PAYCOR HCM, INC. The following discussion and analysis summarizes the significant factors affecting the unaudited condensed consolidated operating results, financial condition, liquidity, and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this report as well as management's discussion and analysis and audited consolidated financial statements for the year endedJune 30, 2021 included in our most recent Annual Report on Form 10-K. This discussion and analysis reflects our historical results of operations and financial position. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements because of various factors, including those discussed below and elsewhere in this report, particularly Item 1A. "Risk Factors" and "Note Regarding Forward-Looking Statements." Unless we state otherwise or the context otherwise requires, the terms "we," "us," "our," and "Paycor" and similar references refer to the Company and its consolidated subsidiaries. Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q, including the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Risk Factors," contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, our objectives for future operations, and any statements of a general economic or industry specific nature, are forward-looking statements. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Words such as "anticipate," "estimate," "expect," "project," "plan," "intend," "believe," "may," "will," "should," "can have," "likely," "outlook," "potential," "targets," "contemplates," or the negative or plural of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe, based on information currently available to our management, may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, related to our operations, financial results, financial condition, business, prospects, growth strategy, and liquidity. Accordingly there are, or will be, important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to: •Our ability to manage our growth effectively. •The expansion and retention of our direct sales force with qualified and productive persons and the related effects on the growth of our business. •The impact on customer expansion and retention if implementation, user experience, customer service, or performance relating to our solutions is not satisfactory. •Our ability to innovate and deliver high-quality, technologically advanced products and services. •Our relationships with third parties. •The proper operation of our software. •Future acquisitions of other companies' businesses, technologies, or customer portfolios. •The continued service of our key executives. •Our ability to attract and retain qualified personnel, including software developers and skilled IT, sales, marketing, and operation personnel. •Payments made to employees and taxing authorities due for a payroll period before a customer's electronic funds transfers are settled to our account. •The potential breach of our security measures and the unauthorized access to our customers' or their employees' personal data and the resulting effects thereof which may include lawsuits, fines, or other regulatory action, significant costs related to remediation, negative perceptions regarding the security of our solutions, and reduction or cessation of customers' use of our solutions. 25 -------------------------------------------------------------------------------- •Damage, failure, or disruption of our Software-as-a-Service ("SaaS") delivery model, data centers, or our third-party providers' services. •Our ability to protect our intellectual and proprietary rights. •The use of open source software in our applications. •The growth of the market for cloud-based human capital management and payroll software among small and medium- sized businesses ("SMBs"). •The competitiveness of our market generally. •The impact of the COVID-19 pandemic. •Our customers' dependence on our solutions to comply with applicable laws. •Changes in laws, regulations, or requirements applicable to our software and services. •The impact of privacy, data protection, tax and other laws and regulations. •Our ability to maintain effective internal controls over financial reporting. •The other risk factors set forth under Item 1A of Part I of the Annual Report on Form 10-K, filed with theSEC onSeptember 2, 2021 . Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations and assumptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We undertake no obligation to publicly update any forward-looking statement after the date of this report, whether as a result of new information, future developments or otherwise, or to conform these statements to actual results or revised expectations, except as may be required by law.
Overview
We are a leading SaaS provider of human capital management solutions for small and medium-sized businesses. Our unified, cloud-native platform is built to empower business leaders by producing actionable, real-time insights to drive workforce optimization. Our comprehensive suite of solutions enables organizations to streamline administrative workflows and achieve regulatory compliance while serving as the single, secure system of record for all employee data. Our highly flexible, scalable, and extensible platform is augmented by industry-specific domain expertise and offers award-winning ease-of-use with an intuitive user experience and deep third-party integrations. Over 29,000 customers across all 50 states trustPaycor to help their leaders develop winning teams.
Our Business Model
Our revenue is almost entirely recurring in nature and largely attributable to
the sale of SaaS subscriptions to our cloud-native HCM software platform. We
typically generate revenue from customers on a per-employee-per-month ("PEPM")
basis whereby our revenue is derived from the number of employees of a given
customer, and the amount, type, and timing of products provided to a customer
with respect to their employees. As a result, we increase our recurring revenue
as we add more customers, and as our customers add more employees and purchase
more product modules. Our highly recurring revenue model provides significant
visibility into our future operating results. Recurring and other revenues are
primarily revenues derived from the provision of our payroll, workforce
management, HR-related cloud-based computing services and nonrefundable
implementation fees, which represented over 99% of total revenue for the three
and six months ended December 31, 2021 . In addition, we earn interest income on
funds held for clients.
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We have developed a robust organic sales and marketing engine and broad referral
network of insurance and retirement benefits brokers. We market and sell our
solutions through a direct sales force, which is organized into field and inside
sales teams based on customer size, geography, and industry. Our highly
efficient and multi-pronged go-to-market strategy is a key driver of our growth.
The table below sets forth selected results of operations for the three and six
months ended
Three Months Ended Six Months Ended
December 31, December 31,
(in thousands) 2021 2020 2021 2020
Total Revenue $ 103,067 $ 85,864 $ 195,799 $ 164,925
Loss from Operations $ (33,764) $ (20,892) $ (86,033) $ (42,359)
Operating Margin (32.8) % (24.3) % (43.9) % (25.7) %
Adjusted Operating Income* $ 10,259 $ 13,495 $ 13,651 $ 26,171
Adjusted Operating Income Margin* 10.0 % 15.7 % 7.0 % 15.9 %
Net Loss $ (25,464) $ (16,817) $ (67,500) $ (34,149)
*Adjusted Operating Income and Adjusted Operating Income Margin are non-U.S.
GAAP ("non-GAAP") financial measures. See Non-GAAP Financial Measures below for
a definition of our non-GAAP measures and reconciliations to the most closely
comparable U.S. GAAP measures.
COVID-19 Pandemic Impact
Many of our prospective and existing customers' businesses have been impacted by the COVID-19 pandemic and related economic impacts, stay-at-home, business closure, and other restrictive orders, which have resulted in reduced customer employee headcount, temporary and permanent business closures, and/or delayed sales/starts. Because we charge our customers on a per-employee basis for certain services we provide, decreases in headcount of our customers as a result of the pandemic negatively impacted our recurring revenue beginning in our fiscal third quarter of 2020. As of the beginning ofMarch 2020 , our customers had approximately 1.9 million customer employees on our platform and we saw a 7% decline throughApril 18, 2020 , which was the lowest point since the beginning of the COVID-19 pandemic. Furthermore, while the number of employees on our platform declined 7%, our number of customers was effectively unchanged over this period. Since then, the number of our customers' employees on our platform has recovered rapidly. As ofDecember 31, 2021 , our existing customers that were active at the beginning ofMarch 2020 had fully regained their lost employees. We have not experienced any material disruptions in our ability to operate our business during the pandemic as our business model enables us to service our clients remotely. We have been able to continue our implementation efforts and our sales team has shifted from in-person meetings with prospective and existing clients to engaging with them virtually, when necessary. Our teams have also quickly mobilized to analyze the various state and federal legislative changes enacted by the government in response to the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security ("CARES") Act and added automated functionality and reporting to our systems for our customers. Despite the economic challenges driven by the pandemic, we remain confident in the overall health of our business, the strength of our product offerings, and our ability to continue to execute on our strategy. The COVID-19 pandemic continues to impact the global economy. The duration and severity of the COVID-19 pandemic, and the long-term effects the pandemic will have on our customers, our operations and general economic conditions, remain uncertain and difficult to predict. Our business and financial performance may continue to be unfavorably impacted in future periods if a significant number of our customers are unable to continue as viable businesses or if they significantly reduce headcount, there is a reduction in business confidence and activity, a decrease in government and consumer spending, a decrease in HCM and payroll solutions spending by SMBs, a decrease in growth in the overall market, among other factors. We remain concerned that the recent resurgence of the virus, in the form of the Delta and Omicron variants, could have a negative impact on our business and results of operations, as could the emergence of additional variants of the virus in the future, effectiveness and acceptance of vaccines and other factors. Therefore, the COVID-19 pandemic may continue to have an unfavorable impact on the growth in both recurring and other revenue and interest income on funds held for clients in future periods for so long as such conditions persist. 27 --------------------------------------------------------------------------------
Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:
Expand Our Sales Footprint to Add New Customers
Our current customer base represents a small portion of the U.S. market for HCM and payroll solutions. We believe there is substantial opportunity to continue to broaden our customer base, particularly in the 15 most populous metropolitan statistical areas inthe United States (i.e. Tier 1 markets), by expanding our sales footprint. Our ability to do so will depend on several factors, including the effectiveness of our products, the relative pricing of our products, our competitors' offerings, and the effectiveness of our marketing efforts. As ofDecember 31, 2021 and 2020, we had approximately 29,000 and 27,900 customers, respectively, representing a period-over-period increase of 3.9%. We define a customer as a parent company grouping, which may include multiple subsidiary client accounts with separate taxpayer identification numbers. We track client accounts as it provides an alternative measure of the scale of our business and customers. In addition, we are also focused on expanding our broker referral relationships to drive the acquisition of new customers. Insurance and benefits brokers are trusted advisors to SMBs and are influential in the HCM selection process.
Increase Product Penetration with Existing and New Customers
In recent years we have increasingly focused our product pricing strategy away from sales of individual products and solutions towards a simplified bundled pricing approach whereby we market multi-product offerings to our customers. We believe that this strategy addresses a key need for SMB customers, while also allowing us to better serve the needs of business leaders through a more comprehensive product suite. This strategy has enabled us to effectively drive increased product penetration and PEPM growth at the initial point of sale, as well as stronger retention. We define "effective PEPM," as recurring and other revenue for the period divided by the average number of customer employees, which we calculate as the sum of the number of customer employees at the end of each month over the period divided by the total number of months in the period. We intend to advance this strategy by progressively expanding the breadth of features included in our core HCM product bundle. Additionally, apart from our sales to new customers, there is a substantial opportunity within our existing customer base to cross-sell additional products from our portfolio, including Workforce Management,Benefits Administration , Employee Experience and Talent Management.
Our ability to successfully increase revenue per customer is dependent upon several factors, including the number of paid employees working for our customers, the number of products purchased by each of our customers, our customers' satisfaction with our solutions and support, and our ability to add new products to our suite.
We believe our ability to retain and expand our existing customers' spending on our solutions is evidenced by our net revenue retention. We define net revenue retention as the current quarterly period recurring revenue for the cohort of customers at the beginning of the prior year quarterly period, divided by the recurring revenue in the prior year reporting period for that same cohort. In calculating the net revenue retention for a period longer than a quarter, such as a fiscal year, we use the weighted average of the retention rates (calculated in accordance with the preceding sentence) for each applicable quarter included in such period.Paycor HCM's net revenue retention remained steady over last quarter as we continue to approach pre-pandemic levels. It had been negatively impacted during the pandemic by stay-at-home, business closure and other restrictive orders, which resulted in reduced employee headcount, temporary and permanent business closures, and delayed sales and starts with many of our customers. 28
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Ongoing Product Innovation and Optimization
We believe that our product features and functionality are key differentiators of our offerings. We intend to continue to invest in research and development, particularly regarding the functionality of our platform, to sustain and advance our product leadership. For instance, in 2019 we released our data analytics and scheduling products, in 2020 we released our compensation management product, and in 2021 we launched on-demand pay and our talent management product, which includes performance management, one-on-one coaching and objectives and key result functionality. As a result of these and other product launches, the total list PEPM for our full suite of products continues to increase. Our ability to innovate and introduce competitive new products is dependent on our ability to recruit and retain top technical talent and invest in research and development initiatives.
Components of Results of Operations
Factors Affecting the Comparability of our Results of Operations
IPO-Related Expenses
As a result of ourJuly 2021 Initial Public Offering ("IPO"), we incurred transaction-related expenses. These expenses include transaction bonuses, share-based compensation expense associated with two Long Term Incentive Plans ("LTIPs") and outstanding performance awards under ourPride Aggregator, L.P. Management Equity Plan ("MEP"), and expenses related to the redemption of the Series A Redeemable Preferred Stock. The specifics of the LTIPs, MEP and Series A Redeemable Preferred Stock are presented below. We granted Long Term Incentive Plan units ("LTIP Units") under ourPride Aggregator, L.P. Top Talent Incentive Plan and Sales Equity Incentive Plan. The LTIP Units provided for, at our discretion, a cash or stock payment ("LTIP Payment") to participants on certain determination dates, if an IPO occurred and if the LTIP participant remained employed with us on such date. OurJuly 2021 IPO resulted in a determination date, for which each LTIP participant is entitled to an LTIP Payment with respect to 20% of the LTIP participant's LTIP Units as of the IPO date and 20% on each of four subsequent payment dates that are six, twelve, eighteen and 24 months following the IPO date. As a result of our IPO, the LTIP Units converted into the entitlement to receive a fixed number of shares of common stock, based on the IPO price. We settled such entitlements by issuing restricted stock units, which will vest on the applicable payment dates and we will recognize approximately$47.6 million of compensation expense over the requisite service period relating to the LTIP Units. Under the terms of the MEP, one-half of the profits interest units vest based on an associate's service time. The time-vesting units vest 25% on the first anniversary after the vesting commencement date and thereafter in twelve equal installments on each subsequent quarterly anniversary of the vesting commencement date, with 100% vesting of the time-vesting units occurring on the fourth anniversary of the vesting commencement date. MEP incentive units are subject to a floor amount established at the grant date, which acts as a participation threshold and permits the award to participate in distributions only to the extent the distribution amount for the units exceed the floor amount. The MEP incentive time-vesting units are accounted for as equity awards and the compensation expense calculated based upon the fair market value of the MEP incentive units at the grant date is recognized as the incentive units vest. We estimated the fair value of the MEP incentive units using the Monte Carlo simulation method. As ofDecember 31, 2021 , there was approximately$5.7 million of unrecognized compensation expense associated with unvested time-based unit awards. The unrecognized compensation expense associated with unvested time-based MEP incentive unit awards outstanding atDecember 31, 2021 will be recognized over a weighted average period of 1.7 years fromDecember 31, 2021 . Vesting for the second half of the MEP incentive units is established based on our performance relative to Apax's original invested amount, with the performance calculations defined in the plan, triggered by our IPO (implied performance condition). As a result of ourJuly 2021 IPO, and due to an election by Apax, the performance-vesting incentive units converted to time-based vesting units, with 25% vesting upon successive six month anniversary dates for the 24 months beginning on the date of the IPO. The conversion was treated as a modification for accounting purposes, and accordingly, we estimated fair value as of the modification date. 29 -------------------------------------------------------------------------------- The modified MEP incentive awards are accounted for as equity awards and the compensation expense calculated based upon the fair value of the modified MEP incentive awards at the modification date is recognized as the incentive units vest. We estimate the fair value of the modified MEP incentive awards based upon the IPO price adjusted for a floor amount established at the grant date and other liquidation preferences in accordance with the terms of the MEP. As ofDecember 31, 2021 , there was approximately$39.8 million of unrecognized compensation expense associated with unvested modified MEP incentive awards. The unrecognized compensation expense associated with the unvested modified MEP incentive units outstanding atDecember 31, 2021 will be recognized over a weighted average period of 1.6 years fromDecember 31, 2021 . In connection withApax Partners L.P.'s acquisition of us,Pride Midco, Inc. , a direct subsidiary ofPaycor HCM, Inc. , issued$200 million in aggregate initial liquidation preference of the Series A Redeemable Preferred Stock. The Series A Redeemable Preferred Stock accrued dividends at a rate of LIBOR plus 8.875%. The dividends were payable, or compounded, quarterly onMarch 31 ,June 30 ,September 30 andDecember 31 of each year. From the issue date throughNovember 2, 2020 , dividends were accrued and added to the then-prevailing liquidation preference of the Series A Redeemable Preferred Stock. FromNovember 2, 2020 through the redemption date, we were required to pay 50% of the accrued dividends in cash. The shares of Series A Redeemable Preferred Stock were accounted for as a redeemable noncontrolling interest in the mezzanine section of our condensed consolidated balance sheet and were accreted using the effective interest method to the redemption value through the net income attributable to redeemable noncontrolling interest line within our unaudited condensed consolidated statement of operations. We redeemed the Series A Redeemable Preferred Stock in connection with, and using proceeds from, ourJuly 2021 IPO. The redemption price per share was equal to 101% of the liquidation preference, plus accrued and unpaid dividends to the redemption date, or approximately$260.0 million . Basis of Presentation Revenues Recurring and Other Revenue We derive our revenue from contractual agreements, which contain recurring and non-recurring service fees. The majority of our contracts are cancellable by the customer on 30 days' notice. We recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration that we are entitled to for those goods or services. Recurring revenue consists primarily of revenues derived from the provision of our payroll, workforce management, and HR-related cloud-based computing services. The performance obligations related to recurring services are generally satisfied monthly as services are provided, with fees charged and collected based on a PEPM or per-employee-per-payroll basis. Recurring revenue is generally recognized as the services are provided during each client's payroll period. Other revenue and non-recurring services fees consist mainly of nonrefundable implementation fees, which involve onboarding and configuring the customer within our cloud-based platform. These nonrefundable implementation fees provide certain clients with a material right to renew the contract, with revenue deferred and recognized over the period to which the material right exists. This is generally a period of 24 months from finalization of onboarding, which typically concludes within three to six months of the original booking. Deferred revenue also includes an immaterial portion related to recurring subscription services where revenue is recognized over the subscription period. Deferred revenue for these nonrefundable upfront fees and recurring subscription services were$15.3 million as ofDecember 31, 2021 , with$5.3 million and$10.1 million of revenue recognized for the three and six months endedDecember 31, 2021 , respectively. Deferred revenue for these nonrefundable upfront fees and recurring subscription services were$16.7 million as ofDecember 31, 2020 , with$3.8 million and$6.6 million of revenue recognized for the three and six months endedDecember 31, 2020 , respectively. We defer certain commission costs that meet the capitalization criteria. We also capitalize certain costs to fulfill a contract related to our proprietary products if they are identifiable, generate or enhance resources used to satisfy future performance obligations and are expected to be recovered. We utilize the portfolio approach to account for both the cost of obtaining a contract and the cost of fulfilling a contract. 30 -------------------------------------------------------------------------------- Capitalized costs to fulfill a contract and cost to obtain a contract are amortized over the expected period of benefit, which is generally six years based on our average client life and other qualitative factors, including rate of technological changes. We do not incur any additional costs to obtain or fulfill contracts upon renewal. We recognize additional selling and commission costs and fulfillment costs when an existing client purchases additional services. The additional costs only relate to the additional services purchased and do not relate to the renewal of previous services. We continue to expense certain costs to obtain a contract and cost to fulfill a contract if those costs do not meet the capitalization criteria.
We expect recurring and other revenue to increase as we continue to add new customers and sell additional products to our existing customers.
Interest Income on Funds Held for Clients
We earn interest income on funds held for clients. We collect funds for employee payroll payments and related taxes in advance of remittance to employees and taxing authorities. Prior to remittance to employees and taxing authorities, we earn interest on these funds through demand deposit accounts with financial institutions with which we have automated clearing house arrangements. We also earn interest by investing a portion of funds held for clients in highly liquid, investment-grade marketable securities. We expect funds held for our clients to generally grow as the employees per customer increase and as we add customers. Interest income on funds held for clients will fluctuate based on market rates of demand deposit accounts, as well as the highly liquid, investment-grade marketable securities in which we invest the client funds.
Cost of Revenues
Cost of revenues includes costs relating to the provision of ongoing customer support and implementation activities, payroll tax filing, distribution of printed checks and other materials providing our payroll and other HCM solutions. These costs primarily consist of employee-related expenses for associates who service customers, as well as third-party processing fees, delivery costs, hosting costs, and bank fees associated with client fund transfers. Costs for recurring support are generally expensed as incurred, while such costs for onboarding and configuring our products for our customers are capitalized and amortized over a period of six years. We amortized$4.1 million and$2.5 million of capitalized contract fulfillment costs during the three months endedDecember 31, 2021 and 2020, respectively, and$7.7 million and$4.6 million of capitalized contract fulfillment costs during the six months endedDecember 31, 2021 and 2020, respectively. We expect to realize increased amortization in future periods as the total capitalized contract fulfillment costs on our balance sheet increases. We also capitalize a portion of our internal-use software costs including external direct costs of materials and services associated with developing or obtaining internal-use software and certain payroll and payroll-related costs for associates who are directly associated with internal-use software projects, which are then generally amortized over a period of three years into cost of revenues. We amortized$10.2 million and$14.8 million of capitalized internal-use and acquired software costs during the three months endedDecember 31, 2021 and 2020, respectively, and$26.8 million and$28.5 million of capitalized internal-use and acquired software costs during the six months endedDecember 31, 2021 and 2020, respectively.
Our cost of revenues is expected to increase in absolute dollars as we expand our customer base. However, in the long-term we expect cost of revenues to reduce as a percentage of total revenues as our business scales.
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of employee-related expenses for our direct sales and marketing staff, marketing, advertising and promotion expenses, and other related costs. We capitalize certain commission costs related to new contracts or purchases of additional services by our existing customers and amortize such items over a period of six years. We amortized$3.4 million and$2.1 million of capitalized contract acquisition costs during the three months endedDecember 31, 2021 and 2020, respectively, and$6.4 million and$3.9 million of capitalized contract acquisition costs during the six months endedDecember 31, 2021 and 2020, respectively. We expect to realize increased amortization in future periods as the total capitalized contract acquisition costs on our balance sheet increases. 31 -------------------------------------------------------------------------------- We seek to grow our number of new customers and upsell existing customers, and therefore our sales and marketing expense is expected to continue to increase in absolute dollars as we grow our sales organization and expand our marketing activities.
General and Administrative
General and administrative expenses consist primarily of employee-related costs for our administrative, finance, accounting, legal and human resources departments. Additional expenses include consulting and professional fees, occupancy costs, insurance, and other corporate expenses.
We amortized$20.5 million and$19.5 million of intangible assets, excluding acquired software amortized through cost of revenues, during the three months endedDecember 31, 2021 and 2020, respectively, and$40.8 million and$39.1 million of intangible assets, excluding acquired software amortized through cost of revenues, during the six months endedDecember 31, 2021 and 2020, respectively. The increase in amortization expense in the three and six months endedDecember 31, 2021 is attributable to our asset acquisition inFebruary 2021 .
We expect our general and administrative expenses to increase in absolute dollars as we grow and scale our business.
Research and Development
Research and development expenses consist primarily of employee-related expenses
for our software development and product management staff. Additional expenses
include costs related to the development, maintenance, quality assurance and
testing of new technologies, and ongoing refinement of our existing solutions.
Research and development expenses, other than internal-use software costs
qualifying for capitalization, including costs associated with preliminary
project stage activities, training, maintenance, and all other
post-implementation stage activities are expensed as incurred.
We capitalize a portion of our development costs related to internal-use
software, which are amortized over a period of three years into cost of
revenues. The timing of our capitalized development projects may affect the
amount of development costs expensed in any given period. The table below sets
forth the amounts of capitalized and expensed research and development costs for
the following periods:
Three Months Ended Six Months Ended
December 31, December 31,
(in thousands) 2021 2020 2021 2020
Capitalized software $ 6,437 $ 4,415 $ 13,678 $ 9,432
Research and development expenses $ 10,605 $ 9,390 $ 20,796 We expect to increase our research and development expenses in absolute dollars as we continue to broaden our product offerings and extend our technological leadership by investing in the development of new technologies and introducing them to new and existing customers.
Interest Expense
Interest expense consists primarily of interest payments and accruals relating to outstanding borrowings. We expect interest expense to vary each reporting period depending on the amount of outstanding borrowings and prevailing interest rates. Other Income (Expense)
Other income (expense) generally consists of other income and expense items outside of our normal operations, such as realized gains or losses on the sale of certain positions of funds held for clients, gains or losses on the extinguishment of debt and expenses relating to our financing arrangements.
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The following table sets forth our unaudited condensed consolidated statement of operations for the periods indicated.
Three Months Ended Six Months Ended
December 31, December 31, December 31, December 31,
(in thousands) 2021 2020 2021 2020
Consolidated Statement of Operations Data:
Revenues:
Recurring and other revenue $ 102,729 $ 85,416 $ 195,145 $ 163,967
Interest income on funds held for clients 338 448 654 958
Total revenues 103,067 85,864 195,799 164,925
Cost of revenues 41,082 36,833 86,693 71,317
Gross profit 61,985 49,031 109,106 93,608
Operating expenses:
Sales and marketing 40,682 25,477 86,470 49,820
General and administrative 44,462 35,056 87,873 68,473
Research and development 10,605 9,390 20,796 17,674
Total operating expenses 95,749 69,923 195,139 135,967
Loss from operations (33,764) (20,892) (86,033) (42,359)
Interest expense (112) (673) (347) (1,159)
Other income 328 44 1,552 240
Loss before benefit for income taxes (33,548) (21,521) (84,828) (43,278)
Income tax benefit (8,084) (4,704) (17,328) (9,129)
Net loss $ (25,464) $ (16,817) $ (67,500) $ (34,149)
Comparison of the Three Months Ended December 31, 2021 and December 31, 2020
Revenues
Three Months Ended
December 31,
(in thousands) December 31, 2021 2020 $ Change % Change
Revenues:
Recurring and other revenue $ 102,729 $ 85,416 $ 17,313 20 %
Interest income on funds held for
clients 338 448 (110) (25) %
Total revenues $ 103,067 $ 85,864 $ 17,203 20 %
Total revenue for the three months ended December 31, 2021 and 2020 was $103.1
million and $85.9 million , respectively. In the three months ended December 31,
2021 and 2020, recurring and other revenue accounted for $102.7 million and
$85.4 million , respectively. Additionally, interest income on funds held for
clients accounted for $0.3 million and $0.4 million , respectively, for the three
months ended December 31, 2021 and 2020. Total revenues increased primarily as a
result of a 3.9% increase in customers to approximately 29,000 at December 31,
2021 from approximately 27,900 at December 31, 2020 , an increase in effective
PEPM, and an increase in the average number of employees per customer, which has
returned to a level similar to what we experienced prior to the beginning of the
COVID-19 pandemic.
Interest income on funds held for clients decreased primarily as a result of
lower average interest rates across our portfolio of debt-security investments.
The impact from the reduction in interest rates was partially offset by higher
average daily balances for funds held due to the addition of new customers.
Average client funds balance for the three months ended December 31, 2021 and
2020 were $932.8 million and $695.5 million , respectively.
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Cost of Revenues
Three Months Ended
(in thousands) December 31, 2021 December 31, 2020 $ Change % Change
Cost of revenues $ 41,082 $ 36,833 $ 4,249 12 %
Percentage of total revenues 40 % 43 %
Gross profit $ 61,985 $ 49,031 $ 12,954 26 %
Percentage of total revenues 60 % 57 %
Total cost of revenues for the three months ended December 31, 2021 and 2020
were $41.1 million and $36.8 million , respectively. Our total cost of revenues
increased primarily as a result of a $6.4 million increase in employee-related
costs, which includes $1.6 million of share-based compensation expense
associated with our IPO, to support new customers, a $2.3 million increase in
amortization expense relating to capitalized software, and a $1.6 million
increase in amortization of deferred contract costs, partially offset by a $6.9
million decrease in amortization expense relating to software acquired in
November 2018 upon Apax Partners L.P.'s acquisition of us fully amortizing
during the three months ended December 31, 2021 .
Operating Expenses
Sales and Marketing
Three Months Ended
(in thousands) December 31, 2021 December 31, 2020 $ Change % Change
Sales and marketing $ 40,682 $ 25,477 $ 15,205 60 %
Percentage of total revenues 39 % 30 %
Sales and marketing expenses for the three months ended December 31, 2021 and
2020 were $40.7 million and $25.5 million , respectively. The increase in sales
and marketing expense was primarily the result of a $13.0 million increase in
employee-related costs, which includes $7.5 million of share-based compensation
expense associated with our IPO, and $1.0 million in additional advertising
costs, both principally to expand our sales coverage, a $0.6 million increase in
professional services and a $0.4 million increase in travel and event related
expenses.
General and Administrative
Three Months Ended
(in thousands) December 31, 2021 December 31, 2020 $ Change % Change
General and administrative $ 44,462 $ 35,056 $ 9,406 27 %
Percentage of total revenues 43 % 41 %
General and administrative expenses for the three months ended December 31, 2021
and 2020 were $44.5 million and $35.1 million , respectively. The increase in
general and administrative expenses was primarily driven by a $6.4 million
increase in employee-related costs, which includes $5.2 million of share-based
compensation expense associated with our IPO, a $2.0 million increase in
professional services, consulting fees and other related costs primarily
associated with becoming a public company, and a $1.0 million increase in
intangible amortization expense primarily associated with our asset acquisition
completed in February 2021 , including the capitalization of subsequent earn out
payments.
34--------------------------------------------------------------------------------
Research and Development
Three Months Ended
(in thousands) December 31, 2021 December 31, 2020 $ Change % Change
Research and development $ 10,605 $ 9,390 $ 1,215 13 %
Percentage of total revenues 10 % 11 %
Research and development expenses for the three months ended December 31, 2021
and 2020 were $10.6 million and $9.4 million , respectively. The increase in
research and development expenses was primarily the result of a $1.1 million
increase in share-based compensation expense associated with our IPO, and a $0.4
million increase in licensing fees.
Interest Expense
Three Months Ended
December 31,
(in thousands) 2021 December 31, 2020 $ Change % Change
Interest expense $ 112 $ 673 $ (561) (83) %
Percentage of total revenues <1 % <1 %
Interest expense for the three months endedDecember 31, 2021 and 2020 was$0.1 million and$0.7 million , respectively. The decrease in interest expense was primarily the result of a decrease in outstanding borrowings.
Other income
Three Months Ended
(in thousands)
$ 44 $ 284 645 %
Other income for the three months ended
Income tax benefit
Income tax benefit for the three months endedDecember 31, 2021 and 2020 was$8.1 million and$4.7 million , respectively, reflecting effective tax rates for the periods of 24.1% and 21.9%, respectively. The increase in tax benefit was due to an increase in net loss and research and development tax credits.
Comparison of the Six Months Ended
Revenues
Six Months Ended
December 31, December 31,
(in thousands) 2021 2020 $ Change % Change
Revenues:
Recurring and other revenue $ 195,145 $ 163,967 $ 31,178 19 %
Interest income on funds held for
clients 654 958 (304) (32) %
Total revenues $ 195,799 $ 164,925 $ 30,874 19 %
35-------------------------------------------------------------------------------- Total revenue for the six months endedDecember 31, 2021 and 2020 was$195.8 million and$164.9 million , respectively. In the six months endedDecember 31, 2021 and 2020, recurring and other revenue accounted for$195.1 million and$164.0 million , respectively. Additionally, interest income on funds held for clients accounted for$0.7 million and$1.0 million , respectively, for the six months endedDecember 31, 2021 and 2020. Total revenues increased primarily as a result of a 3.9% increase in customers to approximately 29,000 atDecember 31, 2021 from approximately 27,900 atDecember 31, 2020 , an increase in effective PEPM, and an increase in the average number of employees per customer, which has returned to a level similar to what we experienced prior to the beginning of the COVID-19 pandemic. Interest income on funds held for clients decreased primarily as a result of lower average interest rates across our portfolio of debt-security investments. The impact from the reduction in interest rates was partially offset by higher average daily balances for funds held due to the addition of new customers. Average client funds balance for the six months endedDecember 31, 2021 and 2020 were$846.3 million and$646.9 million , respectively. Cost of Revenues Six Months Ended (in thousands) December 31, 2021 December 31, 2020 $ Change % Change Cost of revenues $ 86,693 $ 71,317$ 15,376 22 % Percentage of total revenues 44 % 43 % Gross profit$ 109,106 $ 93,608$ 15,498 17 % Percentage of total revenues 56 % 57 % Total cost of revenues for the six months endedDecember 31, 2021 and 2020 were$86.7 million and$71.3 million , respectively. Our total cost of revenues increased primarily as a result of a$13.6 million increase in employee-related costs, which includes$3.1 million of share-based compensation expense associated with our IPO, to support new customers, a$4.4 million increase in amortization expense relating to capitalized software, a$3.1 million increase in amortization of deferred contract costs, and a$0.4 million increase in professional services, partially offset by a$6.1 million decrease in amortization expense relating to software acquired inNovember 2018 uponApax Partners L.P.'s acquisition of us fully amortizing during the three months endedDecember 31, 2021 . Operating Expenses Sales and Marketing Six Months Ended (in thousands) December 31, 2021 December 31, 2020 $ Change % Change Sales and marketing $ 86,470 $ 49,820$ 36,650 74 % Percentage of total revenues 44 % 30 % Sales and marketing expenses for the six months endedDecember 31, 2021 and 2020 were$86.5 million and$49.8 million , respectively. The increase in sales and marketing expense was primarily the result of a$30.3 million increase in employee-related costs, which includes$20.6 million of share-based compensation expense associated with our IPO and$2.5 million in additional advertising costs, both principally to expand our sales coverage, a$1.1 million in professional services and a$2.3 million increase in travel and event related expenses. General and Administrative Six Months Ended (in thousands) December 31, 2021 December 31, 2020 $ Change % Change General and administrative $ 87,873 $ 68,473$ 19,400 28 % Percentage of total revenues 45 % 42 % 36
-------------------------------------------------------------------------------- General and administrative expenses for the six months endedDecember 31, 2021 and 2020 were$87.9 million and$68.5 million , respectively. The increase in general and administrative expenses was primarily driven by a$13.9 million increase in employee-related costs, which includes$9.2 million of share-based compensation expense associated with our IPO, a$3.2 million increase in professional services, consulting fees and other related costs primarily associated with becoming a public company and a$1.7 million increase in intangible amortization expense primarily associated with our asset acquisition completed inFebruary 2021 , including the capitalization of subsequent earn out payments. Research and Development Six Months Ended (in thousands) December 31, 2021 December 31, 2020 $ Change % Change Research and development $ 20,796 $ 17,674$ 3,122 18 % Percentage of total revenues 11 % 11 % Research and development expenses for the six months endedDecember 31, 2021 and 2020 were$20.8 million and$17.7 million , respectively. The increase in research and development expenses was primarily the result of a$2.6 million increase in share-based compensation expense associated with our IPO, and a$0.8 million increase in licensing fees. Interest Expense Six Months Ended December 31, (in thousands) December 31, 2021 2020 $ Change % Change Interest expense$ 347 $ 1,159 $ (812) (70) % Percentage of total revenues <1 %
<1 %
Interest expense for the six months endedDecember 31, 2021 and 2020 was$0.3 million and$1.2 million , respectively. The decrease in interest expense was primarily the result of a decrease in outstanding borrowings. Other income Six Months Ended (in thousands) December 31, 2021 December 31, 2020 $ Change % Change Other income$ 1,552 $ 240$ 1,312 547 % Other income for the six months endedDecember 31, 2021 and 2020 was$1.6 million and$0.2 million , respectively. Other income for the six months endedDecember 31, 2021 primarily consists of$1.4 million relating to the recognition of revenue deferred on an installment sale due to the receipt of the remaining proceeds. Income tax benefit Income tax benefit for the six months endedDecember 31, 2021 and 2020 was$17.3 million and$9.1 million , respectively, reflecting effective tax rates for the periods of 20.4% and 21.1%, respectively. The increase in tax benefit was due to an increase in net loss and research and development tax credits.
Non-GAAP Financial Measures
37
--------------------------------------------------------------------------------
In addition to our results determined in accordance with U.S. GAAP, we believe
the following non-GAAP measures are useful in evaluating our operating
performance. We believe that non-GAAP financial information, when taken
collectively, may be helpful to investors because it provides consistency and
comparability with past financial performance and assists in comparisons with
other companies, some of which use similar non-GAAP financial information to
supplement their U.S. GAAP results. The non-GAAP financial information is
presented for supplemental informational purposes only and should not be
considered a substitute for financial information presented in accordance with
U.S. GAAP and may be different from similarly titled non-GAAP measures used by
other companies. A reconciliation is provided below for each non-GAAP financial
measure to the most directly comparable financial measure stated in accordance
with U.S. GAAP. Investors are encouraged to review the related U.S. GAAP
financial measures and the reconciliation of these non-GAAP financial measures
to their most directly comparable U.S. GAAP financial measures.
Adjusted Gross Profit and Adjusted Gross Profit Margin
We define Adjusted Gross Profit as gross profit before amortization of intangible assets, stock-based compensation expenses, and certain corporate expenses, in each case that are included in costs of recurring revenues. We define Adjusted Gross Profit Margin as Adjusted Gross Profit divided by total revenues.
We use Adjusted Gross Profit and Adjusted Gross Profit Margin to understand and evaluate our core operating performance and trends. We believe these metrics are useful measures to us and to our investors to assist in evaluating our core operating performance because it provides consistency and direct comparability with our past financial performance and between fiscal periods, as the metrics eliminate the effects of variability of items such as stock-based compensation expense and amortization of intangible assets, which are non-cash expenses that may fluctuate for reasons unrelated to overall operating performance. Adjusted Gross Profit and Adjusted Gross Profit Margin have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported underU.S. GAAP and should not be considered as replacements for gross profit and gross profit margin, as determined byU.S. GAAP, or as measures of our profitability. We compensate for these limitations by relying primarily on ourU.S. GAAP results and using non-GAAP measures only for supplemental purposes. Adjusted Gross Profit was$68.7 million and$61.0 million , or 66.6% and 71.0% of total revenue, for the three months endedDecember 31, 2021 and 2020, respectively. Adjusted Gross Profit was$129.2 million and$116.7 million , or 66.0% and 70.8% of total revenue, for the six months endedDecember 31, 2021 and 2020, respectively. Adjusted Gross Profit increased for the three and six months endedDecember 31, 2021 , primarily driven by the increase in revenue from customer growth, partially offset by additional employee related costs to support new customers, amortization of capitalized software and amortization of costs to fulfill contracts within cost of revenues. Three Months Ended Six Months Ended December 31, December 31, December 31, December 31, (in thousands) 2021 2020 2021 2020 Gross Profit*$ 61,985 $ 49,031 $ 109,106 $ 93,608 Gross Profit Margin 60.1 % 57.1 % 55.7 % 56.8 % Amortization of intangible assets 4,862 11,722 16,584 22,691 Stock-based compensation expense 1,838 213 3,495 426 Adjusted Gross Profit*$ 68,685 $ 60,966 $ 129,185 $ 116,725 Adjusted Gross Profit Margin 66.6 % 71.0 % 66.0 % 70.8 % * Gross Profit and Adjusted Gross Profit are burdened by depreciation expense of$0.7 million and$0.5 million for the three months endedDecember 31, 2021 and 2020, respectively, and$1.4 million and$1.2 million for the six months endedDecember 31, 2021 and 2020, respectively. Gross Profit and Adjusted Gross Profit are burdened by amortization of capitalized software of$5.4 million and$3.1 million for the three months endedDecember 31, 2021 and 2020, respectively, and$10.2 million and$5.8 million for the six months endedDecember 31, 2021 and 2020, respectively. Gross Profit and Adjusted Gross Profit are burdened by amortization of deferred contract costs of$4.1 million and$2.5 million for the three months endedDecember 31, 2021 and 2020, respectively, and$7.7 million and$4.6 million for the six months endedDecember 31, 2021 and 2020, respectively. 38 --------------------------------------------------------------------------------
Adjusted Operating Income
We define Adjusted Operating Income as loss from operations before amortization of acquired intangible assets, stock-based award and liability incentive award compensation expenses, and other certain corporate expenses, such as costs related to acquisitions. We define Adjusted Operating Income Margin as Adjusted Operating Income divided by total revenues. We use Adjusted Operating Income and Adjusted Operating Income Margin to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short-term and long-term operating plans. We believe that Adjusted Operating Income and Adjusted Operating Income Margin facilitate comparison of our operating performance on a consistent basis between periods, and when viewed in combination with our results prepared in accordance withU.S. GAAP, help provide a broader picture of factors and trends affecting our results of operations. While the amortization expense relating to intangible assets is excluded from Adjusted Operating Income, the revenue related to such intangible assets is reflected in Adjusted Operating Income as these assets contribute to our revenue generation. Adjusted Operating Income and Adjusted Operating Income Margin have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported underU.S. GAAP. Because of these limitations, Adjusted Operating Income and Adjusted Operating Income Margin should not be considered as replacements for operating loss and operating loss margin, as determined byU.S. GAAP, or as measures of our profitability. We compensate for these limitations by relying primarily on ourU.S. GAAP results and using non-GAAP measures only for supplemental purposes. Adjusted Operating Income was$10.3 million and$13.5 million for the three months endedDecember 31, 2021 and 2020, respectively. Adjusted Operating Income was$13.7 million and$26.2 million for the six months endedDecember 31, 2021 and 2020, respectively. Adjusted Operating Income decreased for the three and six months endedDecember 31, 2021 , primarily driven by continued investment in employee-related costs to support new customers, expand our sales coverage, and develop our products, increased amortization related to capitalized software and deferred contract costs and costs associated with becoming a public company, partially offset by an increase in revenue. Three Months Ended Six Months Ended December 31, December 31, December 31, December 31, (in thousands) 2021 2020 2021 2020 Loss from Operations$ (33,764) $ (20,892) $ (86,033) $ (42,359) Operating Margin (32.8) % (24.3) % (43.9) % (25.7) % Amortization of intangible assets 25,362 31,267 57,412 61,771 Stock-based compensation expense 17,215 1,736 39,027 3,433 Liability incentive award compensation expense - 20 - 63 Corporate adjustments* 1,446 1,364 3,245 3,263 Adjusted Operating Income$ 10,259 $ 13,495 $ 13,651 $ 26,171 Adjusted Operating Income Margin 10.0 % 15.7 % 7.0 % 15.9 % * Corporate adjustments for the three and six months endedDecember 31, 2021 relate to certain restructuring costs of$0.2 million and$0.2 million , respectively, as well as costs associated with becoming a public company, including the implementation of a new enterprise-resource planning system and professional, consulting, and other costs of$0.2 million and$2.0 million , respectively, and costs associated with a secondary offering completed inOctober 2021 ("October 2021 Secondary Offering") of$1.0 million and$1.0 million , respectively. Corporate adjustments for the three and six months endedDecember 31, 2020 relate to certain transition costs of the new executive leadership team and closure of a standalone facility of$0.4 million and$1.0 million , respectively, as well as costs associated with becoming a public company, including the implementation of a new enterprise-resource planning system and professional, consulting, and other costs of$0.9 million and$1.8 million , respectively, and transaction expenses and costs associated with thePaltech Solutions, Inc. ("7Geese") Acquisition totaling$0.1 million and$0.5 million , respectively. 39 --------------------------------------------------------------------------------
Adjusted Operating Expenses
We define Adjusted Sales and Marketing expense as sales and marketing expenses before stock-based award and liability incentive award compensation expenses and other certain corporate expenses. We define Adjusted General and Administrative expense as general and administrative expenses before amortization of acquired intangible assets, stock-based award and liability incentive award compensation expenses, and other certain corporate expenses. We defineAdjusted Research and Development expense as research and development expenses before stock-based award and liability award compensation expenses and other certain corporate expenses. We use Adjusted Sales and Marketing expense, Adjusted General and Administrative expense andAdjusted Research and Development expense (collectively, "Adjusted Operating Expenses") to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short-term and long-term operating plans. We believe that Adjusted Operating Expenses facilitate comparison of our operating performance on a consistent basis between periods, and when viewed in combination with our results prepared in accordance withU.S. GAAP, help provide a broader picture of factors and trends affecting our results of operations. Adjusted Operating Expenses have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported underU.S. GAAP. Because of these limitations, Adjusted Operating Expenses should not be considered as replacements for operating expenses, as determined byU.S. GAAP. We compensate for these limitations by relying primarily on ourU.S. GAAP results and using non-GAAP measures only for supplemental purposes. Adjusted Sales and Marketing expense was$32.6 million and$24.6 million for the three months endedDecember 31, 2021 and 2020, respectively, and$64.7 million and$48.1 million for the six months endedDecember 31, 2021 and 2020, respectively. Adjusted Sales and Marketing expenses increased for the three and six months endedDecember 31, 2021 , primarily driven by expanding our sales coverage. Adjusted General and Administrative expense was$16.4 million and$13.5 million for the three months endedDecember 31, 2021 and 2020, respectively, and$32.8 million and$24.8 million for the six months endedDecember 31, 2021 and 2020, respectively. Adjusted General and Administrative expenses increased for the three and six months endedDecember 31, 2021 , primarily driven by additional employee-related costs and professional services, consulting fees and other related costs primarily associated with becoming a public company.Adjusted Research and Development expense was$9.5 million and$9.4 million for the three months endedDecember 31, 2021 and 2020, respectively, and$18.1 million and$17.6 million for the six months endedDecember 31, 2021 and 2020, respectively.Adjusted Research and Development expenses increased for the three and six months endedDecember 31, 2021 , primarily driven by an increase in licensing fees. Three Months Ended Six Months Ended December 31, December 31, December 31, December 31, (in thousands) 2021 2020 2021 2020 Sales and Marketing expense$ 40,682 $ 25,477 $ 86,470 $ 49,820 Stock-based compensation expense (8,110) (577) (21,756) (1,114) Corporate adjustments* - (299) (53) (595) Adjusted Sales and Marketing expense$ 32,572 $ 24,601 $ 64,661 $ 48,111 General and Administrative expense$ 44,462 $ 35,056 $ 87,873 $ 68,473 Amortization of intangible assets (20,500) (19,545) (40,828) (39,080) Stock-based compensation expense (6,113) (909) (11,101) (1,819) Liability incentive award compensation expense - (20) - (63) Corporate adjustments** (1,446) (1,065) (3,192) (2,668)
Adjusted General and Administrative expense
$ 10,605 $
9,390
Stock-based compensation expense (1,154) (37) (2,675) (74)
9,353$ 18,121 $ 17,600 40
-------------------------------------------------------------------------------- * Corporate adjustments for the six months endedDecember 31, 2021 relate to costs associated with becoming a public company. Corporate adjustments for the three and six months endedDecember 31, 2020 relate to certain transition costs of the new executive leadership team and closure of a standalone facility. ** Corporate adjustments for the three and six months endedDecember 31, 2021 relate to certain restructuring costs of$0.2 million and$0.2 million , respectively, as well as costs associated with becoming a public company, including the implementation of a new enterprise-resource planning system and professional, consulting, and other costs of$0.2 million and$2.0 million , respectively, and costs associated with theOctober 2021 Secondary Offering of$1.0 million and$1.0 million , respectively. Corporate adjustments for the three and six months endedDecember 31, 2020 relate to certain transition costs of the new executive leadership team and closure of a standalone facility of$0.1 million and$0.4 million , respectively, as well as costs associated with becoming a public company, including the implementation of a new enterprise-resource planning system and professional, consulting, and other costs, of$0.9 million and$1.8 million , respectively, and transaction expenses and costs associated with the 7Geese Acquisition totaling$0.1 million and$0.5 million , respectively.
Adjusted Net Income Attributable to
We define Adjusted Net Income Attributable toPaycor HCM, Inc. as loss before benefit for income tax after adjusting for amortization of acquired intangible assets, stock-based award and liability incentive award compensation expenses, gain or loss on the extinguishment of debt, and other certain corporate expenses, such as costs related to acquisitions, all of which are tax effected applying an adjusted effective tax rate. We define Adjusted Net Income Attributable toPaycor HCM, Inc. Per Share as Adjusted Net Income Attributable toPaycor HCM, Inc. divided by adjusted shares outstanding. Adjusted shares outstanding includes potentially dilutive securities excluded from theU.S. GAAP dilutive net loss per share calculation. We use Adjusted Net Income Attributable toPaycor HCM, Inc. and Adjusted Net Income Attributable toPaycor HCM, Inc. Per Share to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short-term and long-term operating plans. We believe that Adjusted Net Income Attributable toPaycor HCM, Inc. and Adjusted Net Income Attributable toPaycor HCM, Inc. Per Share facilitate comparison of our operating performance on a consistent basis between periods, and when viewed in combination with our results prepared in accordance withU.S. GAAP, help provide a broader picture of factors and trends affecting our results of operations. While the amortization expense relating to intangible assets is excluded from Adjusted Net Income Attributable toPaycor HCM, Inc. , the revenue related to such intangible assets is reflected in Adjusted Net Income Attributable toPaycor HCM, Inc. as these assets contribute to our revenue generation. Adjusted Net Income Attributable toPaycor HCM, Inc. and Adjusted Net Income Attributable toPaycor HCM, Inc. Per Share have limitations as analytical tools, and you should not consider these in isolation, or as a substitute for analysis of our results as reported underU.S. GAAP. Because of these limitations, Adjusted Net Income Attributable toPaycor HCM, Inc. should not be considered as a replacement for Net Loss Attributable toPaycor HCM, Inc. , and Adjusted Net Income Attributable toPaycor HCM, Inc. Per Share should not be considered as a replacement for diluted net loss attributable toPaycor HCM, Inc. per share, as determined byU.S. GAAP, or as a measure of our profitability. We compensate for these limitations by relying primarily on ourU.S. GAAP results and using non-GAAP measures only for supplemental purposes. Adjusted Net Income Attributable toPaycor HCM, Inc. was$8.0 million and$9.9 million for the three months endedDecember 31, 2021 and 2020, respectively, and was$10.3 million and$19.4 million for the six months endedDecember 31, 2021 and 2020, respectively. Adjusted Net Income Attributable toPaycor HCM, Inc. decreased for the three and six months endedDecember 31, 2021 , primarily driven by continued investment in employee-related costs to support new customers, expand our sales coverage, and develop our products, increased amortization related to capitalized software and deferred contract costs and costs associated with becoming a public company, partially offset by an increase in revenue. 41 --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31, December 31, December 31,
(in thousands) 2021 2020 2021 2020
Net loss before benefit for income taxes
- - 35 -
Amortization of intangible assets 25,362 31,267 57,412 61,771
Gain on installment sale - - (1,359) -
Stock-based compensation expense 17,215 1,736 39,027 3,433
Liability incentive award compensation
expense - 20 - 63
Corporate adjustments* 1,446 1,364 3,245 3,263
Non-GAAP adjusted income before applicable
income taxes 10,475 12,866 13,532 25,252
Income tax effect on adjustments** (2,514) (2,959) (3,248) (5,808)
Adjusted Net Income Attributable to Paycor
HCM, Inc. $ 7,961 $
9,907
Adjusted Net Income Attributable to Paycor HCM, Inc. Per Share$ 0.05 $ 0.07 $ 0.06 $ 0.13 Adjusted shares outstanding*** 175,075,956 151,626,272 172,368,220 151,672,136 * Corporate adjustments for the three and six months endedDecember 31, 2021 relate to certain restructuring costs of$0.2 million and$0.2 million , respectively, as well as costs associated with becoming a public company, including the implementation of a new enterprise-resource planning system and professional, consulting, and other costs of$0.2 million and$2.0 million , respectively, and costs associated with theOctober 2021 Secondary Offering of$1.0 million and$1.0 million , respectively. Corporate adjustments for the three and six months endedDecember 31, 2020 relate to certain transition costs of the new executive leadership team and closure of a standalone facility of$0.4 million and$1.0 million , respectively, as well as costs associated with becoming a public company, including the implementation of a new enterprise-resource planning system and professional, consulting, and other costs of$0.9 million and$1.8 million , respectively, and transaction expenses and costs associated with the 7Geese Acquisition totaling$0.1 million and$0.5 million , respectively. ** Non-GAAP adjusted income before applicable income taxes is tax effected using an adjusted effective tax rate of 24.0% for the three and six months endedDecember 31, 2021 , respectively, and 23.0% for the three and six months endedDecember 31, 2020 , respectively. *** The adjusted shares outstanding for the three months endedDecember 31, 2021 are based on the if-converted method and include potentially dilutive securities that are excluded fromU.S. GAAP dilutive net income per share calculation because including them would have an anti-dilutive effect. The adjusted shares outstanding for the six months endedDecember 31, 2021 assume the conversion of the Series A Preferred Stock as if it would have occurred onJuly 1, 2021 , based on the if-converted method and include potentially dilutive securities that are excluded fromU.S. GAAP dilutive net income per share calculation because including them would have an anti-dilutive effect. The adjusted shares outstanding for the three and six months endedDecember 31, 2020 assume conversion of the Series A Preferred Stock as if it would have occurred on theDecember 29, 2020 issuance date based on the if-converted method.
Liquidity and Capital Resources
General
As ofDecember 31, 2021 , our principal sources of liquidity were cash and cash equivalents totaling$111.1 million , which was held for working capital purposes, as well as$200.0 million of borrowing capacity available under our revolving credit facility, described further below. As ofDecember 31, 2021 , our cash and cash equivalents principally included demand deposit accounts. We expect our operating cash flows to further improve as we increase our operational efficiency and experience economies of scale. 42 -------------------------------------------------------------------------------- We have historically financed our operations primarily through cash received from operations and debt financing and, more recently, with the issuance of equity in our IPO. We believe our existing cash and cash equivalents, our 2021 Credit Facility and cash provided by sales of our solutions and services will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, and the introduction of new and enhanced products and services offerings. In the future, we may enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, this could reduce our ability to compete successfully and harm our results of operations. The majority of the Company's recurring fees are satisfied over time as the services are provided and invoiced by the customer payroll processing period or by month. The Company recognizes deferred revenue for nonrefundable upfront fees as well as for subscription services related to certain ancillary products invoiced prior to the satisfaction of the performance obligation. As ofDecember 31, 2021 , we had deferred revenue of$15.3 million , of which$10.7 million was recorded as a current liability and is expected to be recorded as revenue in the next twelve months, provided all other revenue recognition criteria have been met.
New Senior Secured Credit Facility
InJune 2021 ,Paycor, Inc. entered into a new credit agreement (the "2021 Credit Agreement") withPNC Bank National Association , as administrative agent and collateral agent, providing a$100.0 million senior secured revolving credit facility (the "2021 Credit Facility"). The 2021 Credit Facility includes an "accordion feature" that allows us, under certain circumstances, to increase the size of the 2021 Credit Facility in a principal amount up to$300.0 million , with a resulting maximum principal amount of$400.0 million , subject to the participating lenders electing to increase their commitments or new lenders being added to the 2021 Credit Agreement. OnSeptember 3, 2021 ,Paycor, Inc. ,Pride Guarantor, Inc. and certain other subsidiaries ofPaycor HCM, Inc. entered into an amendment ("2021 Amendment") to the 2021 Credit Agreement. The 2021 Amendment increased the size of the 2021 Credit Facility from$100.0 million to$200.0 million . No other significant terms of the 2021 Credit Agreement were changed in connection with the 2021 Amendment.
The 2021 Credit Facility commitments will mature on
The 2021 Credit Facility contains financial covenants, which are reviewed for compliance on a quarterly basis, including a total leverage ratio financial covenant of 3.50 to 1.00 and an interest coverage ratio financial covenant of 3.00 to 1.00. As ofDecember 31, 2021 , we were in compliance with all covenants.
Cash Flows
The following table presents a summary of our unaudited condensed consolidated cash flows from operating, investing and financing activities for the six months endedDecember 31, 2021 and 2020. Six Months Ended December 31, December 31, (in thousands) 2021 2020 Net cash (used in) provided by operating activities$ (18,724) $ 6,848 Net cash used in investing activities (16,035) (27,996) Net cash provided by financing activities 413,341 214,327 Impact of foreign exchange on cash and cash equivalents 63 (30) Net change in cash and cash equivalents 378,645 193,149 Cash and cash equivalents at beginning of period 560,000 546,448 Cash and cash equivalents at end of period$ 938,645
43
--------------------------------------------------------------------------------Operating Activities
Net cash used in operating activities was$18.7 million for the six months endedDecember 31, 2021 and net cash provided by operating activities$6.8 million for the six months endedDecember 31, 2020 . The change in operating activities for the six months endedDecember 31, 2021 reflects an increase in net loss and a decrease in changes in assets and liabilities.
Investing Activities
Net cash used in investing activities was$16.0 million and$28.0 million , for the six months endedDecember 31, 2021 and 2020, respectively. The change in investing activities for the six months endedDecember 31, 2021 was primarily due to the acquisition of 7Geese inSeptember 2020 offset by an increase in internally developed software costs in fiscal year 2022.
Financing Activities
Net cash provided by financing activities was$413.3 million and$214.3 million for the six months endedDecember 31, 2021 and 2020, respectively. The change in financing activities for the six months endedDecember 31, 2021 was primarily attributable to an increase in funds held to satisfy client funds obligations as well as proceeds from the issuance of common stock sold in our IPO, net of offering costs, partially offset by cash used for the redemption of our Series A Redeemable Preferred Stock and increased net repayments of long-term debt.
Contractual Obligations and Commitments
Our principal commitments primarily consist of long-term debt and leases for office space. 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 theSEC onSeptember 2, 2021 . For additional information regarding our leases, long-term debt and our commitments and contingencies, see "Note 10. Leases", "Note 9. Debt Agreements and Letters of Credit" and "Note 18. Commitments and Contingencies" in the Form 10-K and "Note "Note 9. Debt Agreements and Letters of Credit" and "Note 15. Commitments and Contingencies" in the notes to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future 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.
JOBS Act
We qualify as an "emerging growth company" pursuant to the provisions of the
JOBS Act. For as long as we are an "emerging growth company," we may take
advantage of certain exemptions from various reporting requirements that are
applicable to other public companies that are not "emerging growth companies,"
including, but not limited to, not being required to comply with the auditor
attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced
disclosure obligations regarding executive compensation in our periodic reports
and proxy statements, exemptions from the requirements of holding advisory
"say-on-pay" votes on executive compensation and shareholder advisory votes on
golden parachute compensation.
The JOBS Act also permits an emerging growth company like us to take advantage
of an extended transition period to comply with new or revised accounting
standards applicable to public companies. We have elected to "opt-in" to this
extended transition period for complying with new or revised accounting
standards and, therefore, we will not be subject to the same new or revised
accounting standards as other public companies that comply with such new or
revised accounting standards on a non-delayed basis.
44
--------------------------------------------------------------------------------Critical Accounting Policies and Significant Judgments and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions, impacting our reported results of operations and financial condition. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses. Management considers these accounting policies to be critical accounting policies. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described 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 filed onSeptember 2, 2021 . There have been no material changes to the critical accounting policies disclosed in the Form 10-K, except as described in Note 2 to our unaudited condensed consolidated financial statements: "Summary of Significant Accounting Policies."
Adoption of Accounting Pronouncements
For a description of recently issued accounting standards not yet adopted, see Note 2 to our unaudited condensed consolidated financial statements: "Summary of Significant Accounting Policies -Pending Accounting Pronouncements" appearing elsewhere in this report.
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