pcty_Current_Folio_10Q

Table of Contents

S

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

Form 10-Q

 


 

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

 

For the quarterly period ended March 31, 2018

 

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

 

For the transition period from     to     

 

Commission file number 001-36348

 


 

PAYLOCITY HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Delaware

 

46-4066644

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

 

 

 

3850 N. Wilke Road

Arlington Heights, Illinois

60004

(Address of principal executive offices)

(Zip Code)

 

(847) 463-3200

(Registrant’s telephone number, including area code)

 


 

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

 

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

 

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

 

Large Accelerated Filer

Accelerated Filer

 ☐

 

 

Non-Accelerated Filer

☐  (Do not check if a smaller reporting company)

Smaller Reporting Company

 ☐

 

 

 

 

Emerging Growth Company

 

 

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 52,653,118 shares of Common Stock, $0.001 par value per share, as of April 27, 2018.

 

 

 


 

Table of Contents

Paylocity Holding Corporation

Form 10-Q

For the Quarterly Period Ended March 31, 2018

 

TABLE OF CONTENTS

 

 

 

 

 

     

Page

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

 

ITEM 1. FINANCIAL STATEMENTS 

 

 

 

 

 

Unaudited Consolidated Balance Sheets 

 

2

 

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Income 

 

3

 

 

 

Unaudited Consolidated Statement of Changes in Stockholders’ Equity 

 

4

 

 

 

Unaudited Consolidated Statements of Cash Flows 

 

5

 

 

 

Notes to the Unaudited Consolidated Financial Statements 

 

6

 

 

 

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

 

18

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 

33

 

 

 

ITEM 4. CONTROLS AND PROCEDURES 

 

33

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

ITEM 1. LEGAL PROCEEDINGS 

 

35

 

 

 

ITEM 1A. RISK FACTORS 

 

35

 

 

 

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

 

53

 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

 

54

 

 

 

ITEM 4. MINE SAFETY DISCLOSURES 

 

54

 

 

 

ITEM 5. OTHER INFORMATION 

 

54

 

 

 

ITEM 6. EXHIBITS 

 

54

 

 

 

SIGNATURES 

 

56

 

 

1

 


 

Table of Contents

 

PART I

FINANCIAL INFORMATION

 

Item  1.    Financial Statements

 

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Balance Sheets

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

March 31, 

 

 

    

2017

    

2018

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103,468

 

$

129,530

 

Accounts receivable, net

 

 

2,040

 

 

3,384

 

Prepaid expenses and other

 

 

14,879

 

 

16,921

 

 

 

 

 

 

 

 

 

Total current assets before funds held for clients

 

 

120,387

 

 

149,835

 

Funds held for clients

 

 

942,459

 

 

1,347,522

 

 

 

 

 

 

 

 

 

Total current assets

 

 

1,062,846

 

 

1,497,357

 

Long-term prepaid expenses

 

 

1,535

 

 

1,022

 

Capitalized internal-use software, net

 

 

17,394

 

 

20,002

 

Property and equipment, net

 

 

40,756

 

 

50,380

 

Intangible assets, net

 

 

8,907

 

 

13,457

 

Goodwill

 

 

6,003

 

 

9,754

 

Deferred income tax assets, net

 

 

 —

 

 

18,906

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,137,441

 

$

1,610,878

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

2,046

 

$

2,371

 

Accrued expenses

 

 

30,301

 

 

35,474

 

 

 

 

 

 

 

 

 

Total current liabilities before client fund obligations

 

 

32,347

 

 

37,845

 

Client fund obligations

 

 

942,459

 

 

1,347,522

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

974,806

 

 

1,385,367

 

Deferred rent

 

 

14,621

 

 

20,963

 

Deferred income tax liabilities, net

 

 

401

 

 

 —

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

989,828

 

$

1,406,330

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000 authorized, no shares issued and outstanding at June 30, 2017 and March 31, 2018

 

$

 —

 

$

 —

 

Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2017 and March 31, 2018; 51,738 shares issued and outstanding at June 30, 2017 and 52,649 shares issued and outstanding at March 31, 2018

 

 

52

 

 

53

 

Additional paid-in capital

 

 

192,837

 

 

209,791

 

Accumulated deficit

 

 

(45,276)

 

 

(5,125)

 

Accumulated other comprehensive loss

 

 

 —

 

 

(171)

 

Total stockholders’ equity

 

$

147,613

 

$

204,548

 

Total liabilities and stockholders’ equity

 

$

1,137,441

 

$

1,610,878

 

 

                                      See accompanying notes to unaudited consolidated financial statements.

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PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31, 

 

March 31, 

 

 

    

2017

    

2018

    

2017

    

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring fees

 

$

85,314

 

$

105,857

 

$

212,581

 

$

264,443

 

Interest income on funds held for clients

 

 

1,041

 

 

2,719

 

 

2,489

 

 

6,119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total recurring revenues

 

 

86,355

 

 

108,576

 

 

215,070

 

 

270,562

 

Implementation services and other

 

 

3,918

 

 

4,831

 

 

8,879

 

 

10,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

90,273

 

 

113,407

 

 

223,949

 

 

280,911

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring revenues

 

 

22,436

 

 

26,982

 

 

62,255

 

 

76,711

 

Implementation services and other

 

 

9,646

 

 

11,670

 

 

28,569

 

 

33,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenues

 

 

32,082

 

 

38,652

 

 

90,824

 

 

110,451

 

Gross profit

 

 

58,191

 

 

74,755

 

 

133,125

 

 

170,460

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

21,242

 

 

26,004

 

 

56,988

 

 

68,782

 

Research and development

 

 

6,969

 

 

9,058

 

 

21,492

 

 

27,227

 

General and administrative

 

 

15,100

 

 

19,228

 

 

43,915

 

 

53,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

43,311

 

 

54,290

 

 

122,395

 

 

149,347

 

Operating income

 

 

14,880

 

 

20,465

 

 

10,730

 

 

21,113

 

Other income (expense)

 

 

(47)

 

 

215

 

 

(4)

 

 

465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

14,833

 

 

20,680

 

 

10,726

 

 

21,578

 

Income tax expense (benefit)

 

 

32

 

 

(18,497)

 

 

164

 

 

(18,573)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

14,801

 

$

39,177

 

$

10,562

 

$

40,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on securities, net of tax

 

 

 —

 

 

(61)

 

 

 —

 

 

(171)

 

Total other comprehensive loss, net of tax

 

 

 —

 

 

(61)

 

 

 —

 

 

(171)

 

Comprehensive income

 

$

14,801

 

$

39,116

 

$

10,562

 

$

39,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.29

 

$

0.74

 

$

0.21

 

$

0.77

 

Diluted

 

$

0.27

 

$

0.71

 

$

0.20

 

$

0.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

51,447

 

 

52,615

 

 

51,353

 

 

52,334

 

Diluted

 

 

54,002

 

 

55,030

 

 

53,987

 

 

54,717

 

 

See accompanying notes to unaudited consolidated financial statements.

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PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Comprehensive

 

Stockholders’

 

 

    

Shares

    

Amount

    

Capital

    

Deficit

    

Loss

    

Equity

 

Balances at June 30, 2017

 

51,738

 

$

52

 

$

192,837

 

$

(45,276)

 

$

 —

 

$

147,613

 

Stock-based compensation

 

 —

 

 

 —

 

 

23,345

 

 

 —

 

 

 —

 

 

23,345

 

Stock options exercised

 

772

 

 

 1

 

 

7,161

 

 

 —

 

 

 —

 

 

7,162

 

Issuance of common stock upon vesting of
    restricted stock units

 

425

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Issuance of common stock under employee
    stock purchase plan

 

53

 

 

 —

 

 

2,045

 

 

 —

 

 

 —

 

 

2,045

 

Net settlement for taxes and/or exercise
    price related to equity awards

 

(339)

 

 

 —

 

 

(15,597)

 

 

 —

 

 

 —

 

 

(15,597)

 

Unrealized losses on securities, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(171)

 

 

(171)

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

40,151

 

 

 —

 

 

40,151

 

Balances at March 31, 2018

 

52,649

 

$

53

 

$

209,791

 

$

(5,125)

 

$

(171)

 

$

204,548

 

 

See accompanying notes to the unaudited consolidated financial statements.

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PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2018

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,562

 

$

40,151

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

18,695

 

 

21,891

 

Depreciation and amortization expense

 

 

14,685

 

 

20,640

 

Deferred income tax expense (benefit)

 

 

127

 

 

(18,603)

 

Provision for doubtful accounts

 

 

47

 

 

149

 

Net accretion of discounts and amortization of premiums on available-for-sale securities

 

 

 —

 

 

(234)

 

Net realized losses on sales of available-for-sale securities

 

 

 —

 

 

 2

 

Loss on disposal of equipment

 

 

225

 

 

160

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(543)

 

 

(1,278)

 

Prepaid expenses and other

 

 

(1,802)

 

 

(1,678)

 

Accounts payable

 

 

(145)

 

 

429

 

Accrued expenses

 

 

1,484

 

 

1,762

 

Tenant improvement allowance

 

 

 —

 

 

5,952

 

Net cash provided by operating activities

 

 

43,335

 

 

69,343

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of available-for-sale securities from funds held for clients

 

 

 —

 

 

(126,223)

 

Proceeds from sales and maturities of available-for-sale securities from funds held for clients

 

 

 —

 

 

51,292

 

Net change in funds held for clients' cash and cash equivalents

 

 

69,281

 

 

(328,462)

 

Capitalized internal-use software costs

 

 

(10,073)

 

 

(11,442)

 

Purchases of property and equipment

 

 

(13,916)

 

 

(9,374)

 

Lease allowances used for tenant improvements

 

 

 —

 

 

(7,086)

 

Acquisition of business, net of cash acquired

 

 

 —

 

 

(8,346)

 

Net cash provided by (used in) investing activities

 

 

45,292

 

 

(439,641)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net change in client fund obligations

 

 

(69,281)

 

 

403,375

 

Proceeds from employee stock purchase plan

 

 

1,823

 

 

2,045

 

Taxes paid related to net share settlement of equity awards

 

 

(6,215)

 

 

(9,060)

 

Net cash provided by (used in) financing activities

 

 

(73,673)

 

 

396,360

 

Net Change in Cash and Cash Equivalents

 

 

14,954

 

 

26,062

 

Cash and Cash Equivalents—Beginning of Period

 

 

86,496

 

 

103,468

 

Cash and Cash Equivalents—End of Period

 

$

101,450

 

$

129,530

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

Purchase of property and equipment and internal-use software, accrued but not paid

 

$

1,714

 

$

2,832

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

Cash paid for income taxes, net of refunds

 

$

41

 

$

17

 

 

See accompanying notes to unaudited consolidated financial statements.

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PAYLOCITY HOLDING CORPORATION

Notes to the Unaudited Consolidated Financial Statements

(all amounts in thousands, except per share data)

 

 

(1)  Organization and Description of Business

 

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

 

(2)  Summary of Significant Accounting Policies

 

(a)  Consolidation and Use of Estimates

 

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

 

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

 

(b)  Interim Unaudited Consolidated Financial Information

 

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the Company’s financial position, results of operations, changes in stockholders’ equity and cash flows. The results of operations for the three and nine months ended March 31, 2018 are not necessarily indicative of the results for the full year or the results for any future periods. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended June 30, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC on August 11, 2017.

 

(c)  Funds Held For Clients and Corporate Investments

 

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

 

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

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

 

The Company reviews the composition of its portfolio for any available-for-sale security that has a fair value that falls below its amortized cost. If any security fits this criterion, the Company further evaluates whether other-than-temporary impairment exists by considering whether the Company has the intent and ability to retain the security for a period of time sufficient enough to allow for anticipated fair value recovery. The Company did not record any other-than-temporary impairment charges during the three or nine months ended March 31, 2018.

 

(d)  Income Taxes

 

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

 

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

 

(e)  Recently Adopted Accounting Standards

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”) which modifies accounting for excess tax benefits and tax deficiencies, forfeitures, and employer tax withholding requirements.  ASU 2016-09 also clarifies certain classifications on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company adopted this standard effective July 1, 2017, and it resulted in an increase to the Company’s gross net operating loss of $30,783. As of December 31, 2017, the adoption of this standard did not have a material impact on its consolidated financial statements and disclosures due to the Company’s valuation allowance on deferred tax assets. However, during the third quarter of fiscal 2018, the Company released its valuation allowance and as a result, the Company recorded a significant increase in deferred tax assets due to excess tax benefits from employee stock exercises. Refer to Note 9 for additional information on the release of the valuation allowance and the impact of excess tax benefits from employee stock exercises. The Company will continue to estimate forfeitures at each reporting period, rather than electing an accounting policy change to record the impact of such forfeitures as they occur.

 

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

 

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) (“ASU 2018-05”) which incorporates the SEC’s Staff Accounting Bulletin 118 (“SAB 118”) issued on December 22, 2017. SAB 118 provides for a provisional measurement period for entities to finalize their accounting for certain income tax effects related to the Tax Cuts and Jobs Act (the “Act”), not to exceed one year from enactment of the new tax law. Entities are permitted to utilize reasonable estimates until they have finished analyzing the effects of the Act. The Company recognized the

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

 

(f)  Recently Issued Accounting Standards

 

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

 

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

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) which amends various aspects of existing guidance for leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease with terms greater than twelve months, along with additional qualitative and quantitative disclosures. ASU 2016-02 also requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented. In March 2018, the FASB affirmed its proposed ASU, Leases (Topic 842): Targeted Improvements, which provides an additional transition method allowing an entity to apply the new lease accounting and disclosure requirements only for the year of adoption with the comparative periods continuing to be in accordance with current GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the potential effects of these changes to its consolidated financial statements as well as evaluating the transition methods and expects to adopt this new standard in its fiscal year beginning July 1, 2019.

 

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

 

(3) Business Combinations

 

In March 2018, the Company acquired substantially all the assets of BeneFLEX HR Resources, Inc. (“BeneFLEX”), a third party employee benefits administrator, for $9,346, net of cash acquired. BeneFLEX administers employee benefit plans, including flexible spending accounts, health savings accounts, health reimbursement accounts, COBRA, and others. The Company paid $8,346 upon closing and may be required to pay an additional $1,000 subject to BeneFLEX attaining certain revenue targets and in the absence of indemnity claims. This acquisition expands the portfolio of services available to the Company’s clients by allowing it to provide additional benefit administration solutions to its clients, prospects, and broker partners.

 

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The Company accounts for business combinations in accordance with ASC 805, Business Combinations. The Company recorded the acquisition using the acquisition method of accounting and recognized assets at their fair value as of the date of acquisition. The Company based the preliminary allocation of the purchase price on estimates and assumptions that are subject to change within the purchase price allocation period, which is generally one year from the acquisition date. The primary areas of the purchase price allocation that are not yet finalized relate to the measurement of identifiable intangible assets and the finalization of net working capital adjustments. The Company determined the estimated fair value of identifiable intangible assets acquired primarily by using an income approach.

 

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

 

 

 

 

 

 

Goodwill

    

$

3,751

 

Client relationships

 

 

5,386

 

Non-solicitation agreements

 

 

240

 

Net liabilities assumed

 

 

(31)

 

Total Purchase Price

 

$

9,346

 

 

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

 

(4)  Balance Sheet Information

 

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

 

Activity in the allowance for doubtful accounts was as follows:

 

 

 

 

 

 

Balance at June 30, 2017

    

$

266

 

Charged to expense

 

 

149

 

Write-offs

 

 

(134)

 

Balance at March 31, 2018

 

$

281

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

March 31, 

 

 

    

2017

    

2018

 

Capitalized internal-use software

 

$

49,663

 

$

62,629

 

Accumulated amortization

 

 

(32,269)

 

 

(42,627)

 

Capitalized internal-use software, net

 

$

17,394

 

$

20,002

 

 

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

 

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Property and equipment, net consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

March 31, 

 

 

    

2017

    

2018

 

Office equipment

 

$

3,591

 

$

3,880

 

Computer equipment

 

 

24,411

 

 

28,526

 

Furniture and fixtures

 

 

7,547

 

 

8,837

 

Software

 

 

4,954

 

 

5,221

 

Leasehold improvements

 

 

21,426

 

 

32,621

 

Time clocks rented by clients

 

 

4,240

 

 

4,551

 

Total

 

 

66,169

 

 

83,636

 

Accumulated depreciation

 

 

(25,413)

 

 

(33,256)

 

Property and equipment, net

 

$

40,756

 

$

50,380

 

 

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

 

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

 

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

 

 

 

 

 

 

Balance at June 30, 2017

 

$

6,003

 

Additions attributable to current period acquisition

 

 

3,751

 

Balance at March 31, 2018

 

$

9,754

 

 

Intangible assets, net consist of the following:

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

 

 

June 30, 

 

March 31, 

 

Useful

 

 

    

2017

    

2018

    

Life

 

Client relationships

 

$

12,580

 

$

17,966

 

9 years

 

Non-solicitation agreements

 

 

360

 

 

600

 

2 - 4 years

 

Total

 

 

12,940

 

 

18,566

 

 

 

Accumulated amortization

 

 

(4,033)

 

 

(5,109)

 

 

 

Intangible assets, net

 

$

8,907

 

$

13,457

 

 

 

 

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

 

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

 

 

 

 

 

 

Remainder of fiscal 2018

    

$

516

 

Fiscal 2019

 

 

2,056

 

Fiscal 2020

 

 

2,056

 

Fiscal 2021

 

 

2,056

 

Fiscal 2022

 

 

2,041

 

Thereafter

 

 

4,732

 

Total

 

$

13,457

 

 

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The components of accrued expenses were as follows:

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

March 31, 

 

 

    

2017

    

2018

 

Accrued payroll and personnel costs

 

$

25,131

 

$

25,361

 

Other

 

 

5,170

 

 

10,113

 

Total accrued expenses

 

$

30,301

 

$

35,474

 

 

 

 

(5) Funds Held for Clients and Corporate Investments

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

 

Type of Issue

 

cost

 

gains

    

losses

    

Fair value

Funds held for clients' cash and cash equivalents

 

$

1,272,771

 

$

 —

 

$

(4)

 

$

1,272,767

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

33,958

 

 

 3

 

 

(168)

 

 

33,793

Commercial paper

 

 

29,165

 

 

 —

 

 

(16)

 

 

29,149

Asset-backed securities

 

 

12,041

 

 

 —

 

 

(65)

 

 

11,976

Total available-for-sale securities

 

 

75,164

 

 

 3

 

 

(249)

 

 

74,918

Investments

 

$

1,347,935

 

$

 3

 

$

(253)

 

$

1,347,685

 

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

 

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

 

 

 

 

 

 

 

March 31, 

 

 

2018

Funds held for clients

 

$

1,347,522

Prepaid expenses and other

 

 

163

Total investments

 

$

1,347,685

 

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

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

unrealized

 

 

 

 

 

losses

 

Fair value

Corporate bonds

 

$

(168)

 

$

31,231

Commercial paper

 

 

(16)

 

 

27,291

Asset-backed securities

 

 

(65)

 

 

11,976

Total

 

$

(249)

 

$

70,498

 

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

 

The Company regularly reviews the composition of its portfolio to determine the existence of other-than-temporary-impairment (“OTTI”). The Company did not recognize any OTTI charges in accumulated other comprehensive loss during the three or nine months ended March 31, 2018, nor does it believe that OTTI exists in its

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portfolio as of March 31, 2018. The Company plans to retain the securities in an unrealized loss position for a period of time sufficient enough to recover their amortized cost basis or until their maturity date. The Company believes that the unrealized losses on these securities were not due to deterioration in credit risk. The securities in an unrealized loss position held an A-1 rating or better as of March 31, 2018.

 

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

 

 

 

 

 

 

 

 

 

 

Amortized

 

 

 

 

cost

 

Fair value

One year or less

 

$

53,150

 

$

53,036

One year to two years

 

 

20,410

 

 

20,275

Two years to three years

 

 

1,604

 

 

1,607

Total available-for-sale securities

 

$

75,164

 

$

74,918

 

 

(6)  Fair Value Measurement

 

The Company applies the fair value measurement and disclosure provisions of ASC 820, Fair Value Measurements and Disclosures, and ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

·

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

 

·

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

 

·

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

 

The Company measures any cash and cash equivalents, accounts receivable, accounts payable and client fund obligations at fair value on a recurring basis using Level 1 inputs. The Company considers the recorded value of these financial assets and liabilities to approximate the fair value of the respective assets and liabilities at June 30, 2017 and March 31, 2018 based upon the short-term nature of these assets and liabilities.

 

Marketable securities, consisting of securities classified as available-for-sale as well as certain cash equivalents, are recorded at fair value on a recurring basis using Level 2 inputs obtained from an independent pricing service. Available-for-sale securities include asset-backed securities, corporate bonds and commercial paper. The independent pricing service utilizes a variety of inputs including benchmark yields, broker/dealer quoted prices, reported trades, issuer spreads as well as other available market data. The Company, on a sample basis, validates the pricing from the independent pricing service against another third-party pricing source for reasonableness. The Company has not adjusted any prices obtained by the independent pricing service, as it believes they are appropriately valued. There were no available-for-sale securities classified in Level 3 of the fair value hierarchy at March 31, 2018, and the Company did not transfer assets between Levels during the nine months ended March 31, 2018. The Company did not hold any marketable securities at June 30, 2017.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Level 1

    

Level 2

    

Level 3

Funds held for clients' cash and cash equivalents

 

$

1,272,767

 

$

1,247,604

 

$

25,163

 

$

 —

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

33,793

 

 

 

 

 

33,793

 

 

 

Commercial paper

 

 

29,149

 

 

 

 

 

29,149

 

 

 

Asset-backed securities

 

 

11,976

 

 

 

 

 

11,976

 

 

 

Total available-for-sale securities

 

 

74,918

 

 

 —

 

 

74,918

 

 

 —

Investments

 

$

1,347,685

 

$

1,247,604

 

$

100,081

 

$

 —

 

 

 

 

(7)  Benefit Plans

 

(a)  Equity Incentive Plan

 

The Company maintains a 2008 Equity Incentive Plan (the “2008 Plan”) and a 2014 Equity Incentive Plan (the “2014 Plan”) pursuant to which the Company has reserved shares of its common stock for issuance to its employees, directors and non-employee third parties. The 2014 Plan serves as the successor to the 2008 Plan and permits the granting of options to purchase common stock and other equity incentives at the discretion of the compensation committee of the Company’s board of directors. No new awards have been or will be issued under the 2008 Plan since the effective date of the 2014 Plan. Outstanding awards under the 2008 Plan continue to be subject to the terms and conditions of the 2008 Plan. The number of shares of common stock reserved for issuance under the 2014 Plan will increase automatically each calendar year, continuing through and including January 1, 2024 (the “Evergreen provision”). The number of shares added each year will be equal to the lesser of (a) four and five tenths percent (4.5%) of the number of shares of common stock of the Company issued and outstanding on the immediately preceding December 31, or (b) an amount determined by the Company’s board of directors. The Company’s board of directors determined that, effective January 1, 2018, it would increase the number of common shares in reserve for issuance under the 2014 Plan by 2,367 shares.

 

As of March 31, 2018, the Company had 13,883 shares allocated to the plans, of which 3,848 shares were subject to outstanding options or awards. Generally, the Company issues previously unissued shares for the exercise of stock options or vesting of awards; however, shares previously subject to 2014 Plan grants or awards that are forfeited or net settled at exercise or release may be reissued to satisfy future issuances.

 

The following table summarizes changes in the number of shares available for grant under the Company’s equity incentive plans during the nine months ended March 31, 2018:

 

 

 

 

 

 

 

    

Number of
Shares

 

Available for grant at July 1, 2017

 

8,227

 

January 1, 2018 Evergreen provision increase

 

2,367

 

RSUs granted

 

(884)

 

Shares withheld in settlement of taxes and/or exercise price

 

339

 

Forfeitures

 

45

 

Shares removed

 

(59)

 

Available for grant at March 31, 2018

 

10,035

 

 

Shares removed represents forfeitures of shares and shares withheld in settlement of taxes and/or payment of exercise price related to grants made under the 2008 Plan. As noted above, no new awards will be issued under the 2008 Plan.

 

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Stock-based compensation expense related to stock options, restricted stock units (“RSUs”), and the Employee Stock Purchase Plan (as described below) is included in the following line items in the accompanying unaudited consolidated statements of operations and comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Nine Months Ended March 31, 

 

 

    

2017