a result, demand for certain applications.

 

   

Changes in the competitive dynamics of our industry, including consolidation among competitors or customers.

 

   

Our ability to manage our existing business and future growth, including expenses related to our data centers, and the expansion of such data centers and the addition of new offices.

 

   

The effects and expenses of acquisition of third-party technologies or businesses and any potential future charges for impairment of goodwill resulting from those acquisitions.

 

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Inclement weather or natural disasters, including but not limited to tornadoes, hurricanes, fires, earthquakes, and floods.

 

   

Network outages or security breaches.

 

   

General economic, industry, and market conditions.

 

   

The other factors described in this “Risk Factors” section.

Our number of new customers typically increases more during our third fiscal quarter ending March 31 than during the rest of our fiscal year, primarily because many new customers prefer to start using our payroll or HCM solutions at the beginning of a calendar year. In addition, client funds and year-end activities are traditionally higher during our third fiscal quarter.

We have a history of losses and may not achieve or maintain profitability in the future.

We incurred losses from operations of $57.0 million and $64.8 million for the nine months ended March 31, 2021 and 2020, respectively. Additionally, we incurred losses from operations of $94.7 million, $88.7 million and $16.6 million in the fiscal year ended June 30, 2020, Successor 2019 Period, and Predecessor 2019 Period, respectively. We must generate and sustain higher revenue levels in future periods to become profitable, and, even if we do, we may not be able to maintain or increase our profitability. We expect to continue to incur losses for the foreseeable future as we expend substantial financial and other resources on, among other things:

 

   

Sales and marketing, including expanding our direct sales team.

 

   

Investments in the development of new products and new features for, and enhancement of, our existing products.

 

   

Expansion of our operations and infrastructure organically and through acquisitions and strategic partnerships, both domestically and internationally.

 

   

General administration, including legal, risk management, accounting, and other expenses related to being a public company.

These expenditures may not result in additional revenue or the growth of our business. Accordingly, we may not be able to generate sufficient revenue to offset our expected cost increases and achieve and sustain profitability. If we fail to achieve and sustain profitability, the market price of our common stock could decline.

If our goodwill or other intangible assets become impaired, we may be required to record a significant charge to earnings.

We are required to test goodwill for impairment at least annually or earlier if events or changes in circumstances indicate the carrying value may not be recoverable. As of March 31, 2021, we had recorded a total of $750.4 million of goodwill and $387.4 million of other intangible assets. An adverse change in domestic or global market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates made in connection with the impairment testing of goodwill or intangible assets, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or other intangible assets. Any such material charges may have a negative impact on our operating results or financial condition.

Corporate investments and client funds that we hold are subject to market, interest rate, credit, and liquidity risks. The loss of these funds could have an adverse impact on our business.

We invest portions of excess cash and cash equivalents and funds held for customers in liquid, investment-grade marketable securities such as corporate bonds, commercial paper, asset-backed securities, U.S. treasury securities, money market securities, and other cash equivalents. We follow an established investment policy and

 

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set of guidelines to monitor and help mitigate our exposure to liquidity and credit risks. Nevertheless, our corporate investments and client fund assets are subject to general market, interest rate, credit, and liquidity risks. These risks may be exacerbated, individually or in unison, during periods of unusual financial market volatility as has been, and may continue to be, experienced because of the COVID-19 pandemic. Any loss of or inability to access our corporate investments or client funds could have adverse impacts on our business, results of operations, financial condition, and liquidity.

Our estimates of certain operational metrics, as well as of total addressable market and market growth, are subject to inherent challenges in measurement.

We make certain estimates with regard to certain operational metrics which we track using internal systems that are not independently verified by any third party. While the metrics presented in this prospectus are based on what we believe to be reasonable assumptions and estimates, our internal systems have a number of limitations, and our methodologies for tracking these metrics may change over time.

Additionally, total addressable market and growth estimates are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Our estimates relating to size and expected growth of our market may prove to be inaccurate. Even if the market in which we compete meets our size and growth estimates, our business could fail to grow at similar rates. If investors do not perceive our estimates of total addressable market and market growth or our operational metrics to be accurate, or if we discover material inaccuracies with respect to these figures, our reputation may be significantly harmed, and our results of operations and financial condition could be adversely affected.

In the event of a catastrophe, our business continuity plan may fail, which could result in the loss of customer data and adversely interrupt operations.

Our operations are dependent on our ability to protect our infrastructure against damage from catastrophe or natural disaster, severe weather, including events resulting from climate change, unauthorized security breach, power loss, telecommunications failure, terrorist attack, public health emergency, or other events that could have a significant disruptive effect on our operations. We have customer service and sales Associates based in or near Jacksonville, Florida, an area that has experienced hurricanes and that faces a threat from hurricanes. We have a business continuity plan in place in the event of system failure due to any of these events. Our business continuity plan has been tested in the past by circumstances of severe weather, including hurricanes, floods, and snowstorms, and has been successful. However, these past successes are not an indicator of success in the future. If the business continuity plan is unsuccessful in a disaster recovery scenario, we could potentially lose customer data or experience material adverse interruptions to our operations, or delivery of services to our customers.

Risks Relating to Information Technology Systems and Intellectual Property

If our security measures are breached, or unauthorized access to our customers’ or their employees’ personal data is otherwise obtained, we may be subject to lawsuits, fines, or other regulatory action, causing us to incur significant costs related to remediation, our solutions may not be perceived as being secure, customers may reduce the use of or stop using our solutions, our ability to attract new customers may be harmed, and we may incur significant liabilities.

Our solutions involve the collection, processing, storage, use, disclosure, and transmission of customers’ and their employees’ confidential and proprietary information, including personal data, as well as financial and payroll data. We rely on the efficient and uninterrupted operation of complex information technology systems and networks to operate our business. Attempts by others to gain unauthorized access to information technology systems and the data contained therein are becoming increasingly sophisticated and difficult to prevent. In particular, HCM software such as ours may be specifically targeted in cyber-attacks, including by way of

 

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computer viruses, worms, phishing attacks, ransomware, malicious software programs, and other data security threats, which could result in the unauthorized release, access, gathering, monitoring, encryption, misuse, loss, or destruction of our customers’ sensitive and/or confidential data (including personal data), or otherwise disrupt our customers’ or other third parties’ business operations. If cybercriminals can circumvent our security measures, or if we are unable to detect an intrusion into or misuse of our systems and contain such intrusion or misuse in a reasonable amount of time, our information and our customers’ personal data, including confidential and personal data, may be compromised. We seek to detect and investigate all security incidents and to prevent their recurrence, but, in some cases, we might be unaware of an incident or its magnitude and effects. There can be no assurance that our information technology (“IT”) security and recovery system will be sufficient to prevent or limit the damage from any future cyber-attack or disruptions or to allow us to reinstate any operations that were affected by such attack or disruption. Additionally, customers or other third parties may seek monetary damages from us in connection with any such breaches or other incidents.

Certain of our employees have access to personal data about our customers’ employees. While we conduct background checks of our employees and limit access to systems and data, it is possible that one or more of these individuals may circumvent these controls, resulting in a security breach. Outside parties have in the past, and may also attempt in the future to fraudulently induce our employees to disclose personal data via illegal electronic spamming, phishing, or other tactics. In addition, some of our third-party service providers and other vendors have access to certain portions of our IT system. Any failures or negligence on the part of these service providers may cause material disruptions in our business.

Although we have security measures in place to protect regulated and personal data, including personal data, and prevent data loss and other security breaches, these measures could be breached because of third-party action, employee error, third-party or employee malfeasance, or otherwise. Because the techniques used to obtain unauthorized access or to sabotage systems change frequently, we may not be able to anticipate these techniques and implement adequate preventative or protective measures. While we currently maintain a cyber liability insurance policy, our cyber liability insurance coverage may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our cyber liability insurance policy may not cover all claims made against us, and defending a suit, regardless of its merit, could be costly and divert management’s attention from our business and operations.

We have experienced data security incidents in the past, and expect to experience additional incidents in the future, however, to date no such incidents have been material. Any actual or perceived data security breach or incident could require notifications to data subjects, data owners, and/or other third parties (including regulators) under applicable data breach notification laws, damage our reputation, cause existing customers to discontinue the use of our solutions, prevent us from attracting new customers, or subject us to third-party lawsuits, regulatory fines, or other actions or liabilities, any of which could adversely affect our business, operating results or financial condition.

If our systems, or the systems at our third-party service providers, were breached or attacked, the proprietary and confidential information of our company and our customers as well as personal data could be disclosed, and we may be required to incur substantial costs and liabilities, including the following:

 

   

Expenses to rectify the consequences of the security breach or cyber-attack.

 

   

Claims by customers or their employees related to stolen information, including personal data.

 

   

Costs of repairing damage to our systems.

 

   

Lost revenue and income resulting from any system downtime caused by such breach or attack.

 

   

Loss of competitive advantage if our proprietary information is obtained by competitors as a result of such breach or attack.

 

   

Increased costs of cyber security insurance or other security risk mitigation tools.

 

   

Damage to our reputation.

 

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As a result, any compromise of security of our systems or cyber-attack could have a material adverse effect on our business, reputation, financial condition, and operating results.

Any damage, failure, or disruption of our SaaS delivery model, data centers, or our third-party providers’ services, could impair our ability to effectively provide our solutions, harm our reputation, and adversely affect our business.

Our SaaS delivery model is a critical part of our business operations. Our customers access our solutions through our cloud-based platform and depend on us for fast and reliable access to our solutions. We serve clients from two data centers located in Lebanon, Ohio and Lombard, Illinois. We also have agreements with Microsoft Azure and Amazon Web Services for externally hosted cloud computing services. Our SaaS delivery model and data centers, as well as externally hosted cloud services, are vulnerable to damage, failure, and disruption.

Furthermore, our payroll module is essential to our customers’ timely payment of wages to their employees. Any interruption in our service may affect the availability, accuracy, or timeliness of these programs and could damage our reputation, cause our customers to terminate their relationship with us, or prevent us from gaining additional business from current or future customers.

In the future, we may experience issues with our cloud-based infrastructure or data centers caused by the following factors:

 

   

Human error.

 

   

Telecommunications failures or outages from third-party providers.

 

   

Computer viruses, cyber-attacks or other security breaches.

 

   

Acts of terrorism, sabotage, intentional acts of vandalism, or other misconduct.

 

   

Tornadoes, fires, earthquakes, hurricanes, floods, and other natural disasters.

 

   

Power loss.

 

   

Other unforeseen interruptions or damages.

If our SaaS delivery model or our customers’ ability to access our platform is interrupted, customer and employee data may be permanently lost, and we could be exposed to significant claims by customers, particularly if the access interruption is associated with problems in the timely delivery of funds payable to employees. Further, any adverse changes in service levels at our data centers resulting from damage to or failure of such centers could result in disruptions in our services. We also may decide to employ additional offsite data centers in the future to accommodate growth. Problems faced by our data center locations (such as a hardware or other supply chain disruption resulting from the COVID-19 pandemic), with the telecommunications network providers with whom we contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the availability and processing of our solutions and related services and the experience of our customers. If our data centers are unable to keep up with our growing needs for capacity, this could have an adverse effect on our business and cause us to incur additional expense. Further, any significant instances of system downtime or performance problems at our data centers could negatively affect our reputation and ability to attract new customers, prevent us from gaining new or additional business from our current customers, or cause our current customers to terminate their use of our solutions, any of which would adversely impact our revenues. In addition, if our cloud-based infrastructure and data centers fail to support increased capacity due to growth in our business, our customers may experience interruptions in the availability of our solutions. Such interruptions may reduce our revenues, cause us to issue refunds to customers, or adversely affect our retention of existing customers, any of which could have a negative impact on our business, operating results, or financial condition.

In addition, our third-party providers have experienced, and may in the future experience, interruptions and delays in their services. For example, Microsoft Office 365 has had outages that impacted us. The Microsoft

 

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Office 365 issues created unavailability of their applications for a period of time that reduced our employees’ productivity and effectiveness. Despite precaution our third-party providers may take, delays or outages in third-party provider services could also harm our business.

If we fail to adequately protect our proprietary rights, our competitive advantage could be impaired, and we may lose valuable assets, generate reduced revenues, or incur costly litigation to protect our rights.

Our success is dependent in part upon our intellectual property. We rely on a combination of copyrights, trademarks, service marks, trade secret, and other intellectual property laws and contractual provisions to establish and to protect our intellectual property and other proprietary rights. However, the steps we take to protect our intellectual property and other proprietary rights may be inadequate. We will not be able to protect our intellectual property and other proprietary rights if we are unable to enforce our rights, or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our applications and use information that we regard as proprietary to create products or services that compete with ours.

We may be required to spend significant resources to monitor and protect our intellectual property and other proprietary rights. Litigation may be necessary in the future to defend, protect, and enforce our intellectual property rights and to protect our trade secrets. Such litigation could be costly, time-consuming, and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. We may not be able to secure, protect and enforce our intellectual property rights or control access to, or the distribution of, our solutions and proprietary information, which could adversely affect our business. A failure to protect our intellectual property or other proprietary rights could adversely affect our business, financial condition, and results of operations.

The use of open source software in our applications may expose us to additional risks and harm our intellectual property rights.

We have in the past and may in the future continue to incorporate certain “open source” software into our codebase and our solutions. Open source software is generally licensed by its authors or other third parties under open source licenses, which typically do not provide for any representations, warranties, or indemnity coverage by the licensor. Some of these licenses provide that combinations of open source software with a licensee’s proprietary software is subject to the open source license and require that the combination be made available to third parties in source code form or at no cost. Some open source licenses may also require the licensee to grant licenses under certain of its intellectual property to third parties. From time to time, there have been claims challenging the ownership of open source software against companies that incorporate such software into their products or applications. The terms of various open source licenses have not been interpreted by courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our use of open source software. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition, or require us to devote additional development resources to change our applications. In addition, if we were to combine our applications with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our applications. If we inappropriately use open source software, we may be required to redesign our applications, discontinue the sale of our solutions, or take other remedial actions, which could adversely impact our business, operating results, or financial condition.

We may be sued by third parties for alleged infringement of their proprietary rights.

There is patent and other intellectual property development activity in our industry. We cannot guarantee that the operation of our business does not infringe upon the intellectual property rights of others. Our

 

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competitors, as well as other entities or individuals, may own or claim to own intellectual property relevant to our industry. In the future, others may claim that our solutions and underlying technology infringe or violate their intellectual property rights. However, we may be unaware of the intellectual property rights that others may claim cover some or all our products. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages, settlement costs or royalty payments, indemnify our customers or business partners or refund fees, obtain licenses, prevent us from offering or require us to modify our products, services, applications, or technology, or require that we comply with other unfavorable terms. Even if we were to prevail in such a dispute, any litigation or dispute regarding our intellectual property could be costly and time-consuming, and divert the attention of our management and key personnel from our business operations.

Risks Relating to Our Industry

If the market for cloud-based HCM and payroll software among SMBs develops more slowly than we expect or declines, our business could be adversely affected.

We believe that the market for cloud-based HCM and payroll software is not as mature among SMBs as the market for outsourced services or on-premise software and services. It is not certain that cloud-based solutions will achieve and sustain high levels of customer demand and market acceptance. Our success will depend to a substantial extent on the widespread adoption by SMBs of cloud-based computing in general, and of payroll and other HCM tools. It is difficult to predict customer adoption rates and demand for our solutions, the future growth rate and size of the cloud-based market or the entry of competitive solutions. The expansion of the cloud-based market depends on several factors, including the cost, performance, and perceived value associated with cloud-based computing, as well as the ability of cloud-based solutions to address security and privacy concerns. If other cloud-based providers experience security incidents, loss of customer data, disruptions in delivery or other problems, the market for cloud-based applications, including our solutions, may be negatively affected. If cloud-based HCM and payroll solutions do not achieve widespread adoption among SMBs, or there is a reduction in demand for cloud-based computing caused by a lack of customer acceptance, technological challenges, weakening economic conditions, public health issues such as the COVID-19 pandemic, security or privacy concerns, competing technologies and products, decreases in corporate spending or otherwise, it could result in a loss of customers, decreased revenues, and an adverse impact on our business.

The markets in which we operate are highly competitive, and if we do not compete effectively, our operating results could be adversely affected.

The market for HCM and payroll solutions is fragmented, highly competitive, and rapidly changing. Our competitors may develop products that are superior to our products or achieve greater market acceptance. We may be unable to compete successfully against current or future competitors. With the introduction of new technologies and market entrants, competition could intensify in the future.

We believe the principal competitive factors in our market include breadth and depth of product functionality, scalability and reliability of applications, modern and innovative cloud technology platforms combined with an intuitive user experience, multi-country and jurisdiction domain expertise in HCM and payroll, quality of implementation and customer service, integration with a wide variety of third-party applications and systems, total cost of ownership and ROI, brand awareness, reputation, pricing, and distribution. We face a variety of competitors, some of which are long-established providers of HCM solutions.

Several of our competitors are larger, have greater name recognition, longer operating histories, and significantly greater resources than we do. Many of these competitors can devote greater resources to the development, promotion, and sale of their products and services. Furthermore, our current or potential competitors may be acquired by third parties with greater available resources and the ability to initiate or withstand substantial price competition, which may include price concessions, delayed payment terms, or other

 

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terms and conditions that are more enticing to potential customers. As a result, our competitors may be able to develop products and services better received by our markets, or may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, regulations, or customer requirements.

In order to capitalize on customer demand for cloud applications, legacy vendors are modernizing and expanding their applications through cloud acquisitions and organic development. Legacy vendors may also seek to partner with other leading cloud HCM providers. We also face competition from vendors selling custom software and point solutions. Our competitors vary for each of our solutions and primarily include payroll and HR service and software providers, such as Automatic Data Processing, Inc., Paychex, Inc., Paycom Software, Inc., Paylocity Holding Corp., Ultimate Software Group, Inc. and other local and regional providers. In addition, other companies, such as NetSuite, Inc. and Microsoft Corporation, that provide cloud applications in different target markets, may develop applications or acquire companies that operate in our target markets, and some potential customers may elect to develop their own internal applications. Our competitors could offer HCM solutions on a standalone basis or bundled as part of a larger product sale.

In addition, current and potential competitors have established, and might in the future establish, partner, or form other cooperative relationships with vendors of complementary products, technologies, or services to enable them to offer new products and services, to compete more effectively or to increase the availability of their products in the marketplace. New competitors or relationships might emerge that have greater market share, a larger customer base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources, and larger sales forces than we have, which could put us at a competitive disadvantage. Considering these advantages, current or potential customers might accept competitive offerings in lieu of purchasing our offerings. We expect intense competition to continue for these reasons, and such competition could negatively impact our sales, profitability, or market share.

If our competitors’ products, services, or technologies become more accepted than our applications, if they are successful in bringing their products or services to market earlier than ours, or if their products or services are more technologically capable than ours, it could have a material adverse effect on our business, financial condition, and results of operations. In addition, some of our competitors may offer their products and services at a lower price. If we are unable to achieve our target pricing levels or if we experience significant pricing pressures, it could have a material adverse effect on our business, financial condition, and results of operations.

Adverse economic and market conditions could affect our business, operating results or financial condition.

Our business depends on the overall demand for HCM solutions and on the economic health of our current and prospective customers. Trade, monetary and fiscal policies, and political and economic conditions may substantially change, and credit markets may experience periods of constriction and volatility. If economic conditions in the United States or in global markets deteriorate, customers may cease their operations, eliminate or reduce unscheduled payroll runs (such as bonuses), reduce headcount, delay or reduce their spending on HCM and other outsourcing services, or attempt to renegotiate their contracts with us. An economic decline could result in reductions in sales of our solutions, decreased revenue from unscheduled payroll runs and fees charged on a per-employee basis, longer sales cycles, slower adoption of new technologies, reduced levels of employee headcount at our customers, which impacts our revenue levels and increased price competition, any of which could adversely affect our business, operating results, or financial condition. For example, in 2020 our customers experienced reductions in headcount that were in line with the overall U.S. labor markets. In last quarter of fiscal year 2020, we experienced a decline in new client sales, and some customers delayed implementation of new services. In addition, HCM spending levels may not increase following any recovery.

In recent years, there have been several instances when there has been uncertainty regarding the ability of Congress and the President collectively to reach agreement on federal budgetary and spending matters. A period of failure to reach agreement on these matters, particularly if accompanied by an actual or threatened government shutdown, may have an adverse impact on the U.S. economy. In addition, there has been pressure to reduce

 

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government spending in the United States, and any tax increases and spending cuts at the U.S. federal level might reduce demand for our applications from organizations that receive funding from the U.S. government and could negatively affect the U.S. economy, which could further reduce demand for our applications. Additionally, because certain of our customers rely on government resources to fund their operations, a prolonged government shutdown may affect such customers’ ability to make timely payments to us, which could adversely affect our operations results or financial condition.

Further, as part of our payroll and tax filing application, we collect and then remit client funds to taxing authorities and accounts designated by our customers. During the interval between receipt and disbursement, we may invest such funds in money market funds, demand deposit accounts, certificates of deposit and commercial paper. These investments are subject to general market, interest rate, credit and liquidity risks, and such risks may be exacerbated during periods of unusual financial market volatility. Any loss of or inability to access such funds could have an adverse impact on our cash position and results of operations and could require us to obtain additional sources of liquidity, which may not be available on terms that are acceptable to us, if at all.

The novel coronavirus pandemic could continue to adversely impact, our business, results of operations, cash flows, financial condition, and liquidity.

The global spread of the novel coronavirus pandemic (the “COVID-19 pandemic”) has created significant volatility, uncertainty, and economic disruption. Individually and collectively, the consequences of the COVID-19 pandemic have adversely impacted, and could continue to adversely impact our business, results of operations, cash flows, financial condition and liquidity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Impact.” In the United States and globally, governmental authorities instituted certain preventative measures, including border closures, travel restrictions, operational restrictions on certain businesses, shelter-in-place orders, quarantines, and recommendations to practice social distancing. These restrictions disrupted and may continue to disrupt economic activity, resulting in reduced commercial and consumer confidence and spending, increased unemployment, closure or restricted operating conditions for businesses, volatility in the global capital markets, instability in the credit and financial markets, labor shortages, regulatory recommendations to provide relief for impacted consumers, disruption in supply chains, and restrictions on many hospitality and travel industry operations. The extent to which the COVID-19 pandemic impacts our business, results of operations, cash flows, financial condition and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to:

 

   

The severity, duration, and scope of the pandemic.

 

   

Governmental, business, and individual actions taken in response to the pandemic and the impact of those actions on global economic activity.

 

   

The impact of business disruptions and reductions in headcount on our customers and the resulting impact on their demand for our services and solutions.

 

   

The administration of vaccines for COVID-19 or other effective treatments for COVID-19, the pace of which remains uncertain, and the efficacy of vaccines against new variants or mutations.

 

   

The increase in business failures among businesses that we serve.

 

   

Our customers’ ability to pay for our services and solutions.

 

   

Our ability to provide our services and solutions, including because of our employees or our customers’ employees working remotely and/or closures of offices and facilities.

Across many industries, temporary and permanent business closures as well as business occupancy limitations have resulted in significant layoffs and employee furloughs since late March 2020. Because we charge our customers on a per-employee-per-month basis for certain services we provide, decreases in headcount

 

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at our customers negatively impact our results of operations. Further, at the end of fiscal year 2020, following the onset of the COVID-19 pandemic, we experienced a decline in new client sales, and some customers temporarily delayed implementation of new services. As the COVID-19 pandemic continues to create uncertainty and the potential for ongoing business disruptions, we may experience similar customer-driven delays in service implementation in the future. Our customers may decrease their workforce, which would decrease their demand for our services. Because of spending constraints on our customers and competition in the industry, we may face pricing pressure on our services and face challenges in onboarding new customers, which would reduce revenue and ultimately impact our results of operations.

In order to spur economic activity and counteract the adverse effects of the COVID-19 pandemic, the Federal Open Market Committee lowered its target for the federal funds rate in March 2020. In addition, a provision in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) allows employers to delay the payment of the employer’s share of Social Security taxes to a future date. To the extent our customers make such election, we will collect less money from them to hold and then remit to the appropriate federal or state taxing authorities, which adversely affects our average funds held for customers balance and, consequently, interest earned on funds held for customers. Significantly lower average interest rates in 2020, had a negative effect on interest earned on funds held for customers and, consequently, total revenue growth. We expect that the foregoing adverse economic factors will continue to have a negative impact on recurring revenues in future periods for so long as such conditions persist. Further, the impact of the pandemic on our recurring revenues combined with our deliberate, increased level of investment to drive the growth of our business may negatively affect net income.

Beginning in February 2020, we took various actions to minimize the risk of COVID-19 to our employees, our customers, and the communities in which we operate. Our remote work arrangements may create operational challenges and may result in increased costs related to investments in technology. As of September 30, 2020, approximately 97% of our employees were working remotely. See “—Risks Relating to Information Technology Systems and Intellectual Property—If our security measures are breached, or unauthorized access to our customers’ or their employees’ personal data is otherwise obtained, we may be subject to lawsuits, fines, or other regulatory action, causing us to incur significant costs related to remediation, our solutions may not be perceived as being secure, customers may reduce the use of or stop using our solutions, our ability to attract new customers may be harmed, and we may incur significant liabilities.”

Furthermore, we have prohibited non-critical business-related travel until further notice and our salesforce is conducting most sales meetings virtually. If customers and customer prospects are not as willing or available to engage via video conference and teleconference, the shift from in-person to virtual sales meetings could negatively affect our sales efforts, impede customer acquisition, and lengthen our sales cycles, which would negatively impact our business and results of operations and could impact our financial condition in the future.

There has been and may continue to be a significant number of new laws and regulations promulgated by federal, state, local, and foreign governments following the outbreak of the COVID-19 pandemic. We have expended additional resources and incurred additional costs in responding to regulatory requirements relevant to us and our customers. These regulations may be unclear, difficult to interpret, or in conflict with other applicable regulations. The failure to comply with these new laws and regulations could result in financial penalties, legal proceedings, and reputational harm.

Even after the COVID-19 pandemic has subsided, depending upon its duration and frequency of recurrence, and the governmental policies in response thereto, we may continue to experience materially adverse impacts to our business because of its global economic impact, including any recession that may occur or be continuing as a result. We continue to monitor and evaluate the extent to which the COVID-19 pandemic has impacted us and our employees and customers, and the extent to which it and other emerging developments are expected to impact us in the future.

 

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The extent to which the coronavirus pandemic impacts our business, operations, and financial results is uncertain and will depend on future developments, including the duration or recurrence, of the pandemic, the related length and severity of its impact on the U.S. and global economy, and the continued governmental, business and individual actions taken in response to the pandemic and economic disruption. Impacts related to the COVID-19 pandemic are expected to continue to pose risks to our business for the foreseeable future, heightened many of the risks and uncertainties identified above, and could have a materially adverse impact on our business, financial condition, and results of operations.

Risks Relating to Regulation and Litigation

Customers depend on our products and services to enable them to comply with applicable laws, which requires us and our third-party providers to constantly monitor applicable laws and to make applicable changes to our solutions; if our solutions have not been updated to enable the customer to comply with applicable laws or we fail to update our solutions on a timely basis, it could have a material adverse effect on our business, financial condition, and results of operations.

Customers rely on our solutions to enable them to comply with payroll, HR, and other applicable laws for which the solutions are intended for use. Changes in tax, benefits, and other laws and regulations could require us to make significant modifications to our products or to delay or to cease sales of certain products, which could result in reduced revenues or revenue growth, and incurring substantial expenses, and write-offs. There are thousands of jurisdictions in the United States and multiple laws in some or all such jurisdictions, which may be relevant to the solutions that we or our third-party providers provide to our customers. Therefore, we and our third-party providers must monitor all applicable laws and as such laws expand, evolve, or are amended in any way, and when new regulations or laws are implemented, we may be required to modify our solutions to enable our customers to comply, which requires an investment of our time and resources. Although we believe that our software delivery model provides us with flexibility to release updates in response to these changes, we cannot be certain that we will be able to make the necessary changes to our solutions and release updates on a timely basis, or at all. In addition, we are reliant on our third-party providers to modify the solutions that they provide to our customers as part of our solutions to comply with changes to such laws and regulations. The number of laws and regulations that we are required to monitor will increase as we expand the geographic region in which the solutions are offered or as we expand to focus on different industry verticals. When a law changes, we must then test our solutions to meet the requirements necessary to enable our customers to comply with the new law. If our solutions fail to enable a customer to comply with applicable laws, we could be subject to negative customer experiences, harm to our reputation, loss of customers, claims for any fines, penalties, or other damages suffered by our customer, and other financial harm. Additionally, the costs associated with such monitoring implementation of changes are significant. If our solutions do not enable our customers to comply with applicable laws and regulations, it could have a material adverse effect on our business, financial condition, and results of operations.

Additionally, if we fail to make any changes to our products as described herein, which are required because of such changes to, or enactment of, any applicable laws in a timely fashion, we could be responsible for fines and penalties implemented by governmental and regulatory bodies. If we fail to provide contracted services, such as processing W-2 tax forms or remitting taxes in accordance with deadlines set by law, our customers could incur fines, penalties, interest, or other damages, which our customers could claim we are responsible for paying. Our payment of fines, penalties, interest, or other damages because of our failure to provide compliance services prior to deadlines may have a material adverse effect on our business, financial condition, and results of operations.

Changes in laws, regulations, or requirements applicable to our software and services could impose increased costs on us, delay or prevent our introduction of new products and services, or impair the function or value of our existing products and services.

Our products and services may become subject to increasing regulatory requirements, and as these requirements proliferate, we may be required to change or adapt our products and services to comply. Changing

 

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regulatory requirements might render our products and services obsolete or might block us from developing new products and services. This might in turn impose additional costs upon us to comply or to further develop our products and services. It might also make introduction of new products and services more costly or more time-consuming than we currently anticipate. It might even prevent introduction by us of new products or services or cause the continuation of our existing products or services to become more costly. For example, the adoption of new money transmitter or money services business statutes in jurisdictions or changes in regulators’ interpretation of existing state and federal money transmitter or money services business statutes or regulations, could subject us to registration or licensing, or limit business activities, cause us to enter into relationships with one or more third parties for payment services until we are appropriately licensed. These occurrences could also require changes to the manner in which we conduct some aspects of our business or invest client funds, which could adversely impact interest income from investing client funds. We have in the past entered into relationships with a third party in a state due to the interpretation of such state’s money transmitter license requirements. Should any state or federal regulators make a determination that we have operated as an unlicensed money services business or money transmitter, we could be subject to civil and criminal fines, penalties, costs, legal fees, reputational damage, or other negative consequences. In addition, if the ACA is repealed or modified in whole or in part, or if implementation of certain aspects of the ACA is delayed, such repeal, modification, or delay could adversely impact the revenue we currently generate from our ACA compliance solution as well as overall gross margins. Any of these regulatory implementations or changes could have an adverse effect on our business, operating results, or financial condition.

Privacy laws or other regulations may reduce the effectiveness of our applications.

Our products and services are subject to various complex laws and regulations on the federal, state, and local levels, including those governing data security and privacy, which have become significant issues globally. The regulatory framework for privacy issues is rapidly evolving and is likely to remain uncertain and inconsistently enforced for the foreseeable future. Many federal, state, and foreign governmental bodies and agencies have adopted or are considering adopting laws and regulations regarding the creation, collection, receipt, processing, handling, maintenance, storage, use, disclosure, and transmission of personal data and other sensitive information. In the United States, these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, the Family Medical Leave Act of 1993, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (the “ACA”), federal and state labor and employment laws, state data breach notification laws, and state privacy laws, such as the California Consumer Privacy Act (the “CCPA”) and the Illinois Biometric Information Privacy Act (the “IBIPA”).

The CCPA went into effect on January 1, 2020 and established a new privacy framework for covered businesses such as ours, which may require us to modify our data processing practices and policies. The CCPA imposes severe statutory damages and provides consumers with a private right of action for certain data breaches. Further, in November 2020, California voters passed the California Privacy Rights and Enforcement Act (“CPRA”), which expands the CCPA with additional data privacy compliance requirements that may impact our business, and establishes a regulatory agency dedicated to enforcing those requirements. It remains unclear how various provisions of the CCPA and CPRA will be interpreted and enforced.

The IBIPA regulates the collection, use, safeguarding, and storage of “biometric identifiers” or “biometric information” by companies such as ours. IBIPA includes a private right of action for persons who are aggrieved by violations of the IBIPA. Even in circumstances where we do not believe a regulation applies to our activities, we may still be the subject of lawsuits alleging a regulation does apply. We are currently a defendant in three lawsuits, two in Illinois state court, and one in federal court in the Southern District of Illinois, related to the IBIPA. Each alleges that Paycor violated IBIPA by failing to provide adequate notices and obtain consent from users of timekeeping devices that use handprint and/or fingerprint scanning for employee timekeeping. We do not believe IBIPA applies to the Company as alleged in the complaints and strenuously deny these claims. In the

 

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two state court cases, we made a motion to dismiss the action, which was denied by the court, which additionally has stayed party discovery. The federal court lawsuit was recently stayed by the court. While adverse results in these lawsuits may include awards of substantial monetary damages, we believe it is too early to determine the possibility of liability and have not accrued any potential or estimated liabilities relating to these matters.

Further, because some of our customers have establishments in the European Union (“EU”) or otherwise process the personal data of EU residents, the General Data Protection Regulation 2016/679 (“GDPR”) may apply to our processing of certain customer and employee information. The GDPR went into effect on May 25, 2018 and has resulted in and will continue to result in significantly greater compliance burdens and costs for companies like us. Any data security breach could require notifications to the data subject and/or owners under federal, U.S., U.S. state, and/or international data breach notification laws and regulations.

The effects of the CCPA, CPRA, IBIPA, GDPR and other U.S. state, U.S. federal, and international laws and regulations that are currently in effect or that may go into effect in the future, are significant and may require us to modify our data processing practices and policies and to incur substantial costs and potential liability in an effort to comply with such laws and regulations. Any actual or perceived failure to comply with these and other data protection and privacy laws and regulations could result in regulatory scrutiny and increased exposure to the risk of litigation or the imposition of consent orders, resolution agreements, requirements to take particular actions with respect to training, policies or other activities, and civil and criminal penalties, including fines, which could have an adverse effect on our results of operations or financial condition. Moreover, allegations of non-compliance, whether or not true, could be costly, time consuming, distracting to management, and cause reputational harm.

In addition to government regulation, privacy advocates, and industry groups may propose new and different self-regulatory standards. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our solutions. Any failure to comply with government laws or regulations that apply to our applications, including privacy and data protection laws, could subject us to liability. In addition to the possibility of fines, lawsuits, and other claims, we could be required to fundamentally change our business activities and practices or modify our solutions, which could have an adverse effect on our business, operating results, or financial condition. Any actual or perceived inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations, standards, and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business, operating results, or financial condition.

Furthermore, privacy concerns may cause our customers’ employees to resist providing the personal data necessary to allow our customers and their employees to use our applications effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our applications in certain industries. All these legislative and regulatory initiatives may adversely affect our ability, or our customers to create, collect, receive, process, handle, maintain, store, transmit, use, or disclose demographic and personal data from their employees, which could reduce demand for our solutions.

Adverse tax laws or regulations could be enacted, or existing laws could be applied in a manner adverse to us or our customers, which could increase the costs of our solutions and applications and could adversely affect our business, operating results, or financial condition.

As a vendor of services, we are ordinarily held responsible by taxing authorities for collecting and paying any applicable sales or other similar taxes. Additionally, the application of federal, state, and local tax laws to services provided electronically like ours is evolving. New income, sales, use, or other tax laws, statutes, rules, regulations, or ordinances could be enacted at any time (possibly with retroactive effect), and could be applied solely or disproportionately to services and applications provided over the internet. These enactments could adversely affect our sales activity, due to the inherent cost increase the taxes would represent, and could adversely affect our business, operating results, or financial condition.

 

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Each state has different rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that change over time. We review these rules and regulations periodically and, when we believe we are subject to sales and use taxes in a particular state, we may voluntarily engage state tax authorities in order to determine how to comply with that state’s rules and regulations. We cannot ensure that we will not be subject to sales and use taxes or related penalties for past sales in States where we currently believe no such taxes are required.

In addition, existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us (possibly with retroactive effect), which could require us or our customers to pay additional tax amounts, as well as require us or our customers to pay fines or penalties and substantial interest for past amounts. If we are unsuccessful in collecting such taxes from our customers, we could be held liable for such costs, thereby adversely affecting our business, operating results, or financial condition. Additionally, the imposition of such taxes on us would effectively increase the cost of our software and services we provide to customers and would likely have a negative impact on our ability to retain existing customers or to gain new customers in the jurisdictions in which such taxes are imposed.

We are involved in litigation from time to time arising from the operation of our business and, as such, we could incur substantial judgments, fines, legal fees or other costs.

We are sometimes the subject of complaints or litigation from customers, employees, or other third parties for various actions. For example, customers use our products in connection with the preparation and filing of tax returns and other regulatory reports. If any of our products contain errors that produce inaccurate results upon which users rely, or cause users to misfile or fail to file required information, we could be subject to liability claims from users. Our cloud and maintenance renewal agreements with our customers typically contain provisions intended to limit our exposure to such claims, but such provisions may not be effective in limiting our exposure. Contractual limitations we use may not be enforceable and may not provide us with adequate protection against product liability claims in certain jurisdictions. A successful claim for product or service liability brought against us could result in substantial cost to us and divert management’s attention from our operations. We are also, from time to time, involved in litigation involving claims related to, among other things, breach of contract, tortious conduct, data security and privacy matters, intellectual property matters and employment and labor law matters. The damages sought against us in some of these litigation proceedings could be substantial. Although we maintain liability insurance for some litigation claims, if one or more of the claims were to greatly exceed our insurance coverage limits or if our insurance policies do not cover a claim, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our solutions and could have a negative impact on our business.

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication, and business applications. Federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our solutions to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees, or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications resulting in reductions in the demand for Internet-based applications such as ours.

In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease of use, accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms,” and similar malicious programs, and the Internet has experienced a variety of outages and other delays because of damage to portions of its infrastructure. If the use of the Internet is adversely affected by these issues, demand for our products and services could suffer.

 

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Furthermore, the availability or performance of our products and services could be adversely affected by several factors, including customers’ inability to access the Internet, the failure of our network or software systems, security breaches, or variability in user traffic for our services. For example, our customers access our solutions through their Internet service providers. If a service provider fails to provide sufficient capacity to support our solutions or otherwise experiences service outages, such failure could interrupt our customers’ access to our solutions, adversely affect their perception of our solutions’ reliability, and reduce our revenues. In addition to potential liability, if we experience interruptions in the availability of our solutions, our reputation could be adversely affected, and we could lose customers.

Our business and reputation may be adversely impacted if we fail to comply with anti-corruption laws and regulations, economic and trade sanctions, anti-money laundering laws and regulations, and similar laws.

We are subject to the Foreign Corrupt Practices Act and other similar laws and regulations concerning bribery and corruption, which prohibit improper payments or offers of payments to government officials and politicians, and in some cases, to other persons, for the purpose of obtaining or retaining business. We are also required to comply with the economic sanctions and embargo programs administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury and similar governmental agencies and multi-national bodies worldwide, which prohibit or restrict transactions or dealings with specified countries, their governments and, in certain circumstances, their nationals, and with individuals and entities that are designated by these authorities. In addition, some of our businesses and entities are subject to anti-money laundering laws and regulations, including, for example, The Bank Secrecy Act of 1970, as amended. As we seek to expand our international operations, we may face additional risks in regards to compliance with foreign laws and regulations related to economic sanctions, anti-corruption, and anti-money-laundering. A violation of any applicable anti-corruption laws or regulations, sanctions or embargo programs, or anti-money laundering laws or regulations, could subject us, and individual employees, to a regulatory enforcement action as well as significant civil and criminal penalties which could adversely impact our business and operations and our reputation.

Risks Relating to Our Indebtedness

Our existing indebtedness could adversely affect our business and growth prospects.

As of March 31, 2021, we had total current and long-term indebtedness of approximately $44.2 million, including $18.9 million outstanding under our Headquarters Loan, $24.9 million outstanding under our 2019 Term Loan and $0.4 million outstanding under our 2019 Revolving Credit Facility. As of March 31, 2021, subject to satisfying liquidity covenants, we had approximately $49.6 million of borrowing capacity under our 2019 Revolving Credit Facility. All obligations under the 2019 Credit Agreement are secured by first-priority perfected security interests in substantially all of our assets and the assets of our domestic subsidiaries, subject to permitted liens and other exceptions. In addition, on June 11, 2021, we entered into the New Credit Facility and borrowed $44.5 million thereafter to repay in full all amounts outstanding under the 2019 Revolving Credit Facility and the Headquarters Loan, and for working capital and other general corporate purposes. As of June 30, 2021, we had $49.1 million of borrowings outstanding and $50.9 million of borrowing capacity under the New Credit Facility. The New Credit Facility includes an “accordion” feature that allows us, under certain circumstances following an initial public offering, to increase the size of the New Credit Facility by an amount up to $300.0 million. See “Description of Certain Indebtedness and Other Obligations.” Our indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets, or issue equity to obtain necessary funds. We do not know whether we will be able to take any of these actions on a timely basis, on terms satisfactory to us, or at all.

Our indebtedness, the cash flow needed to satisfy our debt and the covenants contained in our New Credit Agreement have important consequences, including:

 

   

Limiting funds otherwise available for financing our capital expenditures by requiring us to dedicate a portion of our cash flows from operations to the repayment of debt and the interest on this debt.

 

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Limiting our ability to incur additional indebtedness.

 

   

Limiting our ability to capitalize on significant business opportunities.

 

   

Making us more vulnerable to rising interest rates.

 

   

Making us more vulnerable in the event of a downturn in our business.

Our level of indebtedness may place us at a competitive disadvantage to our competitors that are not as highly leveraged. Fluctuations in interest rates can increase borrowing costs. Increases in interest rates may directly impact the amount of interest we are required to pay and reduce earnings accordingly. In addition, developments in tax policy, such as the disallowance of tax deductions for interest paid on outstanding indebtedness, could have an adverse effect on our liquidity and our business, financial conditions and results of operations. Further, our New Credit Agreement contains customary affirmative and negative covenants and certain restrictions on operations that could impose operating and financial limitations and restrictions on us, including restrictions on our ability to enter into particular transactions and to engage in other actions that we may believe are advisable or necessary for our business.

We expect to use cash flow from operations to meet current and future financial obligations, including funding our operations, debt service requirements and capital expenditures. The ability to make these payments depends on our financial and operating performance, which is subject to prevailing economic, industry and competitive conditions and to certain financial, business, economic, and other factors beyond our control.

Certain of our debt agreements contain covenants that may constrain the operation of our business, and our failure to comply with these covenants could have a material adverse effect on our financial condition.

The New Credit Agreement contains restrictive covenants including restrictions regarding the incurrence of liens and indebtedness, substantial changes in the general nature of our business and our subsidiaries (taken as a whole), certain merger transactions, certain sales of assets and other matters, all subject to certain exceptions. The New Credit Agreement contains financial covenants which are reviewed for compliance on a quarterly basis, including a total leverage ratio covenant and an interest coverage ratio covenant for each quarter after June 11, 2021. Failure to comply with the New Credit Agreement covenants or the New Loans repayment requirements could have a negative impact on our business and financial condition. The New Credit Facility matures on the earlier of (i) August 3, 2024 and (ii) the occurrence of a mandatory redemption event under the Midco Redeemable Preferred Stock; provided, however, if the Midco Redeemable Preferred Stock is redeemed in full prior to August 3, 2024, the maturity date will automatically be extended to June 11, 2026. See “Description of Certain Indebtedness and Other Obligations—Midco Redeemable Preferred Stock—Optional and Mandatory Redemption.” Our ability to refinance this indebtedness is not guaranteed, and, if we are able to refinance, we may not be able to obtain favorable terms with a lender.

Despite current indebtedness levels and restrictive covenants, we may still be able to incur substantially more indebtedness or make certain restricted payments, which could further exacerbate the risks associated with our substantial indebtedness.

We may be able to incur significant additional indebtedness in the future. Although the New Credit Agreement contains restrictions on the incurrence of additional indebtedness and liens, these restrictions are subject to a number of important qualifications and exceptions, and the additional indebtedness and liens incurred in compliance with these restrictions could be substantial.

The New Credit Agreement permits us to incur certain additional indebtedness, including liabilities that do not constitute indebtedness as defined in the financing documents. We may also consider investments in joint ventures or acquisitions, which may increase our indebtedness. In addition, the New Credit Agreement does not restrict our Sponsor from creating new holding companies that may be able to incur indebtedness without regard to the restrictions set forth therein. If new debt is added to our currently anticipated indebtedness levels, the related risks that we face could intensify.

 

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We may not be able to generate sufficient cash flow to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.

Our ability to make scheduled payments or to refinance outstanding debt obligations depends on our financial and operating performance, which will be affected by prevailing economic, industry and competitive conditions and by the COVID-19 pandemic as well as financial, business, and other factors beyond our control. We may not be able to maintain a sufficient level of cash flow from operating activities to permit us to pay the principal, premium, if any, and interest on our indebtedness. Any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which would also harm our ability to incur additional indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, or seek to restructure or refinance our indebtedness. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service obligations. The New Credit Agreement includes certain restrictions on our ability to conduct asset sales and/or use the proceeds from asset sales for general corporate purposes. We may not be able to consummate these asset sales to raise capital or sell assets at prices and on terms that we believe are fair and any proceeds that we do receive may not be adequate to meet any debt service obligations then due. If we cannot meet our debt service obligations, the holders of our indebtedness may accelerate such indebtedness and, to the extent such indebtedness is secured, foreclose on our assets. In such an event, we may not have sufficient assets to repay all of our indebtedness.

The terms of the New Credit Agreement restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

The New Credit Agreement contains a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including restrictions on our ability to:

 

   

Incur additional indebtedness.

 

   

Pay dividends on or make distributions in respect of capital stock or repurchase or redeem capital stock.

 

   

Prepay, redeem, or repurchase certain indebtedness.

 

   

Make loans and investments.

 

   

Sell or otherwise dispose of assets, including capital stock of restricted subsidiaries.

 

   

Incur liens.

 

   

Enter into transactions with affiliates.

 

   

Enter into agreements restricting the ability of our subsidiaries to pay dividends.

 

   

Consolidate, merge, or sell all or substantially all of our assets.

You should read the discussion under the heading “Description of Certain Indebtedness and Other Obligations” for further information about these covenants.

The restrictive covenants in the New Credit Agreement require us to maintain specified financial ratios and satisfy other financial condition tests to the extent applicable. Our ability to meet those financial ratios and tests can be affected by events beyond our control.

 

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A breach of the covenants or restrictions under the New Credit Agreement could result in an event of default under such documents. Such a default may allow the creditors to accelerate the related debt, which may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In the event the holders of our indebtedness accelerate the repayment, we may not have sufficient assets to repay that indebtedness or be able to borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms acceptable to us. As a result of these restrictions, we may be:

 

   

Limited in how we conduct our business.

 

   

Unable to raise additional debt or equity financing to operate during general economic or business downturns.

 

   

Unable to compete effectively or to take advantage of new business opportunities.

These restrictions, along with restrictions that may be contained in agreements evidencing or governing other future indebtedness, may affect our ability to grow in accordance with our growth strategy.

We may be unable to refinance our indebtedness.

We may need to refinance all or a portion of our indebtedness before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. There can be no assurance that we will be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all.

A lowering or withdrawal of the ratings assigned to our debt by rating agencies may increase our future borrowing costs and reduce our access to capital.

Our debt currently has a non-investment grade rating, and any rating assigned could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Any future lowering of our ratings likely would make it more difficult or more expensive for us to obtain additional debt financing.

Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies in the future could reduce our ability to compete successfully and harm our results of operations.

We may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms or at all. If we raise additional equity financing, our security holders may experience significant dilution of their ownership interests. If we engage in additional debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, force us to maintain specified liquidity or other ratios, or restrict our ability to pay dividends or make acquisitions. If we need additional capital and cannot raise it on acceptable terms, or at all, we may not be able to, among other things:

 

   

Develop and enhance our products and solutions.

 

   

Continue to expand our product development, sales, and marketing organizations.

 

   

Hire, train, and retain employees.

 

   

Respond to competitive pressures or unanticipated working capital requirements.

 

   

Pursue acquisition opportunities.

In addition, our New Credit Agreement also limits our ability to incur additional debt and therefore we likely would have to amend our New Credit Agreement or issue equity. If we issue additional equity, your interest in us will be diluted.

 

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Our variable rate debt agreements, including our New Credit Agreement, use LIBOR, which is subject to uncertainty.

If LIBOR ceases to exist or is no longer representative of the underlying market at some point in the future, our variable rate debt agreements with interest rates that are indexed to LIBOR will use various alternative methods to calculate the applicable interest rate, which could result in increases in interest rates on such debt and adversely impact our interest expense, results of operations and cash flows. Further, we may need to amend our variable rate debt agreements to replace LIBOR with a new reference rate. As of March 31, 2021 and June 30, 2020, we did not utilize any derivatives or hedging strategies that have a LIBOR component. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. Dollar LIBOR with a new index calculated by short term repurchase agreements, backed by Treasury securities called the Secured Overnight Financing Rate (“SOFR”). Whether or not SOFR attains market traction as a LIBOR replacement remains a question and the future of LIBOR at this time is uncertain. Because of this uncertainty, we cannot reasonably estimate the expected impact of a transition away from LIBOR to our business.

Risks Relating to Being a Public Company

The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an “emerging growth company.”

As a public company, we will incur legal, accounting, and other expenses that we did not previously incur. We will become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of Nasdaq, and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires that we file annual, quarterly and current reports with respect to our business, financial condition, and results of operations. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert our management’s attention from implementing our growth strategy, which could prevent us from improving our business, financial condition, and results of operations. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage, although we are currently unable to estimate these costs with any degree of certainty. These additional obligations could have a material adverse effect on our business, financial condition, and results of operations.

To date, we have not conducted a review of our internal controls for the purpose of providing the reports required by these rules. During the course of our review and testing, we have in the past and may in the future, identify deficiencies and be unable to remediate them before we must provide the required reports. Furthermore, if we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We or our independent registered public accounting firm may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting, which could harm our operating results, cause investors to lose confidence in our reported financial information and cause the trading price of our stock to fall. In addition, as a public company we will be required to file accurate and timely quarterly and annual reports with the SEC under the Exchange Act. Any failure to report

 

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our financial results on an accurate and timely basis could result in sanctions, lawsuits, delisting of our shares from Nasdaq, or other adverse consequences that would materially harm our business and reputation.

In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of our management’s time and attention from sales-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and could have a material adversely effect on our business, financial condition, and results of operations. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

If we are unable to maintain effective internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a public company, we will be required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and provide a management report on the internal controls over financial reporting. If we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. Compliance with these public company requirements will make some activities more time-consuming, costly, and complicated. If we identify material weaknesses in our internal controls over financial reporting or if we are unable to assert that our internal controls over financial reporting are effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our stock price and trading volume could decline.

The trading market for our shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the

 

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analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock price could decline.

Risks Relating to Our Common Stock and This Offering

Apax Partners controls us, and its interests may conflict with ours or yours in the future.

Immediately following this offering, Apax Partners, through its control of Pride Aggregator, will beneficially own approximately 82.4% of our common stock, or 81.1% if the underwriters exercise in full their option to purchase additional shares, which means that, based on its percentage voting power held after the offering, Apax Partners will be able to control the election and removal of directors on the Board and thereby determine our corporate and management policies, including potential mergers or acquisitions, payment of dividends, asset sales, amendment of our certificate of incorporation or bylaws, and other significant corporate transactions for so long as Apax Partners and its affiliates retain significant ownership of us. This concentration of our ownership may delay or deter possible changes in control of the Company, which may reduce the value of an investment in our common stock. In addition, our bylaws will provide that Apax Partners will have the right to designate the Chairman of the Board for so long as Apax Partners beneficially owns at least 30% or more of the voting power of the then outstanding shares of our capital stock then entitled to vote generally in the election of directors. Even when Apax Partners ceases to own shares of our stock representing a majority of the total voting power, for so long as Apax Partners continues to own a significant portion of our stock, Apax Partners will still be able to significantly influence the composition of our Board, including the right to designate the Chairman of our Board, and the approval of actions requiring shareholder approval. Accordingly, for such period of time, Apax Partners will have significant influence with respect to our management, business plans, and policies, including the appointment and removal of our officers, decisions on whether to raise future capital, and amending our charter and bylaws, which govern the rights attached to our common stock. In particular, for so long as Apax Partners continues to own a significant percentage of our stock through its control of Pride Aggregator, Apax Partners will be able to cause or prevent a change of control of the Company or a change in the composition of our Board, including the designation of our Chairman of our Board, and could preclude any unsolicited acquisition of us. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of us and ultimately might affect the market price of our common stock.

In addition, in connection with this offering, we will enter into a Director Nomination Agreement with Apax Partners that provides Apax Partners the right to designate: (i) all of the nominees for election to our Board for so long as it beneficially owns at least 40% of the Original Amount; (ii) 40% of the nominees for election to our Board for so long as it beneficially owns less than 40% but at least 30% of the Original Amount; (iii) 30% of the nominees for election to our Board for so long as it beneficially owns less than 30% but at least 20% of the Original Amount; (iv) 20% of the nominees for election to our Board for so long as it beneficially owns less than 20% but at least 10% of the Original Amount; and (v) one of the nominees for election to our Board for so long as it beneficially owns at least 5% of the Original Amount. Apax Partners may also assign such right to its affiliates. If Pride Aggregator, the investment vehicle through which Apax Partners holds its investment, is dissolved after this offering, then Apax Partners will be permitted to cause the rights of Pride Aggregator to be assigned to it or one or more of its Affiliates (as defined in the Director Nomination Agreement). The Director Nomination Agreement will also provide for certain consent rights for Apax Partners so long as it owns at least 5% of the Original Amount, including for any increase to the size of our Board. Additionally, the Director Nomination Agreement will also prohibit us from increasing or decreasing the size of our Board without the prior written consent of Apax Partners for so long as Apax Partners holds at least 5% of the Original Amount. See “Certain Relationships and Related Party Transactions—Director Nomination Agreement” for more details with respect to the Director Nomination Agreement.

 

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Apax Partners and its affiliates engage in a broad spectrum of activities, including investments in the software industry generally. In the ordinary course of their business activities, Apax Partners and its affiliates may engage in activities where their interests conflict with our interests or those of our other shareholders, such as investing in or advising businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. Our certificate of incorporation to be effective in connection with the closing of this offering will provide that none of Apax Partners, any of its affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his director and officer capacities) or its affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Apax Partners also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, Apax Partners may have an interest in pursuing acquisitions, divestitures, and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you.

Upon listing of our shares on the Nasdaq Global Select Market, we will be a “controlled company” within the meaning of Nasdaq rules of the and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections as those afforded to stockholders of companies that are subject to such governance requirements.

After completion of this offering, Apax Partners, through its control of Pride Aggregator, will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group, or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

   

The requirement that a majority of our Board consist of independent directors.

 

   

The requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

 

   

The requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

 

   

The requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

Following this offering, we intend to utilize these exemptions. As a result, we may not have a majority of independent directors on our Board, our Compensation & Benefits Committee and our Governance Committee may not consist entirely of independent directors and our Compensation & Benefits and Nominating & Governance Committees may not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

An active, liquid trading market for our common stock may not develop, which may limit your ability to sell your shares.

Prior to this offering, there has been no public market for our common stock. Although we have applied to list our common stock on the Nasdaq Global Select Market under the symbol “PYCR,” an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price will be determined by negotiations between us and the underwriters and may not be indicative of market prices of our common stock that will prevail in the open market after the offering. A public trading market having the desirable characteristics of depth, liquidity, and orderliness depends upon the existence of willing buyers and

 

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sellers at any given time, such existence being dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of our common stock. The market price of our common stock may decline below the initial public offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by issuing shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

We are an “emerging growth company” and we expect to elect to comply with reduced public company reporting requirements, which could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we are eligible for certain exemptions from various public company reporting requirements. These exemptions include, but are not limited to, (i) not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley, (ii) reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, (iii) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved, and (iv) not being required to provide audited financial statements for the fiscal year ended 2018, or five years of Selected Consolidated Financial Data, in this prospectus. We could be an emerging growth company for up to five years after the first sale of our common stock pursuant to an effective registration statement under the Securities Act, which fifth anniversary will occur in 2026. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we would cease to be an emerging growth company prior to the end of such five-year period. We have made certain elections with regard to the reduced disclosure obligations regarding executive compensation in this prospectus and may elect to take advantage of other reduced disclosure obligations in future filings. As a result, the information that we provide to holders of our common stock may be different than you might receive from other public reporting companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive as a result of our reliance on these exemptions. If some investors find our common stock less attractive as a result of any choice we make to reduce disclosure, there may be a less active trading market for our common stock and the market price for our common stock may be more volatile.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act to delay adoption of new or revised accounting standards until such time as those standards apply to private companies. We have elected to “opt-in” to this extended transition period for complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that comply with such new or revised accounting standards on a non-delayed basis. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

 

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Provisions of our corporate governance documents could make an acquisition of us more difficult and may prevent attempts by our shareholders to replace or remove our current management, even if beneficial to our shareholders.

In addition to Apax Partners’ beneficial ownership, through its control of Pride Aggregator, of 82.4% of our common stock after this offering (or 81.1%, if the underwriters exercise in full their option to purchase additional shares), our certificate of incorporation and bylaws to be effective in connection with the closing of this offering and the Delaware General Corporation Law (the “DGCL”) contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders. Among other things:

 

   

These provisions allow us to authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without shareholder approval, and which may include supermajority voting, special approval, dividend, or other rights or preferences superior to the rights of shareholders.

 

   

These provisions provide for a classified Board with staggered three-year terms.

 

   

These provisions provide that, at any time when Apax Partners beneficially owns, in the aggregate, less than 40% in voting power of our stock entitled to vote generally in the election of directors, directors may only be removed for cause, and only by the affirmative vote of holders of at least 6623% in voting power of all the then-outstanding shares of our stock entitled to vote thereon, voting together as a single class.

 

   

These provisions prohibit shareholder action by written consent from and after the date on which Apax Partners beneficially owns, in the aggregate, less than 35% in voting power of our stock entitled to vote generally in the election of directors.

 

   

These provisions provide that for as long as Apax Partners beneficially owns, in the aggregate, at least 50% in voting power of our stock entitled to vote generally in the election of directors, any amendment, alteration, rescission, or repeal of our bylaws by our shareholders will require the affirmative vote of a majority in voting power of the outstanding shares of our stock and at any time when Apax Partners beneficially owns, in the aggregate, less than 50% in voting power of all outstanding shares of our stock entitled to vote generally in the election of directors, any amendment, alteration, rescission, or repeal of our bylaws by our shareholders will require the affirmative vote of the holders of at least 6623% in voting power of all the then-outstanding shares of our stock entitled to vote thereon, voting together as a single class.

 

   

These provisions establish advance notice requirements for nominations for elections to our Board or for proposing matters that can be acted upon by shareholders at shareholder meetings; provided, however, at any time when Apax Partners beneficially owns, in the aggregate, at least 10% in voting power of our stock entitled to vote generally in the election of directors, such advance notice procedure will not apply to it.

Our certificate of incorporation to be effective in connection with the closing of this offering will contain a provision that provides us with protections similar to Section 203 of the DGCL, and will prevent us from engaging in a business combination with a person (excluding Apax Partners and any of its direct or indirect transferees and any group as to which such persons are a party) who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless board or shareholder approval is obtained prior to the acquisition. See “Description of Capital Stock—Anti-Takeover Effects of Our Certificate of Incorporation and Our Bylaws.” These provisions could discourage, delay or prevent a transaction involving a change in control of us. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take other corporate actions you desire, including actions that you may deem advantageous, or negatively affect the trading price of our common stock. In addition, because our Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our shareholders to replace current members of our management team.

 

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These and other provisions in our certificate of incorporation, bylaws, and Delaware law could make it more difficult for shareholders or potential acquirers to obtain control of our Board or initiate actions that are opposed by our then-current Board, including delay or impede a merger, tender offer, or proxy contest involving our company. The existence of these provisions could negatively affect the price of our common stock and limit opportunities for you to realize value in a corporate transaction. For information regarding these and other provisions, see “Description of Capital Stock.”

Our certificate of incorporation will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our shareholders and the federal district courts of the United States as the exclusive forum for litigation arising under the Securities Act, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us.

Pursuant to our certificate of incorporation to be effective in connection with the closing of this offering, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees to us or our shareholders, (3) any action asserting a claim against us arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws, or (4) any other action asserting a claim against us that is governed by the internal affairs doctrine; provided that for the avoidance of doubt, the forum selection provision that identifies the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation, including any “derivative action,” will not apply to suits to enforce a duty or liability created by Securities Act, the Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction. Our certificate of incorporation will also provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. However, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce a duty or liability created by the Securities Act or the rules and regulations thereunder; accordingly, we cannot be certain that a court would enforce such provision. Our certificate of incorporation will further provide that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the provisions of our certificate of incorporation described above; however, our shareholders will not be deemed to have waived (and cannot waive) compliance with the federal securities laws and the rules and regulations thereunder. See “Description of Capital Stock—Exclusive Forum.” The forum selection clause in our certificate of incorporation may have the effect of discouraging lawsuits against us or our directors and officers and may limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us. If the enforceability of our forum selection provision were to be challenged, we may incur additional costs associated with resolving such a challenge. While we currently have no basis to expect any such challenge would be successful, if a court were to find our forum selection provision to be inapplicable or unenforceable, we may incur additional costs associated with having to litigate in other jurisdictions, which could have an adverse effect on our business, financial condition, and results of operations and result in a diversion of the time and resources of our employees, management, and Board.

If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment.

The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our pro forma net tangible book value per share after this offering. Based on an assumed initial public offering price of $19.50 per share, the mid-point of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $18.96 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the initial public offering price. In addition, purchasers of common stock in this offering will have contributed 20.1% of the aggregate price paid by all purchasers of our common stock but will own only approximately 10.8% of our common stock outstanding after this offering. See “Dilution” for more detail.

 

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Our management will have significant flexibility in using the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately.

We intend to use approximately $260.0 million of the net proceeds from this offering to redeem the Midco Redeemable Preferred Stock and the remainder for general corporate purposes, such as, without limitation, the repayment of indebtedness, acquisitions, and other strategic transactions. However, depending on future developments and circumstances, we may use some of the proceeds for other purposes. We do not have more specific plans for the net proceeds from this offering, other than the redemption of the Midco Redeemable Preferred Stock as described above. Therefore, our management will have significant flexibility in applying most of the net proceeds we receive from this offering. The net proceeds could be applied in ways that do not improve our operating results. The actual amounts and timing of these expenditures will vary significantly depending on a number of factors, including the amount of cash used in or generated by our operations. See “Use of Proceeds.”

Our operating results and stock price may be volatile, and the market price of our common stock after this offering may drop below the price you pay.

Our quarterly operating results are likely to fluctuate in the future. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market, or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our operating performance. Our operating results and the trading price of our shares may fluctuate in response to various factors, including:

 

   

Market conditions in our industry or the broader stock market.

 

   

Actual or anticipated fluctuations in our quarterly financial and operating results.

 

   

Introduction of new products or services by us or our competitors.

 

   

Issuance of new or changed securities analysts’ reports or recommendations.

 

   

Sales, or anticipated sales, of large blocks of our stock.

 

   

Additions or departures of key personnel.

 

   

Regulatory or political developments.

 

   

Litigation and governmental investigations.

 

   

Changing economic conditions, including impacts from COVID-19.

 

   

Investors’ perception of us.

 

   

Events beyond our control such as weather and war.

 

   

Any default on our indebtedness.

These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our shares to fluctuate substantially. Fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.

 

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A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have 171,302,784 outstanding shares of common stock (or 174,077,784 shares if the underwriters’ option to purchase additional shares is exercised in full) based on the number of shares outstanding as of June 30, 2021. This includes the shares that we are selling in this offering, which may be resold in the public market immediately. Following the consummation of this offering, shares that are not being sold in this offering will be subject to a 180-day lock-up period provided under lock-up agreements executed in connection with this offering described in “Underwriting” and restricted from immediate resale under the federal securities laws as described in “Shares Eligible for Future Sale.” All of these shares will, however, be able to be resold after the expiration of the lock-up period, as well as pursuant to customary exceptions thereto or upon the waiver of the lock-up agreement by Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC on behalf of the underwriters. We also intend to register shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.

In addition, pursuant to the Registration Rights Agreement (as defined below), Pride Aggregator and the holders of our Series A preferred stock and their respective affiliates and permitted third-party transferees have the right, in certain circumstances, to require us to register up to 152,802,784 shares of our common stock under the Securities Act for sale into the public markets. Upon the effectiveness of such a registration statement, all shares covered by the registration statement will be freely transferable. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

Because we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We do not anticipate paying any regular cash dividends on our common stock following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of our Board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions, and other factors that our Board may deem relevant. In addition, our ability to pay dividends is, and may be in the future, limited by covenants of indebtedness we or our subsidiaries incur. Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur. See “Dividend Policy” for more detail.

We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.

Our certificate of incorporation will authorize us to issue one or more series of preferred stock. Our Board will have the authority to determine the preferences, limitations, and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our shareholders. Our preferred stock could be issued with voting, liquidation, dividend, and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium to the market price, and materially adversely affect the market price and the voting and other rights of the holders of our common stock.

 

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Future offerings of debt or equity securities by us may materially adversely affect the market price of our common stock.

In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional shares of our common stock or offering debt or other equity securities, including senior or subordinated notes, debt securities convertible into equity, or shares of preferred stock. In addition, we may seek to expand operations in the future to other markets which we would expect to finance through a combination of additional issuances of equity, corporate indebtedness, and/or cash from operations.

Issuing additional shares of our common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock or both. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing, or nature of our future offerings. Thus, holders of our common stock bear the risk that our future offerings may reduce the market price of our common stock and dilute their stockholdings in us. See “Description of Capital Stock.”

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance, and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely,” “outlook,” “potential,” “targets,” “project,” “contemplates,” the negative version of such words, and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results or our plans and objectives for future operations, growth initiatives, or strategies are forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us, Apax, the underwriters or any other person that the future plans, estimates, or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relations to our operations, financial results, financial condition, business, prospects, growth strategy, and liquidity. Accordingly there are, or will be, important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to:

 

   

Failure to manage our growth effectively.

 

   

Our ability to expand and retain our direct sales force with qualified and productive persons and the success of our direct sales force’s efforts.

 

   

The satisfaction of our customers with the implementation, user experience, customer service and performance of our solutions.

 

   

Our ability to continue to innovate and deliver high-quality, technologically advanced products and services.

 

   

The success of our relationships with third parties.

 

   

Risks associated with the proper operation of our software, including damage to our reputation, claims instituted against us, and the diversion of resources to address any issues.

 

   

Acquisitions of other companies’ businesses, technologies, or customer portfolios.

 

   

Our dependence on the continued service of our key executives.

 

   

Our ability to attract and retain qualified personnel, including software developers and skilled IT, sales, marketing, and operational personnel.

 

   

Payments made to employees and taxing authorities of our customers for amount due for a payroll period before a customer’s electronic funds transfers are settled to our account.

 

   

Potential fluctuations in our financial results due to many factors, including some that are beyond our control.

 

   

Our history of losses and potential inability to achieve or maintain profitability.

 

   

Impairment of our goodwill or other intangible assets.

 

   

Market, interest rate, credit, and liquidity risks related to the corporate investments and client funds that we hold.

 

   

Inherent challenges in measurement of our estimates of certain operational metrics, as well as total addressable market and market growth.

 

   

Risks related to our business continuity plan in the event of a catastrophe.

 

 

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Risks associated with the potential breach of our security measures and the unauthorized access to our customers’ or their employees’ personal data and the resulting effects thereof which may include lawsuits, fines, or other regulatory action, significant costs related to remediation, negative perceptions regarding the security of our solutions, and reduction or cessation of customers’ use of our solutions.

 

   

Any damage, failure, or disruption of our SaaS delivery model, data centers, or our third-party providers’ services.

 

   

Our ability to protect our intellectual and proprietary rights.

 

   

The use of open source software in our applications.

 

   

Lawsuits filed by third parties for alleged infringement of their proprietary rights.

 

   

The development of the market for cloud-based HCM and payroll software among SMBs.

 

   

The competitiveness of the markets in which we operate.

 

   

Adverse economic and market conditions.

 

   

The impact of the COVID-19 pandemic.

 

   

Our customers’ dependence on our products and services to comply with applicable laws.

 

   

Changes in laws, regulations, or requirements applicable to our business and our software and services.

 

   

Potential litigation resulting from the operation of our business.

 

   

Risks associated with our indebtedness and our debt agreements and the covenants therein.

 

   

Changes in GAAP.

 

   

Our ability to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies in the future.

 

   

The effectiveness of our internal controls over financial reporting.

 

   

Other factors disclosed in the section entitled “Risk Factors” and elsewhere in this prospectus.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as otherwise required by law.

 

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USE OF PROCEEDS

We estimate that our net proceeds from this offering will be approximately $338.2 million (or approximately $388.9 million if the underwriters’ option to purchase additional shares is exercised in full), assuming an initial public offering price of $19.50 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discount. Additional other expenses of issuance and distribution are estimated to be approximately $5.2 million.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our shareholders. We expect to use approximately $260.0 million of the net proceeds of this offering to fund the redemption of the Midco Redeemable Preferred Stock by Pride Midco at the offering date at a redemption price of 101% of the liquidation preference thereof and the remainder of such net proceeds will be used for general corporate purposes. An affiliate of Apax Partners currently owns $25 million of Midco Redeemable Preferred Stock and we expect such affiliate will receive approximately $32.5 million in proceeds as a result of the redemption of the Midco Redeemable Preferred Stock. We do not currently have agreements or commitments for any acquisitions or other strategic transactions. At this time, other than the redemption of the Midco Redeemable Preferred Stock, we have not specifically identified a large single use for which we intend to use the net proceeds and, accordingly, we are not able to allocate the net proceeds among any of these potential uses in light of the variety of factors that will impact how such net proceeds are ultimately utilized by us. Pending use of the proceeds from this offering, we intend to invest the proceeds in a variety of capital preservation investments, including short-term, investment-grade and interest-bearing instruments.

Each $1.00 increase or decrease in the assumed initial public offering price of $19.50 per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $17.3 million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount.

Each 1,000,000 increase or decrease in the number of shares offered would increase or decrease the net proceeds to us from this offering by approximately $18.3 million, assuming that the assumed initial public offering price per share for the offering remains at $19.50, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discount.

The Midco Redeemable Preferred Stock accrues dividends at a rate of LIBOR plus 8.875%, which rate will decrease to LIBOR plus 8.375% beginning November 3, 2021. The dividends are payable, or are compounded, quarterly on March 31, June 30, September 30 and December 31 of each year. From the issue date through November 2, 2020, dividends were accrued and added to the then-prevailing liquidation preference of the Midco Redeemable Preferred Stock. From November 2, 2020 to November 2, 2021, we are required pay 50% of the accrued dividends in cash. After November 2, 2021, we will be required to pay 100% of the accrued dividends in cash. If the Midco Redeemable Preferred Stock remains outstanding after May 2, 2022, we are required to pay 0.50% of the initial liquidation preference to the holders of the Midco Redeemable Preferred Stock in cash.

Additionally, Pride Midco may, at its option, redeem for cash any or all of the then outstanding Midco Redeemable Preferred Stock, in whole at any time or in part from time to time, at (i) a redemption price per share equal to 101.0% prior to and including November 1, 2021; and 100.0% on November 2, 2021 and thereafter, plus (ii) the amount of all accrued dividends for the then current and all prior dividend payment periods.

 

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DIVIDEND POLICY

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness and, therefore, we do not anticipate paying any cash dividends in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us. Any future determination to pay dividends will be at the discretion of our Board, subject to compliance with covenants in current and future agreements governing our and our subsidiaries’ indebtedness (see “Description of Certain Indebtedness and Other Obligations”) and requirements under Delaware law, and will depend on our results of operations, financial condition, capital requirements and other factors that our Board may deem relevant.

Because we are a holding company and have no direct operations, we will only be able to pay dividends from our available cash on hand and any funds we received from our subsidiaries.

Under Delaware law, dividends may be payable only out of surplus, which is calculated as our net assets less our liabilities and our capital, or, if we have no surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

See “Risk Factors—Risks Relating to Our Common Stock and This Offering—Because we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.”

 

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CAPITALIZATION

The following table describes our cash and cash equivalents and capitalization as of March 31, 2021, as follows:

 

   

On an actual basis.

 

   

On an as adjusted basis, after giving effect to (i) amounts outstanding under our New Credit Facility as of June 30, 2021 and the repayment of all outstanding indebtedness under our 2019 Credit Facility and Headquarters Loan, (ii) the conversion of all shares of our Series A preferred stock into common stock on a 1-for-1 basis, and (iii) the implementation of a 1,517.18-for-1 stock split with respect to our common stock.

 

   

On a pro forma as adjusted basis, after giving further effect to our sale of 18,500,000 shares of common stock in this offering and the application of the net proceeds from this offering to redeem the Midco Redeemable Preferred Stock as set forth under “Use of Proceeds” (assuming an initial public offering price of $19.50 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus).

The information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table in conjunction with our consolidated financial statements and the related notes, “Use of Proceeds,” “Selected Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Additionally, the table below does not reflect the impact of expenses that we expect to incur in connection with the completion of this offering. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations—Factors Affecting the Comparability of our Results of Operations—IPO-Related Expenses.”

 

     As of March 31, 2021
(unaudited)
 
(dollars in thousands)    Actual     As Adjusted     Pro Forma As
Adjusted
 

Cash and cash equivalents(1)

   $ 19,364     $ 23,964     $ 98,967  
  

 

 

   

 

 

   

 

 

 

Total debt, including current portion(2):

      

2019 Revolving Credit Facility

   $ 390     $ —       $ —    

2019 Term Loan

     24,875       —         —    

Headquarters Loan

     18,884       —         —    

New Credit Facility(3)

    
—  
 
    49,100       49,100  
  

 

 

   

 

 

   

 

 

 

Total debt

     44,149       49,100       49,100  

Midco Redeemable Preferred Stock(4)

     245,041       245,041       —    

Shareholders’ equity:

      

Common stock, $0.001 par value, 200,000 shares authorized, 100,000 shares issued and 93,000 outstanding, actual; 303,436,000 shares authorized, 152,802,784 shares issued and outstanding, as adjusted; 500,000,000 shares authorized, 171,302,784 shares issued and outstanding, pro forma as adjusted

     —         153       171  

Treasury stock, at cost, 7,000 shares, actual; 10,620,260 shares, as adjusted; 10,620,260 shares, pro forma as adjusted

     (245,074     (245,074     (245,074

Preferred stock, $0.001 par value per share, 10,000 shares authorized, 7,715 shares issued and outstanding, actual; 15,171,800 shares authorized, no shares issued and outstanding, as adjusted; 50,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted(5)

     262,772       —         —    

Additional paid-in capital

     1,134,676       1,397,295       1,735,480  

Accumulated deficit

     (242,923     (244,949     (263,108

Accumulated other comprehensive income

     2,758       2,758       2,758  
  

 

 

   

 

 

   

 

 

 

Shareholders’ equity

     912,209       910,183       1,230,227  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 1,201,399     $ 1,204,324     $ 1,279,327  
  

 

 

   

 

 

   

 

 

 

 

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(1)

As of June 30, 2021, cash and cash equivalents were $2.6 million. Except as set forth above, as adjusted and pro forma amounts do not give effect to subsequent changes in our cash position.

(2)

Reflects principal amounts, without giving effect to debt issuance costs of $0.4 million. On June 11, 2021, we entered into the New Credit Facility and used the $44.5 million in proceeds therefrom to repay in full all amounts outstanding under the 2019 Revolving Credit Facility and the Headquarters Loan, and for working capital and other general corporate purposes. We borrowed an additional $4.6 million prior to the offering date to pay $3.2 million in dividends to the Midco Redeemable Preferred Stockholders and for other general corporate purposes. See “Description of Certain Indebtedness and Other Obligations—New Senior Secured Indebtedness.”

(3)

As of June 30, 2021, we had $50.9 million of commitments available to be drawn under our New Credit Facility, and there were no outstanding letters of credit. The New Credit Facility includes an “accordion” feature that allows us, under certain circumstances following an initial public offering, to increase the size of the New Credit Facility by an amount up to $300.0 million.

(4)

The liquidation preference of the Midco Redeemable Preferred Stock includes the $200.0 million initial liquidation preference ($1,000 per share) plus accrued but unpaid dividends. The carrying value of the Midco Redeemable Preferred Stock included within the condensed consolidated financial statements changes over time as the redemption value is accreted over the period from the date of issuance to the earliest redemption date using the effective interest method. The pro forma as adjusted amounts reflect the redemption of the Midco Redeemable Preferred Stock at the offering date at a redemption price of 101% of liquidation preference, or approximately $260.0 million, and the June 30, 2021 payment of dividends of $3.2 million to the holders of the Midco Reedemable Preferred Stock.

(5)

In connection with the completion of this offering, the holders of the Series A preferred stock have agreed that the Series A preferred stock will automatically convert into shares of our common stock on a 1-to-1 basis. See “Prospectus Summary—Recent Developments—Series A Preferred Stock Issuance.”

A $1.00 increase or decrease in the assumed initial public offering price of $19.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease each of cash and cash equivalents, additional paid-in capital, total shareholders’ equity and total capitalization on a pro forma as adjusted basis by approximately $17.3 million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us.

Each 1,000,000 increase or decrease in the number of shares of common stock offered in this offering would increase or decrease each of cash and cash equivalents, additional paid-in capital, total shareholders’ equity (deficit) and total capitalization on a pro forma as adjusted basis by approximately $18.3 million, based on an assumed initial public offering price of $19.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering. Because the Reorganization Transactions will take place prior to or concurrently with the closing of this offering, we have presented dilution in as adjusted net tangible book value per share before this offering assuming (i) the conversion of all shares of our Series A preferred stock into common stock on a 1-for-1 basis and (ii) implementation of a 1,517.18-for-1 stock split with respect to our common stock, in order to more meaningfully present the dilutive impact on the investors in this offering. We also note that the effect of the Reorganization Transactions is to increase the assumed number of shares of common stock outstanding before the offering, thereby decreasing the pro forma net tangible book value per share after the offering and correspondingly increasing the dilution per share to new common stock investors.

As of March 31, 2021, we had as adjusted net tangible book value of $19.5 million, or $0.13 per share of common stock. As adjusted net tangible book value per share is equal to our total tangible assets, less total liabilities, divided by the number of outstanding shares of our common stock after giving effect to the Reorganization Transactions.

After giving effect to the sale of shares of common stock in this offering, after deducting the underwriting discount and the application of the net proceeds of this offering to redeem the Midco Redeemable Preferred Stock as set forth under “Use of Proceeds,” at an assumed initial public offering price of $19.50 per share, which is the midpoint of the price range set forth on the cover of this prospectus, our pro forma as adjusted net tangible book value as of March 31, 2021 would have been $92.4 million, or $0.54 per share of common stock. This represents an immediate increase in as adjusted net tangible book value of $0.41 per share to our existing shareholders and an immediate dilution in as adjusted net tangible book value of $18.96 per share to investors participating in this offering at the assumed initial public offering price.

As used in this “Dilution” section, our pro forma net tangible book value per share of common stock represents pro forma net tangible book value divided by the number of shares of common stock outstanding after giving effect to the Reorganization Transactions, the closing of this offering and the use of proceeds therefrom.

The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

      $ 19.50  

Historical as adjusted net tangible book value per share as of March 31, 2021

   $ 0.13     

Increase in as adjusted net tangible book value per share attributable to the investors in this offering

   $ 0.41     
  

 

 

    

Pro forma net tangible book value per share after giving effect to this offering

      $ 0.54  
     

 

 

 

Dilution in pro forma net tangible book value per share to the investors in this offering

      $ 18.96  
     

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $19.50 per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, would increase or decrease our pro forma net tangible book value per share after this offering by $0.10, and would increase or decrease the dilution per share to the investors in this offering by $0.90, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount. Similarly, each increase or decrease of one million shares in the number of shares of common stock offered by us would increase or decrease our pro forma net tangible book value per share after this offering by $0.10 and would increase or decrease dilution per share to investors in this offering by $0.10, assuming the assumed initial public offering price, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount.

 

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If the underwriters exercise their option to purchase additional shares in full, the pro forma net tangible book value per share after this offering would be $0.83, and the dilution in net tangible book value per share to new investors in this offering would be $18.67.

The following table presents, on a as adjusted basis as described above, as of March 31, 2021, the differences between our existing shareholders and the investors purchasing shares of our common stock in this offering, with respect to the number of shares purchased, the total consideration paid to us, and the average price per share paid by our existing shareholders or to be paid to us by investors purchasing shares in this offering at an assumed offering price of $19.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the underwriting discount.

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
     Number      Percentage     Amount      Percentage  

Existing Shareholders

     152,802,784        89.2   $ 1,433,852,110        79.9   $ 9.38  

New Investors

     18,500,000        10.8   $ 360,750,000        20.1   $ 19.50  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     171,302,784        100.0   $ 1,794,602,110        100.0   $ 10.48  

A $1.00 increase or decrease in the assumed initial public offering price of $19.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $18.5 million and increase or decrease the percent of total consideration paid by new investors by 0.8%, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting the underwriting discount.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares. After giving effect to sales of shares in this offering, assuming the underwriters’ option to purchase additional shares is exercised in full, our existing shareholders would own 89.2% and our new investors would own 10.8% of the total number of shares of our common stock outstanding after this offering.

In addition, to the extent we issue stock options or any LTIP Units are settled through the issuance of common stock, or we issue any other securities or convertible debt in the future, investors participating in this offering may experience further dilution.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables present our selected consolidated financial data. For accounting purposes, the terms “Predecessor” and “Successor” used below and throughout this prospectus refer to the periods prior and subsequent to the Apax Acquisition on November 2, 2018, respectively. As a result of the Apax Acquisition, the results of operations and financial position of the Predecessor and Successor are not directly comparable.

The selected consolidated statement of operations data and selected consolidated statement of cash flows data for the period from July 1, 2018 to November 1, 2018 relate to the Predecessor and are derived from the audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data and selected consolidated statement of cash flows data for the period from November 2, 2018 to June 30, 2019 and for the fiscal year ended June 30, 2020 and the selected consolidated balance sheet data as of June 30, 2020 relate to the Successor and are derived from the audited consolidated financial statements that are included elsewhere in this prospectus. The selected consolidated statement of operations data and selected consolidated statements of cash flows data for the nine months ended March 31, 2020 and 2021 and the selected consolidated balance sheet data as of March 31, 2021 relate to the Successor and are derived from our unaudited condensed consolidated financial statements that are included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for the fair statement of our unaudited interim consolidated financial statements. Our results for any interim period are not necessarily indicative of results that may be expected for any full fiscal year.

Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the selected historical financial data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

 

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    Successor     Predecessor  
(in thousands, except per share data)   Nine Months
Ended
March 31,
2021
    Nine Months
Ended
March 31,
2020
    Fiscal Year
Ended
June 30,
2020
    Period from
November 2,
2018 to
June 30,
2019
    Period from
July 1, 2018 to
November 1,
2018
 
    (Unaudited)                    

Consolidated Statement of Operations Data:

         

Revenue:

         

Recurring and other revenue

  $ 263,372     $ 245,357     $ 317,620     $ 191,881     $ 86,262  

Interest income on funds held for clients

    1,392       9,192       10,289       9,977       3,343  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    264,764       254,549       327,909       201,858       89,605  

Cost of revenues

    112,506       105,501       139,683       77,566       31,939  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    152,258       149,048       188,226       124,292       57,666  

Operating expenses:

         

Sales and marketing

    75,864       74,970       99,998       56,660       30,479  

General and administrative

    106,914       102,964       137,071       127,862       31,069  

Research and development

    26,507       35,918       45,866       28,428       12,695  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    209,285       213,852       282,935       212,950       74,243  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (57,027     (64,804     (94,709     (88,658     (16,577

Other income (expense):

         

Interest expense

    (1,847     (1,403     (1,780     (1,119     (1,036

Other

    320       6,438       9,004       423       175  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before benefit for income taxes

    (58,554     (59,769     (87,485     (89,354     (17,438

Income tax benefit

    (12,344     (12,619     (20,182     (16,531     (2,517
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (46,210     (47,150     (67,303     (72,823     (14,921
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Paycor HCM, Inc.

  $ (64,110   $ (64,931   $ (90,193   $ (88,518   $ (14,921
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Per Share Data (1):

         

Net loss per share:

         

Basic and diluted

  $ (656.70   $ (649.31   $ (901.93   $ (885.18  
 

 

 

   

 

 

   

 

 

   

 

 

   

Weighted-average shares used in computing net loss per share:

         

Basic and diluted

    97,624       100,000       100,000       100,000    

 

(1)

See Note 13 of our unaudited condensed consolidated financial statements for the nine months ended March 31, 2021 and 2020 and Note 15 to our audited consolidated financial statements for the year ended June 30, 2020, Successor 2019 and Predecessor 2019 periods appearing elsewhere in this prospectus for an explanation of the method used to calculate our basic and diluted net loss per share and the weighted average number of shares used in the computation of the per share amounts.

 

    Successor     Predecessor  
(in thousands)   Nine Months
Ended
March 31,
2021
    Nine Months
Ended
March 31,
2020
    Fiscal Year
Ended
June 30,
2020
    Period from
November 2,
2018 to
June 30,
2019
    Period from
July 1, 2018 to
November 1,
2018
 
    (Unaudited)                    

Consolidated Statement of Cash Flow Data:

         

Net cash provided by (used in) operating activities

  $ 26,185     $ (1,791   $ 88     $ (11,584   $ (1,003

Net cash (used in) provided by investing activities

  $ (43,810   $ (24,194   $ 121,529     $ (772,039   $ 90,100  

Net cash provided by (used in) financing activities

  $ 202,049     $ 126,526     $ (20,880   $ 1,152,334     $ (283,506

 

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     Successor  
     March 31,
2021
    June 30,
2020
 
(in thousands)    Actual     Actual  
     (Unaudited)        

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $ 19,364     $ 828  

Funds held for clients(2)

     823,123      
614,115
 

Working capital(3)

     (5,434    
(19,865

Total assets

     2,209,241       2,007,783  

Client fund obligations(4)

     822,551       613,151  

Total debt

     43,769       24,435  

Total liabilities

     1,051,991       821,123  

Redeemable noncontrolling interest(5)

     245,041       233,335  

Total stockholder’s equity

     912,209       953,325  

 

(2)

Consists of cash and cash equivalents and debt-security investments relating to obtaining funds from clients in advance of performing payroll and payroll tax filing services on behalf of our clients.

(3)

We define working capital as total current assets (including funds held for clients) less total current liabilities (including client fund obligations).

(4)

Represents the Company’s contractual obligations to remit funds to satisfy clients’ payroll and tax payment obligations within one year of the balance sheet date.

(5)

Refers to the Midco Redeemable Preferred Stock, the shares of which accrue dividends at a rate of LIBOR plus 8.875%, which rate will decrease to LIBOR plus 8.375% beginning November 3, 2021. The dividends are payable, or are compounded, quarterly on March 31, June 30, September 30 and December 31 of each year. Additionally, the Company may, at its option, redeem for cash any or all of the then outstanding Midco Redeemable Preferred Stock, in whole at any time or in part from time to time, at (i) a redemption price per share equal to 101.0% prior to and including November 1, 2021; and 100.0% on November 2, 2021 and thereafter, plus (ii) the amount of all accrued dividends for the then current and all prior dividend payment periods.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. This discussion and analysis reflects our historical results of operations and financial position, and, except as otherwise indicated below, does not give effect to the expected conversion of all our outstanding Series A preferred stock into common stock on a 1-for-1 basis. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements because of various factors, including those discussed below and elsewhere in this prospectus, particularly in the sections entitled “Risk Factors” and “Forward-Looking Statements.”

The following discussion contains references to fiscal year 2019 and fiscal year 2020, which represents the consolidated financial results of Paycor HCM, Inc. and its consolidated subsidiaries for the fiscal year ended June 30, 2020 (“Successor”), for the period from November 2, 2018 through June 30, 2019 (“Successor 2019 Period”), and for the period from July 1, 2018 through November 1, 2018 (“Predecessor 2019 Period”). Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our,” and “Paycor” refer to and similar references refer to the Company and its consolidated subsidiaries.

Overview

We are a leading Software-as-a-Service provider of human capital management solutions for small and medium-sized businesses. Our unified, cloud-native platform is built to empower business leaders by producing actionable, real-time insights to drive workforce optimization. Our comprehensive suite of solutions enables organizations to streamline administrative workflows and achieve regulatory compliance while serving as the single, secure system of record for all employee data. Our highly flexible, scalable, and extensible platform is augmented by industry-specific domain expertise and offers award-winning ease-of-use with an intuitive user experience and deep third-party integrations. Over 28,000 customers across all 50 states trust Paycor to help their leaders develop winning teams.

Since our founding in 1990 we have achieved several key milestones, including:

 

   

2004: Completed first business acquisition and developed web-based version of our software.

 

   

2006 – 2008: Expanded offering beyond payroll services, adding human resources and time and attendance functionalities.

 

   

2012: Launched new flagship SaaS platform “Perform”, which was built to provide ease-of-use and depth of functionality for SMBs.

 

   

2014: Released Perform Time and Onboarding solutions and surpassed $100.0 million in annual revenue.

 

   

2015: Completed acquisition of Newton Software, adding applicant tracking software to the portfolio, and surpassed 1,000,000 employees on platform.

 

   

2017: Surpassed $200 million in annual revenue.

 

   

2018: Received majority investment from Apax Partners and launched research-based resource hub, HR Center of Excellence.

 

   

2019: Hired Raul Villar Jr. as CEO and acquired Nimble Scheduling Software.

 

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2020: Surpassed $300 million in annual revenue, launched GUIDE Elite implementation, released Pulse surveys tool, and completed acquisition of 7Geese talent management software.

Our Business Model

Our revenue is almost entirely recurring in nature and largely attributable to the sale of SaaS subscriptions to our cloud-native HCM software platform. We typically generate revenue from customers on a per-employee- per-month (“PEPM”) basis whereby our revenue is derived from the number of employees of a given customer, and the amount, type, and timing of products provided to a customer with respect to their employees. As a result, we increase our recurring revenue as we add more customers, and as our customers add more employees and purchase more product modules. Our highly recurring revenue model provides significant visibility into our future operating results. Recurring and other revenues are primarily revenues derived from the provision of our payroll, workforce management, and HR-related cloud-based computing services and nonrefundable implementation fees and represented 99% of total revenue for the nine months ended March 31, 2021. In addition, we earn interest income on funds held for clients.

Our revenues are seasonal in nature. Recurring revenues include revenues relating to the annual processing of payroll forms, such as Form W-2, Form 1099, and Form 1095 and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. Because payroll forms are typically processed in the third quarter of our fiscal year, third quarter revenues and margins are generally higher than in subsequent quarters. These seasonal fluctuations in revenues can also have an impact on gross profits. Historical results impacted by these seasonal trends should not be considered a reliable indicator of our future results of operations.

We have developed a robust organic sales and marketing engine and broad referral network of insurance and retirement benefits brokers. We market and sell our solutions through a direct sales force, which is organized into field and inside sales teams based on customer size, geography, and industry. We generated more than 5.5 million unique visitors to our website over the nine months ended March 31, 2021. Our highly efficient and multi-pronged go-to-market strategy is a key driver of our growth, which is evidenced by our LTV/CAC ratio of 5.0x for the nine months ended March 31, 2021 and 3.8x as of the twelve months ending June 30, 2020, and 5.6x for the nine months ended March 31, 2021 within our ‘target segment’. This strategy enabled us to generate $80.5 million, $53.2 million and $24.4 million of total bookings for the fiscal year ended June 30, 2020 and for the Successor 2019 Period and the Predecessor 2019 Period, respectively. Total bookings increased 4% year-over-year for the fiscal year ended June 30, 2020. Our bookings for the nine months ended March 31, 2021 and 2020 were $83.9 million and $63.1 million, a 33% increase year-over-year.

 

     Successor     Predecessor  
(in thousands)    Nine Months
Ended
March 31,
2021
    Nine Months
Ended
March 31,
2020
    Fiscal
Year
Ended
June 30,
2020
    Period from
November 2,
2018 to
June 30,
2019
    Period from
July 1, 2018 to
November 1,
2018
 

Total Revenue

   $ 264,764     $ 254,549     $ 327,909     $ 201,858     $ 89,605  

Loss from Operations

   $ (57,027   $ (64,804   $ (94,709   $ (88,658   $ (16,577

Operating Margin

     (21.5 )%      (25.5 )%      (28.9 )%      (43.9 )%      (18.5 )% 

Adjusted Operating Income

   $ 47,768     $ 34,900     $ 46,263     $ 36,940     $ 4,977  

Adjusted Operating Income Margin

     18.0     13.7     14.1     18.3     5.6

Net Loss

   $ (46,210   $ (47,150   $ (67,303   $ (72,823   $ (14,921

See the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” section for additional information on our non-GAAP metrics.

 

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COVID-19 Impact

Many of our prospective and existing customers’ businesses have been impacted by the COVID-19 pandemic and related economic impacts, stay-at-home, business closure, and other restrictive orders, which has resulted in reduced customer employee headcount, temporary and permanent business closures, and/or delayed sales/starts. Because we charge our customers on a per-employee basis for certain services we provide, decreases in headcount at our customers as a result of the pandemic negatively impacted our recurring revenue beginning in our fiscal third quarter of 2020. As of the beginning of March 2020, our customers had approximately 1.9 million customer employees on our platform and we saw a 7% decline through April 18, 2020, which was the lowest point since the beginning of the COVID-19 pandemic, as the U.S. unemployment rate increased to 14.8%. Furthermore, while the number of employees on our platform declined 7%, our number of customers was effectively unchanged over this period. Since then, the number of our customers’ employees on our platform has recovered rapidly. As of March 31, 2021, our existing customers that were active at the beginning of March 2020 had regained 87% of their lost employees. Including the addition of new customers, we now serve more than 1.9 million customer employees.

The COVID-19 pandemic continues to impact the global economy. The duration and severity of the COVID-19 pandemic, and the long-term effects the pandemic will have on our customers, our operations and general economic conditions, remain uncertain and difficult to predict. Our business and financial performance may continue to be unfavorably impacted in future periods if a significant number of our customers are unable to continue as viable businesses or if they significantly reduce headcount, there is a reduction in business confidence and activity, a decrease in government and consumer spending, a decrease in HCM and payroll solutions spending by SMBs, a decrease in growth in the overall market or a further decline of interest rates, among other factors. Therefore, we expect COVID-19 to continue to have an unfavorable impact on the growth in both recurring and other revenue and interest income on funds held for clients in future periods for so long as such conditions persist.

In response to these developments, we implemented measures focusing on the safety of our employees, transitioning more than 97% of our Associates to a virtual work arrangement and prohibiting non-critical business related travel, and we will continue to operate remotely for the foreseeable future. We did not experience any material disruptions in our ability to operate our business during this transition as our business model enables us to service our clients remotely. We were able to continue our implementation efforts and our sales team shifted from in-person meetings with prospective and existing clients to engaging with them virtually. As a result of the shift to virtual meetings, we have experienced a decrease in our sales and marketing expenses since the onset of the pandemic, primarily related to a decrease in travel costs. We expect this trend to continue at least in the near term, although such savings may be offset by increased costs when employees return to the office and we implement measures to ensure their safety. Our teams also quickly mobilized to analyze the various state and federal legislative changes enacted by the government in response to the COVID-19 crisis, including the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and added automated functionality and reporting to our systems for our customers.

Our total revenue growth during the nine months ended March 31, 2021 was impacted by the ongoing effects from the COVID-19 pandemic. We expect COVID-19 to continue to unfavorably impact our revenue growth rates in future periods as we anticipate lower customer employee counts, potential increases in customer losses, a reduction in business confidence and activity, a continued low interest rate environment, and a decrease in the growth of the overall market, among other factors. In response to the reduction in revenue for the quarter ending June 30, 2020, we implemented certain cost saving initiatives, including consolidating our facilities footprint, reducing employee-related costs, including temporary salary reductions and implementing a hiring freeze, delaying non-essential maintenance projects and eliminating or minimizing discretionary spending. As of March 31, 2021, we have removed all temporary cost and hiring restrictions. Despite the economic challenges driven by the pandemic, we remain confident in the overall health of our business, the strength of our product offerings, and our ability to continue to execute on our strategy.

 

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See “Risk Factor—Risks Relating to Our Business—The novel coronavirus pandemic has adversely impacted, and could continue to adversely impact, our business, results of operations, cash flows, financial condition, and liquidity.”

Key Factors Affecting Our Performance

Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:

Expand Our Sales Footprint to Add New Customers

Our current customer base represents a small portion of the U.S. market for HCM and payroll solutions. We believe there is substantial opportunity to continue to broaden our customer base, particularly in Tier 1 markets by expanding our sales footprint. Our ability to do so will depend on several factors, including the effectiveness of our products, the relative pricing of our products, our competitors’ offerings, and the effectiveness of our marketing efforts.

As of March 31, 2021 and 2020, we had approximately 28,200 and 26,700 customers, respectively, representing a year-over-year increase of 6%. As of June 30, 2020 and 2019, we had approximately 27,100 and 25,200 customers, respectively, representing a year-over-year increase of 7%. We define a customer as a parent company grouping, which may include multiple subsidiary client accounts with separate taxpayer identification numbers. As of March 31, 2021 and 2020, we had approximately 44,400 and 42,200 client accounts, respectively. As of June 30, 2020 and 2019, we had approximately 42,600 and 39,900 client accounts, respectively. We track client accounts as it provides an alternative measure of the scale of our business and customers. We believe the number of customer employees on our platform is a key indicator of the growth of our business. We define customer employees as the number of our customers’ employees at end of any particular period. As of March 31, 2021 and 2020, we had approximately 1.9 million and 1.8 million customer employees, respectively. As of June 30, 2020 and 2019, we had approximately 1.9 million and 1.8 million customer employees, respectively.

In addition, we are also focused on expanding our broker referral relationships to drive the acquisition of new customers. Insurance and benefits brokers are trusted advisors to SMBs and are influential in the HCM selection process. As a result of this focus, we have increased the percentage of bookings that were originated by brokers to 41% of total bookings in the nine months ended March 31, 2021 as compared to 27%, 28% and 24% in the nine months ended March 31, 2020 and the fiscal years ended June 30, 2020 and 2019, respectively.

Increase Product Penetration with Existing and New Customers

In recent years we have increasingly focused our product pricing strategy away from sales of individual products and solutions towards a simplified bundled pricing approach whereby we market multi-product offerings to our customers. We believe that this strategy addresses a key need for SMB customers, while also allowing us to better serve the needs of business leaders through a more comprehensive product suite. This strategy has enabled us to effectively drive increased product penetration and PEPM growth at the initial point of sale, as well as stronger retention. Our “effective PEPM,” which we define as recurring and other revenue for the period divided by the average number of customer employees, which we calculate as the sum of the number of customer employees at the end of each month over the period divided by the total number of months in the period, was $15.34 and $14.59 for the nine months ended March 31, 2021 and 2020, respectively, and $14.25, $13.65 and $13.15 for the fiscal year ended June 30, 2020, the Successor 2019 Period and the Predecessor 2019 Period, respectively. We intend to advance this strategy by progressively expanding the breadth of features included in our core HCM product bundle. Additionally, apart from our sales to new customers, there is a substantial opportunity within our existing customer base to cross-sell additional products from our portfolio, including Workforce Management, Benefits Administration, Talent Management, and Employee Engagement.

Our ability to successfully increase revenue per customer is dependent upon several factors, including the number of paid employees working for our customers, the number of products purchased by each of our customers, our customers’ satisfaction with our solutions and support, and our ability to add new products to our suite.

 

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We believe our ability to retain and expand our existing customers’ spending on our solutions is evidenced by our net revenue retention, which was approximately 94% and 96% for the fiscal years ended June 30, 2020 and 2019, respectively. Over the same periods, our net revenue retention for customers with 10 to 1,000 employees was approximately 95% and 97%, respectively. For the fiscal years ended June 30, 2020 and 2019, this customer segment represented 81% and 80% of our recurring billings, respectively. Our net revenue retention has been negatively impacted by stay-at-home, business closure and other restrictive orders, which resulted in reduced employee headcount, temporary and permanent business closures, and delayed sales and starts with many of our customers.

Ongoing Product Innovation and Optimization

We believe that our product features and functionality are key differentiators of our offerings. We intend to continue to invest in research and development, particularly regarding the functionality of our platform, to sustain and advance our product leadership. For instance, in 2019 we released our data analytics and scheduling products, and in 2020 we released our compensation management product. As a result of these and other product launches, we have increased the total list PEPM for our full suite of products to $35 as of July 2020 from $29 as of June 2019. Our effective PEPM was $15.34 and $14.59 for the nine months ended March 31, 2021 and 2020, respectively, and $14.25, $13.65 and $13.15 for the fiscal year ended June 30, 2020, the Successor 2019 Period and the Predecessor 2019 Period, respectively. Our ability to innovate and introduce competitive new products is dependent on our ability to recruit and retain top technical talent and invest in research and development initiatives.

Components of Results of Operations

Factors Affecting the Comparability of our Results of Operations

Apax Acquisition

On November 2, 2018, Paycor HCM, Inc. acquired 100% of the equity interest in Paycor, Inc. in the Apax Acquisition. We accounted for the Apax Acquisition as a business combination under ASC 805, Business Combinations (“ASC 805”), resulting in the purchase price allocated to the assets acquired and liabilities assumed based on the estimated fair value at the date of the Apax Acquisition. As a result of the Apax Acquisition, our historical results of operations are not comparable from period to period and may not be comparable to our financial results of operations in future periods due to a number of factors. Set forth below is a brief discussion of the key factors impacting the comparability of our results of operations.

Increased Depreciation and Amortization Expense

In connection with the Apax Acquisition, depreciation and amortization expense increased $118.8 million for the fiscal year ended June 30, 2020 and $79.2 million for the Successor 2019 Period as a result of the step-up in fair value required under ASC 805.

Transaction Costs

In connection with the Apax Acquisition, we incurred approximately $11.6 million and $14.5 million in the Successor 2019 and Predecessor 2019 Period, respectively, of non-recurring transaction costs. These transaction costs, which are principally professional fees, were included in general and administrative expenses.

Compensation Expense

In connection with the Apax Acquisition and the subsequent recruitment of additional management personnel, we incurred share-based award and liability incentive award compensation expense of $3.1 million

 

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and $29.0 million for the year ended June 30, 2020 and for the Successor 2019 Period, respectively, which is included in cost of revenues, sales and marketing expense, general and administrative expense and research and development expense.

IPO-Related Expenses

We also expect to incur additional costs as a result of the successful completion of this offering. These additional expenses include transaction bonuses, share-based compensation expense associated with two cash Long Term Incentive Plans (“LTIPs”) and outstanding performance awards under our Pride Aggregator, L.P. Management Equity Plan (“MEP”), and expenses related to the redemption of the Midco Redeemable Preferred Stock. The specifics of the LTIPs, MEP and Midco Redeemable Preferred Stock are presented below.

We have granted Long Term Incentive Plan units (“LTIP Units”) under our Pride Aggregator, L.P. Top Talent Incentive Plan and Sales Equity Incentive Plan. The LTIP Units are phantom awards providing for, at our discretion, a cash or stock payment (“LTIP Payment”) to participants on certain determination dates, if an initial public offering (“IPO”) occurs and if the LTIP Participant remains employed with us on such date. The occurrence of an IPO will result in a determination date, for which each LTIP Participant will be entitled to an LTIP Payment with respect to 20% of the LTIP Participant’s LTIP Units as of the IPO date and 20% on each of four subsequent payment dates that are six, twelve, eighteen and 24 months following the IPO date. Upon the occurrence of the IPO, the LTIP Units will convert into the entitlement to receive a fixed number of shares of common stock, to be determined based on the IPO price. We currently expect to settle such entitlements by issuing restricted stock units (“RSUs”) concurrently with the consummation of the IPO, which RSUs will vest on the applicable payment dates. However, until such RSUs are issued, we also retain the option to settle such payments in cash based on the average closing price per share for the five-day trading period ending on the day prior to the applicable payment date. Upon the successful completion of this offering, we will recognize approximately $32.0 million of compensation expense over the requisite service period relating to the LTIP Units based on an assumed initial public offering price of $19.50, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus.

Under the terms of the MEP, one-half of the profits interest units vest based on an associate’s service time. The time-vesting units vest 25% on the first anniversary after the vesting commencement date and thereafter in twelve equal installments on each subsequent quarterly anniversary of the vesting commencement date, with 100% vesting of the time-vesting units occurring on the fourth anniversary of the vesting commencement date. Following the IPO, all time-vesting incentive units will continue to vest based upon their original vesting schedule. MEP incentive units are subject to a floor amount established at the grant date, which acts as a participation threshold and permits the award to participate in distributions only to the extent the distribution amount for the units exceed the floor amount.

The second half of the MEP incentive units vest based on our performance relative to Apax Partners’ original invested amount, with the performance calculations defined in the plan, triggered by either a distribution, a liquidity event or IPO (implied performance condition). We expect that Apax Partners will treat our IPO as an event that converts the performance-vesting incentive units to time-based vesting units, with 25% vesting upon successive six-month anniversary dates for the 24 months following an IPO.

The MEP incentive units are accounted for as equity awards and the compensation expense calculated based upon the fair market value of the MEP incentive units at the grant date and recognized as the incentive units vest. We estimate the fair value of the MEP incentive units using the Monte Carlo simulation method. As of March 31, 2021, there was approximately $11.9 million and $15.8 million of unrecognized compensation expense associated with unvested time-based and performance-based MEP incentive unit awards, respectively. The unrecognized compensation expense associated with the unvested time-based MEP incentive unit awards outstanding as of March 31, 2021 will be recognized over a weighted average period of 2.8 years from March 31, 2021. We expect that the unrecognized compensation expense associated with performance-based MEP incentive unit awards will be recognized over a period of 24 months beginning upon the consummation of this offering.

 

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In connection with the Apax Acquisition, Pride Midco issued $200 million in aggregate initial liquidation preference of Midco Redeemable Preferred Stock. The Midco Redeemable Preferred Stock accrues dividends at a rate of LIBOR plus 8.875%, which rate will decrease to LIBOR plus 8.375% beginning November 3, 2021. The dividends are payable, or are compounded, quarterly on March 31, June 30, September 30 and December 31 of each year. From the issue date through November 2, 2020, dividends were accrued and added to the then-prevailing liquidation preference of the Midco Redeemable Preferred Stock. From November 2, 2020 to November 2, 2021, we are required pay 50% of the accrued dividends in cash. After November 2, 2021, we will be required to pay 100% of the accrued dividends in cash. If the Midco Redeemable Preferred Stock remains outstanding after May 2, 2022, we are required to pay 0.50% of the initial liquidation preference to the holders of the Midco Redeemable Preferred Stock in cash. Additionally, the Company may, at its option, redeem for cash any or all of the then outstanding Midco Redeemable Preferred Stock, in whole at any time or in part from time to time, at (i) a redemption price per share equal to 101.0% prior to and including November 1, 2021; and 100.0% on November 2, 2021 and thereafter, plus (ii) the amount of all accrued dividends for the then current and all prior dividend payment periods.

The shares of Midco Redeemable Preferred Stock are accounted for as a redeemable noncontrolling interest in the mezzanine section of our consolidated balance sheet and are accreted using the effective interest method to the redemption value through the net income attributable to redeemable noncontrolling interest line within our consolidated statement of operations.

The holders of the Midco Redeemable Preferred Stock have the ability to redeem the shares upon the occurrence of certain events, such as a change in control or an IPO, or on or after the sixth anniversary of the issue date. Upon an initial public offering, we will be required to redeem any outstanding shares of the Midco Redeemable Preferred Stock at (i) a redemption price per share equal to 101.0% prior to and including November 1, 2021; and 100.0% on November 2, 2021 and thereafter, plus (ii) all accrued and unpaid dividends to the redemption date. Upon completion of this offering, we expect to use a portion of the proceeds to effect the redemption by Pride Midco of all outstanding shares of the Midco Redeemable Preferred Stock for $260.0 million.

In connection with this offering, we intend to grant awards under the 2021 Plan to certain executives consisting of options to purchase shares of common stock with an aggregate value of approximately $10.6 million and RSUs with an aggregate value of approximately $10.6 million. The options will have an exercise price equal to the initial public offering price. We also intend to grant approximately $1.2 million of RSU awards to our independent directors and approximately $6.1 million of RSU awards to members of our IPO transaction team and certain senior employees of the Company. In addition, we intend to make a grant of RSUs to each Paycor employee as of the date of this offering, for an aggregate of approximately 200,000 RSUs (approximately $3.9 million in RSUs assuming an initial public offering price of $19.50 per share). We expect to recognize compensation expense equal to the aggregate dollar value of such awards over their three year vesting term.

Revenues

Recurring and Other Revenue

We derive our revenue from contractual agreements which contain recurring and non-recurring service fees. The majority of our contracts are cancelable by the customer on 30 days’ notice. We recognize revenue under Accounting Standard Codification ASC Topic 606 (“ASC 606”). Under ASC 606, we recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration that we are entitled to for those goods or services. Recurring revenue consists primarily of revenues derived from the provision of our payroll, workforce management, and HR-related cloud-based computing services. The performance obligations related to recurring services are generally satisfied monthly as services are provided, with fees charged and collected based on a PEPM or per-employee-per-payroll basis. Recurring revenue is generally recognized as the services are provided during each client’s payroll period. Other revenue and non-recurring services fees consist mainly of nonrefundable implementation fees, which involve onboarding and configuring the customer within our cloud-based platform. These nonrefundable implementation fees provide certain clients with a material right to

 

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renew the contract, with revenue deferred and recognized over the period to which the material right exists. This is generally a period of 24 months from finalization of onboarding, which typically concludes within three to six months of the original booking. Nonrefundable upfront fees related to implementation services were $16.5 million as of March 31, 2021, with $10.6 million revenue recognized in the nine months ended March 31, 2021. Nonrefundable upfront fees related to implementation services were $15.9 million as of June 30, 2020, with $4.3 million of revenue recognized in the fiscal year ended June 30, 2020.

We defer certain commission costs that meet the capitalization criteria. We also capitalize certain costs to fulfill a contract related to our proprietary products if they are identifiable, generate or enhance resources used to satisfy future performance obligations and are expected to be recovered. We utilize the portfolio approach to account for both the cost of obtaining a contract and the cost of fulfilling a contract.

Capitalized costs to fulfill a contract and cost to obtain a contract are amortized over the expected period of benefit, which is generally six years based on our average client life and other qualitative factors, including rate of technological changes. We do not incur any additional costs to obtain or fulfill contracts upon renewal. We recognize additional selling and commission costs and fulfillment costs when an existing client purchases additional services. The additional costs only relate to the additional services purchased and do not relate to the renewal of previous services. We continue to expense certain costs to obtain a contract and cost to fulfill a contract if those costs do not meet the capitalization criteria.

See “—Critical Accounting Policies—Revenue Recognition.” We expect recurring and other revenue to increase as we continue to add new customers and sell additional products to our existing customers.

Interest Income on Funds Held for Clients

We earn interest income on funds held for clients. We collect funds for employee payroll payments and related taxes in advance of remittance to employees and taxing authorities. Prior to remittance to employees and taxing authorities, we earn interest on these funds through demand deposit accounts with financial institutions with which we have automated clearing house (“ACH”) arrangements. We also earn interest by investing a portion of funds held for clients in highly liquid, investment-grade marketable securities. We expect funds held for our clients to generally grow as the employees per customer increase and as we add customers. Interest income on funds held for clients will fluctuate based on market rates of demand deposit accounts, as well as the highly liquid, investment-grade marketable securities in which we invest the client funds.

Cost of Revenues

Cost of revenues includes costs relating to the provision of ongoing customer support and implementation activities, payroll tax filing, distribution of printed checks and other materials providing our payroll and other HCM solutions. These costs primarily consist of employee-related expenses for Associates who service customers, as well as third-party processing fees, delivery costs, hosting costs, and bank fees associated with client fund transfers. Costs for recurring support are generally expensed as incurred, while such costs for onboarding and configuring our products for our customers are capitalized and amortized over a period of six years.

We amortized $7.4 million and $3.8 million of capitalized contract fulfillment costs during the nine months ended March 31, 2021 and 2020, respectively. We amortized $5.7 million, $1.1 million, and $4.7 million of capitalized contract fulfillment costs during the fiscal year ended June 30, 2020, the Successor 2019 Period, and the Predecessor 2019 period, respectively. We expect to realize increased amortization in future periods as the total capitalized contract fulfillment costs on our balance sheet increases.

We also capitalize a portion of our internal-use software costs including external direct costs of materials and services associated with developing or obtaining internal use software and certain payroll and payroll-related costs for Associates who are directly associated with internal use software projects, which are then generally

 

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amortized over a period of three years into cost of revenues. We amortized $44.0 million and $36.7 million of capitalized internal-use and acquired software costs during the nine months ended March 31, 2021 and 2020, respectively. We amortized $49.8 million, $28.7 million, and $4.9 million of capitalized internal-use and acquired software costs during the fiscal year ended June 30, 2020, the Successor 2019 Period, and the Predecessor 2019 period, respectively.

Our cost of revenues is expected to increase in absolute dollars as we expand our customer base. However, in the long-term we expect cost of revenues to reduce as a percentage of total revenues as our business scales.

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of employee-related expenses for our direct sales and marketing staff, marketing, advertising and promotion expenses, and other related costs. We capitalize certain commission costs related to new contracts or purchases of additional services by our existing customers and amortize such items over a period of six years.

We amortized $6.2 million and $3.0 million of capitalized contract acquisition costs during the nine months ended March 31, 2021 and 2020, respectively. We amortized $4.5 million, $0.8 million, and $4.0 million of capitalized contract acquisition costs during the fiscal year ended June 30, 2020, the Successor 2019 Period, and the Predecessor 2019 period, respectively. We expect to realize increased amortization in future periods as the total capitalized contract acquisition costs on our balance sheet increases.

We seek to grow our number of new customers and upsell existing customers, and therefore our sales and marketing expense is expected to continue to increase in absolute dollars as we grow our sales organization and expand our marketing activities.

General and Administrative

General and administrative expenses consist primarily of employee-related costs for our administrative, finance, accounting, legal and human resources departments. Additional expenses include consulting and professional fees, occupancy costs, insurance, and other corporate expenses.

We amortized $59.1 million and $58.4 million of intangible assets, excluding acquired software amortized through cost of revenues, during the nine months ended March 31, 2021 and 2020, respectively. We amortized $78.0 million, $51.9 million and $0.1 million of intangible assets, excluding acquired software amortized through cost of revenues, during the fiscal year ended June 30, 2020, the Successor 2019 Period, and the Predecessor 2019 Period, respectively. The increase in fiscal year ended June 30, 2020, and the Successor 2019 Period amortization expense is a result of the step-up in fair value relating to the Apax Acquisition.

We expect our general and administrative expenses to increase in absolute dollars as a result of our preparation to become and operate as a public company. Also, following the completion of this offering, we expect these expenses will include additional costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance with the Sarbanes-Oxley Act and other regulations governing public companies, and increased insurance costs, investor relations and professional services.

Research and Development

Research and development expenses consist primarily of employee-related expenses for our software development and product management staff. Additional expenses include costs related to the development, maintenance, quality assurance and testing of new technologies, and ongoing refinement of our existing solutions. Research and development expenses, other than internal-use software costs qualifying for capitalization, including costs associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities are expensed as incurred.

 

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We capitalize a portion of our development costs related to internal-use software, which are amortized over a period of three years into cost of revenues. The timing of our capitalized development projects may affect the amount of development costs expensed in any given period. The table below sets forth the amounts of capitalized and expensed research and development costs for the periods presented:

 

    Successor     Predecessor  
(in thousands)   Nine Months
Ended
March 31,
2021
    Nine Months
Ended
March 31,
2020
    Fiscal Year
Ended
June 30,
2020
    Period from
November 2,
2018 to
June 30,
2019
    Period from
July 1, 2018 to
November 1,
2018
 

Capitalized software

  $ 15,065   $ 14,777   $ 18,846     $ 12,083     $ 6,701  

Research and development expenses

    26,507     35,918       45,866       28,428       12,695  

We expect to increase our research and development expenses in absolute dollars as we continue to broaden our product offerings and extend our technological leadership by investing in the development of new technologies and introducing them to new and existing customers.

Interest Expense

Interest expense consists primarily of interest payments and accruals relating to outstanding borrowings. We expect interest expense to vary each reporting period depending on the amount of outstanding borrowings and prevailing interest rates.

Other Income (Expense)

Other income (expense) generally consists of other income and expense items outside of our normal operations, such as realized gains or losses on the sale of certain positions of funds held for clients, gains or losses on the extinguishment of debt and expenses relating to our financing arrangements.

 

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Results of Operations

The following table sets forth our consolidated statement of operations for the periods indicated:

 

    Successor     Predecessor  
(in thousands)   Nine Months
Ended
March 31,
2021
    Nine Months
Ended
March 31,
2020
    Fiscal Year
Ended
June 30,
2020
    Period from
November 2,
2018 to
June 30,
2019
    Period from
July 1 to
November 1,
2018
 

Consolidated Statement of Operations Data:

         

Revenues:

         

Recurring and other revenue

  $ 263,372   $ 245,357     $ 317,620     $ 191,881     $ 86,262  

Interest income on funds held for clients

    1,392     9,192     10,289       9,977       3,343  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    264,764       254,549       327,909       201,858       89,605  

Cost of revenues

    112,506     105,501       139,683       77,566       31,939  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    152,258     149,048       188,226       124,292       57,666  

Operating expenses:

         

Sales and marketing

    75,864     74,970     99,998       56,660       30,479  

General and administrative

    106,914     102,964     137,071       127,862       31,069  

Research and development

    26,507     35,918     45,866       28,428       12,695  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    209,285     213,852     282,935       212,950       74,243  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (57,027 )     (64,804 )     (94,709     (88,658     (16,577

Interest expense

    (1,847 )     (1,403 )     (1,780     (1,119     (1,036

Other income

    320     6,438     9,004       423       175  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (58,554 )     (59,769     (87,485     (89,354     (17,438

Income tax benefit

    (12,344 )     (12,619 )     (20,182     (16,531     (2,517
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (46,210   $ (47,150   $ (67,303   $ (72,823   $ (14,921
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Nine Months Ended March 31, 2021 to the Nine Months Ended March 31, 2020

Revenues

 

     Nine Months Ended March 31,                
(in thousands)            2021                      2020              $ Change          % Change      

Revenues:

           

Recurring and other revenue

   $ 263,372      $  245,357      $ 18,015        7%  

Interest income on funds held for clients

     1,392        9,192        (7,800)        (85)%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 264,764      $ 254,549      $ 10,215        4%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue increased 4% to $264.8 million for the nine months ended March 31, 2021 from $254.5 million for the nine months ended March 31, 2020. Total revenues increased primarily as a result of an increase in customers of 6% to approximately 28,200 at March 31, 2021 from approximately 26,700 at March 31, 2020. The increase in customers was partially offset by a 4% decline in the average number of employees per customer to 68 on average for the nine months ended March 31, 2021 from 71 on average for the nine months ended March 31, 2020. This decline in employees per customer was primarily driven by customers terminating or furloughing employees in response to the COVID-19 pandemic. For the nine months ended March 31, 2021 and March 31, 2020, average customer employees were 1.9 million and 1.8 million, respectively.

 

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Interest income on funds held for clients decreased primarily as a result of lower average interest rates across our portfolio of debt-security investments. The impact from the reduction in interest rates was partially offset by higher average daily balances for funds held due to the addition of new customers.

Cost of Revenues

 

     Nine Months Ended March 31,                
(in thousands)            2021                      2020              $ Change      % Change  

Cost of revenues

   $ 112,506      $ 105,501      $ 7,005        7%  

Percentage of total revenues

     42%        41%        

Gross profit

   $ 152,258      $ 149,048      $ 3,210        2%  

Percentage of total revenues

     58%        59%        

Total cost of revenues increased 7% to $112.5 million for the nine months ended March 31, 2021 from $105.5 million for the nine months ended March 31, 2020. Our total cost of revenues increased primarily as a result of a $5.0 million increase in amortization expense relating to capitalized internal-use software and a $2.3 million increase in intangible amortization expense primarily associated with our acquisition of 7Geese in September 2020.

Operating Expenses

Sales and Marketing

 

     Nine Months Ended March 31,                
(in thousands)            2021                      2020              $ Change      % Change  

Sales and marketing

   $ 75,864      $ 74,970    $ 894        1%  

Percentage of total revenues

     29%        29%        

Sales and marketing expenses increased 1% to $75.9 million for the nine months ended March 31, 2021 from $75.0 million for the nine months ended March 31, 2020. The increase in sales and marketing expense was primarily the result of $3.4 million of additional employee-related costs, principally those incurred to expand our sales coverage, partially offset by a $2.9 million reduction in travel related expenses due to decreased travel as a result of the COVID-19 pandemic.

General and Administrative

 

     Nine Months Ended March 31,                
(in thousands)            2021                      2020              $ Change      % Change  

General and administrative

   $ 106,914      $ 102,964    $ 3,950        4%  

Percentage of total revenues

     40%        40%        

General and administrative expenses increased 4% to $106.9 million for the nine months ended March 31, 2021 from $103.0 million for the nine months ended March 31, 2020. The increase in general and administrative expenses was primarily driven by a $3.6 million increase in consulting fees and a $0.7 million increase in intangible amortization expense primarily associated with an asset acquisition completed in February 2021, partially offset by a $0.5 million reduction in travel related expenses due to decreased travel as a result of the COVID-19 pandemic.

 

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Research and Development

 

     Nine Months Ended March 31,                
(in thousands)            2021                      2020              $ Change      % Change  

Research and development

   $ 26,507      $ 35,918      $ (9,411)        (26)%  

Percentage of total revenues

     10%        14%        

Research and development expenses decreased 26% to $26.5 million for the nine months ended March 31, 2021 from $35.9 million for the nine months ended March 31, 2020. The decrease in research and development expenses was primarily the result of an $8.4 million decrease in employee-related costs and a $1.1 million decrease in consulting fees, in each case driven primarily by cost-saving initiatives as a result of the COVID-19 pandemic.

Interest Expense

 

     Nine Months Ended March 31,                
(in thousands)            2021                      2020              $ Change      % Change  

Interest expense

   $ 1,847      $ 1,403    $ 444        32%  

Percentage of total revenues

     <1%        <1%        

Interest expense increased to $1.8 million for the nine months ended March 31, 2021 from $1.4 million for the nine months ended March 31, 2020. This increase in interest expense was primarily attributable to an increase in borrowings as a result of the 2019 Term Loan entered into in September 2020.

Other Income

 

     Nine Months Ended March 31,                
(in thousands)            2021                      2020              $ Change      % Change  

Other income

   $ 320      $ 6,438    $ (6,118      (95 )% 

Other income was $0.3 million for nine months ended March 31, 2021, primarily consisting of unrealized gains resulting from changes in foreign currency rates. Other income for the nine months ended March 31, 2020 was $6.4 million, primarily consisting of a $6.2 million gain resulting from the forgiveness of debt relating to the satisfactory completion of certain requirements which were met under the New Market Tax Credits Agreement with the City of Norwood.

Income Tax Benefit

Income tax benefit for the nine months ended March 31, 2021 and 2020 was $12.3 million and $12.6 million, respectively, reflecting effective tax rates of 21.1% for the nine months ended March 31, 2021 and 2020.

 

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Comparison of the Fiscal Year Ended June 30, 2020, Successor 2019 Period, and Predecessor 2019 Period

Revenues

 

     Successor      Predecessor  
(in thousands)    Fiscal Year
Ended
June 30,
2020
     Period from
November 2,
2018 to
June 30,
2019
     Period from
July 1 to
November 1,
2018
 

Revenues:

        

Recurring and other revenue

   $ 317,620      $ 191,881      $ 86,262  

Interest income on funds held for clients

     10,289        9,977        3,343  
  

 

 

    

 

 

    

 

 

 

Total revenues

   $ 327,909      $ 201,858      $ 89,605  
  

 

 

    

 

 

    

 

 

 

Total revenue for the fiscal year ended June 30, 2020 was $327.9 million, and for the Successor 2019 Period and the Predecessor 2019 Period, was $201.9 million and $89.6 million, respectively. In the fiscal year ended June 30, 2020, the Successor 2019 Period, and the Predecessor 2019 Period, recurring and other revenue accounted for $317.6 million, $191.9 million and $86.3 million, respectively. Additionally, interest income on funds held for clients accounted for $10.3 million, $10.0 million, and $3.3 million, respectively, for the fiscal year ended June 30, 2020, the Successor 2019 Period, and the Predecessor 2019 Period. Total revenues increased primarily as a result of an increase in customers of 7% to approximately 27,100 at June 30, 2020 from approximately 25,200 at June 30, 2019. The increase in customers was partially offset by a 6% decline in the average number of employees per customer to 68 at June 30, 2020 from 72 at June 30, 2019. This decline in employees per customer was primarily driven by customers terminating or furloughing employees in response to the COVID-19 pandemic. For the fiscal year ended June 30, 2020, the Successor 2019 Period, and the Predecessor 2019 Period, average customer employees over were 1.9 million, 1.7 million and 1.6 million, respectively.

Interest income on funds held for clients decreased primarily as a result of lower average interest rates across our portfolio of debt-security investments. The impact from the reduction in interest rates was partially offset by higher average daily balances for funds held due to the addition of new customers.

Cost of Revenues

 

     Successor      Predecessor  
(in thousands)    Fiscal
Year
Ended
June 30,
2020
     Period from
November 2,
2018 to
June 30,
2019
     Period from
July 1, 2018 to
November 1,
2018
 

Cost of revenues

   $ 139,683      $ 77,566      $ 31,939  

Percentage of total revenues

     43%        38%        36%  

Gross profit

   $ 188,226      $ 124,292      $ 57,666  

Percentage of total revenues

     57%        62%        64%  

Total cost of revenues for the fiscal year ended June 30, 2020 was $139.7 million, and for the Successor 2019 Period and Predecessor 2019 Period was $77.6 million and $32.0 million, respectively. Our total cost of revenues increased primarily as a result of the continued growth of our business, including $11.9 million in additional employee-related labor and benefits costs for Associates necessary to service the increasing number of customers on our platform, and increased amortization of technology as a result of the step-up in fair value as a result of the Apax Acquisition. We amortized $49.8 million, $28.7 million, and $4.9 million of capitalized technology and internal-use software costs during the fiscal year ended June 30, 2020, the Successor 2019 Period, and the Predecessor 2019 period, respectively.

 

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Operating Expenses

Sales and Marketing

 

     Successor      Predecessor  
(in thousands)    Fiscal Year
Ended
June 30,
2020
     Period from
November 2,
2018 to
June 30,
2019
     Period from
July 1, 2018 to
November 1,
2018
 

Sales and marketing

   $ 99,998      $ 56,660      $ 30,479  

Percentage of total revenues

     30%        28%        34%  

Sales and marketing expenses for the fiscal year ended June 30, 2020 were $100.0 million, and for the Successor 2019 Period and Predecessor 2019 Period were $56.7 million and $30.5 million, respectively. The increase in sales and marketing expense was primarily the result of additional employee-related costs, principally those incurred to expand our sales coverage, which were partially offset by a reduction in travel related expenses due to decreased travel as a result of the COVID-19 pandemic.

General and Administrative

 

     Successor      Predecessor  
(in thousands)    Fiscal
Year Ended
June 30,
2020
     Period from
November 2,
2018 to June 30,
2019
     Period from
July 1, 2018 to
November 1,
2018
 

General and administrative

   $ 137,071      $ 127,862      $ 31,069  

Percentage of total revenues

     42%        63%        35%  

General and administrative expenses for the fiscal year ended June 30, 2020 were $137.1 million, and for the Successor 2019 Period and Predecessor 2019 Period were $127.9 million and $31.1 million, respectively. The decrease in general and administrative expenses was primarily driven by a $26.1 million decrease in certain one-time expenses from the prior periods related to the Apax Acquisition, a decrease in stock based compensation expense of $27.0 million, and partially offset by a $26.0 million increase in amortization expense related to the step-up in intangibles assets from the Apax Acquisition.

Research and Development

 

     Successor      Predecessor  
(in thousands)    Fiscal Year
Ended
June 30,
2020
     Period from
November 2,
2018 to June 30,
2019
     Period from
July 1, 2018 to
November 1,
2018
 

Research and development

   $ 45,866      $ 28,428      $ 12,695  

Percentage of total revenues

     14%        14%        14%  

Research and development expenses for the fiscal year ended June 30, 2020 were $45.9 million, and for the Successor 2019 Period and Predecessor 2019 Period were $28.4 million and $12.7 million, respectively. The increase in research and development expenses was primarily the result of $2.8 million of additional employee-related costs and $1.1 million of additional consulting fees.

 

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Interest Expense

 

     Successor      Predecessor  
(in thousands)    Fiscal Year
Ended
June 30,
2020
     Period from
November 2,
2018 to
June 30,
2019
     Period from
July 1, 2018 to
November 1,
2018
 

Interest expense

   $ 1,780      $ 1,119      $ 1,036  

Percentage of total revenues

     <1%        <1%        1.2%  

Interest expense for the fiscal year ended June 30, 2020 was $1.8 million, and for the Successor 2019 Period and Predecessor 2019 Period was $1.1 million and $1.0 million, respectively. This decrease was driven primarily by a lower interest rate associated with the refinancing of our building loan.

Other Income

 

     Successor      Predecessor  
(in thousands)    Fiscal Year
Ended
June 30,
2020
     Period from
November 2,
2018 to
June 30,
2019
     Period from
July 1, 2018 to
November 1,
2018
 

Other income

   $ 9,004      $ 423      $ 175  

Other income was $9.0 million for the fiscal year ended June 30, 2020 compared to $0.4 million and $0.2 million for the Successor 2019 Period and the Predecessor 2019 Period. Other income for the fiscal year ended June 30, 2020 primarily consists of a $6.2 million gain resulting from the forgiveness of debt relating to satisfactory completion of certain requirements which were met under the New Market Tax Credits agreement with the City of Norwood and $2.5 million in realized gains on the sale of certain positions of funds held for clients.

Income Tax Benefit

Income tax benefit for the fiscal year ended June 30, 2020 was a benefit of $20.2 million, and for the Successor 2019 Period and Predecessor 2019 Period was a benefit of $16.5 million and $2.5 million, respectively, reflecting effective tax rates for the year ended June 30, 2020 of 23.1%, and for the Successor 2019 Period and the Predecessor 2019 Period of 18.5% and 14.4%, respectively.

 

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Quarterly Results of Operations and Other Data

The following table sets forth selected unaudited consolidated quarterly statements of operations data for the periods presented. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly results are not necessarily indicative of our results of operations to be expected for any future period.

 

    Three Months Ended  
(in thousands)   June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
    March 31,
2021
 

Revenue:

               

Recurring and other revenue

  $ 68,450   $ 72,533     $ 79,891   $ 92,933     $ 72,263     $ 78,551   $ 85,416     $ 99,405  

Interest income on funds held for clients

    3,806     3,260     2,995     2,937     1,097     510       448       434  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    72,256     75,793     82,886     95,870     73,360     79,061     85,864       99,839  

Cost of revenues

    29,409     32,355     34,793     38,353     34,182     34,484     36,833     41,189  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    42,847     43,438     48,093     57,517     39,178     44,577     49,031     58,650  

Operating expenses:

               

Sales and marketing

    23,553     23,920     24,400     26,650     25,028     24,343     25,477     26,044  

General and administrative

    37,056     33,354     33,780     35,830     34,107     33,417     35,056     38,441  

Research and development

    9,982     10,969     11,799     13,150     9,948  

 

 

 

8,284

 

 

 

 

 

 

9,390

 

 

 

 

 

8,833

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    70,591     68,243     69,979     75,630     69,083  

 

 

 

66,044

 

 

 

 

 

69,923

 

 

 

 

 

73,318

 

 

Loss from operations

    (27,744 )     (24,805 )     (21,886 )     (18,113 )     (29,905 )     (21,467 )     (20,892 )     (14,668

Other income (expense):

               

Interest expense

    (420 )     (437 )     (522 )     (444 )     (377 )     (486 )     (673 )     (688 )

Other

    181     (21     6,372     87     2,566  

 

 

 

196

 

 

 

 

 

44

 

 

 

 

 

80

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before benefit for income taxes

    (27,983 )     (25,263 )     (16,036 )     (18,470 )     (27,716 )  

 

 

 

(21,757

 

)

 

 

 

 

(21,521

 

)

 

 

 

 

(15,276

 

)

Income tax benefit

    (5,292 )     (5,334 )     (3,386 )     (3,899 )     (7,563 )  

 

 

 

(4,425

 

 

 

 

 

(4,704

 

)

 

 

 

 

(3,215

 

)

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (22,691   $ (19,929 )   $ (12,650   $ (14,571   $ (20,153 )  

 

$

 

(17,332

 

)

 

 

$

 

(16,817

 

)

 

 

$

 

(12,061

 

Less: Net loss attributable to noncontrolling interests

    (5     —         —         —         —         —         —         —    

Less: Accretion of redeemable noncontrolling interests

    5,927       5,871       5,926       5,984       5,109    

 

 

 

5,050

 

 

 

 

 

 

6,471

 

 

 

 

 

 

6,379

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Paycor HCM, Inc.

  $ (28,613   $ (25,800   $ (18,576   $ (20,555   $ (25,262  

 

 

$

 

 

(22,382

 

 

 

 

 

$

 

 

(23,288

 

 

 

 

 

$

 

 

(18,440

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Revenue Trends

Our number of new customers typically increases more during our third fiscal quarter ending March 31 than during the rest of our fiscal year, primarily because many new customers prefer to start using our payroll or HCM solutions at the beginning of a calendar year. In addition, client funds and year-end activities are traditionally higher during our third fiscal quarter. As a result of these factors, our total revenue has historically grown disproportionately during our third fiscal quarter as compared to other quarters.

Quarterly Operating Expense Trends

Our operating expenses have generally increased sequentially due to our growth and are primarily related to increases in personnel-related costs and related overhead to support our expanding operations and our continued investments in our solutions and service capabilities. A significant portion of our operating expenses are related to compensation and other items which are relatively fixed in the short-term, and we plan expenditures based in part on our expectations regarding future needs and opportunities.

 

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Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP and may be different from similarly titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

Adjusted Gross Profit and Adjusted Gross Profit Margin

We define Adjusted Gross Profit as gross profit, before amortization of intangible assets, stock-based compensation expenses, and certain corporate expenses, in each case that are included in costs of recurring revenues. We define Adjusted Gross Profit Margin as Adjusted Gross Profit divided by total revenues.

We use Adjusted Gross Profit and Adjusted Gross Profit Margin to understand and evaluate our core operating performance and trends. We believe these metrics are useful measures to us and to our investors to assist in evaluating our core operating performance because it provides consistency and direct comparability with our past financial performance and between fiscal periods, as the metrics eliminate the effects of variability of items such as stock-based compensation expense and amortization of intangible assets, which are non-cash expenses that may fluctuate for reasons unrelated to overall operating performance.

Adjusted Gross Profit and Adjusted Gross Profit Margin have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP and should not be considered as replacements for gross profit and gross profit margin, as determined by GAAP, or as measures of our profitability. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes.

 

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Adjusted Gross Profit was $187.3 million and $182.1 million, or 70.8% and 71.5% of total revenues, for the nine months ended March 31, 2021 and 2020, respectively. Adjusted Gross Profit increased for the nine months ended March 31, 2021 when compared to the nine months ended March 31, 2020 as a result of an increase in total revenues from customer growth, offset partially by an increase in amortization of costs to fulfill contracts and amortization of capitalized software within cost of revenues. Adjusted Gross Profit was $233.4 million, $152.2 million and $58.5 million, or 71.2%, 75.4% and 65.2% of total revenues, for the fiscal year ended June 30, 2020, the Successor 2019 Period and the Predecessor 2019 Period, respectively. Adjusted Gross Profit increased for the fiscal period ended June 30, 2020, primarily driven by the increase in total revenues from customer growth, partially offset by an increase in employee-related expenses and amortization of capitalized software within cost of revenues.

 

     Successor     Predecessor  
(in thousands)    Nine Months
Ended
March 31,
2021
    Nine Months
Ended
March 31,
2020
    Fiscal Year
Ended
June 30,
2020
    Period from
November 2,
2018 to
June 30,
2019
    Period from
July 1, 2018 to
November 1,
2018
 

Gross Profit*

   $ 152,258     $ 149,048     $ 188,226     $ 124,292     $ 57,666  

Gross Profit Margin

     57.5 %      58.6 %      57.4 %      61.6 %      64.4 % 

Amortization of intangible assets

     34,413       32,157       42,876       27,657       397  

Stock-based compensation expense

     656       —         617       —       401  

Corporate adjustments**

     —         884       1,658       262       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Gross Profit*

   $ 187,327     $ 182,089     $ 233,377     $ 152,211     $ 58,464  

Adjusted Gross Profit Margin,

     70.8 %      71.5 %      71.2 %      75.4 %      65.2 % 

 

*

Gross Profit and Adjusted Gross Profit are burdened by depreciation expense of $1.8 million and $1.8 million for the nine months ended March 31, 2021 and 2020, respectively, and $2.5 million, $1.5 million, and $0.8 million for the fiscal year ended June 30, 2020, the Successor 2019 Period and the Predecessor 2019 Period, respectively.

**

Corporate adjustments for the nine months ended March 31, 2020 primarily related to the transition of the new executive leadership team and closure of a standalone facility. Corporate Adjustments for the fiscal year ended June 30, 2020 and the Successor 2019 Period primarily related to certain costs related to the transition of the new executive leadership team and closure of a standalone facility of $0.7 million and $0.3 million, respectively, and $0.9 million of costs related to implementing certain expense saving initiatives as a result of the COVID-19 pandemic for the fiscal year ended June 30, 2020.

Quarterly Adjusted Gross Profit and Adjusted Gross Profit Margin

 

    Three Months Ended  
    June
30, 2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
    March 31,
2021
 

Gross Profit

  $ 42,847     $ 43,438     $ 48,093     $ 57,517     $ 39,178     $ 44,577     $ 49,031     $ 58,650  

Gross Profit Margin

    59.3 %       57.3 %       58.0 %       60.0 %       53.4 %      56.4 %       57.1 %       58.7 % 

Amortization of intangible assets

    10,507       10,719       10,719       10,719       10,719       10,969       11,722       11,722  

Stock-based compensation expense

    —         —         —         —         617       213       213       230  

Corporate adjustments

    262       206       106       572       774       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Gross Profit

  $ 53,616     $ 54,363     $ 58,918     $ 68,808     $ 51,288     $ 55,759     $ 60,966     $ 70,602  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Gross Profit Margin

    74.2 %       71.7 %       71.1 %       71.8 %       69.9 %      70.5 %       71.0 %       70.7 % 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Income

We define Adjusted Operating Income as loss from operations before amortization of acquired intangible assets, stock-based award and liability incentive award compensation expenses, and other certain corporate

 

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expenses, such as costs related to acquisitions, including the Apax Acquisition. We define Adjusted Operating Income Margin as Adjusted Operating Income divided by total revenues.

We use Adjusted Operating Income and Adjusted Operating Income Margin to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short-term and long-term operating plans. We believe that Adjusted Operating Income and Adjusted Operating Income Margin facilitate comparison of our operating performance on a consistent basis between periods, and when viewed in combination with our results prepared in accordance with GAAP, help provide a broader picture of factors and trends affecting our results of operations. While the amortization expense relating to intangible assets is excluded from Adjusted Operating Income, the revenue related to such intangible assets is reflected in Adjusted Operating Income as these assets contribute to our revenue generation.

Adjusted Operating Income and Adjusted Operating Income Margin have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Because of these limitations, Adjusted Operating Income and Adjusted Operating Income Margin should not be considered as replacements for operating loss and operating loss margin, as determined by GAAP, or as measures of our profitability. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes.

Adjusted Operating Income was $47.8 million and $34.9 million for the nine months ended March 31, 2021 and 2020, respectively. Adjusted Operating Income increased for the nine months ended March 31, 2021 compared to the nine months ended March 31, 2020 as a result of an increase in gross profit and a reduction in research and development expenses as a result of a decrease in employee-related costs and consulting fees, partially offset by an increase in cost related to expanding our sales coverage. Adjusted Operating Income was $46.3 million, $36.9 million and $5.0 million for the fiscal year ended June 30, 2020, the Successor 2019 Period and the Predecessor 2019 Period, respectively. Adjusted Operating Income increased for the fiscal period ended June 30, 2020, primarily driven by an increase in gross profit and offset by an increase in cost related to expanding our sales coverage, as well as continued investment in research and development.

 

     Successor     Predecessor  
(in thousands)    Nine Months
Ended
March 31,
2021
    Nine Months
Ended
March 31,
2020
    Fiscal
Year
Ended
June 30,
2020
    Period from
November 2,
2018 to
June 30,
2019
    Period from
July 1, 2018 to
November 1,
2018
 

Loss from Operations

   $ (57,027 )   $ (64,804 )   $ (94,709   $ (88,658   $ (16,577

Operating Margin

     (21.5 )%      (25.5 )%      (28.9 )%      (43.9 )%      (18.5 )% 

Amortization of intangible assets

     93,553       90,571       120,862       79,545       508  

Stock-based award and liability incentive award compensation expense

     5,378       2,789