Paycom Software, Inc. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


☐	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: 001-36393

Paycom Software, Inc.

(Exact name of registrant as specified in its charter)


Delaware		80-0957485
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

7501 W. Memorial Road

Oklahoma City, Oklahoma

73142

(Address of principal executive offices)

(Zip Code)

(405) 722-6900

(Registrant’s telephone number, including area code)

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

PAYC

New York Stock Exchange

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ 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.


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 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 ☒

As of October 25, 2022, there were 60,020,369 shares of common stock, par value of $0.01 per share, outstanding, including 2,153,904 shares of restricted stock.

Paycom Software, Inc.


	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Unaudited Consolidated Balance Sheets	3
	Unaudited Consolidated Statements of Comprehensive Income	4
	Unaudited Consolidated Statements of Stockholders’ Equity	5
	Unaudited Consolidated Statements of Cash Flows	6
	Notes to the Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 5.	Other Information	34
Item 6.	Exhibits	36
Signatures		37

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Paycom Software, Inc.

Unaudited Consolidated Balance Sheets

(in thousands, except per share amounts)


	September 30, 2022			December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	317,163		$	277,978
Accounts receivable		14,896			9,490
Prepaid expenses		39,717			23,729
Inventory		1,471			1,131
Income tax receivable		15,168			16,413
Deferred contract costs		90,832			76,724
Current assets before funds held for clients		479,247			405,465
Funds held for clients		1,749,115			1,846,573
Total current assets		2,228,362			2,252,038
Property and equipment, net		383,860			348,953
Intangible assets, net		54,993			58,028
Goodwill		51,889			51,889
Long-term deferred contract costs		536,942			461,852
Other assets		58,524			42,385
Total assets	$	3,314,570		$	3,215,145
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	10,211		$	5,772
Accrued commissions and bonuses		19,037			22,357
Accrued payroll and vacation		36,069			34,259
Deferred revenue		19,546			16,277
Current portion of long-term debt		—			1,775
Accrued expenses and other current liabilities		58,797			63,397
Current liabilities before client funds obligation		143,660			143,837
Client funds obligation		1,754,095			1,846,573
Total current liabilities		1,897,755			1,990,410
Deferred income tax liabilities, net		139,368			145,504
Long-term deferred revenue		94,465			85,149
Net long-term debt, less current portion		29,000			27,380
Other long-term liabilities		77,602			72,988
Total long-term liabilities		340,435			331,021
Total liabilities		2,238,190			2,321,431
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value (100,000 shares authorized, 62,517 and 62,298 shares issued at September 30, 2022 and December 31, 2021, respectively; 57,867 and 58,012 shares outstanding at September 30, 2022 and December 31, 2021, respectively)		625			623
Additional paid-in capital		550,302			465,594
Retained earnings		1,117,017			915,579
Accumulated other comprehensive earnings (loss)		(3,813	)		—
Treasury stock, at cost (4,650 and 4,286 shares at September 30, 2022 and December 31, 2021, respectively)		(587,751	)		(488,082	)
Total stockholders’ equity		1,076,380			893,714
Total liabilities and stockholders’ equity	$	3,314,570		$	3,215,145

See accompanying notes to the unaudited consolidated financial statements.

Paycom Software, Inc.

Unaudited Consolidated Statements of Comprehensive Income

(in thousands, except per share amounts)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2022			2021		2022			2021
Revenues
Recurring	$	328,150		$	251,306	$	987,848		$	756,665
Implementation and other		6,017			4,888		16,762			13,873
Total revenues		334,167			256,194		1,004,610			770,538
Cost of revenues
Operating expenses		44,169			34,766		122,265			92,612
Depreciation and amortization		10,935			7,914		31,405			22,751
Total cost of revenues		55,104			42,680		153,670			115,363
Administrative expenses
Sales and marketing		91,114			69,745		253,834			200,485
Research and development		40,366			31,077		108,774			84,012
General and administrative		60,693			59,980		179,109			160,234
Depreciation and amortization		12,625			9,407		36,378			25,503
Total administrative expenses		204,798			170,209		578,095			470,234
Total operating expenses		259,902			212,889		731,765			585,597
Operating income		74,265			43,305		272,845			184,941
Interest expense		(1,018	)		—		(1,587	)		—
Other income (expense), net		2,041			244		4,331			1,019
Income before income taxes		75,288			43,549		275,589			185,960
Provision for income taxes		23,135			13,170		74,151			38,687
Net income	$	52,153		$	30,379	$	201,438		$	147,273
Earnings per share, basic	$	0.90		$	0.52	$	3.48		$	2.55
Earnings per share, diluted	$	0.90		$	0.52	$	3.46		$	2.53
Weighted average shares outstanding:
Basic		57,865			57,935		57,949			57,843
Diluted		58,033			58,190		58,193			58,192
Comprehensive earnings (loss):
Net income	$	52,153		$	30,379	$	201,438		$	147,273
Unrealized net gains (losses) on available-for-sale securities		(2,705	)		—		(4,881	)		—
Tax effect		492			—		1,068			—
Other comprehensive income (loss), net of tax		(2,213	)		—		(3,813	)		—
Comprehensive earnings (loss)	$	49,940		$	30,379	$	197,625		$	147,273

See accompanying notes to the unaudited consolidated financial statements.

Paycom Software, Inc.

Unaudited Consolidated Statements of Stockholders’ Equity

(in thousands)


	Common Stock				Additional			Retained		Accumulated Other			Treasury Stock					Total
	Shares		Amount		Paid-in Capital			Earnings		Comprehensive Loss			Shares		Amount			Stockholders’ Equity
Balances at December 31, 2020		61,861	$	618	$	357,908		$	719,619	$	—			4,122	$	(422,502	)	$	655,643
Vesting of restricted stock		3		—		—			—		—			—		—			—
Stock-based compensation		—		—		25,594			—		—			—		—			25,594
Repurchases of common stock		—		—		—			—		—			1		(377	)		(377	)
Net income		—		—		—			64,616		—			—		—			64,616
Balances at March 31, 2021		61,864	$	618	$	383,502		$	784,235	$	—			4,123	$	(422,879	)	$	745,476
Vesting of restricted stock		271		3		(3	)		—		—			—		—			—
Stock-based compensation		—		—		26,480			—		—			—		—			26,480
Repurchases of common stock		—		—		—			—		—			94		(31,978	)		(31,978	)
Net income		—		—		—			52,278		—			—		—			52,278
Balances at June 30, 2021		62,135	$	621	$	409,979		$	836,513	$	—			4,217	$	(454,857	)	$	792,256
Vesting of restricted stock		140		1		(1	)		—		—			—		—			—
Stock-based compensation		—		—		31,501			—		—			—		—			31,501
Repurchases of common stock		—		—		—			—		—			61		(28,795	)		(28,795	)
Net income		—		—		—			30,379		—			—		—			30,379
Balances at September 30, 2021		62,275	$	622	$	441,479		$	866,892	$	—			4,278	$	(483,652	)	$	825,341


	Common Stock				Additional			Retained		Accumulated Other			Treasury Stock					Total
	Shares		Amount		Paid-in Capital			Earnings		Comprehensive Loss			Shares		Amount			Stockholders’ Equity
Balances at December 31, 2021		62,298	$	623	$	465,594		$	915,579	$	—			4,286	$	(488,082	)	$	893,714
Vesting of restricted stock		4		—		—			—		—			—		—			—
Stock-based compensation		—		—		24,713			—		—			—		—			24,713
Repurchases of common stock		—		—		—			—		—			1		(218	)		(218	)
Net income		—		—		—			91,930		—			—		—			91,930
Other comprehensive earnings (loss), net of tax		—		—		—			—		(1,119	)		—		—			(1,119	)
Balances at March 31, 2022		62,302	$	623	$	490,307		$	1,007,509	$	(1,119	)		4,287	$	(488,300	)	$	1,009,020
Vesting of restricted stock		212		2		(2	)		—		—			—		—			—
Stock-based compensation		—		—		27,472			—		—			—		—			27,472
Repurchases of common stock		—		—		—			—		—			363		(99,227	)		(99,227	)
Net income		—		—		—			57,355		—			—		—			57,355
Other comprehensive earnings (loss), net of tax		—		—		—			—		(481	)		—		—			(481	)
Balances at June 30, 2022		62,514	$	625	$	517,777		$	1,064,864	$	(1,600	)		4,650	$	(587,527	)	$	994,139
Vesting of restricted stock		3		—		—			—		—			—		—			—
Stock-based compensation		—		—		32,525			—		—			—		—			32,525
Repurchases of common stock		—		—		—			—		—			—		(224	)		(224	)
Net income		—		—		—			52,153		—			—		—			52,153
Other comprehensive earnings (loss), net of tax		—		—		—			—		(2,213	)		—		—			(2,213	)
Balances at September 30, 2022		62,517	$	625	$	550,302		$	1,117,017	$	(3,813	)		4,650	$	(587,751	)	$	1,076,380

See accompanying notes to the unaudited consolidated financial statements.

Paycom Software, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)


	Nine Months Ended September 30,
	2022			2021
Cash flows from operating activities
Net income	$	201,438		$	147,273
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		67,783			48,254
Accretion of discount on available-for-sale securities		(872	)		(276	)
Non-cash marketing expense		1,320			618
Loss on disposition of property and equipment		—			146
Amortization of debt issuance costs		532			27
Stock-based compensation expense		70,815			76,364
Cash paid for derivative settlement		205			(558	)
Gain on derivative		(1,559	)		(305	)
Deferred income taxes, net		(4,841	)		12,630
Other		(227	)		—
Changes in operating assets and liabilities:
Accounts receivable		(5,406	)		(3,874	)
Prepaid expenses		(11,203	)		(8,789	)
Inventory		27			97
Other assets		(10,104	)		671
Deferred contract costs		(86,634	)		(68,041	)
Accounts payable		4,159			1,659
Income taxes, net		1,245			236
Accrued commissions and bonuses		(3,320	)		(1,272	)
Accrued payroll and vacation		1,810			11,609
Deferred revenue		12,585			11,051
Accrued expenses and other current liabilities		(1,106	)		2,117
Net cash provided by operating activities		236,647			229,637
Cash flows from investing activities
Purchases of investments from funds held for clients		(268,718	)		(170,760	)
Proceeds from investments from funds held for clients		328,731			195,000
Purchases of intangible assets		—			(1,500	)
Purchases of property and equipment		(92,041	)		(86,718	)
Net cash used in investing activities		(32,028	)		(63,978	)
Cash flows from financing activities
Proceeds from issuance of debt		29,000			—
Repurchases of common stock		(94,652	)		—
Withholding taxes paid related to net share settlements		(5,017	)		(61,149	)
Payments on long-term debt		(29,287	)		(1,331	)
Net change in client funds obligation		(92,478	)		1,346,479
Payment of debt issuance costs		(6,437	)		—
Net cash used in (provided by) financing activities		(198,871	)		1,283,999
Increase in cash, cash equivalents, restricted cash and restricted cash equivalents		5,748			1,449,658
Cash, cash equivalents, restricted cash and restricted cash equivalents
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period		1,812,691			1,585,275
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period	$	1,818,439		$	3,034,933


	Nine Months Ended September 30,
	2022		2021
Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents
Cash and cash equivalents	$	317,163	$	230,926
Restricted cash included in funds held for clients		1,501,276		2,804,007
Total cash, cash equivalents, restricted cash and restricted cash equivalents, end of period	$	1,818,439	$	3,034,933


Supplemental disclosures of cash flow information:
Non-cash investing and financing activities:
Purchases of property and equipment, accrued but not paid	$	3,355	$	5,994
Stock-based compensation for capitalized software	$	6,545	$	5,108
Right of use assets obtained in exchange for operating lease liabilities	$	14,385	$	4,439

See accompanying notes to the unaudited consolidated financial statements.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

ORGANIZATION AND DESCRIPTION OF BUSINESS

Paycom Software, Inc. (“Software”) and its wholly-owned subsidiaries (collectively, the “Company”) is a leading provider of a comprehensive, cloud-based human capital management (“HCM”) solution delivered as Software-as-a-Service. Unless we state otherwise or the context otherwise requires, the terms “we,” “our,” “us” and the “Company” refer to Software and its consolidated subsidiaries.

We provide functionality and data analytics that businesses need to manage the complete employment lifecycle, from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources (“HR”) management applications.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are discussed in “Note 2. Summary of Significant Accounting Policies” in the notes to our audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on February 17, 2022.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements and notes have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the SEC regarding interim financial statements that permit reduced disclosure for interim periods. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes presented in the Form 10-K. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results expected for the full year.

Recently Adopted Accounting Pronouncements

In January 2021, we adopted Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes” (“ASU 2019-12”) utilizing the prospective transition method. The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income tax in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The adoption of this guidance did not have a material impact on our unaudited interim consolidated financial statements.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, “Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. Prior to August 24, 2022, our floating-to-fixed interest rate swap was outstanding to offset the rate variability associated with our outstanding indebtedness. As discussed in Note 7, the interest rate swap was terminated on August 24, 2022. As a result, the adoption of ASU 2020-04 had no material impact on our unaudited financial statements.

In January 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform (Topic 848) Scope” (“ASU 2021-01”), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that are affected by the discounting transition. ASU 2021-01 amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. As discussed in Note 7, the interest rate swap was terminated on August 24, 2022. As a result, the adoption of ASU 2021-01 had no material impact on our unaudited financial statements.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, loss contingencies, the useful life of property and equipment and intangible assets, the life of our client relationships, the fair value of our stock-based awards and the fair value of our financial instruments, intangible assets and goodwill. These estimates are based on historical experience where applicable and other assumptions that management believes are reasonable under the circumstances. Actual results could materially differ from these estimates.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

Seasonality

Our revenues are seasonal in nature and generally we expect our first and fourth quarter recurring revenues to be higher than other quarters during the year. Recurring revenues include revenues relating to the annual processing of payroll tax filing forms and ACA form filing requirements, such as Form W-2, Form 1099, and Form 1095 and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. As payroll tax forms are typically processed in the first quarter of the year, first quarter recurring revenues and margins are positively impacted. In addition, unscheduled payroll runs at the end of the year often result in increased recurring revenues in the fourth quarter. 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.

Funds Held for Clients and Client Funds Obligation

As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities. Amounts collected by us from clients for their federal, state and local employment taxes are invested by us, and we earn interest on these funds during the interval between receipt and disbursement.

These investments are shown in our consolidated balance sheets as funds held for clients, and the associated liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying consolidated balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the consolidated balance sheet date. As of September 30, 2022 and December 31, 2021, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper and certificates of deposit. Additionally, as of September 30, 2022, the funds held for clients were invested in U.S. treasury securities with an original maturity duration of greater than one year. Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item in the consolidated balance sheets. U.S. treasury securities with an original maturity duration of greater than one year are also classified as available-for-sale securities and included within the funds held for clients line item in the consolidated balance sheets. These available-for-sale securities are recorded in the consolidated balance sheets at fair value, with the difference between the amortized cost and fair value of these available-for-sale securities recorded as unrealized net gains (losses) on available-for-sale securities and are included within comprehensive earnings (loss) in the consolidated statements of comprehensive income. Funds held for clients are classified as a current asset in the consolidated balance sheets because the funds are held solely to satisfy the client funds obligation. Additionally, the funds held for clients is classified as restricted cash and restricted cash equivalents and presented within the reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents on the consolidated statements of cash flows.

Stock Repurchase Plan

In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. Most recently, in August 2022, our Board of Directors authorized the repurchase of up to $1.1 billion of our common stock. As of September 30, 2022, there was $1.1 billion available for repurchases under our stock repurchase plan. Our stock repurchase plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, shares withheld for taxes associated with the vesting of restricted stock and other corporate considerations. The current stock repurchase plan will expire on August 15, 2024.

Recently Issued Accounting Pronouncements

Accounting pronouncements issued, but not effective until after September 30, 2022, are not expected to have a significant impact on our consolidated financial position or results of operations.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

REVENUE

Revenues are recognized when control of the promised goods or services is transferred to our clients in an amount that reflects the consideration we expect to be entitled to for those goods or services. Substantially all of our revenues are comprised of revenue from contracts with clients. Sales taxes and other applicable taxes are excluded from revenues.

Recurring Revenues

Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for form ﬁlings and delivery of client payroll checks and reports. Talent acquisition includes our Applicant Tracking, Candidate Tracker, Enhanced Background Checks®, Onboarding, E-Verify® and Tax Credit Services applications. Time and labor management includes Time and Attendance, Scheduling/Schedule exchange, Time-Off Requests, Labor Allocation, Labor Management Reports/Push Reporting®, Geofencing/Geotracking and Microfence™ tools and applications. Payroll includes Beti®, Payroll and Tax Management, Paycom Pay®, Expense Management, Mileage Tracker/FAVR, Garnishment Administration and GL Concierge applications. Talent management includes our Employee Self-Service®, Compensation Budgeting, Performance Management, Position Management, My Analytics and Paycom Learning and Content Subscriptions applications. HR management includes our Manager on-the-Go®, Direct Data Exchange®, Ask Here, Documents and Checklists, Government and Compliance, Beneﬁts Administration/Benefits to Carrier, Benefit Enrollment Service, COBRA Administration, Personnel Action Forms and Performance Discussion Forms, Surveys, Enhanced ACA and Clue™ applications.

The performance obligations related to recurring revenues are satisfied during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an automated clearing house as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk.

The contract period for substantially all contracts associated with these revenues is one month due to the fact that both we and the client have the unilateral right to terminate a wholly unperformed contract without compensating the other party by providing 30 days’ notice of termination. Our payroll application is the foundation of our solution, and all of our clients are required to utilize this application in order to access our other applications. For clients who purchase multiple applications, due to the short-term nature of our contracts, we do not believe it is meaningful to separately assess and identify whether or not each application potentially represents its own, individual, performance obligation as the revenue generated from each application is recognized within the same month as the revenue from the core payroll application. Similarly, we do not believe it is meaningful to individually determine the standalone selling price for each application. We consider the total price charged to a client in a given period to be indicative of the standalone selling price, as the total amount charged is within a reasonable range of prices typically charged for our goods and services for comparable classes of client groups, which we periodically assess for price adjustments.

Implementation and Other Revenues

Implementation and other revenues consist of nonrefundable upfront conversion fees which are charged to new clients to offset the expense of new client set-up as well as revenues from the sale of time clocks as part of our Time and Attendance application. Although these revenues are related to our recurring revenues, they represent distinct performance obligations.

Implementation activities primarily represent administrative activities that allow us to fulfill future performance obligations for our clients and do not represent services transferred to the client. However, the nonrefundable upfront fee charged to our clients results in an implied performance obligation in the form of a material right to the client related to the client’s option to renew at the end of each 30-day contract period. Further, given that all other services within the contract are sold at a total price indicative of the standalone selling price, coupled with the fact that the upfront fees are consistent with upfront fees charged in similar contracts that we have with clients, the standalone selling price of the client’s option to renew the contract approximates the dollar amount of the nonrefundable upfront fee. The nonrefundable upfront fee is typically included on the client’s first invoice, and is deferred and recognized ratably over the estimated renewal period (i.e., ten-year estimated client life).

Revenues from the sale of time clocks are recognized when control is transferred to the client upon delivery of the product. We estimate the standalone selling price for the time clocks by maximizing the use of observable inputs such as our specific pricing practices for time clocks.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

Contract Balances

The timing of revenue recognition for recurring services is consistent with the invoicing of clients as they both occur during the respective client payroll period for which the services are provided. Therefore, we do not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.

Changes in deferred revenue related to material right performance obligations as of September 30, 2022 and 2021 were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Balance, beginning of period	$	108,880		$	92,458		$	101,426		$	86,826
Deferral of revenue		7,109			10,573			31,723			26,071
Recognition of unearned revenue		(1,978	)		(5,154	)		(19,138	)		(15,020	)
Balance, end of period	$	114,011		$	97,877		$	114,011		$	97,877

We expect to recognize $7.7 million of deferred revenue related to material right performance obligations in the remainder of 2022, $17.7 million of such deferred revenue in 2023, and $88.6 million of such deferred revenue thereafter.

Assets Recognized from the Costs to Obtain and Costs to Fulfill Revenue Contracts

We recognize an asset for the incremental costs of obtaining a contract with a client if we expect the amortization period to be longer than one year. We also recognize an asset for the costs to fulfill a contract with a client if such costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. We have determined that substantially all costs related to implementation activities are administrative in nature and also meet the capitalization criteria under ASC 340-40. These capitalized costs to fulfill principally relate to upfront direct costs that are expected to be recovered through margin and that enhance our ability to satisfy future performance obligations.

The assets related to both costs to obtain, and costs to fulfill, contracts with clients are accounted for utilizing a portfolio approach, and are capitalized and amortized ratably over the expected period of benefit, which we have determined to be the estimated client relationship of ten years. The expected period of benefit has been determined to be the estimated life of the client relationship primarily because we incur no new costs to obtain, or costs to fulfill, a contract upon renewal of such contract. Additional commission costs may be incurred when an existing client purchases additional applications; however, these commission costs relate solely to the additional applications purchased and are not related to contract renewal. Furthermore, additional fulfillment costs associated with existing clients purchasing additional applications are minimized by our seamless single-database platform. These assets are presented as deferred contract costs in the accompanying consolidated balance sheets. Amortization expense related to costs to obtain and costs to fulfill a contract are included in the “sales and marketing” and “general and administrative” line items in the accompanying consolidated statements of comprehensive income.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

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


	As of and for the Three Months Ended September 30, 2022
	Beginning		Capitalization					Ending
	Balance		of Costs		Amortization			Balance
Costs to obtain a contract	$	295,986	$	21,663	$	(11,530	)	$	306,119
Costs to fulfill a contract	$	302,019	$	30,195	$	(10,559	)	$	321,655

	As of and for the Three Months Ended September 30, 2021
	Beginning		Capitalization					Ending
	Balance		of Costs		Amortization			Balance
Costs to obtain a contract	$	248,908	$	16,648	$	(9,469	)	$	256,087
Costs to fulfill a contract	$	229,512	$	24,652	$	(7,931	)	$	246,233

	As of and for the Nine Months Ended September 30, 2022
	Beginning		Capitalization					Ending
	Balance		of Costs		Amortization			Balance
Costs to obtain a contract	$	272,919	$	66,544	$	(33,344	)	$	306,119
Costs to fulfill a contract	$	265,657	$	85,644	$	(29,646	)	$	321,655

	As of and for the Nine Months Ended September 30, 2021
	Beginning		Capitalization					Ending
	Balance		of Costs		Amortization			Balance
Costs to obtain a contract	$	232,583	$	50,890	$	(27,386	)	$	256,087
Costs to fulfill a contract	$	199,593	$	68,764	$	(22,124	)	$	246,233

PROPERTY AND EQUIPMENT

Property and equipment and accumulated depreciation and amortization were as follows:


	September 30, 2022			December 31, 2021
Property and equipment
Software and capitalized software costs	$	252,787		$	199,470
Buildings		177,550			172,807
Computer equipment		123,068			102,509
Rental clocks		34,302			30,313
Furniture, fixtures and equipment		28,160			24,971
Other		16,905			16,397
		632,772			546,467
Less: accumulated depreciation and amortization		(307,400	)		(242,652	)
		325,372			303,815
Construction in progress		24,692			11,342
Land		33,796			33,796
Property and equipment, net	$	383,860		$	348,953

We capitalize computer software development costs related to software developed for internal use in accordance with ASC 350-40. For the three and nine months ended September 30, 2022, we capitalized $17.0 million and $48.8 million, respectively, of computer software development costs related to software developed for internal use. For the three and nine months ended September 30, 2021, we capitalized $13.2 million and $39.2 million, respectively, of computer software development costs related to software developed for internal use.

Rental clocks included in property and equipment, net represent time clocks issued to clients under month-to-month operating leases. As such, these items are transferred from inventory to property and equipment and depreciated over their estimated useful lives.

We capitalize interest incurred for indebtedness related to construction in progress. For the three and nine months ended September 30, 2022, we incurred interest costs of $1.2 million and $2.1 million, respectively, of which we capitalized $0.2 million and

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

$0.5 million, respectively. For the three and nine months ended September 30, 2021, we incurred interest costs of $0.4 million and $1.1 million, respectively, of which we capitalized $0.4 million and $1.1 million, respectively. Included in the construction in progress balance at September 30, 2022 and December 31, 2021 is $1.0 million and $0.1 million in retainage, respectively.

Depreciation and amortization expense for property and equipment was $22.5 million and $64.7 million, respectively, for the three and nine months ended September 30, 2022. Depreciation and amortization expense for property and equipment was $16.3 million and $46.8 million, respectively, for the three and nine months ended September 30, 2021.

GOODWILL AND INTANGIBLE ASSETS, NET

As of both September 30, 2022 and December 31, 2021, goodwill was $51.9 million. We have selected June 30 as our annual goodwill impairment testing date. We performed a qualitative impairment test of our goodwill and concluded that, as of June 30, 2022, it was more likely than not that the fair value exceeded the carrying value and therefore goodwill was not impaired. As of September 30, 2022 and December 31, 2021, there were no indicators of impairment.

In connection with our marketing initiatives, we purchased the naming rights to the downtown Oklahoma City arena that is home to the Oklahoma City Thunder National Basketball Association franchise. Under the terms of the naming rights agreement, we committed to make payments escalating annually from $4.0 million in 2021 to $6.1 million in 2035. We also made a $1.5 million one-time payment in July 2021 to cover sponsorship rights leading up to the 2021-2022 season. Upon the conclusion of the initial term, the agreement may be extended upon the mutual agreement of both parties for an additional five-year period. The cost of the naming rights has been recorded as an intangible asset with an offsetting liability as of the date of the contract. The intangible asset is being amortized over the life of the agreement on a straight line basis that commenced in June 2021. The difference between the present value of the offsetting liability and actual cash payments is being relieved through sales and marketing expense using the effective interest method over the life of the agreement.

All of our intangible assets other than goodwill are considered to have definite lives and, as such, are subject to amortization. The following tables present the components of intangible assets within our consolidated balance sheets:


	September 30, 2022
	Weighted Average Remaining			Accumulated
	Useful Life	Gross		Amortization			Net
	(Years)
Intangibles:
Naming rights	14.1	$	60,199	$	(5,206	)	$	54,993
Trade name	—		3,194		(3,194	)		—
Total		$	63,393	$	(8,400	)	$	54,993


	December 31, 2021
	Weighted Average Remaining			Accumulated
	Useful Life	Gross		Amortization			Net
	(Years)
Intangibles:
Naming rights	14.8	$	60,199	$	(2,278	)	$	57,921
Trade name	0.5		3,194		(3,087	)		107
Total		$	63,393	$	(5,365	)	$	58,028

Amortization of intangible assets for the three and nine months ended September 30, 2022 was $0.9 million and $3.0 million, respectively. Amortization of intangible assets for the three and nine months ended September 30, 2021 was $1.1 million and $1.5 million, respectively. We estimate the aggregate amortization expense will be $1.0 million for the remainder of 2022 and $3.9 million for each of 2023, 2024, 2025, 2026 and 2027.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

LONG-TERM DEBT, NET

Long-term debt consisted of the following:


	September 30, 2022		December 31, 2021
July 2022 Revolving Credit Agreement due July 29, 2027	$	29,000	$	—
Net term note to bank due September 7, 2025		—		29,155
Total long-term debt, net (including current portion)		29,000		29,155
Less: Current portion		—		(1,775	)
Total long-term debt, net	$	29,000	$	27,380

On December 7, 2017, we entered into a senior secured term credit agreement (as amended from time to time, the “2017 Term Credit Agreement”), pursuant to which JPMorgan Chase Bank, N.A., Bank of America, N.A. and Kirkpatrick Bank made certain term loans to us (the “2017 Term Loans”). Our obligations under the 2017 Term Loans were secured by a mortgage and first priority security interest in our corporate headquarters property. The 2017 Term Loans were due to mature on September 7, 2025 and bore interest, at our option, at either (a) a prime rate plus 1.0% or (b) an adjusted LIBOR rate for the interest period in effect for such 2017 Term Loan plus 1.5%.

As discussed below, the 2017 Term Loans were repaid in full on May 4, 2022 and the 2017 Term Credit Agreement was terminated. At the time of payoff, unamortized debt issuance costs totaling $0.1 million were written off.

On May 4, 2022 (the “May 2022 Facility Closing Date”), Paycom Payroll, LLC (the “Borrower”), Software, and certain other subsidiaries of Software (collectively, the “Guarantors,” and collectively with the Borrower, the “Loan Parties”), entered into a credit agreement (as amended from time to time, the “May 2022 Revolving Credit Agreement”) with Bank of America, N.A., as a lender, swingline lender and letters of credit issuer, the lenders from time to time party thereto and Bank of America, N.A., as the administrative agent.

The May 2022 Revolving Credit Agreement provided for a senior secured revolving credit facility (the “May 2022 Facility”) in the initial aggregate principal amount of up to $250.0 million, and the ability to request an incremental facility of up to an additional $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The May 2022 Facility included a $25.0 million sublimit for swingline loans and a $2.5 million sublimit for letters of credit. On June 7, 2022, the aggregate commitments under the May 2022 Revolving Credit Agreement were increased from $250.0 million to $350.0 million. Our obligations under the May 2022 Facility were secured by a senior security interest in all personal property of the Loan Parties. The May 2022 Facility was scheduled to mature on May 4, 2027.

On the May 2022 Closing Date, we borrowed $29.0 million under the May 2022 Facility to repay the 2017 Term Loans, along with accrued interest, expenses and fees. The loan on the May 2022 Facility Closing Date bore interest at the BSBY rate plus 1.125%. In connection with the repayment of the 2017 Term Loans, the 2017 Term Credit Agreement was terminated on May 4, 2022.

As discussed below, the May 2022 Facility was repaid in full on July 29, 2022 and the May 2022 Revolving Credit Agreement was terminated.

On July 29, 2022 (the “July 2022 Facility Closing Date”), the Borrower, Software, and certain other subsidiaries of Software entered into a new credit agreement (the “July 2022 Credit Agreement”) with JPMorgan Chase Bank, N.A., as a lender, swingline lender and issuing bank, the lenders from time to time party thereto (collectively with JPMorgan Chase Bank, N.A., the “July 2022 Lenders”), and JPMorgan Chase Bank, N.A., as the administrative agent.

The July 2022 Credit Agreement provides for a senior secured revolving credit facility (the “July 2022 Revolving Credit Facility”) in the aggregate principal amount of up to $650.0 million, and the ability to request an incremental facility of up to an additional $500.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The July 2022 Credit Agreement includes a $25.0 million sublimit for swingline loans and a $6.5 million sublimit for letters of credit. The July 2022 Credit Agreement also provides for a senior secured delayed draw term loan (the “July 2022 Term Loan Facility”) in the aggregate amount of up to $750.0 million. All loans under the July 2022 Credit Agreement will mature on July 29, 2027 (the “Scheduled Maturity Date”).

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

The borrowings under the July 2022 Credit Agreement will bear interest at a rate per annum equal to (i) the Alternate Base Rate (“ABR”) plus an applicable margin (“ABR Loans”) or (ii) (x) the term Secured Overnight Financing Rate (“SOFR”) plus 0.10% (the “Adjusted Term SOFR Rate”) or (y) the daily SOFR plus 0.10%, in each case plus an applicable margin (“SOFR Rate Loans”). ABR is calculated as the highest of (i) the rate of interest last quoted by The Wall Street Journal in the United States as the prime rate in effect, (ii) the federal funds rate plus 0.5% and (iii) the Adjusted Term SOFR Rate for a one-month interest period plus 1.00%; provided that, if the ABR as determined pursuant to the foregoing would be less than 1.00%, such rate shall be deemed to be 1.00%. The applicable margin for ABR Loans is (i) 0.25% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 0.50% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 0.75% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 1.00% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0. The applicable margin for SOFR Rate Loans is (i) 1.25% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 1.5% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 1.75% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 2.00% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0. We are required to pay a quarterly commitment fee on the daily amount of the undrawn portion of the revolving commitments under the July 2022 Revolving Credit Facility and a quarterly ticking fee on the daily amount of the undrawn portion of the July 2022 Term Loan Facility, in each case at a rate per annum of (i) 0.20% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 0.225% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 0.25% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 0.275% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0. We are also required to pay customary letter of credit fees upon drawing any letter of credit.

The July 2022 Revolving Credit Facility provides for no scheduled principal amortization prior to the Scheduled Maturity Date. Subject to certain conditions set forth in the July 2022 Credit Agreement, we may borrow, prepay and reborrow under the July 2022 Revolving Credit Facility and terminate or reduce the July 2022 Lenders’ commitments at any time prior to the Scheduled Maturity Date.

We may make up to ten draws under the July 2022 Term Loan Facility at any time during the period from and after the July 2022 Facility Closing Date through twelve months after the July 2022 Facility Closing Date. Loans under the July 2022 Term Loan Facility will amortize in equal quarterly installments commencing with the first full fiscal quarter after the earlier of (x) the date on which the July 2022 Term Loan Facility has been fully drawn and (y) the expiration of the draw period, in an aggregate annual amount equal to 7.5% in year one (if applicable) and year two, and 10% thereafter.

The proceeds of the loans and letters of credit under the July 2022 Credit Agreement are to be used for ongoing working capital and general corporate purposes, permitted acquisitions, share repurchases and refinancing the May 2022 Facility. On the July 2022 Facility Closing Date, we borrowed $29.0 million under the July 2022 Revolving Credit Facility to repay the outstanding indebtedness under the May 2022 Facility, along with accrued interest, expenses and fees. The loan bears interest at the Adjusted Term SOFR Rate for the interest period in effect plus 1.25%. In connection with the repayment of the May 2022 Facility, the May 2022 Revolving Credit Agreement was terminated on July 29, 2022.

Under the July 2022 Credit Agreement, we are required to maintain as of the end of each fiscal quarter a consolidated interest ratio of not less than 3.0 to 1.0 and a consolidated leverage ratio of not greater than 3.75 to 1.0, stepping down to 3.0 to 1.0 at intervals thereafter. Additionally, the July 2022 Credit Agreement contains customary affirmative and negative covenants, including covenants limiting our ability to, among other things, grant liens, incur debt, effect certain mergers, make investments, dispose of assets, enter into certain transactions, including swap agreements and sale and leaseback transactions, pay dividends or distributions on our capital stock, and enter into transactions with affiliates, in each case subject to customary exceptions. As of September 30, 2022, we were in compliance with these covenants. Our obligations under the July 2022 Credit Agreement are secured by a senior security interest in all personal property of the Loan Parties.

The events of default under the July 2022 Credit Agreement include, among others, payment defaults, breaches of covenants, defaults under the related loan documents, material misrepresentations, cross defaults with certain other material indebtedness, bankruptcy and insolvency events, judgment defaults, certain events related to plans subject to the Employee Retirement Income Security Act of 1974, as amended, invalidity of the July 2022 Credit Agreement or the related loan documents and change in control events. The occurrence of an event of default could result in the acceleration of our obligations under the July 2022 Credit Agreement, the requirement to post cash collateral with respect to letters of credit, the termination of the July 2022 Lenders’ commitments and a 2.0% increase in the rate of interest.

As of September 30, 2022 and December 31, 2021, the carrying value of our total long-term debt approximated its fair value as of such date. The fair value of our long-term debt is estimated based on the borrowing rates currently available to us for bank loans with similar terms and maturities.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

DERIVATIVE INSTRUMENTS

In December 2017, we entered into a floating-to-fixed interest rate swap agreement to limit the exposure to floating interest rate risk related to the 2017 Term Loans. We do not hold derivative instruments for trading or speculative purposes. The interest rate swap agreement effectively converted a portion of the variable interest rate payments to fixed interest rate payments. We account for our derivatives under ASC Topic 815, “Derivatives and Hedging,” and recognize all derivative instruments in the consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. See Note 9, “Fair Value of Financial Instruments”. We have elected not to designate our interest rate swap as a hedge; therefore, changes in the fair value of the derivative instrument are recognized in our consolidated statements of comprehensive income within Other income (expense), net.

The objective of the interest rate swap was to reduce the variability in the forecasted interest payments of the 2017 Term Loans, which was based on a one-month USD LIBOR rate versus a fixed interest rate of 2.54% on a notional value of $35.5 million. Under the terms of the interest rate swap agreement, we received quarterly variable interest payments based on the LIBOR rate and paid interest at a fixed rate. As further discussed in Note 6, on May 4, 2022, we repaid the 2017 Term Loans and terminated the 2017 Term Credit Agreement. In connection with the repayment of the 2017 Term Loans, we borrowed funds under the May 2022 Facility. The interest rate swap remained outstanding to offset the interest rate variability associated with the outstanding borrowings under the May 2022 Facility. The interest rate swap agreement had a maturity date of September 7, 2025. On August 24, 2022, we terminated the interest rate swap by settling the contract, which resulted in a cash receipt of $0.5 million. The realized gain from the settlement of the interest rate swap contract is included in Other income (expense), net in the consolidated statements of comprehensive income.

CORPORATE INVESTMENTS AND FUNDS HELD FOR CLIENTS

The tables below present our cash and cash equivalents, the funds held for clients’ cash and cash equivalents as well as the investments that were included within funds held for clients on the consolidated balance sheets:


	September 30, 2022
Type of issue	Amortized cost		Gross unrealized gains		Gross unrealized losses(1)			Fair value
Cash and cash equivalents	$	317,163	$	—	$	—		$	317,163
Funds held for clients' cash and cash equivalents		1,501,276		—		—			1,501,276
Available-for-sale securities (2):
Commercial paper		53,478		—		(140	)		53,338
Certificates of deposit		25,000		—		—			25,000
U.S. treasury securities		174,242		—		(4,741	)		169,501
Total investments	$	2,071,159	$	—	$	(4,881	)	$	2,066,278

	December 31, 2021
Type of issue	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Cash and cash equivalents	$	277,978	$	—	$	—		$	277,978
Funds held for clients' cash and cash equivalents		1,534,894		—		—			1,534,894
Available-for-sale securities (2):
Commercial paper		311,679		—		—			311,679
Certificates of deposit		—		—		—			—
Total investments	$	2,124,551	$	—	$	—		$	2,124,551

(1)

These securities have been in an unrealized loss position for a period of less than 12 months.

(2)

All available-for-sale securities were included within funds held for clients.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

We did not make any reclassification adjustments out of accumulated other comprehensive income for realized gains or losses on the sale or maturity of available-for-sale securities for the nine months ended September 30, 2022 or 2021. There were no realized gains or losses on the sale of available-for-sale securities for the nine months ended September 30, 2022 or 2021.

We regularly review the composition of our investment portfolio and did not recognize any credit impairment losses during the nine months ended September 30, 2022 or during the nine months ended September 30, 2021. All of our commercial paper securities held an A-2 rating or better as of September 30, 2022 and the U.S. treasury securities held a rating of AAA as of September 30, 2022.

Expected maturities of available-for-sale securities at September 30, 2022 are as follows:


Expected maturity	Amortized cost		Fair value
One year or less	$	78,478	$	78,338
One year to five years	$	174,242	$	169,501
Total available-for-sale securities	$	252,720	$	247,839

FAIR VALUE OF FINANCIAL INSTRUMENTS

Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients, client funds obligation and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and client funds obligation approximates fair value due to the short-term nature of the instruments. See Note 6 for discussion of the fair value of our debt.

As discussed in Note 2, we invest funds held for clients in money market funds, demand deposit accounts, commercial paper with a maturity duration less than three months and certificates of deposit, and classify these items as cash and cash equivalents within the funds held for clients line item in the consolidated balance sheets. Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item. These available-for-sale securities are recognized in the consolidated balance sheets at fair value, with the difference between the amortized cost and fair value of these available-for-sale securities recorded as unrealized net gains (losses) within comprehensive earnings (loss) in our consolidated statements of comprehensive income. See Note 8 for additional information.

We also invest funds held for clients in U.S. treasury securities with initial maturity durations greater than one year. These U.S. treasury securities are classified as available-for-sale securities and included within the funds held for clients line item. The unrealized gains and losses associated with these available-for-sale securities are included within comprehensive earnings (loss) in our consolidated statements of comprehensive income. See Note 8 for additional information.

As discussed in Note 7, during the year ended December 31, 2017, we entered into an interest rate swap. While outstanding, the interest rate swap was measured on a recurring basis based on quoted prices for similar financial instruments and other observable inputs recognized at fair value. We terminated the interest rate swap on August 24, 2022.

The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

•

Level 1 – Observable inputs such as quoted prices in active markets

•

Level 2 – Inputs other than quoted prices in active markets for identical assets or liabilities that are observable either directly or indirectly or quoted prices that are not active

•

Level 3 – Unobservable inputs in which there is little or no market data

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

Included in the following tables are the Company’s major categories of assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021:


	September 30, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Commercial paper	$	—	$	53,338	$	—	$	53,338
Certificates of deposit	$	—	$	25,000	$	—	$	25,000
U.S. treasury securities	$	—	$	169,501	$	—	$	169,501

	December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Commercial paper	$	—	$	311,679	$	—	$	311,679
Certificates of deposit	$	—	$	—	$	—	$	—
Liabilities:
Interest rate swap	$	—	$	1,335	$	—	$	1,335

10.

EMPLOYEE SAVINGS PLAN AND EMPLOYEE STOCK PURCHASE PLAN

Employees over the age of 18 who have completed ninety days of service are eligible to participate in our 401(k) plan. We have made a Qualified Automatic Contribution Arrangement (“QACA”) election, whereby the Company matches the contribution of our employees equal to 100% of the first 1% of salary deferrals and 50% of salary deferrals between 2% and 6%, up to a maximum matching contribution of 3.5% of an employee’s salary each plan year. We are allowed to make additional discretionary matching contributions and discretionary profit sharing contributions. Employees are 100% vested in amounts attributable to salary deferrals and rollover contributions. The QACA matching contributions as well as the discretionary matching and profit sharing contributions vest 100% after two years of employment from the date of hire. Matching contributions were $3.3 million and $9.9 million for the three and nine months ended September 30, 2022, respectively. Matching contributions were $2.9 million and $8.8 million for the three and nine months ended September 30, 2021, respectively.

The ESPP has overlapping offering periods, with each offering period lasting approximately 24 months. At the beginning of each offering period, eligible employees may elect to contribute, through payroll deductions, up to 10% of their compensation, subject to an annual per-employee maximum of $25,000. Eligible employees purchase shares of the Company’s common stock at a price equal to 85% of the fair market value of the shares on the exercise date. The maximum number of shares that may be purchased by a participant during each offering period is 2,000 shares, subject to limits specified by the Internal Revenue Service. The shares reserved for purposes of the ESPP are shares we purchase in the open market. The maximum aggregate number of shares of the Company’s common stock that may be purchased by all participants under the ESPP is 2.0 million shares. Eligible employees purchased 40,997 and 31,824 shares of the Company’s common stock under the ESPP during the nine months ended September 30, 2022 and 2021, respectively. Compensation expense related to the ESPP is recognized on a straight-line basis over the requisite service period. Our compensation expense related to the ESPP was $0.7 million and $2.1 million for the three and nine months ended September 30, 2022, respectively. Our compensation expense related to the ESPP was $0.6 million and $2.0 million for the three and nine months ended September 30, 2021, respectively.

11.

EARNINGS PER SHARE

Basic earnings per share is based on the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is computed in a similar manner to basic earnings per share after assuming the issuance of shares of common stock for all potentially dilutive shares of restricted stock whether or not they are vested.

In accordance with ASC Topic 260, “Earnings Per Share,” the two-class method determines earnings for each class of common stock and participating securities according to an earnings allocation formula that adjusts the income available to common stockholders for dividends or dividend equivalents and participation rights in undistributed earnings. Certain unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. For the time periods in the table below, we did not have any participating securities.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

The following is a reconciliation of net income and the shares of common stock used in the computation of basic and diluted earnings per share:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Numerator:
Net income	$	52,153	$	30,379	$	201,438	$	147,273
Denominator:
Basic weighted average shares outstanding		57,865		57,935		57,949		57,843
Dilutive effect of unvested restricted stock		168		255		244		349
Diluted weighted average shares outstanding		58,033		58,190		58,193		58,192
Earnings per share:
Basic	$	0.90	$	0.52	$	3.48	$	2.55
Diluted	$	0.90	$	0.52	$	3.46	$	2.53

12.

STOCK-BASED COMPENSATION

Restricted Stock Awards

During the nine months ended September 30, 2022, we issued an aggregate of 421,739 restricted shares of common stock under the Paycom Software, Inc. 2014 Long-Term Incentive Plan (as amended, the “LTIP”), consisting of 59,503 shares subject to market-based vesting conditions (“Market-Based Shares”) and 362,236 shares subject to time-based or no vesting conditions (“Time-Based Shares”). Market-Based Shares will vest 50% on the first date, if any, that the arithmetic average of the Company’s volume weighted average price on each of the twenty consecutive trading days immediately preceding such date (the “VWAP Value”) equals or exceeds $484 per share and 50% on the first date, if any, that the Company’s VWAP Value equals or exceeds $559 per share, in each case provided that (i) such date occurs on or before the eighth anniversary of the grant date and (ii) the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the LTIP and the applicable restricted stock award agreement. The Time-Based Shares granted to non-executive employees will vest over periods ranging from three to four years, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the LTIP and the applicable restricted stock award agreement.

The 362,236 Time-Based Shares mentioned above include an aggregate of 5,210 Time-Based Shares issued to the non-employee members of our Board of Directors in May 2022, all of which will cliff-vest on May 9, 2023, provided that such director is providing services to the Company through the applicable vesting date, and subject to the terms and conditions of the LTIP and the applicable restricted stock award agreement.

The following table summarizes restricted stock awards activity for the nine months ended September 30, 2022:


	Time-Based					Market-Based
	Restricted Stock Awards					Restricted Stock Awards
	Shares			Weighted Average Grant Date Fair Value Per Share		Shares			Weighted Average Grant Date Fair Value Per Share
Unvested shares of restricted stock outstanding at December 31, 2021		369.6		$	259.94		1,628.3			111.87
Granted		362.2		$	301.86		59.5			269.00
Vested		(218.4	)	$	201.26		(0.1	)		347.62
Forfeited		(48.3	)	$	315.59		(8.1	)		280.23
Unvested shares of restricted stock outstanding at September 30, 2022		465.1		$	314.37		1,679.6		$	116.61

Restricted Stock Units

In February 2022, the Compensation Committee of the Board of Directors authorized the granting of performance-based restricted stock units (“PSUs”) to certain executive officers pursuant to the LTIP (the “2022 PSU Awards”). Each PSU granted under the LTIP represents a notional share of the Company’s common stock. The 2022 PSU Awards represented an aggregate of 51,494 target units that may increase to an aggregate of 128,735 awarded units based upon the Company’s performance over two separate

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

performance periods: (i) a two-year performance period commencing on January 1, 2022 and ending on December 31, 2023 (the “Two-Year Performance Period”); and (ii) a three-year performance period commencing on January 1, 2022 and ending on December 31, 2024 (the “Three-Year Performance Period”). Up to 25% of the PSUs will be eligible to vest no later than February 29, 2024, for the Two-Year Performance Period, and up to 75% of the PSUs will be eligible to vest no later than March 1, 2025, for the Three-Year Performance Period, provided that the grantee remains employed by or providing services to the Company on the applicable vesting date, and subject to the terms and conditions of the LTIP and the Restricted Stock Unit Award Agreement – Performance Based Vesting (the “PSU Award Agreement”). The number of PSUs that will vest and be converted into shares of common stock will depend on the Company’s relative total stockholder return (“Relative TSR”), expressed as a percentile ranking of the Company’s total stockholder return (“TSR”) as compared to the Company’s peer group set forth in the PSU Award Agreement.

For purposes of the 2022 PSU Awards, TSR is determined by dividing (i) the sum of (A) the average daily volume weighted average price (or “VWAP” as defined in the PSU Award Agreement) of a share of the Company’s common stock or the common stock of a peer company, as applicable, during the final 60 trading day period of the applicable performance period, less (B) the average VWAP of a share of the Company’s common stock or the common stock of a peer company, as applicable, during the 60 trading day period ending on December 31, 2021, plus (C) the sum of all dividends which are paid by the Company (or the member of the peer group) to its stockholders, assuming such dividends are reinvested in the applicable company through the applicable performance period, by (ii) the average VWAP of a share of the Company’s common stock or the common stock of a peer company, as applicable, during the 60 trading day period ending on December 31, 2021. The Company’s peer group includes 35 publicly traded companies, which were reflective of the S&P 500 Software & Services index on the grant date.

On April 14, 2022, the Company announced the departure of Jon Evans from the position of Chief Operating Officer of the Company, effective April 14, 2022. Justin Long, the Company’s Executive Vice President of Operations, assumed Mr. Evans’s responsibilities. In connection with Mr. Evans’s departure, 5,663 of the Time-Based Shares previously granted to Mr. Evans accelerated in vesting. The PSUs granted to Mr. Evans in 2021 and 2022 will remain eligible for vesting based on the Company’s actual performance, but pro-rated for the number of days Mr. Evans was employed during the applicable two-year performance periods and three-year performance periods.

During the nine months ended September 30, 2022, we issued 500 time-based restricted stock units ("Time RSUs") under the LTIP. The Time RSUs will vest over four years, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the LTIP and the applicable Time RSU award agreement.

The following table summarizes restricted stock unit activity for the nine months ended September 30, 2022:


	Time RSUs				PSUs
	Units		Weighted Average Grant Date Fair Value Per Unit		Units			Weighted Average Grant Date Fair Value Per Unit
Unvested restricted stock units outstanding at December 31, 2021		—	$	—		37.1		$	556.50
Granted		0.5	$	377.01		51.5		$	296.07
Vested		—	$	—		—		$	—
Forfeited		—	$	—		(10.8	)	$	376.69
Unvested restricted stock units outstanding at September 30, 2022 (1)		0.5	$	377.01		77.8		$	409.13

(1)

A maximum of 194,478 shares could be delivered upon settlement of PSUs based upon Paycom’s Relative TSR over the applicable performance periods.

For the three and nine months ended September 30, 2022, our total stock-based compensation expense was $24.5 million and $70.8 million, respectively. For the three and nine months ended September 30, 2021, our total stock-based compensation expense was $29.0 million and $76.4 million, respectively.

The following table presents the unrecognized compensation cost and the related weighted average recognition period associated with unvested restricted stock awards and unvested restricted stock units awards as of September 30, 2022.


	Restricted Stock		Restricted Stock
	Awards		Units
Unrecognized compensation cost	$	235,647	$	16,191
Weighted average period for recognition (years)		3.2		1.6

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

We capitalized stock-based compensation costs related to software developed for internal use of $2.3 million and $6.5 million for the three and nine months ended September 30, 2022, respectively. We capitalized stock-based compensation costs related to software developed for internal use of $1.7 million and $5.1 million for the three and nine months ended September 30, 2021, respectively.

13.

COMMITMENTS AND CONTINGENCIES

We are involved in various legal proceedings in the ordinary course of business. Although we cannot predict the outcome of these proceedings, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows.

14.

INCOME TAXES

The Company’s effective income tax rate was 26.9% and 20.8% for the nine months ended September 30, 2022 and 2021, respectively. The increase in effective tax rate for the nine months ended September 30, 2022 is primarily related to a decrease of excess tax benefits from stock-based compensation.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. Based on our current analysis of the provisions, we do not believe this legislation will have a material impact on our consolidated financial statements.

15.

SUBSEQUENT EVENTS

Restricted Stock Awards

On October 25, 2022, we issued an aggregate of 14,998 restricted shares of common stock to certain non-executive employees under the LTIP, consisting of Time-Based Shares that will vest in annual tranches over periods ranging from three to four years, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the LTIP and the applicable restricted stock award agreement.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with management’s perspective on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and notes thereto for the three and nine months ended September 30, 2022, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2021 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 17, 2022 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K. Except for certain information as of December 31, 2021, all amounts herein are unaudited. Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer to Paycom Software, Inc. and its consolidated subsidiaries. All amounts presented in tables, other than per share amounts, are in thousands unless otherwise noted.

Forward-Looking Statements

The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are any statements that look to future events and include, but are not limited to, statements regarding our business strategy; anticipated future operating results and operating expenses, cash flows, capital resources, dividends and liquidity; trends, opportunities and risks affecting our business, industry and financial results; future expansion or growth plans and potential for future growth; our ability to attract new clients to purchase our solution; our ability to retain clients and induce them to purchase additional applications; our ability to accurately forecast future revenues and appropriately plan our expenses; market acceptance of our solution and applications; our expectations regarding future revenues generated by certain applications; our ability to attract and retain qualified employees and key personnel; future regulatory, judicial and legislative changes; how certain factors affecting our performance correlate to improvement or deterioration in the labor market; our plan to open additional sales offices and our ability to effectively execute such plan; the sufficiency of our existing cash and cash equivalents to meet our working capital and capital expenditure needs over the next 12 months; our plans regarding our capital expenditures and investment activity as our business grows, including with respect to research and development and the expansion of our corporate headquarters and other facilities; our plans to repurchase shares of our common stock through a stock repurchase plan; our expected income tax rate for future periods; and the impact of the coronavirus (COVID-19) pandemic on our business, results of operations, cash flows, financial condition and liquidity. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “anticipate,” “believe,” “could,” “estimate,” “expect,” “will,” “intend,” “may,” “might,” “plan,” “potential,” “should,” “would,” and similar expressions or the negative of such terms or other comparable terminology.

Forward-looking statements are neither historical facts nor assurances of future performance, and are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

•

changes in laws, government regulations and policies and interpretations thereof;

•

the possibility of security vulnerabilities, cyberattacks and network disruptions, including breaches of data security and privacy leaks, data loss, and business interruptions;

•

our compliance with data privacy laws and regulations;

•

our ability to develop enhancements and new applications, keep pace with technological developments and respond to future disruptive technologies;

•

our ability to compete effectively;

•

fluctuations in our financial results due to factors beyond our control;

•

our ability to manage our rapid growth and organizational change effectively;

•

the possibility that clients may not be satisfied with our deployment or technical support services, or that our solution fails to perform properly;

•

our dependence on our key executives;

•

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

•

the possibility that the Affordable Care Act may be modified, repealed or declared unconstitutional;

•

the impact of the COVID-19 pandemic on the U.S. economy;

•

our failure to develop and maintain our brand cost-effectively;

•

seasonality of certain operating results and financial metrics;

•

our failure to adequately protect our intellectual property rights;

•

our reliance on relationships with third parties; and

•

the other factors set forth in Part I, Item 1A, “Risk Factors” of the Form 10-K and our other reports filed with the SEC.

Forward-looking statements are based only on information currently available to us and speak only as of the date of this Form 10-Q and are subject to business and economic risks. We do not undertake any obligation to update or revise the forward-looking statements to reflect events that occur or circumstances that exist after the date on which such statements were made, except to the extent required by law.

Overview

We are a leading provider of a comprehensive, cloud-based human capital management (“HCM”) solution delivered as Software-as-a-Service. We provide functionality and data analytics that businesses need to manage the complete employment lifecycle, from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources management applications. Our user-friendly software allows for easy adoption of our solution by employees, enabling self-management of their HCM activities in the cloud, which reduces the administrative burden on employers and increases employee productivity.

We generate revenues from (i) fixed amounts charged per billing period plus a fee per employee or transaction processed and (ii) fixed amounts charged per billing period. We do not require clients to enter into long-term contractual commitments with us. Our billing period varies by client based on when each client pays its employees, which may be weekly, bi-weekly, semi-monthly or monthly. We serve a diverse client base in terms of size and industry. None of our clients constituted more than one-half of one percent of our revenues for the nine months ended September 30, 2022. Our revenues are primarily generated through our sales force that solicits new clients and our client relations representatives ("CRRs") who sell new applications to existing clients.

Our continued growth depends on attracting new clients through further penetration of our existing markets and geographic expansion into new markets, targeting a high degree of client employee usage across our solution, and introducing new applications to our existing client base. We believe our ability to continue to develop new applications and to improve existing applications will enable us to increase revenues in the future, and the number of our new applications adopted by our clients has been a significant factor in our revenue growth. In January 2022, we added new sales teams in Las Vegas, Jacksonville, New England and South Jersey, bringing our total to 55 sales teams (including one team consisting of CRRs and inside sales representatives) located in 28 states. We plan to open additional sales offices in the future and leverage virtual sales meetings to further expand our market presence.

Our principal marketing efforts include national and local advertising campaigns, email campaigns, social and digital media campaigns, search engine marketing methods, sponsorships, tradeshows, print advertising and outbound marketing including personalized direct mail campaigns. In addition, we generate leads and build recognition of our brand and thought leadership with relevant and informative content, such as white papers, blogs, podcast episodes and webinars.

Throughout our history, we have built strong relationships with our clients. As the HCM needs of our clients evolve, we believe that we are well-positioned to expand the HCM spending of our clients and we believe this opportunity is significant. To be successful, we must continue to demonstrate the operational and economic benefits of our solution, as well as effectively hire, train, motivate and retain qualified personnel.

Growth Outlook, Opportunities and Challenges

As a result of our significant revenue growth and geographic expansion, we are presented with a variety of opportunities and challenges. Our payroll application is the foundation of our solution and all of our clients are required to utilize this application in order to access our other applications. Consequently, we have historically generated the majority of our revenues from our payroll applications, although our revenue mix has evolved and will continue to evolve as we develop and add new non-payroll applications to our solution. We believe our strategy of focusing on increased employee usage is key to long-term client satisfaction and client retention. Client adoption of new applications and client employee usage of both new and existing applications have been significant factors in our revenue growth, and we expect the continuation of this trajectory will depend, in part, on the introduction of applications to our existing client base that encourage and promote more employee usage. For example, in 2021, we launched our industry-first Beti technology, which further automates and streamlines the payroll process by empowering employees to do their own payroll. Moreover, in order to increase revenues and continue to improve our operating results, we must also attract new clients. We intend to obtain new clients by (i) continuing to leverage our sales force productivity within markets where we currently have existing sales offices, (ii) expanding our presence in metropolitan areas where we currently have an existing sales office through adding sales teams or offices, thereby increasing the number of sales professionals within such markets, and (iii) opening sales offices in new metropolitan areas.

Our target client size range is 50 to 10,000 employees. While we continue to serve a diversified client base ranging in size from one employee to many thousands of employees, the average size of our clients has grown significantly as we have organically grown our operations, increased the number of applications we offer and gained traction with larger companies. We believe larger employers represent a substantial opportunity to increase the number of potential clients and to increase our revenues per client, with limited incremental cost to us. Because we charge our clients on a per employee basis for certain services we provide, any increase or decrease in the number of employees of our clients will have a positive or negative impact, respectively, on our results of operations. As discussed in more detail below, client headcount fluctuations are particularly relevant in light of the ongoing COVID-19 pandemic. Generally, we expect that changes in certain factors affecting our performance will correlate with improvement or deterioration in the labor market.

We collect funds from clients in advance of either the applicable due date for payroll tax submissions or the applicable disbursement date for employee payment services. Those collections from clients are typically disbursed from one to 30 days after receipt, with some funds being held for up to 120 days. We typically invest funds held for clients in money market funds, demand deposit accounts, U.S. treasury securities, commercial paper and certificates of deposit until they are paid to the applicable tax or regulatory agencies or to client employees. As we introduce new applications, expand our client base and renew and expand relationships with existing clients, we expect our average funds held for clients balance and, accordingly, interest earned on funds held for clients, will increase; however, the amount of interest we earn can be positively or negatively impacted by changes in interest rates.

Growing our business has resulted in, and will continue to result in, substantial investments in sales professionals, operating expenses, system development and programming costs and general and administrative expenses, which have increased and will continue to increase our expenses. Specifically, our revenue growth and geographic expansion drive increases in our employee headcount, which in turn precipitates increases in (i) salaries and benefits, (ii) stock-based compensation expense and (iii) facility costs related to the expansion of our corporate headquarters and operations facilities and additional sales office leases.

We believe the challenges of managing the ever-changing complexity of payroll and human resources will continue to drive companies to turn to outsourced providers for help with their HCM needs. The HCM industry historically has been driven, in part, by legislation and regulatory action, including COBRA, changes to the minimum wage laws or overtime rules, and legislation from federal, state or municipal taxation authorities.

For the three months ended September 30, 2022 and 2021, our total gross margins were approximately 84% and 83%, respectively. For the nine months ended September 30, 2022 and 2021, our total gross margins were approximately 85%. Although our gross margins may fluctuate from quarter to quarter due to seasonality and hiring trends, we expect that our gross margins will remain relatively consistent in future periods.

Impact of the COVID-19 Pandemic

The COVID-19 pandemic has created uncertainty and impacted the operations of many of our clients and client prospects. Nonetheless, demand for our solution remains high and, despite the economic challenges brought on by the COVID-19 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.

We are monitoring developments related to the pandemic. We may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees and clients. We are unable to estimate the full impact that the COVID-19 pandemic could have on our business and results of operations in the future due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, the emergence of different COVID-19 variants, actions that may be taken by governmental authorities, the impact to the business of our clients and other factors identified in Part I, Item 1A “Risk Factors” in our Form 10-K that was filed with the SEC on February 17, 2022.

Results of Operations

The following table sets forth certain consolidated statements of income data and such data as a percentage of total revenues for the periods presented:


	Three Months Ended September 30,										Nine Months Ended September 30,
	2022					2021				% Change	2022					2021				% Change
Revenues
Recurring	$	328,150		98.2	%	$	251,306	98.1	%	30.6%	$	987,848		98.3	%	$	756,665	98.2	%	30.6%
Implementation and other		6,017		1.8	%		4,888	1.9	%	23.1%		16,762		1.7	%		13,873	1.8	%	20.8%
Total revenues		334,167		100.0	%		256,194	100.0	%	30.4%		1,004,610		100.0	%		770,538	100.0	%	30.4%
Cost of revenues
Operating expenses		44,169		13.2	%		34,766	13.6	%	27.0%		122,265		12.2	%		92,612	12.0	%	32.0%
Depreciation and amortization		10,935		3.3	%		7,914	3.1	%	38.2%		31,405		3.1	%		22,751	3.0	%	38.0%
Total cost of revenues		55,104		16.5	%		42,680	16.7	%	29.1%		153,670		15.3	%		115,363	15.0	%	33.2%
Administrative expenses
Sales and marketing		91,114		27.3	%		69,745	27.2	%	30.6%		253,834		25.3	%		200,485	26.0	%	26.6%
Research and development		40,366		12.1	%		31,077	12.1	%	29.9%		108,774		10.8	%		84,012	10.9	%	29.5%
General and administrative		60,693		18.1	%		59,980	23.4	%	1.2%		179,109		17.8	%		160,234	20.8	%	11.8%
Depreciation and amortization		12,625		3.8	%		9,407	3.7	%	34.2%		36,378		3.6	%		25,503	3.3	%	42.6%
Total administrative expenses		204,798		61.3	%		170,209	66.4	%	20.3%		578,095		57.5	%		470,234	61.0	%	22.9%
Total operating expenses		259,902		77.8	%		212,889	83.1	%	22.1%		731,765		72.8	%		585,597	76.0	%	25.0%
Operating income		74,265		22.2	%		43,305	16.9	%	71.5%		272,845		27.2	%		184,941	24.0	%	47.5%
Interest expense		(1,018	)	-0.3	%		—	0.0	%	-100.0%		(1,587	)	-0.2	%		—	0.0	%	-100.0%
Other income (expense), net		2,041		0.6	%		244	0.1	%	736.5%		4,331		0.4	%		1,019	0.1	%	325.0%
Income before income taxes		75,288		22.5	%		43,549	17.0	%	72.9%		275,589		27.4	%		185,960	24.1	%	48.2%
Provision for income taxes		23,135		6.9	%		13,170	5.1	%	75.7%		74,151		7.3	%		38,687	5.0	%	91.7%
Net income	$	52,153		15.6	%	$	30,379	11.9	%	71.7%	$	201,438		20.1	%	$	147,273	19.1	%	36.8%

Revenues

The increase in total revenues for the three and nine months ended September 30, 2022 compared to the same periods in 2021 was primarily the result of the addition of new clients and productivity and efficiency gains in mature sales offices, which are offices that have been open for at least 24 months, and the sale of additional applications to our existing clients. In addition, the performance of our tax forms filing business in the first quarter contributed to the increase in total revenues for the nine months ended September 30, 2022 as compared to the same period in 2021. The COVID-19 pandemic has resulted in, and may continue to result in, headcount fluctuations across our client base. Additionally, rising interest rates and a higher average funds held for clients balance during the three and nine months ended September 30, 2022 as compared to the same periods in 2021, resulted in increased interest earned on funds held for clients, which had a positive impact on recurring revenue.

The increase in implementation and other revenues for the three and nine months ended September 30, 2022 from the same periods in 2021 was primarily the result of the increased non-refundable upfront conversion fees collected from the addition of new clients. These fees are deferred and recognized ratably over the ten-year estimated life of our clients.

Expenses

Cost of Revenues

During the three months ended September 30, 2022, operating expenses increased from the comparable prior year period by $9.4 million due to an $8.6 million increase in employee-related expenses primarily attributable to growth in the number of operating personnel and a $0.7 million increase in automated clearing house fees in connection with the increase in revenues. Depreciation and amortization expense increased $3.0 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other fixed assets.

During the nine months ended September 30, 2022, operating expenses increased from the comparable prior year period by $29.7 million due to a $24.6 million increase in employee-related expenses primarily attributable to growth in the number of operating personnel, a $2.9 million increase in shipping and supplies fees and a $2.2 million increase in automated clearing house fees in connection with the increase in revenues. Depreciation and amortization expense increased $8.7 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other fixed assets.

Administrative Expenses

Sales and Marketing

During the three months ended September 30, 2022, sales and marketing expenses increased from the comparable prior year period by $21.4 million due to a $16.6 million increase in employee-related expenses, including commissions and bonuses, and a $4.8 million increase in marketing and advertising expense attributable to increased spending across most components of our marketing program.

During the nine months ended September 30, 2022, sales and marketing expenses increased from the comparable prior year period by $53.3 million due to a $41.1 million increase in employee-related expenses, including commissions and bonuses, and a $12.2 million increase in marketing and advertising expense attributable to increased spending across most components of our marketing program. Based on positive results from our advertising campaigns, we plan to continue to make significant investments in our marketing program and may adjust spending levels in future periods as we see opportunities for returns on our investments.

Research and Development

During the three and nine months ended September 30, 2022, research and development expenses increased from the comparable prior year periods due to increases in employee-related expenses of $9.3 million and $24.8 million, respectively.

As we continue the ongoing development of our platform and product offerings, we generally expect research and development expenses (exclusive of stock-based compensation) to continue to increase, particularly as we hire more personnel to support our growth. While we expect this trend to continue on an absolute dollar basis and as a percentage of total revenues, we also anticipate the rate of increase to decline over time as we leverage our growth and realize additional economies of scale. As is customary for our business, we also expect fluctuations in research and development expense as a percentage of revenue on a quarter-to-quarter basis due to seasonal revenue trends, the introduction of new products, the amount and timing of research and development costs that may be capitalized and the timing of onboarding new hires and restricted stock vesting events.

Expenditures for software developed or obtained for internal use are capitalized and amortized over a three-year period on a straight-line basis. The nature of the development projects underway during a particular period directly impacts the timing and extent of these capitalized expenditures and can affect the amount of research and development expenses in such period. The table below sets forth the amounts of capitalized and expensed research and development costs for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2022		2021		% Change	2022		2021		% Change
Capitalized portion of research and development	$	16,995	$	13,157	29%	$	48,835	$	39,160	25%
Expensed portion of research and development		40,366		31,077	30%		108,774		84,012	29%
Total research and development costs	$	57,361	$	44,234	30%	$	157,609	$	123,172	28%

General and Administrative

During the three months ended September 30, 2022, general and administrative expenses increased $0.7 million from the comparable prior year period due to a $1.1 million increase in accounting and legal expenses, which was partially offset by a $0.4 million decrease in employee-related expenses.

During the nine months ended September 30, 2022, general and administrative expenses increased $18.9 million from the comparable prior year period due to a $19.7 million increase in employee-related expenses, which was partially offset by a $0.8 million decrease in accounting and legal expenses.

Non-Cash Stock-Based Compensation Expense

The following table presents the non-cash stock-based compensation expense that is included within the specified line items in our consolidated statements of comprehensive income:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2022		2021		% Change	2022		2021		% Change
Non-cash stock-based compensation expense
Operating expenses	$	1,396	$	1,256	11%	$	3,725	$	3,381	10%
Sales and marketing		5,280		3,417	55%		13,186		10,567	25%
Research and development		3,039		1,827	66%		8,115		5,394	50%
General and administrative		14,777		22,491	-34%		45,789		57,022	-20%
Total non-cash stock-based compensation expense	$	24,492	$	28,991	-16%	$	70,815	$	76,364	-7%

Depreciation and Amortization

During the three and nine months ended September 30, 2022, depreciation and amortization expense increased from the comparable prior year periods primarily due to the development of additional technology and purchases of other related fixed assets.

Interest Expense

The increase in interest expense for the three and nine months ended September 30, 2022, as compared to the comparable prior year periods, is due to the timing and progress of construction of the expansion of our corporate headquarters and our expanded operations facility, which resulted in a lower capitalization rate of interest in 2022.

Other Income (Expense), net

The change in other income (expense), net for the three and nine months ended September 30, 2022 was primarily due to the realized gain which resulted from the settlement of our interest rate swap agreement.

Provision for Income Taxes

The provision for income taxes is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items. Our effective income tax rate was 26.9% and 20.8% for the nine months ended September 30, 2022 and 2021, respectively. The increase in the effective income tax rate for the nine months ended September 30, 2022 is primarily related to a decrease of excess tax benefits from stock-based compensation.

Liquidity and Capital Resources

Our principal sources of capital and liquidity are our operating cash flow and cash and cash equivalents. Our cash and cash equivalents consist primarily of demand deposit accounts, money market funds and certificates of deposit. Additionally, we maintain a $650.0 million senior secured revolving credit facility (the “July 2022 Revolving Credit Facility”), and a $750.0 million senior secured delayed draw term loan facility (the “July 2022 Term Loan Facility”), which can be accessed as needed to supplement our operating cash flow and cash balances. As of September 30, 2022, we have $29.0 million of outstanding borrowings under the July 2022 Revolving Credit Facility and no outstanding borrowings under the July 2022 Term Loan Facility.

We have historically funded our operations from cash flows generated from operations, cash from the sale of equity securities and debt financing. Although we have funded most of the costs for construction projects at our corporate headquarters and other facilities from available cash, we have incurred indebtedness for a portion of these costs. We are funding the current building expansion at our Oklahoma City headquarters from available cash. Further, all purchases under our stock repurchase plans were paid for from available cash. We believe our existing cash and cash equivalents, cash generated from operations and available sources of liquidity will be sufficient to maintain operations, make necessary capital expenditures and opportunistically repurchase shares for at least the next 12 months. In addition, based on our strong profitability and continued growth, we expect to meet our longer-term liquidity needs with cash flows from operations and, as needed, financing arrangements.

Interest Rate Swap Agreement. In December 2017, we entered into a floating-to-fixed interest rate swap agreement (the "Interest Rate Swap Agreement") to limit our exposure to interest rate risk related to the term loans used to finance construction projects at our corporate headquarters (the "2017 Term Loans"). The Interest Rate Swap Agreement, which had a maturity date of September 7, 2025, provided that we received quarterly variable interest payments based on the LIBOR rate and paid interest at a fixed rate. We have

elected not to designate this interest rate swap as a hedge and, as such, changes in the fair value of the derivative instrument are recognized in our consolidated statements of comprehensive income. On August 24, 2022, we terminated the Interest Rate Swap Agreement by settling the contract. The settlement of the interest rate swap contract resulted in a cash receipt of $0.5 million. The realized gain from the settlement of the interest rate swap is included in Other income (expense), net in the consolidated statements of comprehensive income.

May 2022 Revolving Credit Agreement. On May 4, 2022, we entered into a credit agreement (the “May 2022 Revolving Credit Agreement”) with Bank of America, N.A., as a lender, swingline lender and letters of credit issuer, the lenders from time to time party thereto, and Bank of America, N.A., as the administrative agent, which provided for a senior secured revolving credit facility in the initial aggregate principal amount of up to $250.0 million and the ability to request an incremental facility of up to an additional $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions (the “May 2022 Facility”). The May 2022 Facility included a $25.0 million sublimit for swingline loans and a $2.5 million sublimit for letters of credit. On May 4, 2022, we borrowed $29.0 million under the May 2022 Facility to repay the 2017 Term Loans, along with accrued interest, expenses and fees. On June 7, 2022, the aggregate commitments under the May 2022 Revolving Credit Agreement were increased from $250.0 million to $350.0 million. The May 2022 Facility was scheduled to mature on May 4, 2027.

As discussed below, on July 29, 2022, we entered into the July 2022 Credit Agreement (as defined below) and borrowed $29.0 million to repay the outstanding indebtedness under the May 2022 Facility along with accrued interest, expenses and fees. In connection with the repayment, the May 2022 Revolving Credit Agreement was terminated on July 29, 2022.

July 2022 Credit Agreement. On July 29, 2022 (the “July 2022 Facility Closing Date”), we entered into a new credit agreement (the “July 2022 Credit Agreement”) with JPMorgan Chase Bank, N.A., as a lender, swingline lender and issuing bank, the lenders from time to time party thereto (collectively with JPMorgan Chase Bank, N.A., the “July 2022 Lenders”), and JPMorgan Chase Bank, N.A., as the administrative agent.

The July 2022 Credit Agreement provides for the July 2022 Revolving Credit Facility in the aggregate principal amount of up to $650.0 million, and the ability to request an incremental facility of up to an additional $500.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The July 2022 Credit Agreement includes a $25.0 million sublimit for swingline loans and a $6.5 million sublimit for letters of credit. The July 2022 Credit Agreement also provides for the July 2022 Term Loan Facility in the aggregate amount of up to $750.0 million. All loans under the July 2022 Credit Agreement will mature on July 29, 2027 (the “Scheduled Maturity Date”).

which the July 2022 Term Loan Facility has been fully drawn and (y) the expiration of the draw period, in an aggregate annual amount equal to 7.5% in year one (if applicable) and year two, and 10% thereafter.

On the July 2022 Facility Closing Date, we borrowed $29.0 million under the July 2022 Revolving Credit Facility to repay the outstanding indebtedness under the May 2022 Facility, along with accrued interest, expenses and fees. The loan bears interest at the Adjusted Term SOFR Rate for the interest period in effect plus 1.25%. In connection with the repayment of the May 2022 Facility, the May 2022 Revolving Credit Agreement was terminated on July 29, 2022.

Stock Repurchase Plan and Withholding Shares to Cover Taxes. In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. Most recently, in August 2022, our Board of Directors authorized the repurchase of up to $1.1 billion of our common stock. As of September 30, 2022, there was $1.1 billion available for repurchases under our stock repurchase plan. Our stock repurchase plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, shares withheld for taxes associated with the vesting of restricted stock and other corporate considerations. The current stock repurchase plan will expire on August 15, 2024.

During the nine months ended September 30, 2022, we repurchased an aggregate of 364,200 shares of our common stock at an average cost of $273.67 per share, including 16,888 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock. Our payment of the taxes on behalf of those employees resulted in an aggregate cash expenditure of $5.0 million and, as such, we generally subtract the amounts attributable to such withheld shares from the aggregate amount available for future purchases under our stock repurchase plan.

Cash Flow Analysis

Our cash flows from operating activities have historically been significantly impacted by profitability, implementation revenues received but deferred, our investment in sales and marketing to drive growth, and research and development. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives.

As our business grows, we expect our capital expenditures and our investment activity to continue to increase. We are currently focused on the expansion of our corporate headquarters. Capital expenditures related to this expansion began in the fourth quarter of 2021. We estimate that the total cost of the project will be between $60 million and $70 million and we expect construction will take approximately two years to complete. In addition, we purchased the naming rights to the downtown Oklahoma City arena that is home to the Oklahoma City Thunder National Basketball Association franchise. Under the terms of the naming rights agreement, we committed to make payments escalating annually from $4.0 million in 2021 to $6.1 million in 2035. The payments are due in the fourth quarter of each year. Upon the conclusion of the initial term, the agreement may be extended upon the mutual agreement of both parties for an additional five-year period. Depending on certain growth opportunities, we may choose to accelerate investments in sales and marketing, acquisitions, technology and services. Actual future capital requirements will depend on many factors, including our future revenues, cash from operating activities and the level of expenditures in all areas of our business.

As part of our payroll and payroll tax filing services, we collect funds from our clients for federal, state and local employment taxes, which we remit to the appropriate tax agencies. We invest these funds in money market funds, demand deposit accounts, commercial paper, U.S. treasury securities and certificates of deposit from which we earn interest income during the period between their receipt and disbursement.

Our cash flows from investing and financing activities are influenced by the amount of funds held for clients, which can vary significantly from quarter to quarter. The balance of the funds we hold depends on our clients’ payroll calendars, and therefore such balance changes from period to period in accordance with the timing of each payroll cycle.

Our cash flows from financing activities are also affected by the extent to which we use available cash to purchase shares of common stock under our stock repurchase plan as well as restricted stock vesting events that result in net share settlements and the Company paying withholding taxes on behalf of certain employees.

The following table summarizes the consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
	2022			2021			% Change
Net cash provided by (used in):
Operating activities	$	236,647		$	229,637		3%
Investing activities		(32,028	)		(63,978	)	50%
Financing activities		(198,871	)		1,283,999		-115%
Change in cash, cash equivalents, restricted cash and restricted cash equivalents	$	5,748		$	1,449,658		-100%

Operating Activities

Cash provided by operating activities for the nine months ended September 30, 2022 primarily consisted of payments received from our clients and interest earned on funds held for clients. Cash used in operating activities primarily consisted of personnel-related expenditures to support the growth and infrastructure of our business. These payments included costs of operations, advertising and other sales and marketing efforts, IT infrastructure development, product research and development and security and administrative costs. Compared to the nine months ended September 30, 2021, our operating cash flows for the nine months ended September 30, 2022 were positively impacted by the growth of our business.

Investing Activities

Cash flows used in investing activities for the nine months ended September 30, 2022 decreased from the comparable prior year period due to a $133.7 million increase in proceeds from investments from funds held for clients and a $1.5 million decrease in purchases of intangible assets, which were partially offset by a $98.0 million increase in purchases of investments from funds held for clients and a $5.3 million increase in purchases of property and equipment.

Financing Activities

Cash flows used in financing activities for the nine months ended September 30, 2022 increased from the comparable prior year period primarily due to the impact of a $1,439.0 million change related to the client funds obligation, which is due to the timing of receipts from our clients and payments made to our clients’ employees and applicable taxing authorities on their behalf, a $94.7 million increase in common stock repurchases, a $28.0 million increase in payments on long-term debt, and a $6.4 million increase in payment of debt issuance costs. The increase in cash flows used in financing activities was partially offset by a $56.1 million decrease in withholding taxes paid related to net share settlements and $29.0 million in proceeds from the issuance of debt.

Contractual Obligations

Our principal commitments primarily consist of long-term debt, leases for office space and the naming rights agreement. As discussed in “Note 6. Long-Term Debt, Net” and elsewhere in this Form 10-Q, on May 4, 2022, we entered into the May 2022 Revolving Credit Agreement, repaid the 2017 Term Loans and terminated the 2017 Term Credit Agreement. On July 29, 2022, we entered into the July 2022 Credit Agreement and terminated the May 2022 Revolving Credit Agreement. Outside of the changes related to the May 2022 Revolving Credit Agreement, repayment of the 2017 Term Loans, termination of the 2017 Term Credit Agreement and changes related to the July 2022 Credit Agreement, there have been no material changes to our contractual obligations disclosed in the contractual obligations section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K that was filed with the SEC on February 17, 2022. For additional information regarding our naming rights agreement, leases, long-term debt and our commitments and contingencies, see “Note 4. Goodwill and Intangible Assets, Net”, “Note 5. Leases”, “Note 6. Long-Term Debt, Net” and “Note 12. Commitments and Contingencies” in the Form 10-K and “Note 5. Goodwill and Intangible Assets, Net”, “Note 6. Long-Term Debt, Net”, and “Note 13. Commitments and Contingencies” in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.

Critical Accounting Policies and Estimates

Our consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions to ensure that management believes them to be reasonable under the then-current facts and circumstances. Actual amounts and results may materially differ from these estimates made by management under different assumptions and conditions.

Certain accounting policies that require significant management estimates, and are deemed critical to our results of operations or financial position, are discussed in the critical accounting policies and estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K. There have been no material changes to the critical accounting policies disclosed in the Form 10-K.

Adoption of Accounting Pronouncements

Discussion of our recently adopted accounting pronouncements can be found in Note 2 in this Form 10-Q.

Non-GAAP Financial Measures

Management uses adjusted EBITDA and non-GAAP net income as supplemental measures to review and assess the performance of our core business operations and for planning purposes. We define (i) adjusted EBITDA as net income plus interest expense, taxes, depreciation and amortization, non-cash stock-based compensation expense, certain transaction expenses that are not core to our operations (if any) and the change in fair value of our interest rate swap and (ii) non-GAAP net income as net income plus non-cash stock-based compensation expense, certain transaction expenses that are not core to our operations (if any) and the change in fair value of our interest rate swap, all of which are adjusted for the effect of income taxes. Adjusted EBITDA and non-GAAP net income are metrics that provide investors with greater transparency to the information used by management in its financial and operational decision-making. We believe these metrics are useful to investors because they facilitate comparisons of our core business operations across periods on a consistent basis, as well as comparisons with the results of peer companies, many of which use similar non-GAAP financial measures to supplement results under U.S. GAAP. In addition, adjusted EBITDA is a measure that provides useful information to management about the amount of cash available for reinvestment in our business, repurchasing common stock and other purposes. Management believes that the non-GAAP measures presented in this Form 10-Q, when viewed in combination with our results prepared in accordance with U.S. GAAP, provide a more complete understanding of the factors and trends affecting our business and performance.

Adjusted EBITDA and non-GAAP net income are not measures of financial performance under U.S. GAAP, and should not be considered a substitute for net income, which we consider to be the most directly comparable U.S. GAAP measure. Adjusted EBITDA and non-GAAP net income have limitations as analytical tools, and when assessing our operating performance, you should not consider adjusted EBITDA or non-GAAP net income in isolation, or as a substitute for net income or other consolidated statements of comprehensive income data prepared in accordance with U.S. GAAP. Adjusted EBITDA and non-GAAP net income may not be comparable to similarly titled measures of other companies and other companies may not calculate such measures in the same manner as we do.

The following tables reconcile net income to adjusted EBITDA, net income to non-GAAP net income and earnings per share to non-GAAP net income per share on a basic and diluted basis:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2022		2021			2022		2021
Net income to adjusted EBITDA:
Net income	$	52,153	$	30,379		$	201,438	$	147,273
Interest expense		1,018		—			1,587		—
Provision for income taxes		23,135		13,170			74,151		38,687
Depreciation and amortization		23,560		17,321			67,783		48,254
EBITDA		99,866		60,870			344,959		234,214
Non-cash stock-based compensation expense		24,492		28,991			70,815		76,364
Change in fair value of interest rate swap		1,668		(158	)		—		(863	)
Adjusted EBITDA	$	126,026	$	89,703		$	415,774	$	309,715


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Net income to non-GAAP net income:
Net income	$	52,153		$	30,379		$	201,438		$	147,273
Non-cash stock-based compensation expense		24,492			28,991			70,815			76,364
Change in fair value of interest rate swap		1,668			(158	)		—			(863	)
Income tax effect on non-GAAP adjustments		(4,882	)		(5,626	)		(15,180	)		(26,798	)
Non-GAAP net income	$	73,431		$	53,586		$	257,073		$	195,976

Weighted average shares outstanding:
Basic		57,865			57,935			57,949			57,843
Diluted		58,033			58,190			58,193			58,192

Earnings per share, basic	$	0.90		$	0.52		$	3.48		$	2.55
Earnings per share, diluted	$	0.90		$	0.52		$	3.46		$	2.53
Non-GAAP net income per share, basic	$	1.27		$	0.92		$	4.44		$	3.39
Non-GAAP net income per share, diluted	$	1.27		$	0.92		$	4.42		$	3.37


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Earnings per share to non-GAAP net income per share, basic:
Earnings per share, basic	$	0.90		$	0.52		$	3.48		$	2.55
Non-cash stock-based compensation expense		0.42			0.50			1.22			1.32
Change in fair value of interest rate swap		0.03			—			—			(0.01	)
Income tax effect on non-GAAP adjustments		(0.08	)		(0.10	)		(0.26	)		(0.47	)
Non-GAAP net income per share, basic	$	1.27		$	0.92		$	4.44		$	3.39

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Earnings per share to non-GAAP net income per share, diluted:
Earnings per share, diluted	$	0.90		$	0.52		$	3.46		$	2.53
Non-cash stock-based compensation expense		0.42			0.50			1.22			1.31
Change in fair value of interest rate swap		0.03			—			—			(0.01	)
Income tax effect on non-GAAP adjustments		(0.08	)		(0.10	)		(0.26	)		(0.46	)
Non-GAAP net income per share, diluted	$	1.27		$	0.92		$	4.42		$	3.37

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

We had cash and cash equivalents totaling $317.2 million as of September 30, 2022. These amounts are invested primarily in demand deposit accounts and money market funds. We consider all highly liquid debt instruments purchased with a maturity of three months or less and SEC-registered money market mutual funds to be cash equivalents. The primary objectives of our investing activities are capital preservation, meeting our liquidity needs and, with respect to investing client funds, generating interest income while maintaining the safety of principal. We do not enter into investments for trading or speculative purposes.

Our cash equivalents are subject to market risk due to changes in interest rates. The market value of fixed rate securities may be adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.

To mitigate interest rate risk, we entered into the Interest Rate Swap Agreement. The Interest Rate Swap Agreement effectively eliminated a portion of the variable rate and coinciding interest rate risk associated with our outstanding indebtedness. We exited the interest rate swap on August 24, 2022.

As of September 30, 2022, we had $29.0 million of indebtedness outstanding under the July 2022 Revolving Credit Facility. Our borrowings under the July 2022 Revolving Credit Facility bear interest at the Adjusted Term SOFR Rate for the interest period in effect plus 1.25%, and as a result, we may be exposed to increased interest rate risk. As of September 30, 2022, an increase or decrease in interest rates of 100 basis points would not have had a material effect on our operating results or financial condition.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our chief executive officer and chief financial officer, evaluated, as of September 30, 2022, the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2022 to ensure that information required to be disclosed by us in this Form 10-Q is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosures.

We believe, however, that a controls system, no matter how well designed and operated, can only provide reasonable assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

There have been no material changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in various disputes, claims, suits, investigations and legal proceedings arising in the ordinary course of business. We believe that the resolution of current pending legal matters will not have a material adverse effect on our business, financial condition, results of operations or cash flows. Nonetheless, we cannot predict the outcome of these proceedings, as legal matters are subject to inherent uncertainties, and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Item 1A. Risk Factors

There have been no material changes from the information set forth in “Item 1A. Risk Factors” in the Form 10-K filed with the SEC on February 17, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The number of shares of common stock repurchased by us during the three months ended September 30, 2022 is set forth below.


	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1 - 31, 2022(2)		30	$	330.49		30	$	549,991,000
August 1 - 31, 2022(2)		193	$	367.62		193	$	1,099,930,000
September 1 - 30, 2022(2)		408	$	351.58		408	$	1,099,786,000
Total		631				631

(1)

Pursuant to a stock repurchase plan announced on November 20, 2018, we were authorized to purchase (in the aggregate) up to $150.0 million of our common stock in open market purchases, privately negotiated transactions or by other means. On May 13, 2021, we announced that our Board of Directors increased the availability under the existing stock repurchase plan to $300.0 million and extended the expiration date to May 13, 2023. On June 7, 2022, we announced that our Board of Directors increased the availability under the existing stock repurchase plan to $550.0 million and extended the expiration date to June 7, 2024. On August 15, 2022, we announced that our Board of Directors increased the availability under the existing stock repurchase plan to $1.1 billion and extended the expiration date to August 15, 2024.

(2)

Consists of shares withheld to satisfy tax withholding for certain employees upon the vesting of restricted stock.

Item 5. Other Information

Amended and Restated Bylaws

On October 31, 2022, our Board of Directors adopted amended and restated bylaws of the Company (as so amended and restated, the “Amended and Restated Bylaws”), effective immediately. The Amended and Restated Bylaws, among other things:

•

Clarify that meetings of stockholders may be held by remote communications or in a hybrid in-person and remote format;

•

Modify the provisions relating to notices of stockholder meetings, adjournment procedures and lists of stockholders entitled to vote at stockholder meetings, in each case, to reflect recent amendments to the Delaware General Corporation Law, as amended (the “DGCL”);

•

Clarify the parameters for proxies in connection with stockholder meetings;

•

Enhance procedural mechanics and disclosure requirements in connection with stockholder nominations of directors and submissions of stockholder proposals at stockholder meetings, including without limitation, by requiring:

additional background information and disclosures regarding proposing stockholders, proposed nominees, proposed business, and other persons related to a stockholder’s solicitation of proxies;

any stockholder submitting a nomination or proposal notice to make a representation that such stockholder is a holder of record of shares of capital stock of the Company entitled to vote at the meeting at which such nomination or proposal is to be brought;

any stockholder submitting a nomination or proposal notice to make a representation that such stockholder has complied with all applicable requirements of state law and the Exchange Act;

any stockholder submitting a nomination notice to make a representation as to whether such stockholder intends to solicit proxies in support of director nominees other than the Company’s nominees in accordance with Rule 14a-19 under the Exchange Act (“Rule 14a-19”), and if so, to include an undertaking that such stockholder will comply with the requirements of Rule 14a-19 and to provide, at the Company’s request, no later than five business days prior to the applicable meeting, reasonable evidence that the requirements of Rule 14a-19 have been satisfied;

that disclosures included in a stockholder’s nomination or proposal notice be updated so that they are accurate as of the stockholder meeting record date and as of ten business days prior to the stockholder meeting;

that any material inaccuracies in the disclosures included in a stockholder’s nomination or proposal notice be corrected in accordance with the Amended and Restated Bylaws;

•

Clarify that the Board of Directors (or an officer designated thereby) has the power and duty to determine whether a stockholder nomination or proposal has been made in accordance with the Amended and Restated Bylaws and that, if the Board of Directors or such officer determines that any stockholder’s nomination or proposal was not made in accordance with the Amended and Restated Bylaws, such nomination or proposal will not be presented at the meeting at which such nomination or proposal was to be brought;

•

Clarify that a director’s verbal resignation is not effective until confirmed by the director in writing or by electronic transmission;

•

Remove the requirement that officers of the Company be elected annually;

•

Modify the requirements for signatures on stock certificates to reflect amendments to the DGCL; and

•

Make various other updates, including ministerial and conforming changes.

The foregoing summary of the Amended and Restated Bylaws does not purport to be complete and is qualified in its entirety by reference to the complete text of the Amended and Restated Bylaws, a copy of which is attached hereto as Exhibit 3.2 and is incorporated herein by reference.

Item 6. Exhibits

The following exhibits are incorporated herein by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K):


Exhibit No.		Description

3.1		Amended and Restated Certificate of Incorporation of Paycom Software, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Amendment No. 1 to the Registration Statement on Form S-1/A dated March 31, 2014, filed with the SEC on March 31, 2014).

3.2*		Amended and Restated Bylaws of Paycom Software, Inc.

4.1		Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Amendment No. 1 to the Registration Statement on Form S-1/A dated March 31, 2014, filed with the SEC on March 31, 2014).

10.1+		Credit Agreement, dated July 29, 2022, by and among Paycom Software, Inc., Paycom Payroll, LLC, certain other subsidiaries of Paycom Software, Inc. as guarantors, JPMorgan Chase Bank, N.A., as a lender, swingline lender and issuing bank, the lenders party thereto, and JPMorgan Chase Bank, N.A., as the administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 29, 2022, filed with the SEC on August 2, 2022).

31.1*		Certification of the Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of the Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of the Chief Executive Officer and Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


101.INS		Inline XBRL Instance Document – the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*		Inline XBRL Taxonomy Extension Schema Document.

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

+ Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish to the SEC a copy of any omitted schedule or exhibit upon request.

* Filed herewith.

** The certifications attached as Exhibit 32.1 are not deemed “filed” with the SEC and are not to be incorporated by reference into any filing of Paycom Software, Inc. under the Securities Act whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		PAYCOM SOFTWARE, INC.

Date: November 3, 2022	By:	/s/ Chad Richison
		Chad Richison
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: November 3, 2022	By:	/s/ Craig E. Boelte
		Craig E. Boelte
		Chief Financial Officer
		(Principal Accounting Officer and Principal Financial Officer)