Enhanced Investments - Financial Portal

Published: 2021-11-04 16:06:35 ET

payc-10q_20210930.htm

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, 2021

☐	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 26, 2021, there were 60,025,819 shares of common stock, par value of $0.01 per share, outstanding, including 2,029,204 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 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	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 6.	Exhibits	33
Signatures		34

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Paycom Software, Inc.

Unaudited Consolidated Balance Sheets

(in thousands, except per share amounts)

	September 30, 2021			December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	230,926		$	151,710
Accounts receivable		13,004			9,130
Prepaid expenses		26,643			17,854
Inventory		866			1,151
Income tax receivable		10,211			10,447
Deferred contract costs		71,559			60,819
Current assets before funds held for clients		353,209			251,111
Funds held for clients		2,959,973			1,613,494
Total current assets		3,313,182			1,864,605
Property and equipment, net		329,296			285,218
Intangible assets, net		59,057			319
Goodwill		51,889			51,889
Long-term deferred contract costs		430,761			371,357
Other assets		33,853			34,524
Total assets	$	4,218,038		$	2,607,912
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	9,441		$	6,787
Accrued commissions and bonuses		12,431			13,703
Accrued payroll and vacation		36,138			24,529
Deferred revenue		16,175			13,567
Current portion of long-term debt		1,775			1,775
Accrued expenses and other current liabilities		50,340			44,175
Current liabilities before client funds obligation		126,300			104,536
Client funds obligation		2,959,973			1,613,494
Total current liabilities		3,086,273			1,718,030
Deferred income tax liabilities, net		125,228			112,598
Long-term deferred revenue		81,702			73,259
Net long-term debt, less current portion		27,815			29,119
Other long-term liabilities		71,679			19,263
Total long-term liabilities		306,424			234,239
Total liabilities		3,392,697			1,952,269
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value (100,000 shares authorized, 62,275 and 61,861 shares issued at September 30, 2021 and December 31, 2020, respectively; 57,997 and 57,739 shares outstanding at September 30, 2021 and December 31, 2020, respectively)		622			618
Additional paid-in capital		441,479			357,908
Retained earnings		866,892			719,619
Treasury stock, at cost (4,278 and 4,122 shares at September 30, 2021 and December 31, 2020, respectively)		(483,652	)		(422,502	)
Total stockholders’ equity		825,341			655,643
Total liabilities and stockholders’ equity	$	4,218,038		$	2,607,912

See accompanying notes to the unaudited consolidated financial statements.

Paycom Software, Inc.

Unaudited Consolidated Statements of Income

(in thousands, except per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020
Revenues
Recurring	$	251,306	$	192,664	$	756,665	$	609,109
Implementation and other		4,888		3,868		13,873		11,378
Total revenues		256,194		196,532		770,538		620,487
Cost of revenues
Operating expenses		34,766		24,278		92,612		71,651
Depreciation and amortization		7,914		6,634		22,751		18,865
Total cost of revenues		42,680		30,912		115,363		90,516
Administrative expenses
Sales and marketing		69,745		62,146		200,485		173,228
Research and development		31,077		21,772		84,012		65,171
General and administrative		59,980		40,516		160,234		121,487
Depreciation and amortization		9,407		7,150		25,503		20,209
Total administrative expenses		170,209		131,584		470,234		380,095
Total operating expenses		212,889		162,496		585,597		470,611
Operating income		43,305		34,036		184,941		149,876
Interest expense		—		—		—		(19	)
Other income (expense), net		244		246		1,019		(522	)
Income before income taxes		43,549		34,282		185,960		149,335
Provision for income taxes		13,170		6,800		38,687		30,249
Net income	$	30,379	$	27,482	$	147,273	$	119,086
Earnings per share, basic	$	0.52	$	0.48	$	2.55	$	2.07
Earnings per share, diluted	$	0.52	$	0.47	$	2.53	$	2.04
Weighted average shares outstanding:
Basic		57,935		57,603		57,843		57,609
Diluted		58,190		58,171		58,192		58,312

See accompanying notes to the unaudited consolidated financial statements.

Paycom Software, Inc.

Unaudited Consolidated Statements of Stockholders’ Equity

(in thousands)

	Common Stock				Additional			Retained		Treasury Stock					Total
	Shares		Amount		Paid-in Capital			Earnings		Shares		Amount			Stockholders’ Equity
Balances at December 31, 2019		61,350	$	613	$	257,501		$	576,166		3,689	$	(307,652	)	$	526,628
Vesting of restricted stock		2		1		(1	)		—		—		—			—
Stock-based compensation		—		—		18,313			—		—		—			18,313
Repurchases of common stock		—		—		—			—		41		(8,168	)		(8,168	)
Net income		—		—		—			63,015		—		—			63,015
Balances at March 31, 2020		61,352	$	614	$	275,813		$	639,181		3,730	$	(315,820	)	$	599,788
Vesting of restricted stock		261		2		(2	)		—		—		—			—
Stock-based compensation		—		—		24,597			—		—		—			24,597
Repurchases of common stock		—		—		—			—		295		(67,121	)		(67,121	)
Net income		—		—		—			28,589		—		—			28,589
Balances at June 30, 2020		61,613	$	616	$	300,408		$	667,770		4,025	$	(382,941	)	$	585,853
Vesting of restricted stock		26		—		—			—		—		—			—
Stock-based compensation		—		—		21,913			—		—		—			21,913
Repurchases of common stock		—		—		—			—		9		(2,849	)		(2,849	)
Net income		—		—		—			27,482		—		—			27,482
Balances at September 30, 2020		61,639	$	616	$	322,321		$	695,252		4,034	$	(385,790	)	$	632,399

	Common Stock				Additional			Retained		Treasury Stock					Total
	Shares		Amount		Paid-in Capital			Earnings		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

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,
	2021			2020
Cash flows from operating activities
Net income	$	147,273		$	119,086
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		48,254			39,073
Accretion of discount on available-for-sale securities		(276	)		(1,374	)
Non-cash marketing expense		618			—
Loss on disposition of property and equipment		146			—
Amortization of debt issuance costs		27			27
Stock-based compensation expense		76,364			56,531
Cash paid for derivative settlement		(558	)		(424	)
(Gain)/loss on derivative		(305	)		2,042
Deferred income taxes, net		12,630			11,204
Changes in operating assets and liabilities:
Accounts receivable		(3,874	)		(3,057	)
Prepaid expenses		(8,789	)		(7,196	)
Inventory		97			32
Other assets		671			(3,757	)
Deferred contract costs		(68,041	)		(56,922	)
Accounts payable		1,659			4,491
Income taxes, net		236			(5,260	)
Accrued commissions and bonuses		(1,272	)		(4,403	)
Accrued payroll and vacation		11,609			12,853
Deferred revenue		11,051			9,143
Accrued expenses and other current liabilities		2,117			2,239
Net cash provided by operating activities		229,637			174,328
Cash flows from investing activities
Purchase of short-term investments from funds held for clients		(170,760	)		(217,858	)
Proceeds from maturities of short-term investments from funds held for clients		195,000			93,593
Purchases of intangible assets		(1,500	)		—
Purchases of property and equipment		(86,718	)		(73,502	)
Net cash used in investing activities		(63,978	)		(197,767	)
Cash flows from financing activities
Repurchases of common stock		—			(52,040	)
Withholding taxes paid related to net share settlements		(61,149	)		(26,099	)
Payments on long-term debt		(1,331	)		(1,331	)
Net change in client funds obligation		1,346,479			(140,421	)
Net cash provided by (used in) financing activities		1,283,999			(219,891	)
Increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents		1,449,658			(243,330	)
Cash, cash equivalents, restricted cash and restricted cash equivalents
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period		1,585,275			1,641,854
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period	$	3,034,933		$	1,398,524

	Nine Months Ended September 30,
	2021		2020
Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents
Cash and cash equivalents	$	230,926	$	156,398
Restricted cash included in funds held for clients		2,804,007		1,242,126
Total cash, cash equivalents, restricted cash and restricted cash equivalents, end of period	$	3,034,933	$	1,398,524


Supplemental disclosures of cash flow information:
Non-cash investing and financing activities:
Purchases of property and equipment, accrued but not paid	$	5,994	$	2,707
Stock-based compensation for capitalized software	$	5,108	$	5,284
Right of use assets obtained in exchange for operating lease liabilities	$	4,439	$	9,323

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 amounts)

1.	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.

2.	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, 2020 (the “Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on February 18, 2021.

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, 2021 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 January 2020, we adopted ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2018-15”) utilizing the prospective transition method. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The adoption of this guidance did not have a material impact on our unaudited interim consolidated financial statements.

In January 2020, we adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU No. 2018-13 modifies the disclosure requirements in Topic 820, “Fair Value Measurement,” based on the FASB Concepts Statement, “Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements,” including consideration of costs and benefits. The adoption of ASU 2018-13 removed or modified disclosure requirements retrospectively to all periods presented, whereas any new requirements have been applied prospectively from the adoption date. The adoption of this guidance did not have a material impact on our unaudited interim consolidated 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, 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

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

historical experience where applicable and other assumptions that management believes are reasonable under the circumstances. Actual results could materially differ from these estimates.

Prior Period Reclassifications

Certain immaterial prior period amounts have been reclassified to conform to the current period presentation.

Seasonality

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

Employee Stock Purchase Plan

An award issued under the Paycom Software, Inc. Employee Stock Purchase Plan (the “ESPP”) is classified as a share-based liability and recognized at the fair value of the award. Expense is recognized, net of estimated forfeitures, on a straight-line basis over the requisite service period.

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 offsetting 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, 2021 and December 31, 2020, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper with a maturity duration less than three months and certificates of deposit. 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. These available-for-sale securities are recorded in the consolidated balance sheets at fair value, which approximates the amortized cost of the securities. 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 May 2021, our Board of Directors authorized the repurchase of up to $300.0 million of our common stock. As of September 30, 2021, there was $270.7 million 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 May 13, 2023.

Recently Issued Accounting Pronouncements

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

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

affected by reference rate reform. Our interest-bearing notes bear interest, at our option, at either (a) a prime rate plus 1.0% or (b) fluctuating interest rates based on a one-month USD LIBOR rate. Once the one-month USD LIBOR rate ceases to exist, we will have to renegotiate our loan documents and cannot currently predict what alternative index will be negotiated with our lenders. While ASU 2020-04 is currently effective, we plan to adopt and apply ASU 2020-04 prospectively to contract modifications made on or before December 31, 2022. We are currently assessing the impact that this guidance will have on our consolidated 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. ASU 2021-01 is currently effective and upon adoption may be applied to contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. We are currently assessing the impact that this guidance will have on our consolidated financial statements.

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, background check, on-boarding, 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 and geofencing/geotracking. Payroll includes Beti™, our payroll and tax management, Paycom Pay®, expense management, garnishment management and GL Concierge applications. Talent management includes our employee self-service, compensation budgeting, performance management, executive dashboard and Paycom learning and course content applications. HR management includes our document and task management, government and compliance, beneﬁts administration, benefit enrollment services, COBRA administration, personnel action forms, surveys and enhanced Affordable Care Act 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 employee time and attendance services. Although these revenues are related to our recurring revenues, they represent distinct performance obligations.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

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.

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, 2021 and 2020 were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Balance, beginning of period	$	92,458		$	80,887		$	86,826		$	76,244
Deferral of revenue		10,573			7,838			26,071			20,324
Recognition of unearned revenue		(5,154	)		(3,338	)		(15,020	)		(11,181	)
Balance, end of period	$	97,877		$	85,387		$	97,877		$	85,387

We expect to recognize $4.7 million of deferred revenue related to material right performance obligations in the remainder of 2021, $15.0 million of such deferred revenue in 2022, and $78.2 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 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 income.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share 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, 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 Three Months Ended September 30, 2020
	Beginning		Capitalization					Ending
	Balance		of Costs		Amortization			Balance
Costs to obtain a contract	$	209,462	$	12,174	$	(7,716	)	$	213,920
Costs to fulfill a contract	$	171,941	$	18,709	$	(5,889	)	$	184,761

	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

	As of and for the Nine Months Ended September 30, 2020
	Beginning		Capitalization					Ending
	Balance		of Costs		Amortization			Balance
Costs to obtain a contract	$	194,964	$	41,340	$	(22,384	)	$	213,920
Costs to fulfill a contract	$	143,788	$	57,289	$	(16,316	)	$	184,761

4.	PROPERTY AND EQUIPMENT

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

	September 30, 2021			December 31, 2020
Property and equipment
Software and capitalized software costs	$	184,196		$	144,190
Buildings		116,045			115,772
Computer equipment		78,710			68,181
Rental clocks		28,928			25,474
Furniture, fixtures and equipment		21,269			19,829
Other		7,451			7,016
		436,599			380,462
Less: accumulated depreciation and amortization		(224,713	)		(178,111	)
		211,886			202,351
Construction in progress		88,376			53,833
Land		29,034			29,034
Property and equipment, net	$	329,296		$	285,218

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, 2021, we capitalized $13.2 million and $39.2 million, respectively, of computer software development costs related to software developed for internal use. For the three and nine months ended September 30, 2020, we capitalized $11.7 million and $32.4 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.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

We capitalize interest incurred for indebtedness related to construction in progress. 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. For the three and nine months ended September 30, 2020, 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, 2021 and December 31, 2020 is $3.4 million and $3.5 million in retainage, respectively.

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. Depreciation and amortization expense for property and equipment was $13.8 million and $39.1 million, respectively, for the three and nine months ended September 30, 2020.

5.	GOODWILL AND INTANGIBLE ASSETS, NET

As of both September 30, 2021 and December 31, 2020, goodwill was $51.9 million. We have selected June 30 as our annual goodwill impairment testing date. We performed a qualitative analysis of the fair value of our goodwill and determined there was no impairment as of June 30, 2021. As of September 30, 2021 and December 31, 2020, there were no indicators of impairment.

In connection with our marketing initiatives, we have 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 have 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 table presents the components of intangible assets within our consolidated balance sheets:

	September 30, 2021
	Weighted Average Remaining				Accumulated
	Useful Life		Gross		Amortization			Net
	(Years)
Intangibles:
Naming rights		15.1	$	60,199	$	(1,302	)	$	58,897
Trade name		0.8		3,194		(3,034	)		160
Total			$	63,393	$	(4,336	)	$	59,057

	December 31, 2020
	Weighted Average Remaining			Accumulated
	Useful Life	Gross		Amortization			Net
	(Years)
Intangibles:
Trade name	1.5	$	3,194	$	(2,875	)	$	319
Total		$	3,194	$	(2,875	)	$	319

Amortization of intangible assets for the three and nine months ended September 30, 2021 was $1.1 million and $1.5 million, respectively. Amortization of intangible assets for the three and nine months ended September 30, 2020 was less than $0.1 million and $0.2 million, respectively. We estimate the aggregate amortization expense will be $1.0 million for the remainder of 2021, $4.0 million for 2022, and $3.9 million for each of 2023, 2024, 2025 and 2026, respectively.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

6.LONG-TERM DEBT, NET

Long-term debt consisted of the following:

	September 30, 2021			December 31, 2020
Net term note to bank due September 7, 2025	$	29,590		$	30,894
Total long-term debt, net (including current portion)		29,590			30,894
Less: Current portion		(1,775	)		(1,775	)
Total long-term debt, net	$	27,815		$	29,119

On December 7, 2017, we entered into a senior secured term credit agreement (as amended from time to time, the “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 “Term Loans”). Our obligations under the Term Loans are secured by a mortgage and first priority security interest in our corporate headquarters property. The Term Loans mature on September 7, 2025 and bear 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 Term Loan plus 1.5%. As of September 30, 2021, our long-term indebtedness consisted solely of the Term Loans made under the Term Credit Agreement. Unamortized debt issuance costs of $0.1 million and $0.2 million as of September 30, 2021 and as of December 31, 2020, respectively, are presented as a direct deduction from the carrying amount of the debt liability.

Under the Term Credit Agreement, we are subject to two material financial covenants, which require us to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0. As of September 30, 2021, we were in compliance with these covenants.

On February 12, 2018, we entered into a senior secured revolving credit agreement (the “Revolving Credit Agreement”) with JPMorgan Chase Bank, N.A. and Bank of America, N.A. that provided for a senior secured revolving credit facility (the “Facility”) in the aggregate principal amount of $50.0 million (the “Revolving Commitment”), which could be increased to up to $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The Facility includes a $5.0 million sublimit for swingline loans and a $2.5 million sublimit for letters of credit. The Facility was scheduled to mature on February 12, 2020. On April 15, 2019, we entered into the First Amendment to Revolving Credit Agreement (the “First Amendment”). Pursuant to the First Amendment, Wells Fargo Bank, N.A., was added as a lender and the Revolving Commitment was increased to $75.0 million, which may be further increased to $125.0 million subject to obtaining additional lender commitments and certain approvals and satisfying other conditions. The scheduled maturity date of the Facility was extended to April 15, 2022.

Borrowings under the Facility will generally bear interest at a prime rate plus 1.0% or, at our option, an adjusted LIBOR rate for the interest period in effect for such borrowing plus 1.5%. The proceeds of the loans and letters of credit under the Facility are to be used only for our general business purposes and working capital. Letters of credit are to be issued only to support our business operations. As of September 30, 2021, we did not have any borrowings outstanding under the Facility.

Under the Revolving Credit Agreement, we are required to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0. Additionally, the Revolving 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 certain 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 for a facility of the size and type of the Facility. As of September 30, 2021, we were in compliance with all covenants related to the Revolving Credit Agreement.

As of September 30, 2021 and December 31, 2020, 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 amounts)

7.	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 Term Loans. We do not hold derivative instruments for trading or speculative purposes. The interest rate swap agreement effectively converts 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 8, “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 income within Other income (expense), net.

The objective of the interest rate swap is to reduce the variability in the forecasted interest payments of the Term Loans, which is 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 receive quarterly variable interest payments based on the LIBOR rate and pay interest at a fixed rate. The interest rate swap agreement has a maturity date of September 7, 2025. For the three and nine months ended September 30, 2021, we recorded gains of $0.2 million and $0.9 million, respectively, for the change in fair value of the interest rate swap, and for the three months ended September 30, 2020, we recorded a gain of $0.1 million and for the nine months ended September 30, 2020, we recorded a loss of $1.6 million, for the change in fair value of the interest rate swap. The change in the fair value of the interest rate swap is included in Other income (expense), net in the consolidated statements of income.

8.	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, funds held for clients 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 the 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, which approximates the amortized cost of the securities. All of our available-for-sale securities had expected maturity dates of twelve months or less at September 30, 2021.

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

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 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, 2021 and December 31, 2020:

	September 30, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Commercial paper	$	—	$	130,966	$	—	$	130,966
Certificates of deposit	$	—	$	25,000	$	—	$	25,000
Liabilities:
Interest rate swap	$	—	$	1,875	$	—	$	1,875

	December 31, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Commercial paper	$	—	$	99,929	$	—	$	99,929
Certificates of deposit	$	—	$	80,000	$	—	$	80,000
Liabilities:
Interest rate swap	$	—	$	2,738	$	—	$	2,738

9.	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 $2.9 million and $8.8 million for the three and nine months ended September 30, 2021, respectively. Matching contributions were $1.9 million and $6.3 million for the three and nine months ended September 30, 2020, 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 31,824 and 42,966 shares of the Company’s common stock under the ESPP during the nine months ended September 30, 2021 and 2020, 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 $0.6 million and $2.0 million for the three and nine months ended September 30, 2021, respectively. Our compensation expense related to the ESPP was $0.7 million and $1.5 million for the three and nine months ended September 30, 2020, respectively.

10.	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. The unvested shares of restricted stock granted in 2015 are considered participating securities, while all other unvested shares of restricted stock are not considered participating securities. As of December 31, 2020, all shares of restricted stock granted in 2015 have vested.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share 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,
	2021		2020		2021		2020
Numerator:
Net income	$	30,379	$	27,482	$	147,273	$	119,086
Less: income allocable to participating securities		—		—		—		—
Income allocable to common shares	$	30,379	$	27,482	$	147,273	$	119,086
Add back: undistributed earnings allocable to participating securities	$	—	$	—	$	—	$	—
Less: undistributed earnings reallocated to participating securities		—		—		—		—
Numerator for diluted earnings per share	$	30,379	$	27,482	$	147,273	$	119,086
Denominator:
Basic weighted average shares outstanding		57,935		57,603		57,843		57,609
Dilutive effect of unvested restricted stock		255		568		349		703
Diluted weighted average shares outstanding		58,190		58,171		58,192		58,312
Earnings per share:
Basic	$	0.52	$	0.48	$	2.55	$	2.07
Diluted	$	0.52	$	0.47	$	2.53	$	2.04

11.STOCK-BASED COMPENSATION

Restricted Stock Awards

During the nine months ended September 30, 2021, we issued an aggregate of 180,735 restricted shares of common stock to certain non-executive employees and non-employee members of our board of directors under the Paycom Software, Inc. 2014 Long-Term Incentive Plan (the “LTIP”), consisting of 42,934 shares subject to market-based vesting conditions (“Market-Based Shares”) and 137,801 shares subject to time-based vesting conditions (“Time-Based Shares”). The 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 $520 per share and 50% on the first date, if any, that the Company’s VWAP Value equals or exceeds $600 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.

Of the 137,801 Time-Based Shares mentioned above, on May 3, 2021, we issued an aggregate of 3,558 Time-Based Shares to the non-employee members of our Board of Directors. Such shares of restricted stock will cliff-vest on the seventh day following the first anniversary of the date of grant, 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. In September 2021, Janet Haugen tendered her resignation from our Board of Directors. As a result of Ms. Haugen’s resignation, the compensation committee of the Board of Directors determined to accelerate the vesting of 297 shares of Ms. Haugen’s unvested shares of restricted stock, which was approximately one-half of the shares of restricted stock awarded to Ms. Haugen in 2021. Subsequent to Ms. Haugen’s resignation, the Board of Directors appointed Sharen Turney to serve as a Class I director to fill the resulting vacancy. Ms. Turney received a prorated portion of the standard compensation package for the Company’s non-management directors, which included 230 shares of restricted stock, and which will vest on May 10, 2022.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

The following table summarizes restricted stock awards activity for the nine months ended September 30, 2021:

	Time-Based					Market-Based
	Restricted Stock Awards					Restricted Stock Awards
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Unvested shares of restricted stock outstanding at December 31, 2020		559.8		$	156.48		1,748.5		$	115.91
Granted		137.8		$	426.59		42.9		$	331.35
Vested		(275.3	)	$	131.87		(138.5	)	$	189.86
Forfeited		(37.7	)	$	276.14		(5.0	)	$	331.35
Unvested shares of restricted stock outstanding at September 30, 2021		384.6		$	259.16		1,647.9		$	114.64

The following table summarizes vesting activity for Market-Based Shares during the nine months ended September 30, 2021, the associated compensation cost recognized in connection with each vesting event and the number of shares withheld to satisfy tax withholding obligations:

Vesting Condition

Date Vested

Number of Shares

Vested

Compensation

Cost Recognized

Upon Vesting

Shares Withheld

for Taxes¹

Market-based (Total Enterprise Value = $27.7 billion)

September 11, 2021

138.5

5,000

60.3

(1)

All shares withheld to satisfy tax withholding obligations are held as treasury stock.

Performance-Based Restricted Stock Units

In February 2021, 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 “PSU Awards”). Each PSU granted under the LTIP represents a notional share of the Company’s common stock. The PSU Awards represented an aggregate of 52,470 target units that may increase to an aggregate of 131,176 awarded units based upon the Company’s performance over two separate performance periods: (i) a two-year performance period commencing on January 1, 2021 and ending on December 31, 2022 (the “Two-Year Performance Period”); and (ii) a three-year performance period commencing on January 1, 2021 and ending on December 31, 2023 (the “Three-Year Performance Period”). Up to 25% of the PSUs will be eligible to vest no later than March 1, 2023, for the Two-Year Performance Period, and up to 75% of the PSUs will be eligible to vest no later than February 29, 2024, 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 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, 2020, 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, 2020. The Company’s peer group includes 34 publicly traded companies, which are reflective of the S&P 500 Software & Services index and were selected by the Compensation Committee.

On April 2, 2021, Jeffrey D. York resigned from his position as Chief Sales Officer of the Company and accepted a new role as Leadership Strategist of the Company. In connection with the change in Mr. York’s role, the Company and Mr. York entered into a letter agreement that, among other things, (i) amends that certain Amended and Restated Executive Employment Agreement, dated March 9, 2020, by and between the Company and Mr. York, to, among other things, reflect the change in Mr. York’s role, eliminate

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

certain executive-level benefits and remove the termination and severance provisions, and (ii) forfeits and releases the PSU award granted to Mr. York on February 10, 2021.

On April 2, 2021, the Board of Directors appointed Holly Faurot to succeed Mr. York as Chief Sales Officer of the Company. In connection with her appointment, Mrs. Faurot was granted an award of PSUs pursuant to the LTIP. Consistent with the PSU awards granted to certain other executive officers of the Company on February 10, 2021, Mrs. Faurot received 5,445 target PSUs that will vest based on the Company’s total stockholder return relative to a peer group of 34 publicly traded companies, subject to the terms and conditions of the LTIP and the PSU Award Agreement.

The following table summarizes PSU activity for the nine months ended September 30, 2021:

	PSUs
	Units			Weighted Average Grant Date Fair Value
Unvested PSUs outstanding at December 31, 2020		—		$	—
Granted		57.9		$	564.68
Forfeited		(20.8	)	$	579.30
Unvested PSUs outstanding at September 30, 2021 ⁽¹⁾		37.1		$	556.50

(1)

A maximum of 92,814 units could be awarded based upon Paycom’s Relative TSR over the applicable performance periods.

For the three and nine months ended September 30, 2021, our total compensation expense related to restricted stock awards and PSU awards, in the aggregate, was $29.0 million and $76.4 million, respectively. For the three and nine months ended September 30, 2020, our total compensation expense related to restricted stock awards and PSU awards, in the aggregate, was $19.5 million and $56.5 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 PSU awards as of September 30, 2021.

	Restricted Stock
	Awards		PSUs
Unrecognized compensation cost	$	229,361	$	15,639
Weighted average period for recognition (years)		3.9		2.0

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. We capitalized stock-based compensation costs related to software developed for internal use of $1.6 million and $5.3 million for the three and nine months ended September 30, 2020, respectively.

12.	COMMITMENTS AND CONTINGENCIES

As previously disclosed, starting in February 2019, we received subpoenas and requests from the SEC focused on whether certain of our clients were charged, and paid, an additional amount for one or more applications for which the clients were already being charged. In connection with this matter, we identified fewer than 250 affected clients, representing approximately 0.5% of our client base as of December 31, 2020. We have made diligent efforts to notify the affected clients and reached substantially all that were affected by such charges between approximately 2011 and September 2020. We have refunded approximately $3.0 million, in the aggregate, to such clients. We have also instituted a control aimed at preventing this situation from reoccurring. This issue did not have a material impact on our financial results for any prior period. In connection with this matter, we paid a total of $0.25 million to the SEC to settle two accounting-related charges concerning our books and records and internal controls. We neither admitted nor denied the SEC’s findings with respect to these charges.

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.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

13.	INCOME TAXES

The Company’s effective income tax rate was 20.8% and 20.3% for the nine months ended September 30, 2021 and 2020, respectively. The higher effective income tax rate for the nine months ended September 30, 2021 is primarily related to a decrease in excess tax benefits from stock-based compensation.

14.	SUBSEQUENT EVENTS

On October 30, 2021, the Company’s VWAP value exceeded $520 per share, which resulted in the vesting of 18,727 Market-Based Shares issued on February 5, 2021. For additional information on our stock-based compensation, see “Note 11. Stock-Based Compensation” in this Form 10-Q.

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 a narrative from the perspective of our management 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, 2021, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2020 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 18, 2021 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, 2020, 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 ability to relocate our Texas operations facility within an expected timeframe; our plans regarding our capital expenditures and investment activity as our business grows, including with respect to our new Texas operations facility and research and development; the expected impact on our consolidated financial statements of new accounting pronouncements; 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 novel 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, including proposed tax legislation, 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;

•

the impact of the COVID-19 pandemic on the U.S. economy, including reductions in employment levels, business disruptions resulting from government-mandated mitigation measures and an increase in business failures;

•

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;

•

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, Part II, Item 1A, “Risk Factors” of this Form 10-Q 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, 2021. Our revenues are primarily generated through our sales force that solicits new clients and our client relations representatives 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. We also 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, 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. 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, 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. Even if our average funds held for clients balance increases, the impact of significantly lower average interest rates could partially offset the impact of such increased balance and, as a result, have a negative impact on recurring revenue growth.

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.

Our revenues are seasonal in nature. Recurring revenues include revenues relating to the annual processing of payroll forms, such as Form W-2, Form 1099, and Form 1095, and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. Because payroll forms are typically processed in the first quarter of the year, first quarter revenues and margins are generally higher than in subsequent quarters. These seasonal fluctuations in revenues can also have an impact on gross profits. Historical results impacted by these seasonal trends should not be considered a reliable indicator of our future results of operations. For the three months ended September 30, 2021 and 2020, our total gross margins were approximately 83% and 84%, respectively. For the nine months ended September 30, 2021 and 2020, 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

Beginning in February 2020, we took various actions in order to minimize the risk of COVID-19 to our employees, our clients, and the communities in which we operate. In March 2020, we prohibited all business-related travel until further notice and began transitioning our employees to work-from-home arrangements. During the third quarter of 2021, we transitioned the majority of our employees back to our offices, with a large contingent temporarily utilizing alternating schedules between work-from-home and on-site arrangements. Our sales employees have been conducting meetings with current and prospective clients virtually since March 2020, but as prospective clients begin to take meetings in-person, we expect our sales process would transition to include a combination of virtual and in-person meetings. We are permitting a limited amount of business travel, and will continue to actively monitor the situation. 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. Business continuity and safety will continue to guide our return-to-office plans.

The COVID-19 pandemic has disrupted the operations of our clients and client prospects and may continue to do so for an indefinite period of time. Across many industries, temporary and permanent business closures as well as business occupancy limitations have resulted in significant layoffs and employee furloughs since late March 2020. Because we charge our clients on a per-employee basis for certain services we provide, decreases in headcount at our clients as of the onset of the pandemic negatively impacted our recurring revenue beginning in the second quarter of 2020, and we expect that our recurring revenue in future periods will continue to be negatively impacted by such headcount reductions until employment levels among such client base return to pre-pandemic levels. Further, at the onset of the COVID-19 pandemic, a limited number of new clients temporarily delayed service implementation.

Between August 2019 and March 2020, the Federal Open Market Committee reduced the target range for short-term interest rates several times, with the most significant rate cut occurring in March 2020 to support the economy and potentially reduce the impacts of the COVID-19 pandemic. Due to significantly lower average interest rates during the first nine months of 2021, as compared to the first nine months of 2020, interest earned on funds held for clients for the three and nine months ended September 30, 2021 decreased from the comparable prior year periods, which had a negative effect on recurring revenue growth.

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. Prior to the COVID-19 pandemic, our sales force historically traveled frequently to sell our solution. The remote work environment has presented a unique opportunity for our sales force, in that each sales employee is able to meet virtually with a greater number of client prospects in a given day than he or she would if conducting in-person meetings. Internally, all applications within the Paycom solution, and more specifically Employee Self-Service®, Manager on-the-Go®, Documents and Checklists, Ask Here and our enhanced Learning Management System, were instrumental in our ability to seamlessly manage and communicate with our remote workforce. As many clients transitioned their workforces to work-from-home arrangements, we believe they too recognized the benefits of these applications and our focus on employee usage, as well as the strengths and advantages of our single database solution. In contrast, we believe the remote work environment has exposed the weaknesses and disadvantages arising from the combination of disparate systems offered by some of our competitors. We will continue to aggressively invest in sales and marketing and in research and development to drive future growth and expand our market share.

On November 4, 2021, the Department of Labor’s Occupational Safety and Health Administration released an emergency temporary standard requiring private employers with 100 or more employees to mandate vaccination or weekly testing and masking for their unvaccinated employees. We are evaluating the impact this standard may have on our business and results of operations, including any potential impact it may have on our employees or the employees of our 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 18, 2021. Further, while our revenue and earnings are relatively predictable, the effect of the ongoing COVID-19 pandemic may not be fully reflected in our results of operations and overall financial performance until future periods.

Results of Operations

The following table sets forth 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,
	2021				2020				% Change	2021				2020					% Change
Revenues
Recurring	$	251,306	98.1	%	$	192,664	98.0	%	30.4%	$	756,665	98.2	%	$	609,109		98.2	%	24.2%
Implementation and other		4,888	1.9	%		3,868	2.0	%	26.4%		13,873	1.8	%		11,378		1.8	%	21.9%
Total revenues		256,194	100.0	%		196,532	100.0	%	30.4%		770,538	100.0	%		620,487		100.0	%	24.2%
Cost of revenues
Operating expenses		34,766	13.6	%		24,278	12.3	%	43.2%		92,612	12.0	%		71,651		11.5	%	29.3%
Depreciation and amortization		7,914	3.1	%		6,634	3.4	%	19.3%		22,751	3.0	%		18,865		3.0	%	20.6%
Total cost of revenues		42,680	16.7	%		30,912	15.7	%	38.1%		115,363	15.0	%		90,516		14.5	%	27.5%
Administrative expenses
Sales and marketing		69,745	27.2	%		62,146	31.6	%	12.2%		200,485	26.0	%		173,228		27.9	%	15.7%
Research and development		31,077	12.1	%		21,772	11.1	%	42.7%		84,012	10.9	%		65,171		10.5	%	28.9%
General and administrative		59,980	23.4	%		40,516	20.6	%	48.0%		160,234	20.8	%		121,487		19.6	%	31.9%
Depreciation and amortization		9,407	3.7	%		7,150	3.6	%	31.6%		25,503	3.3	%		20,209		3.3	%	26.2%
Total administrative expenses		170,209	66.4	%		131,584	66.9	%	29.4%		470,234	61.0	%		380,095		61.3	%	23.7%
Total operating expenses		212,889	83.1	%		162,496	82.6	%	31.0%		585,597	76.0	%		470,611		75.8	%	24.4%
Operating income		43,305	16.9	%		34,036	17.4	%	27.2%		184,941	24.0	%		149,876		24.2	%	23.4%
Interest expense		—	0.0	%		—	0.0	%	0.0%		—	0.0	%		(19	)	0.0	%	-100.0%
Other income (expense), net		244	0.1	%		246	0.1	%	-0.8%		1,019	0.1	%		(522	)	-0.1	%	-295.2%
Income before income taxes		43,549	17.0	%		34,282	17.5	%	27.0%		185,960	24.1	%		149,335		24.1	%	24.5%
Provision for income taxes		13,170	5.1	%		6,800	3.5	%	93.7%		38,687	5.0	%		30,249		4.9	%	27.9%
Net income	$	30,379	11.9	%	$	27,482	14.0	%	10.5%	$	147,273	19.1	%	$	119,086		19.2	%	23.7%

Revenues

The increase in total revenues for the three and nine months ended September 30, 2021 compared to the same periods in 2020 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, our tax forms filing business in the first quarter of 2021 contributed to the increase in total revenues for the nine months ended September 30, 2021 as compared to the same period in 2020. The COVID-19 pandemic has resulted in, and may continue to result in, headcount fluctuations across our client base. Because we charge our clients on a per-employee basis for certain services we provide, the drivers of revenue for the three and nine months ended September 30, 2021 described above were impacted by the headcount fluctuations within our client base. The negative effects on our client revenue of lower headcount resulting from the pandemic were more than offset by headcount additions from new clients and modestly improved headcount levels among our pre-pandemic client base throughout the third quarter of 2021. Significantly lower average interest rates during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, had a negative effect on recurring revenue growth for the three and nine months ended September 30, 2021. We expect that the foregoing adverse macroeconomic factors may continue to have a negative effect on recurring revenues in future periods for so long as such conditions persist.

The increase in implementation and other revenues for the three and nine months ended September 30, 2021 from the same periods in 2020 was primarily the result of 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, 2021, operating expenses increased from the comparable prior year period by $10.5 million due to a $7.3 million increase in employee-related expenses primarily attributable to growth in the number of operating personnel, a $2.2 million increase in shipping and supplies fees and a $1.0 million increase in automated clearing house fees in connection with the increase in revenues. Depreciation and amortization expense increased $1.3 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, 2021, operating expenses increased from the comparable prior year period by $21.0 million due to a $14.1 million increase in employee-related expenses primarily attributable to growth in the number of operating personnel, a $4.5 million increase in shipping and supplies fees and a $2.4 million increase in automated clearing house fees in connection with the increase in revenues. Depreciation and amortization expense increased $3.9 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, 2021, sales and marketing expenses increased from the comparable prior year period by $7.6 million due to an $8.8 million increase in employee-related expenses, including commissions and bonuses, which was partially offset by a $1.2 million decrease in marketing and advertising expense.

During the nine months ended September 30, 2021, sales and marketing expenses increased from the comparable prior year period by $27.3 million due to a $22.0 million increase in employee-related expenses, including commissions and bonuses, and a $5.3 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, 2021, research and development expenses increased from the comparable prior year periods due to an increase in employee-related expenses of $9.3 million and $18.8 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, 2021 and 2020:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2021		2020		% Change	2021		2020		% Change
Capitalized portion of research and development	$	13,157	$	11,727	12%	$	39,160	$	32,448	21%
Expensed portion of research and development		31,077		21,772	43%		84,012		65,171	29%
Total research and development costs	$	44,234	$	33,499	32%	$	123,172	$	97,619	26%

General and Administrative

During the three months ended September 30, 2021, general and administrative expenses increased $19.5 million from the comparable prior year period primarily due to a $10.2 million increase in non-cash stock-based compensation and a $10.1 million increase in employee-related expenses, which were partially offset by a $0.8 million decrease in accounting and legal expenses.

During the nine months ended September 30, 2021, general and administrative expenses increased $38.7 million from the comparable prior year period primarily due to a $22.7 million increase in non-cash stock-based compensation and a $19.2 million increase in employee-related expenses, which were partially offset by a $3.2 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 income:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2021		2020		% Change	2021		2020		% Change
Non-cash stock-based compensation expense
Operating expenses	$	1,256	$	1,227	2%	$	3,381	$	4,158	-19%
Sales and marketing		3,417		3,829	-11%		10,567		10,795	-2%
Research and development		1,827		2,115	-14%		5,394		7,270	-26%
General and administrative		22,491		12,331	82%		57,022		34,308	66%
Total non-cash stock-based compensation expense	$	28,991	$	19,502	49%	$	76,364	$	56,531	35%

During the three and nine months ended September 30, 2021, our non-cash stock-based compensation expense increased $9.5 million and $19.8 million, respectively, from the comparable prior year periods due to an increase in both the number of employees who received awards and the grant date fair value associated with the issuances in 2021. Also contributing to the increase in our non-cash stock-based compensation expense was the accelerated vesting of restricted stock subject to market-based vesting conditions.

Depreciation and Amortization

During the three and nine months ended September 30, 2021, 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 decreases in interest expense for the three and nine months ended September 30, 2021, as compared to the comparable prior year periods, were due to the timing of construction of our expanded operations facility in Grapevine, Texas, which resulted in a higher capitalization rate of interest in 2021.

Other Income (Expense), net

The changes in other income (expense), net for the three and nine months ended September 30, 2021 was primarily due to the increase in the fair value of our interest rate swap as compared to the comparable prior year periods.

Provision (Benefit) for Income Taxes

The provision (benefit) 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 20.8% and 20.3% for the nine months ended September 30, 2021 and 2020, respectively. The higher effective income tax rate for the nine months ended September 30, 2021 is primarily related to a decrease in excess tax benefits from stock-based compensation as compared to the nine months ended September 30, 2020.

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 senior secured revolving credit facility (the “Facility”), which can be accessed as needed to supplement our operating cash flow and cash balances. The Facility provides us the ability to borrow funds in the aggregate principal amount of $75.0 million, which may be increased to $125.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. We believe our existing cash and cash equivalents and cash generated from operations will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months.

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 ongoing construction projects at our corporate headquarters and other facilities from available cash, we have incurred indebtedness for a portion of these costs. Further, all purchases under our stock repurchase plans were paid for from available cash.

Term Credit Agreement. As of September 30, 2021, our indebtedness consisted solely of term loans (the “Term Loans”) made under a senior secured term credit agreement (as amended from time to time, the “Term Credit Agreement”) among the Company, certain of our subsidiaries, JPMorgan Chase Bank, N.A., Bank of America, N.A. and Kirkpatrick Bank. All Term Loans were used to finance construction projects at our corporate headquarters. Our obligations under the Term Loans are secured by a mortgage and first priority security interest in our corporate headquarters property. The Term Loans mature on September 7, 2025 and bear 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 Term Loan plus 1.5%.

Under the Term Credit Agreement, we are required to comply with certain financial and non-financial covenants, including maintaining a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0. Additionally, the Term 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 for a credit agreement of this size and type. As of September 30, 2021, we were in compliance with all covenants set forth in the Term Credit Agreement.

Interest Rate Swap Agreement. In connection with entering into the Term Credit Agreement, we also entered into a floating-to-fixed interest rate swap agreement to limit the exposure to interest rate risk related to the Term Loans (the “Interest Rate Swap Agreement”). The Interest Rate Swap Agreement, which has a maturity date of September 7, 2025, provides that we receive quarterly variable interest payments based on the LIBOR rate and pay 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 income. For the three and nine months ended September 30, 2021, we recorded gains of $0.2 million and $0.9 million, respectively, for the change in fair value of the interest rate swap, and for the three months ended September 30, 2020, we recorded a gain of $0.1 million and for the nine months ended September 30, 2020, we recorded a loss of $1.6 million, for the change in fair value of the interest rate swap. The change in fair value of the interest rate swap is included in Other income (expense), net in the consolidated statements of income.

Revolving Credit Agreement. On February 12, 2018, we entered into a senior secured revolving credit agreement (the “Revolving Credit Agreement”) with JPMorgan Chase Bank, N.A. and Bank of America, N.A. that provided for the Facility in the aggregate principal amount of $50.0 million (the “Revolving Commitment”), which could be increased to up to $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The Facility includes a $5.0 million sublimit for swingline loans and a $2.5 million sublimit for letters of credit. The Facility was scheduled to mature on February 12, 2020. On April 15, 2019, we entered into the First Amendment to Revolving Credit Agreement (the “First Amendment”). Pursuant to the First Amendment, Wells Fargo Bank, N.A. was added as a lender and the Revolving Commitment was increased to $75.0 million, which may be further increased to $125.0 million subject to obtaining additional lender commitments and certain approvals and satisfying other conditions. The scheduled maturity date of the Facility was also extended to April 15, 2022.

Borrowings under the Facility will generally bear interest at a prime rate plus 1.0% or, at our option, an adjusted LIBOR rate for the interest period in effect for such borrowing plus 1.5%, in each case subject to certain conditions set forth in the Revolving Credit Agreement. As of September 30, 2021, we did not have any borrowings outstanding under the Facility.

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 May 2021, our Board of Directors authorized the repurchase of up to $300.0 million of our common stock. As of September 30, 2021, there was $270.7 million 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 May 13, 2023.

During the nine months ended September 30, 2021, we repurchased an aggregate of 155,575 shares of our common stock at an average cost of $393.05 per share, all of which were 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 $61.1 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 completing the construction of our new Texas operations facility in Grapevine, Texas. Capital expenditures related to the construction of the facility began in the second quarter of 2019. On November 3, 2021, we signed a construction contract for a fifth building at our Oklahoma City headquarters. We estimate that the total cost of the project will be between $60 million and $70 million and construction will take approximately two years to complete. In addition, we have 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 have 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 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, 2021 and 2020:

	Nine Months Ended September 30,
	2021			2020			% Change
Net cash provided by (used in):
Operating activities	$	229,637		$	174,328		32%
Investing activities		(63,978	)		(197,767	)	-68%
Financing activities		1,283,999			(219,891	)	684%
Change in cash, cash equivalents, restricted cash and restricted cash equivalents	$	1,449,658		$	(243,330	)	696%

Operating Activities

Cash provided by operating activities for the nine months ended September 30, 2021 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, 2020, our operating cash flows for the nine months ended September 30, 2021 were positively impacted by the growth of our business.

Investing Activities

Cash flows used in investing activities for the nine months ended September 30, 2021 decreased from the comparable prior year period due to an $101.4 million increase in proceeds from maturities of short-term investments from funds held for clients and a $47.1 million decrease in purchases of short-term investments from funds held for clients. This decrease was slightly offset by a $13.2 million increase in purchases of property and equipment as well as a $1.5 million increase in purchases for intangible assets related to the naming rights agreement.

Financing Activities

Cash flows provided by financing activities for the nine months ended September 30, 2021 increased from the comparable prior year period primarily due to the impact of a $1,486.9 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 as well as a $52.0 million decrease in common stock repurchases. The increase in cash flows provided by financing activities was slightly offset by a $35.1 million increase in the withholding taxes paid related to net share settlements.

Contractual Obligations

Our principal commitments primarily consist of long-term debt and leases for office space. As discussed within “Note 5. Goodwill and Intangible Assets, Net”, we have entered into a naming rights agreement pursuant to which we have committed to pay an annual fee escalating annually from $4.0 million in 2021 to $6.1 million in 2035 in exchange for arena naming rights and other

associated benefits. Outside of the naming rights 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 18, 2021. For additional information regarding our naming rights agreement, leases, long-term debt and our commitments and contingencies, see “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 12. Commitments and Contingencies” in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.

Off-Balance Sheet Arrangements

As of September 30, 2021, we did not have any off-balance sheet arrangements that have or are reasonably likely to have an effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that may be material to investors.

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 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,
	2021			2020			2021			2020
Net income to adjusted EBITDA:
Net income	$	30,379		$	27,482		$	147,273		$	119,086
Interest expense		—			—			—			19
Provision for income taxes		13,170			6,800			38,687			30,249
Depreciation and amortization		17,321			13,784			48,254			39,074
EBITDA		60,870			48,066			234,214			188,428
Non-cash stock-based compensation expense		28,991			19,502			76,364			56,531
Change in fair value of interest rate swap		(158	)		(88	)		(863	)		1,618
Adjusted EBITDA	$	89,703		$	67,480		$	309,715		$	246,577

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Net income to non-GAAP net income:
Net income	$	30,379		$	27,482		$	147,273		$	119,086
Non-cash stock-based compensation expense		28,991			19,502			76,364			56,531
Change in fair value of interest rate swap		(158	)		(88	)		(863	)		1,618
Income tax effect on non-GAAP adjustments		(5,626	)		(6,332	)		(26,798	)		(22,802	)
Non-GAAP net income	$	53,586		$	40,564		$	195,976		$	154,433

Weighted average shares outstanding:
Basic		57,935			57,603			57,843			57,609
Diluted		58,190			58,171			58,192			58,312

Earnings per share, basic	$	0.52		$	0.48		$	2.55		$	2.07
Earnings per share, diluted	$	0.52		$	0.47		$	2.53		$	2.04
Non-GAAP net income per share, basic	$	0.92		$	0.70		$	3.39		$	2.68
Non-GAAP net income per share, diluted	$	0.92		$	0.70		$	3.37		$	2.65

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Earnings per share to non-GAAP net income per share, basic:
Earnings per share, basic	$	0.52		$	0.48		$	2.55		$	2.07
Non-cash stock-based compensation expense		0.50			0.34			1.32			0.98
Change in fair value of interest rate swap		—			—			(0.01	)		0.03
Income tax effect on non-GAAP adjustments		(0.10	)		(0.12	)		(0.47	)		(0.40	)
Non-GAAP net income per share, basic	$	0.92		$	0.70		$	3.39		$	2.68

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Earnings per share to non-GAAP net income per share, diluted:
Earnings per share, diluted	$	0.52		$	0.47		$	2.53		$	2.04
Non-cash stock-based compensation expense		0.50			0.34			1.31			0.97
Change in fair value of interest rate swap		—			—			(0.01	)		0.03
Income tax effect on non-GAAP adjustments		(0.10	)		(0.11	)		(0.46	)		(0.39	)
Non-GAAP net income per share, diluted	$	0.92		$	0.70		$	3.37		$	2.65

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

We had cash and cash equivalents totaling $230.9 million as of September 30, 2021. 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.

As described elsewhere in this Form 10-Q, the Term Loans made under the Term Credit Agreement bear 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 Term Loan plus 1.5%. As a result, we are exposed to increased interest rate risk. To mitigate the increased interest rate risk, we entered into the Interest Rate Swap Agreement. The Interest Rate Swap Agreement has effectively fixed our interest rate at 4.0%, eliminating a portion of the variable rate and coinciding interest rate risk associated with the Term Loans. As of September 30, 2021, 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.

As described elsewhere in this Form 10-Q, the Revolving Credit Agreement, as amended, provides for a Facility in the aggregate amount of $75.0 million, which may be increased to up to $125.0 million. Borrowings under the Facility will generally bear interest at a prime rate plus 1.0% or, at our option, an adjusted LIBOR rate for the interest period in effect for such borrowing plus 1.5%. As of September 30, 2021, we have not made any draws under the Facility. To the extent we make draws under the Facility in the future, we may be exposed to increased interest rate risk.

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, 2021, 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, 2021 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, 2021 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 18, 2021.

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, 2021 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, 2021⁽²⁾		235	$	400.00		235	$	299,418,000
August 1 - 31, 2021⁽²⁾		67	$	471.45		67	$	299,386,000
September 1 - 30, 2021⁽²⁾		60,276	$	475.63		60,276	$	270,717,000
Total		60,578				60,578

(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.

(2)

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

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. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated June 5, 2020, filed with the SEC on June 8, 2020).

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).

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).

*	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 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 4, 2021	By:	/s/ Chad Richison
		Chad Richison
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: November 4, 2021	By:	/s/ Craig E. Boelte
		Craig E. Boelte
		Chief Financial Officer
		(Principal Accounting Officer and Principal Financial Officer)