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S

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

Form 10-Q

 


 

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

 

For the quarterly period ended September 30, 2018

 

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

 

For the transition period from     to     

 

Commission file number 001-36348

 


 

PAYLOCITY HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Delaware

 

46-4066644

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

 

 

 

1400 American Lane

Schaumburg, Illinois

60173

(Address of principal executive offices)

(Zip Code)

 

(847) 463-3200

(Registrant’s telephone number, including area code)

 


 

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

 

Indicate by check mark whether the registrant has submitted electronically 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. (Check one):

 

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  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 52,798,602 shares of Common Stock, $0.001 par value per share, as of October 26, 2018.

 

 

 


 

Paylocity Holding Corporation

Form 10-Q

For the Quarterly Period Ended September 30, 2018

 

TABLE OF CONTENTS

 

 

 

 

 

     

Page

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

 

ITEM 1. FINANCIAL STATEMENTS 

 

 

 

 

 

Unaudited Consolidated Balance Sheets 

 

2

 

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Income 

 

3

 

 

 

Unaudited Consolidated Statement of Changes in Stockholders’ Equity 

 

4

 

 

 

Unaudited Consolidated Statements of Cash Flows 

 

5

 

 

 

Notes to the Unaudited Consolidated Financial Statements 

 

6

 

 

 

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

 

22

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 

34

 

 

 

ITEM 4. CONTROLS AND PROCEDURES 

 

34

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

ITEM 1. LEGAL PROCEEDINGS 

 

36

 

 

 

ITEM 1A. RISK FACTORS 

 

36

 

 

 

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

 

54

 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

 

55

 

 

 

ITEM 4. MINE SAFETY DISCLOSURES 

 

55

 

 

 

ITEM 5. OTHER INFORMATION 

 

55

 

 

 

ITEM 6. EXHIBITS 

 

55

 

 

 

SIGNATURES 

 

57

 

 

1


 

PART I

FINANCIAL INFORMATION

 

Item  1.    Financial Statements

 

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Balance Sheets

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

June 30, 

 

September 30, 

 

 

    

2018

    

2018

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

137,193

 

$

63,662

 

Corporate investments

 

 

732

 

 

21,225

 

Accounts receivable, net

 

 

3,453

 

 

2,992

 

Deferred contract costs

 

 

 —

 

 

16,215

 

Prepaid expenses and other

 

 

11,248

 

 

14,220

 

 

 

 

 

 

 

 

 

Total current assets before funds held for clients

 

 

152,626

 

 

118,314

 

Funds held for clients

 

 

1,225,614

 

 

1,168,156

 

 

 

 

 

 

 

 

 

Total current assets

 

 

1,378,240

 

 

1,286,470

 

Capitalized internal-use software, net

 

 

21,094

 

 

22,034

 

Property and equipment, net

 

 

62,029

 

 

61,823

 

Intangible assets, net

 

 

13,002

 

 

12,439

 

Goodwill

 

 

9,590

 

 

9,590

 

Long-term deferred contract costs

 

 

 —

 

 

59,061

 

Long-term prepaid expenses and other

 

 

1,504

 

 

3,132

 

Deferred income tax assets, net

 

 

22,140

 

 

9,554

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,507,599

 

$

1,464,103

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

2,990

 

$

3,559

 

Accrued expenses

 

 

42,241

 

 

35,678

 

 

 

 

 

 

 

 

 

Total current liabilities before client fund obligations

 

 

45,231

 

 

39,237

 

Client fund obligations

 

 

1,225,614

 

 

1,168,156

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

1,270,845

 

 

1,207,393

 

Deferred rent

 

 

22,812

 

 

22,660

 

Other long-term liabilities

 

 

1,118

 

 

1,424

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

1,294,775

 

$

1,231,477

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

 

$

 —

 

$

 —

 

Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2018 and September 30, 2018; 52,758 shares issued and outstanding at June 30, 2018 and 52,796 shares issued and outstanding at September 30, 2018

 

 

53

 

 

53

 

Additional paid-in capital

 

 

219,588

 

 

176,851

 

Retained earnings (accumulated deficit)

 

 

(6,678)

 

 

55,846

 

Accumulated other comprehensive loss

 

 

(139)

 

 

(124)

 

Total stockholders’ equity

 

$

212,824

 

$

232,626

 

Total liabilities and stockholders’ equity

 

$

1,507,599

 

$

1,464,103

 

 

See accompanying notes to unaudited consolidated financial statements.

2


 

 

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 30, 

 

 

    

2017

    

2018

 

Revenues:

 

 

 

 

 

 

 

Recurring fees

 

$

77,294

 

$

95,761

 

Interest income on funds held for clients

 

 

1,617

 

 

3,502

 

 

 

 

 

 

 

 

 

Total recurring revenues

 

 

78,911

 

 

99,263

 

Implementation services and other

 

 

2,589

 

 

1,241

 

 

 

 

 

 

 

 

 

Total revenues

 

 

81,500

 

 

100,504

 

Cost of revenues:

 

 

 

 

 

 

 

Recurring revenues

 

 

24,091

 

 

29,231

 

Implementation services and other

 

 

10,868

 

 

6,711

 

 

 

 

 

 

 

 

 

Total cost of revenues

 

 

34,959

 

 

35,942

 

Gross profit

 

 

46,541

 

 

64,562

 

Operating expenses:

 

 

 

 

 

 

 

Sales and marketing

 

 

21,180

 

 

26,418

 

Research and development

 

 

8,895

 

 

11,400

 

General and administrative

 

 

15,951

 

 

22,968

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

46,026

 

 

60,786

 

Operating income

 

 

515

 

 

3,776

 

Other income

 

 

109

 

 

269

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

624

 

 

4,045

 

Income tax expense (benefit)

 

 

81

 

 

(5,807)

 

 

 

 

 

 

 

 

 

Net income

 

$

543

 

$

9,852

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

Unrealized gains (losses) on securities, net of tax

 

 

(5)

 

 

15

 

Total other comprehensive income (loss)

 

 

(5)

 

 

15

 

Comprehensive income

 

$

538

 

$

9,867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

Basic

 

$

0.01

 

$

0.19

 

Diluted

 

$

0.01

 

$

0.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Basic

 

 

51,893

 

 

52,865

 

Diluted

 

 

54,610

 

 

55,487

 

 

See accompanying notes to unaudited consolidated financial statements.

3


 

 

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

Earnings

 

Other

 

Total

 

 

 

Common Stock

 

Paid-in

 

(Accumulated

 

Comprehensive

 

Stockholders’

 

 

    

Shares

    

Amount

    

Capital

    

Deficit)

    

Loss

    

Equity

 

Balances at June 30, 2018

 

52,758

 

$

53

 

$

219,588

 

$

(6,678)

 

$

(139)

 

$

212,824

 

Cumulative effect of change in accounting
     policy (adoption of Topic 606)

 

 —

 

 

 —

 

 

 —

 

 

52,672

 

 

 —

 

 

52,672

 

Stock-based compensation

 

 —

 

 

 —

 

 

10,050

 

 

 —

 

 

 —

 

 

10,050

 

Stock options exercised

 

182

 

 

 —

 

 

2,241

 

 

 —

 

 

 —

 

 

2,241

 

Issuance of common stock upon vesting of
     restricted stock units

 

579

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

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

 

(281)

 

 

 —

 

 

(20,037)

 

 

 —

 

 

 —

 

 

(20,037)

 

Repurchases of common shares

 

(442)

 

 

 —

 

 

(34,991)

 

 

 —

 

 

 —

 

 

(34,991)

 

Unrealized gains on securities, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

15

 

 

15

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

9,852

 

 

 —

 

 

9,852

 

Balances at September 30, 2018

 

52,796

 

$

53

 

$

176,851

 

$

55,846

 

$

(124)

 

$

232,626

 

 

See accompanying notes to the unaudited consolidated financial statements.

4


 

 

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 30, 

 

 

    

2017

    

2018

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

543

 

$

9,852

 

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

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

6,606

 

 

9,425

 

Depreciation and amortization expense

 

 

6,673

 

 

8,232

 

Deferred income tax expense (benefit)

 

 

37

 

 

(5,809)

 

Provision for doubtful accounts

 

 

 4

 

 

30

 

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

 

 

(108)

 

 

(407)

 

Loss on disposal of equipment

 

 

31

 

 

241

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(529)

 

 

431

 

Deferred contract costs

 

 

 —

 

 

(7,169)

 

Prepaid expenses and other

 

 

(305)

 

 

(853)

 

Accounts payable

 

 

(101)

 

 

(415)

 

Accrued expenses

 

 

(6,304)

 

 

(6,214)

 

Tenant improvement allowance

 

 

1,656

 

 

 —

 

Net cash provided by operating activities

 

 

8,203

 

 

7,344

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of available-for-sale securities

 

 

(58,844)

 

 

(75,804)

 

Proceeds from sales and maturities of available-for-sale securities

 

 

421

 

 

56,446

 

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

 

 

59,001

 

 

55,844

 

Capitalized internal-use software costs

 

 

(3,751)

 

 

(5,001)

 

Purchases of property and equipment

 

 

(2,693)

 

 

(2,428)

 

Lease allowances used for tenant improvements

 

 

(1,466)

 

 

 —

 

Net cash provided by (used in) investing activities

 

 

(7,332)

 

 

29,057

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net change in client fund obligations

 

 

(470)

 

 

(57,458)

 

Repurchases of common shares

 

 

 —

 

 

(34,679)

 

Proceeds from exercise of stock options

 

 

 —

 

 

85

 

Taxes paid related to net share settlement of equity awards

 

 

(6,470)

 

 

(17,880)

 

Net cash used in financing activities

 

 

(6,940)

 

 

(109,932)

 

Net Change in Cash and Cash Equivalents

 

 

(6,069)

 

 

(73,531)

 

Cash and Cash Equivalents—Beginning of Period

 

 

103,468

 

 

137,193

 

Cash and Cash Equivalents—End of Period

 

$

97,399

 

$

63,662

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

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

 

$

4,317

 

$

1,064

 

Repurchases of common shares, accrued but not paid

 

$

 —

 

$

313

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

Cash paid for income taxes, net of refunds

 

$

53

 

$

351

 

 

See accompanying notes to unaudited consolidated financial statements.

5


 

PAYLOCITY HOLDING CORPORATION

Notes to the Unaudited Consolidated Financial Statements

(all amounts in thousands, except per share data)

 

 

(1)  Organization and Description of Business

 

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

 

(2)  Summary of Significant Accounting Policies

 

(a)  Consolidation and Use of Estimates

 

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

 

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

 

The Company began investing corporate funds in available-for-sale securities during the first quarter of fiscal 2019 and as a result, reclassified $732 as of June 30, 2018 from prepaid expenses and other on the unaudited consolidated balance sheets to corporate investments for comparability purposes in order to conform to the current year’s presentation.

 

(b)  Interim Unaudited Consolidated Financial Information

 

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

 

(c) Revenue Recognition

 

The Company adopted ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”) effective as of July 1, 2018.  Topic 606 requires revenue to be recognized when an entity transfers control of goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled to for those goods or services.  To achieve this core principle, the Company recognizes revenue from contracts with customers based on the following five steps:

 

1)

Identify the contract with a customer;

6


 

2)

Identify the performance obligations in the contract;

3)

Determine the transaction price;

4)

Allocate the transaction price to performance obligations in the contract; and

5)

Recognize revenue when or as the Company satisfies a performance obligation.

 

The Company derives its revenue from contracts predominantly from recurring and non-recurring service fees. While the majority of its agreements are generally cancellable by the client on 60 days’ notice or less, the Company began entering into term arrangements in fiscal 2018, which are generally two years long. Recurring fees are derived from payroll, timekeeping, and HR-related cloud-based computing services as follows:

 

·

Payroll processing and related services, including payroll reporting and tax filing services are delivered on a weekly, biweekly, semi-monthly, or monthly basis depending upon the payroll frequency of the client and on an annual basis if a client selects W-2 preparation and processing services,

 

·

Time and attendance reporting services, including time clock rentals, are delivered on a monthly basis, and

 

·

Cloud-based HR software solutions, including employee administration and benefits enrollment and administration, are delivered on a monthly basis.

 

The majority of the Company’s recurring fees are satisfied over time as services are provided. The performance obligations related to payroll services are satisfied upon the processing of the client’s payroll with the fee charged and collected based on a per employee per payroll frequency fee. The performance obligations related to time and attendance services and HR related services are satisfied over time each month with the fee charged and collected based on a per employee per month fee. For subscription based fees which can include payroll, time and attendance and HR related services, the Company recognizes the applicable recurring fees over time each month with the fee charged and collected based on a per employee per month fee. The Company has certain optional performance obligations that are satisfied at a point in time including the sales of time clocks and W-2 services.

 

Non-recurring service fees consist mainly of nonrefundable implementation fees, which involve setting the client up in, and loading data into, the Company’s cloud-based applications. These implementation activities are considered set-up activities. The Company has determined that the nonrefundable upfront fees provide certain clients with a material right to renew the contract. Implementation fees are deferred and amortized generally over a period up to 24 months.

 

Sales taxes collected from clients and remitted to governmental authorities where applicable are accounted for on a net basis and therefore are excluded from revenues in the statements of operations and comprehensive income.

 

Interest income collected on funds held for clients is recognized in recurring revenues when earned as the collection, holding and remittance of these funds are components of providing these services.

 

The following table, consistent with the presentation of its unaudited consolidated statements of operations and comprehensive income, disaggregates revenue by recurring fees and implementation services and other, which it believes represents the major categories of revenue:

 

 

 

 

 

 

 

Three Months Ended

 

    

September 30, 2018

Recurring fees

 

$

95,761

Implementation services and other

 

 

1,241

Total revenues from contracts

 

$

97,002

 

7


 

Deferred revenue

 

The timing of revenue recognition for recurring revenue is consistent with the timing of invoicing as they occur simultaneously upon the client payroll-processing period or by month.  As such, the Company does not recognize contract assets or liabilities related to recurring revenue. 

 

The nonrefundable upfront fees related to implementation services are invoiced with the client’s first payroll period. The Company defers these nonrefundable upfront fees generally over a period up to 24 months based on the type of contract.  The following table summarizes the changes in deferred revenue (i.e. contract liability) related to these nonrefundable upfront fees as follows:

 

 

 

 

 

 

 

 

Three Months Ended

 

 

September 30, 2018

Balance at July 1, 2018

 

$

 —

Deferral of revenue

 

 

2,518

Revenue recognized

 

 

(499)

Balance at September 30, 2018

 

$

2,019

 

Deferred revenue related to these nonrefundable upfront fees are recorded within accrued expenses and other long-term liabilities on the unaudited consolidated balance sheets. The Company expects to recognize these deferred revenue balances of $1,382 in fiscal 2019, $504 in fiscal 2020, and $133 thereafter.

 

Deferred contract costs

 

The Company defers certain selling and commission costs that meet the capitalization criteria under ASC 340-40, which prior to the adoption of Topic 606 were previously expensed as incurred.  The Company also capitalizes certain costs to fulfill a contract related to its proprietary products if they are identifiable, generate or enhance resources used to satisfy future performance obligations and are expected to be recovered under ASC 340-40. As discussed in Note 2(e), the Company determined that implementation services related to its proprietary products are not separate performance obligations for contracts entered into after July 1, 2018. Implementation fees are treated as nonrefundable upfront fees and the related implementation costs are required to be capitalized and amortized over the expected period of benefit, which is the period in which the Company expects to recover the costs and enhance its ability to satisfy future performance obligations.

 

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

 

The following table presents the deferred contract costs balances and the related amortization expense for these deferred contract costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

Balance

 

Capitalized

 

 

 

 

Balance

 

 

July 1, 2018

 

Costs

 

Amortization

 

September 30, 2018

Costs to obtain a new contract

 

$

68,107

 

$

5,711

 

$

(3,885)

 

$

69,933

Costs to fulfill a contract

 

 

 —

 

 

5,474

 

 

(131)

 

 

5,343

Total

 

$

68,107

 

$

11,185

 

$

(4,016)

 

$

75,276

 

Deferred contract costs are recorded within deferred contract costs and long-term deferred contract costs on the unaudited consolidated balance sheets. Amortization of deferred contracts costs is recorded in implementation services

8


 

and other cost of revenue, sales and marketing, and general and administrative in the unaudited consolidated statements of operations and comprehensive income.

 

Remaining Performance Obligations

 

The Company has applied the practical expedients as allowed under Topic 606 and elects not to disclose the value of unsatisfied performance obligations for contracts that have an original expected duration of one year or less and contracts for which the variable consideration is allocated entirely to wholly unsatisfied performance obligations. The Company’s remaining performance obligations related to minimum monthly fees on its term based contracts was approximately $29,000 as of September 30, 2018, which will be generally recognized over the next 24 months.

 

(d)  Income Taxes

 

Income taxes are accounted for in accordance with ASC 740, Income Taxes, using the asset and liability method. The Company’s provision for income taxes is based on the annual effective rate method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 

 

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

 

(e)  Recently Adopted Accounting Standards

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 supersedes a majority of existing revenue recognition guidance under GAAP, and requires companies to recognize revenue when it transfers goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled. The standard also provides guidance on the recognition of costs related to obtaining and fulfilling a contract under Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers. The Company adopted the new standard, including subsequent amendments and Subtopic 340-40, effective as of July 1, 2018 using the modified retrospective method of transition, which limited the application of the new standard only to contracts that were not completed as of the effective date. The adoption of Topic 606 did not have a material impact in the timing or amount of revenue recognized. However, it did have a material impact on its unaudited consolidated balance sheet due to the deferral of costs of obtaining and fulfilling a contract as detailed below. The Company has updated its control framework for new internal controls and has updated existing controls relating to the new standard.

 

Under the legacy revenue standard through fiscal 2018, the Company accounted for implementation and recurring services each as a separate unit of account. The Company was able to establish standalone value for implementation services as supported by the activity of third-party resellers and other vendors that performed certain implementation services. The Company has observed that third party implementation activity has continued to decrease over time and at the same time, the Company has invested in proprietary applications and processes that impact implementation activities. The Company determined that from July 1, 2018 forward it no longer had a sufficient basis to establish standalone value of implementations for its proprietary products due to the culmination of the changes to the Company’s applications and processes that eliminated the ability of third parties to perform implementation services. Similarly, the Company determined that these implementation services are not a separate performance obligation under Topic 606 for contracts entered into after July 1, 2018 and the associated implementation fees are treated as nonrefundable upfront fees which are deferred and amortized over a period of time instead of recognized upon completion. The Company recognized $2,191, net of deferred taxes, of contract assets for implementation fees related to open contracts as of July 1, 2018 which began when the Company was still able to establish stand-alone value for

9


 

implementation activities.  This adjustment was recorded through retained earnings (accumulated deficit) in the statement of changes in stockholder’s equity upon adoption on July 1, 2018.

 

The Company also finalized the treatment of costs of obtaining and fulfilling a new contract under the new standard. The Company is now required to defer these costs and amortize them over the expected period of benefit, which it has determined to be 7 years. The Company recognized the cumulative effect related to the deferral of the costs of obtaining new contracts of $50,481, net of deferred taxes, which was recorded through retained earnings (accumulated deficit) in the statement of changes in stockholder’s equity upon adoption on July 1, 2018.

 

The cumulative effect of the changes made to the July 1, 2018 balance sheet due to the adoption of Topic 606 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

As Reported

 

Adjustments

 

Balances at

 

 

June 30, 2018

 

due to Topic 606

 

July 1, 2018

Balance Sheet

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Deferred contract costs

 

$

 —

 

$

14,783

 

$

14,783

Prepaid expenses and other

 

 

11,248

 

 

1,730

 

 

12,978

Long-term deferred contract costs

 

 

 —

 

 

53,324

 

 

53,324

Long-term prepaid expenses and other

 

 

1,504

 

 

1,226

 

 

2,730

Deferred income tax assets, net

 

 

22,140

 

 

(18,391)

 

 

3,749

Stockholders' Equity

 

 

 

 

 

 

 

 

 

Retained earnings (accumulated deficit)

 

 

(6,678)

 

 

52,672

 

 

45,994

 

The following table summarizes the impact from the adoption of Topic 606 on the Company’s unaudited consolidated statement of operations and comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

As Reported

 

Balances under

 

Impact from

 

 

(Topic 606)

 

ASC 605

 

Adoption

Statement of Operations

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Recurring fees

 

$

95,761

 

$

96,197

 

$

(436)

Implementation services and other

 

 

1,241

 

 

800

 

 

441

Cost of Revenues

 

 

 

 

 

 

 

 

 

Implementation services and other

 

 

6,711

 

 

11,956

 

 

(5,245)

Operating expenses

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

26,418

 

 

28,209

 

 

(1,791)

General and administrative

 

 

22,968

 

 

23,101

 

 

(133)

Income tax expense (benefit)

 

 

(5,807)

 

 

(7,664)

 

 

1,857

Net income

 

 

9,852

 

 

4,535

 

 

5,317

 

10


 

The following table summarizes the impact from the adoption of Topic 606 on the Company’s unaudited consolidated balance sheet:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

As Reported

 

Balances under

 

Impact from

 

 

(Topic 606)

 

ASC 605

 

Adoption

Balance Sheet

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Deferred contract costs

 

$

16,215

 

$

 —

 

$

16,215

Prepaid expenses and other

 

 

14,220

 

 

12,506

 

 

1,714

Long-term deferred contract costs

 

 

59,061

 

 

 —

 

 

59,061

Long-term prepaid expenses and other

 

 

3,132

 

 

2,326

 

 

806

Deferred income tax assets, net

 

 

9,554

 

 

29,802

 

 

(20,248)

Liabilities

 

 

 

 

 

 

 

 

 

Accrued expenses

 

 

35,678

 

 

34,479

 

 

1,199

Other long-term liabilities

 

 

1,424

 

 

3,064

 

 

(1,640)

Stockholders' Equity

 

 

 

 

 

 

 

 

 

Retained earnings (accumulated deficit)

 

 

55,846

 

 

(2,143)

 

 

57,989

 

The following table summarizes the impact from the adoption of Topic 606 on the Company’s unaudited consolidated statement of cash flows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

As Reported

 

Balances under

 

Impact from

 

 

(Topic 606)

 

ASC 605

 

Adoption

Statement of Cash Flows

 

 

 

 

 

 

 

 

 

Net income

 

$

9,852

 

$

4,535

 

$

5,317

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

 

 

 

 

 

 

 

 

 

Deferred income tax expense (benefit)

 

 

(5,809)

 

 

(7,666)

 

 

1,857

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Deferred contract costs

 

 

(7,169)

 

 

 —

 

 

(7,169)

Prepaid expenses and other

 

 

(853)

 

 

(1,289)

 

 

436

Accrued expenses

 

 

(6,214)

 

 

(5,773)

 

 

(441)

Net cash provided by operating activities

 

 

7,344

 

 

7,344

 

 

 —

 

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) (“ASU 2018-05”) which incorporates the SEC’s Staff Accounting Bulletin 118 (“SAB 118”) issued on December 22, 2017. SAB 118 provides for a provisional measurement period for entities to finalize their accounting for certain income tax effects related to the Tax Cuts and Jobs Act (the “Act”), not to exceed one year from enactment of the new tax law. Entities are permitted to utilize reasonable estimates until they have finished analyzing the effects of the Act. The Company recognized provisional income tax effects of the Act during fiscal 2018 in accordance with SAB 118, and expects to complete its accounting under the Act by the end of December 2018. Refer to Note 8 for additional information.

 

(f)  Recently Issued Accounting Standards

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) which amends various aspects of existing guidance for leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease with terms greater than twelve months, along with additional qualitative and quantitative disclosures. ASU 2016-02 also requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented. In March 2018, the FASB affirmed its proposed guidance by issuing ASU 2018-01, Leases (Topic 842): Targeted Improvements, which provides an additional transition method allowing an entity to apply the new lease accounting and disclosure requirements only for the year of adoption with the comparative periods continuing to be in accordance with current GAAP. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases (Topic 842): Targeted Improvements to amend and clarify the original guidance established in the new lease standard. ASU 2016-02, including all of its amendments, is effective for fiscal years

11


 

beginning after December 15, 2018, with early adoption permitted. While the Company is still assessing the impact of the new standard, it expects the adoption of this standard will have a material effect on its consolidated balance sheets. The Company is evaluating the transition methods and will adopt this new standard in its fiscal year beginning July 1, 2019.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends the requirements for fair value measurement disclosures. ASU 2018-13 removes, modifies or adds certain disclosure requirements under GAAP. This standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Any new disclosure requirements must be applied on a prospective basis in the interim and annual periods of initial adoption; all removed or modified requirements must be applied retrospectively to all periods presented. The Company is assessing the impact of ASU 2018-13 including the timing and method of adoption.

 

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

 

 

 

(3)  Balance Sheet Information

 

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

 

Activity in the allowance for doubtful accounts was as follows:

 

 

 

 

 

 

Balance at June 30, 2018

    

$

375

 

Charged to expense

 

 

30

 

Write-offs

 

 

(29)

 

Balance at September 30, 2018

 

$

376

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

September 30, 

 

 

    

2018

    

2018

 

Capitalized internal-use software

 

$

67,678

 

$

72,830

 

Accumulated amortization

 

 

(46,584)

 

 

(50,796)

 

Capitalized internal-use software, net

 

$

21,094

 

$

22,034

 

 

Amortization of capitalized internal-use software costs is included in Cost of Revenues-Recurring Revenues and amounted to $3,389 and $4,212 for the three months ended September 30, 2017 and 2018, respectively.

 

Property and equipment, net consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

September 30, 

 

 

    

2018

    

2018

 

Office equipment

 

$

3,743

 

$

3,965

 

Computer equipment

 

 

29,768

 

 

31,239

 

Furniture and fixtures

 

 

10,382

 

 

10,274

 

Software

 

 

5,965

 

 

6,181

 

Leasehold improvements

 

 

36,366

 

 

36,910

 

Time clocks rented by clients

 

 

4,534

 

 

4,508

 

Total

 

 

90,758

 

 

93,077

 

Accumulated depreciation

 

 

(28,729)

 

 

(31,254)

 

Property and equipment, net

 

$

62,029

 

$

61,823

 

 

Depreciation expense amounted to $2,925 and $3,457 for the three months ended September 30, 2017 and 2018, respectively.

12


 

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

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

 

 

June 30, 

 

September 30, 

 

Useful

 

 

    

2018

    

2018

    

Life

 

Client relationships

 

$

18,130

 

$

18,130

 

7 - 9 years

 

Non-solicitation agreements

 

 

600

 

 

600

 

2 - 4 years

 

Total

 

 

18,730

 

 

18,730

 

 

 

Accumulated amortization

 

 

(5,728)

 

 

(6,291)

 

 

 

Intangible assets, net

 

$

13,002

 

$

12,439

 

 

 

 

Amortization expense for acquired intangible assets was $359 and $563 for the three months ended September 30, 2017 and 2018, respectively.

 

Future amortization expense for acquired intangible assets is as follows, as of September 30, 2018:

 

 

 

 

 

 

 

Remainder of fiscal 2019

    

$

1,688

 

Fiscal 2020

 

 

2,251

 

Fiscal 2021

 

 

2,251

 

Fiscal 2022

 

 

2,232

 

Fiscal 2023

 

 

2,118

 

Thereafter

 

 

1,899

 

Total

 

$

12,439

 

 

The components of accrued expenses were as follows:

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

September 30, 

 

 

    

2018

    

2018

 

Accrued payroll and personnel costs

 

$

31,206

 

$

21,883

 

Lease exit obligations