SEC Filing | PAYCOR HCM, INC.

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pycr-20220930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

————————

Form 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2022


o			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 001-40640

PAYCOR HCM, INC.

(Exact name of registrant as specified in its charter)


Delaware									83-1813909
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)
4811 Montgomery Road Cincinnati, OH									45212
(Address of Principal Executive Offices)									(Zip Code)

(800) 381-0053

Registrant's telephone number, including area code

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	PYCR	The NASDAQ Stock Market LLC (Nasdaq Global Select Market)

Securities registered pursuant to section 12(g) of the Act: None

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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 x No o

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 x No o

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


Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	o
		Emerging growth company	x

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. o

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

As of October 31, 2022, the number of shares of the Registrant’s Common Stock outstanding was 175,855,994 shares.

Table of Contents


Part I - FINANCIAL INFORMATION
Item 1. Financial Statements			5
Unaudited Condensed Consolidated Balance Sheets as of September 3 0 , 2022 and June 30, 202 2			5
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended S eptember 30 , 2022 and 2021			6
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended S eptember 30 , 2022 and 2021			7
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended September 30, 2022 and 2021			8
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30 , 2022 and 2021			9
Notes to the Unaudited Condensed Consolidated Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			36
Item 4. Controls and Procedures			37
Part II - OTHER INFORMATION
Item 1. Legal Proceedings			39
Item 1A. Risk Factors			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3. Defaults Upon Senior Securities			39
Item 4. Mine Safety Disclosures			39
Item 5. Other Information			39
Item 6. Exhibits			40
Signatures			41

Table of Contents

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 resulting effects of any potential breach of our security measures or any unauthorized access to our customers’ or their employees’ personal data, including by way of computer viruses, worms, phishing and ransomware attacks, malicious software programs, and other data security threats.

•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.

•The timing of payments made to employees and taxing authorities relative to the timing of when a customer’s electronic funds transfers are settled to our account.

•Future acquisitions of other companies’ businesses, technologies, or customer portfolios.

•The continued service of our key executives.

•Our ability to innovate and deliver high-quality, technologically advanced products and services.

•Our ability to attract and retain qualified personnel, including software developers and skilled IT, sales, marketing, and operation personnel.

•The proper operation of our software.

•Our relationships with third parties.

•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 ongoing effects of inflation, supply chain disruptions, labor shortages and other adverse macroeconomic conditions in the markets in which we and our customers operate.

•The impact of an economic recession in the United States (“U.S.”) or global economy.

•Our customers’ dependence on our solutions to comply with applicable laws.

•Our ability to comply with anti-corruption, anti-bribery and similar laws.

Table of Contents

•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 the SEC on August 24, 2022.

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.

Table of Contents

Part I - FINANCIAL INFORMATION

Item 1. Financial Statements

Paycor HCM, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)


	September 30, 2022		June 30, 2022
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	98,161	$	133,041
Accounts receivable, net	23,359		21,511
Deferred contract costs	41,398		37,769
Prepaid expenses	10,954		9,421
Other current assets	2,490		1,874
Current assets before funds held for clients	176,362		203,616
Funds held for clients	933,307		1,715,916
Total current assets	1,109,669		1,919,532
Property and equipment, net	30,789		31,675
Operating lease right-of-use assets	22,732		—
Goodwill	749,221		750,155
Intangible assets, net	322,645		263,069
Capitalized software, net	42,696		40,002
Long-term deferred contract costs	133,818		125,705
Other long-term assets	1,662		1,179
Total assets	$	2,413,232	$	3,131,317
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	15,512	$	13,945
Accrued expenses and other current liabilities	18,837		13,907
Accrued payroll and payroll related expenses	25,873		44,592
Deferred revenue	11,333		11,742
Current liabilities before client fund obligations	71,555		84,186
Client fund obligations	938,836		1,719,047
Total current liabilities	1,010,391		1,803,233
Deferred income taxes	26,222		31,895
Long-term operating leases	23,180		—
Other long-term liabilities	79,580		11,458

Total liabilities	1,139,373		1,846,586
Commitments and contingencies (Note 15)

Stockholders' equity:
Common stock $0.001 par value per share, 500,000,000 shares authorized, 175,643,109 shares outstanding at September 30, 2022 and 174,909,539 shares outstanding at June 30, 2022	176		175
Treasury stock, at cost, 10,620,260 shares at September 30, 2022 and June 30, 2022	(245,074)		(245,074)
Preferred stock, $0.001 par value, 50,000,000 shares authorized, — shares outstanding at September 30, 2022 and June 30, 2022	—		—

Additional paid-in capital	1,947,102		1,926,800
Accumulated deficit	(424,441)		(395,389)
Accumulated other comprehensive loss	(3,904)		(1,781)
Total stockholders' equity	1,273,859		1,284,731
Total liabilities and stockholders' equity	$	2,413,232	$	3,131,317

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

Paycor HCM, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except share amounts)



	Three Months Ended September 30,
		2022		2021
Revenues:
Recurring and other revenue		$	114,169	$	92,416
Interest income on funds held for clients		4,134		316
Total revenues		118,303		92,732
Cost of revenues		43,185		45,611
Gross profit		75,118		47,121
Operating expenses:
Sales and marketing		48,195		45,788
General and administrative		47,911		43,411
Research and development		12,402		10,191
Total operating expenses		108,508		99,390
Loss from operations		(33,390)		(52,269)
Other (expense) income:
Interest expense		(1,087)		(235)
Other		445		1,224
Loss before benefit for income taxes		(34,032)		(51,280)
Income tax benefit		(4,980)		(9,244)
Net loss		(29,052)		(42,036)
Less: Accretion of redeemable noncontrolling interests		—		11,621
Net loss attributable to Paycor HCM, Inc.		$	(29,052)	$	(53,657)
Basic and diluted net loss attributable to Paycor HCM, Inc. per share		$	(0.17)	$	(0.32)
Weighted average common shares outstanding:
Basic and diluted		175,512,577		166,459,168

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

Paycor HCM, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(in thousands)


	Three Months Ended
	September 30,
		2022		2021
Net loss		$	(29,052)	$	(42,036)
Other comprehensive loss, net of tax:
Unrealized loss on foreign currency translation		(423)		(153)
Unrealized loss on available-for-sale securities, net of tax		(1,700)		(61)
Other comprehensive loss, net of tax		(2,123)		(214)
Comprehensive loss		(31,175)		(42,250)
Less: Comprehensive income attributable to redeemable noncontrolling interests		—		11,621
Comprehensive loss attributable to Paycor HCM, Inc.		$	(31,175)	$	(53,871)

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

Paycor HCM, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)


	Three Months Ended September 30, 2021
	Preferred Stock			Series A Preferred Stock			Common Stock					Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Shares	Amount		Shares	Amount		Shares	Amount		Treasury Stock

Balance, June 30, 2021	—	$	—	7,715	$	262,772	141,097,740	$	141	$	(245,074)	$	1,133,399	$	(275,751)	$	3,152	$	878,639
Net loss attributable to Paycor HCM, Inc.	—	—		—	—		—	—		—		—		(53,657)		—		(53,657)
Stock-based compensation expense	—	—		—	—		—	—		—		21,812		—		—		21,812
Issuance of common stock sold in the initial public offering, net of offering costs and underwriting discount	—	—		—	—		21,275,000	21		—		454,126		—		—		454,147
Conversion of Series A Preferred Stock to common stock upon initial public offering	—	—		(7,715)	(262,772)		11,705,039	12		—		262,760		—		—		—
Issuance of common stock upon vesting of restricted stock units at initial public offering	—	—		—	—		352,124	—		—		—		—		—		—
Other comprehensive loss	—	—		—	—		—	—		—		—		—		(214)		(214)
Other	—	—		—	—		—	—		—		1,943		—		(1,953)		(10)
Balance, September 30, 2021	—	$	—	—	$	—	174,429,903	$	174	$	(245,074)	$	1,874,040	$	(329,408)	$	985	$	1,300,717


	Three Months Ended September 30, 2022
	Preferred Stock			Series A Preferred Stock			Common Stock					Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
	Shares	Amount		Shares	Amount		Shares	Amount		Treasury Stock

Balance, June 30, 2022	—	$	—	—	$	—	174,909,539	$	175	$	(245,074)	$	1,926,800	$	(395,389)	$	(1,781)	$	1,284,731
Net loss attributable to Paycor HCM, Inc.	—	—		—	—		—	—		—		—		(29,052)		—		(29,052)
Stock-based compensation expense	—	—		—	—		—	—		—		16,951		—		—		16,951

Net settlement for taxes	—	—		—	—		—	—		—		(1,293)		—		—		(1,293)
Issuance of common stock under employee stock plans	—	—		—	—		733,570	1		—		4,644		—		—		4,645
Other comprehensive loss	—	—		—	—		—	—		—		—		—		(2,123)		(2,123)

Balance, September 30, 2022	—	$	—	—	$	—	175,643,109	$	176	$	(245,074)	$	1,947,102	$	(424,441)	$	(3,904)	$	1,273,859

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

Paycor HCM, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)


	Three Months Ended
	September 30,
	2022		2021
Cash flows from operating activities:
Net loss	$	(29,052)	$	(42,036)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	1,200		1,718
Amortization of intangible assets and software	29,676		36,870
Amortization of deferred contract costs	10,028		6,634
Stock-based compensation expense	16,951		21,812
Amortization of debt acquisition costs	23		20
Deferred tax benefit	(5,000)		(9,253)
Bad debt expense	562		794
Loss (gain) on sale of investments	47		(6)
Gain on installment sale	—		(1,359)
Loss on foreign currency exchange	424		222
Loss on lease exit	509		—
Naming rights accretion expense	893		—



Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable	(2,450)		(316)
Prepaid expenses and other assets	(1,841)		(4,338)

Accounts payable	1,358		801
Accrued liabilities and other	(25,220)		(9,285)
Deferred revenue	(439)		(1,185)

Deferred contract costs	(21,770)		(18,338)
Net cash used in operating activities	(24,101)		(17,245)
Cash flows from investing activities:
Purchases of client funds available-for-sale securities	(247,927)		(39,708)
Proceeds from sale and maturities of client funds available-for-sale securities	143,107		39,932
Purchase of property and equipment	(331)		(803)
Proceeds from note receivable on installment sale	—		3,040
Acquisition of intangible assets	(4,713)		(195)


Internally developed software costs	(9,096)		(7,524)
Net cash used in investing activities	(118,960)		(5,258)
Cash flows from financing activities:
Net change in cash and cash equivalents held to satisfy client funds obligations	(775,923)		906,626





Proceeds from line-of-credit	—		3,500
Repayments of line-of-credit	—		(52,600)

Repayments of debt and capital lease obligations	(70)		—


Proceeds from the issuance of common stock sold in the IPO, net of offering costs and underwriting discount	—		455,040
Redemption of Redeemable Series A Preferred Stock (acquisition of non-controlling interest)	—		(260,044)
Withholding taxes paid related to net share settlements	(1,293)		—
Proceeds from exercise of stock options	345		—
Proceeds from employee stock purchase plan	4,300		—

Other financing activities	—		(395)
Net cash (used in) provided by financing activities	(772,641)		1,052,127
Impact of foreign exchange on cash and cash equivalents	(14)		(3)
Net change in cash, cash equivalents, restricted cash and short-term investments, and funds held for clients	(915,716)		1,029,621
Cash, cash equivalents, restricted cash and short-term investments, and funds held for clients, beginning of period	1,682,923		560,000
Cash, cash equivalents, restricted cash and short-term investments, and funds held for clients, end of period	$	767,207	$	1,589,621
Supplemental disclosure of non-cash investing, financing and other cash flow information:
Capital expenditures in accounts payable	$	9	$	48
Cash paid during the year for interest	—		150

Reconciliation of cash, cash equivalents, restricted cash and short-term investments, and funds held for clients to the Consolidated Balance Sheets
Cash and cash equivalents	$	98,161	$	125,787

Funds held for clients	669,046		1,463,834
Total cash, cash equivalents, restricted cash and short-term investments, and funds held for clients	$	767,207	$	1,589,621

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

Paycor HCM, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

(all amounts in thousands, except share and per share data)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS:

Paycor HCM, Inc. (“Paycor HCM” or “the Company”) is a leading provider of human capital management (“HCM”) software located primarily in the United States (“U.S.”). Paycor’s solutions target small and medium-sized businesses with 10-1,000 employees. Solutions provided include payroll, human resources (“HR”) services, talent management, workforce management, benefits administration, reporting and analytics, and other payroll-related services. Services are generally provided in a Software-as-a-Service (“SaaS”) delivery model utilizing a cloud-based platform.

Paycor HCM is a holding company with no material operating assets or operations that was formed on August 24, 2018 to effect the acquisition of Paycor, Inc. and its subsidiaries (“Paycor”) by certain funds advised by Apax Partners LLP, a leading global private equity advisory firm (“Apax Partners”). On September 7, 2018, Paycor HCM, through its subsidiary companies, entered into the Agreement and Plan of Merger to acquire Paycor (the “Apax Acquisition”). The Apax Acquisition closed on November 2, 2018. As a result of the Apax Acquisition, Paycor is an indirect controlled subsidiary of Paycor HCM.

Initial Public Offering

On July 23, 2021, the Company completed an initial public offering (“IPO”) of 21,275,000 shares of its common stock, $0.001 par value per share, at an offering price of $23.00 per share (the “IPO Price”). In aggregate, proceeds from the IPO were approximately $454,147, which is net of approximately $30,583 in underwriters’ discount and $4,595 of offering costs. During the three months ended September 30, 2021, $3,702 of offering costs were paid. Additionally, upon the closing of the IPO:

•all of the Company’s outstanding shares of Series A Preferred Stock were automatically converted into 11,705,039 shares of the Company’s common stock;

•the Company used a portion of the proceeds to effect the redemption of all of the outstanding shares of the Series A Redeemable Preferred Stock (acquisition of non-controlling interest) (“Series A Redeemable Preferred Stock” or “Redeemable Noncontrolling Interest”) at a redemption price of 101% of the liquidation preference, plus the amount of all accrued dividends for the then current and all prior dividend payment periods, for a total of $260,044;

•the outstanding Long Term Incentive Plan Units (“LTIP Units”) converted to 1,761,578 restricted stock units (“RSUs”) and the Company began recognizing compensation expense equal to the aggregate dollar value over the requisite two-year service period; and

•the performance-based incentive units granted under the Pride Aggregator, L.P. Management Equity Plan (“MEP”) converted to time-based incentive units, with 25% vesting upon successive 6-month anniversary dates for the 24 months beginning on the date of the Company’s IPO.

In connection with the Company’s IPO, the Company executed a 1,517.18 for 1 share stock split (“IPO Stock Split”) relating to its common stock. All share and per share amounts have been retroactively adjusted to reflect the IPO Stock Split for all periods presented within the unaudited condensed consolidated financial statements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of presentation and consolidation

The accompanying interim unaudited condensed consolidated financial statements of the Company were prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim reporting. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended June 30, 2022 in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on August 24, 2022. The unaudited condensed consolidated financial statements for interim periods do not include all disclosures required by U.S. GAAP for annual financial statements and are not necessarily indicative of results for the future interim periods and the full fiscal year ending June 30, 2023. Adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the unaudited condensed consolidated financial position, results of operations and cash flows at the dates and for the periods presented have been included. All intercompany transactions and balances have been eliminated in consolidation.

Use of estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the recognition of revenue, evaluation of potential impairment of goodwill and intangible assets, and the valuation of stock-based compensation.

The Company’s results of operations and financial condition can also be affected by economic, political, legislative, regulatory and legal actions, including but not limited to health epidemics and pandemics and their resulting economic impact. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, and government fiscal policies can have a significant effect on the Company’s results of operations and financial condition. While the Company maintains reserves for anticipated liabilities and carries various levels of insurance, the Company could be affected by civil, criminal, regulatory or administrative actions, claims or proceedings.

Accounts receivable, net

Accounts receivable balances are shown on the condensed consolidated balance sheets net of the allowance for doubtful accounts of $3,810 and $3,268 as of September 30, 2022 and June 30, 2022, respectively. The allowance for doubtful accounts considers factors such as historical experience, credit quality, age of the accounts receivable balance and current and forecasted economic conditions that may affect a client’s ability to pay. The Company performs ongoing credit evaluations and generally requires no collateral from clients. Management reviews individual accounts as they become past due to determine collectability. The allowance for doubtful accounts is adjusted periodically based on management’s consideration of past due accounts. Individual accounts are charged against the allowance when all reasonable collection efforts have been exhausted.

Sales and marketing

Sales and marketing expenses consist of costs associated with the Company’s direct sales and marketing staff, including employee-related costs, marketing, advertising and promotion expenses, and other related costs. Advertising and promotion costs are expensed as incurred. Advertising and promotion expense totaled approximately $5,918 and $4,986 for the three months ended September 30, 2022 and 2021, respectively.

Stock-based compensation

The Company recognizes all employee and director stock-based compensation as a cost in the unaudited condensed consolidated financial statements. Equity-classified awards are measured at the grant date fair value of the award and expense is recognized, net of actual forfeitures, on a straight-line basis over the requisite service period for the award.

The Company establishes grant date fair value of RSUs based on the fair value of the Company's underlying common stock. The Company estimates the grant date fair value of stock options, including common stock purchased as a part of the Company's Employee Stock Purchase Plan ("ESPP"), using the Black-Scholes option pricing model, which requires management to make assumptions with respect to the fair value of the Company's award on the grant date, including the expected term of the award, the expected volatility of the Company's stock calculated based on a period of time generally commensurate with the expected term of the award, the expected risk-free rate of return, and expected dividend yields of the Company's stock. The Company recognized stock-based compensation cost for the three months ended September 30, 2022 and 2021 of $16,951 and $21,812, respectively.

Leases

The Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASC 842”), as subsequently amended, on July 1, 2022, through the modified retrospective method applied to those contracts that were not completed as of that date. ASC 842 requires entities to recognize lease assets and lease liabilities and disclose key information about leasing arrangements for certain leases. Results for reporting periods beginning after July 1, 2022 are presented under ASC 842, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historical accounting treatment.

The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. Adoption of the new standard resulted in recording additional lease assets and liabilities of $16,818 and $23,987, respectively, as of July 1, 2022.

The adoption of the standard did not materially impact our consolidated statements of operations or cash flows. See Note 10 - “Leases” for additional information.

Pending accounting pronouncements

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” (Topic 326). This update establishes a new approach to estimate credit losses on certain types of financial instruments. The update requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The amended standard will also update the impairment model for available-for-sale debt securities, requiring entities to determine whether all or a portion of the unrealized loss on any such securities is a credit loss. The Company is currently evaluating this standard and the potential effects of these changes to its unaudited condensed consolidated financial statements and expects to adopt this new standard in the fiscal year beginning July 1, 2023.

3. REVENUE:

The following table disaggregates revenue from contracts by recurring fees and implementation services and other, which the Company believes depicts the nature, amount and timing of its revenue:



	Three Months Ended September 30,
	2022		2021
Recurring fees	$	111,062	$	89,209
Implementation services and other	3,107		3,207
Recurring and other revenue	$	114,169	$	92,416

Deferred revenue

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.

The nonrefundable upfront fees related to implementation services are typically included on the client’s first invoice. Implementation fees are deferred and recognized as revenue over an estimated 24-month period to which the material right exists, which is the period the client is expected to benefit from not having to pay an additional nonrefundable implementation fee upon renewal of the service.

The following table summarizes the changes in deferred revenue related to the nonrefundable upfront fees and recurring subscription services:


	Three Months Ended September 30,
		2022		2021
Balance, beginning of period		$	17,046	$	16,047

Deferral of revenue		4,270		3,612
Revenue recognized		(4,709)		(4,799)
Impact of foreign exchange		(117)		(49)
Balance, end of period		$	16,490	$	14,811

Deferred revenue is recorded within deferred revenue and other long-term liabilities on the condensed consolidated balance sheets. The Company will recognize deferred revenue of $9,409 in fiscal year 2023, $5,246 in fiscal year 2024, $1,215 in fiscal year 2025 and $620 thereafter.

Deferred contract costs


	As of and for the Three Months Ended September 30, 2022
	Beginning Balance		Capitalization of Costs		Amortization		Ending Balance
Costs to obtain a contract	$	72,342	$	8,993	$	(4,441)	$	76,894
Costs to fulfill a contract	91,132		12,777		(5,587)		98,322
Total	$	163,474	$	21,770	$	(10,028)	$	175,216


	As of and for the Three Months Ended September 30, 2021
	Beginning Balance		Capitalization of Costs		Amortization		Ending Balance
Costs to obtain a contract	$	52,926	$	8,074	$	(3,023)	$	57,977
Costs to fulfill a contract	62,457		10,264		(3,611)		69,110
Total	$	115,383	$	18,338	$	(6,634)	$	127,087

Deferred contract costs are recorded within deferred contract costs and long-term deferred contract costs on the condensed consolidated balance sheets. Amortization of costs to fulfill a contract and costs to obtain a contract are recorded in cost of revenues and sales and marketing expense in the unaudited condensed consolidated statements of operations, respectively. The Company regularly reviews its deferred costs for impairment and did not recognize an impairment loss during any period presented in this report.

4. BUSINESS COMBINATION AND ASSET ACQUISITION:

Asset Acquisition

On February 4, 2021, the Company acquired payroll, timekeeping and HCM service customer relationships from another large provider of HCM services for an initial purchase price of approximately $9,300, which included approximately $50 of transaction costs. As part of this asset purchase, the Company was required to make quarterly contingent payments and a final payment to the seller based on the revenue generated by the acquired clients over a 12-month period. Contingent payments made for the three months ended September 30, 2022 and 2021 were $4,259 and $195, respectively. As of September 30, 2022, all contingent payments have been made.

The acquired customer relationships are recorded as an intangible asset and are being amortized on a straight-line basis over three years. As of September 30, 2022, the weighted average remaining amortization period for these intangible assets was approximately 1.3 years. The contingent payments are recognized when each contingency is resolved and the consideration is paid or becomes payable as an increase to the acquired intangible asset, amortized on a straight-line basis over the remaining period of the initial acquired intangible asset.

5. FUNDS HELD FOR CLIENTS:

Funds held for clients are as follows:


	September 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Demand deposit accounts and other cash equivalents	$	669,046	$	—	$	—	$	669,046
U.S. Treasury and direct obligations of U.S. government agencies	61,330		—		(670)		60,660
Corporate bonds	175,159		12		(3,684)		171,487
Commercial paper	16,296		1		(3)		16,294
Other securities	16,278		—		(458)		15,820
	$	938,109	$	13	$	(4,815)	$	933,307


	June 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Demand deposit accounts and other cash equivalents	$	1,549,882	$	—	$	—	$	1,549,882
U.S. Treasury and direct obligations of U.S. government agencies	29,367		—		(290)		29,077
Corporate bonds	112,753		4		(1,894)		110,863
Commercial paper	6,642		2		(3)		6,641
Other securities	19,817		2		(366)		19,453
	$	1,718,461	$	8	$	(2,553)	$	1,715,916

Other securities are primarily comprised of collateralized and other mortgage obligations, municipal obligations, and certificates of deposit.

Proceeds from sales and maturities of investment securities for the three months ended September 30, 2022 and 2021, were approximately $143,107 and $39,932, respectively.

The Company is exposed to interest rate risk as rate volatility will cause fluctuations in the earnings potential of future investments. The Company does not utilize derivative financial instruments to manage interest rate risk.

The Company reviews its investments on an ongoing basis to determine if any are other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. The Company has no material individual securities that have been in a continuous unrealized loss position greater than twelve months. The Company believes these unrealized losses result from changes in interest rates rather than credit risk, and therefore does not believe the related investments are other-than-temporarily impaired. Additionally, the Company believes it will recover its cost basis in the securities with unrealized losses and has the ability to hold the securities until they recover in value and had no intent to sell them at September 30, 2022.

Expected maturities as of September 30, 2022 for client fund assets are as follows:


Due within fiscal year 2023	$	775,270
Due within fiscal year 2024	93,419
Due within fiscal year 2025	36,490
Due within fiscal year 2026	27,185
Due within fiscal year 2027	943
Total	$	933,307

6. PROPERTY AND EQUIPMENT, NET:

A summary of the Company’s property and equipment, net is as follows:


	September 30, 2022		June 30, 2022
Land	$	3,680	$	3,680
Land improvements	910		910
Building and improvements	22,845		22,845
Computer, equipment and software	15,242		14,951
Furniture and fixtures	2,242		2,246
Office equipment	2,534		2,538
Leasehold improvements	1,413		1,430
Construction in progress	36		—
	48,902		48,600
Accumulated depreciation and amortization	(18,113)		(16,925)
Property and equipment, net	$	30,789	$	31,675

Depreciation and amortization of property and equipment was approximately $1,200 and $1,718 for the three months ended September 30, 2022 and 2021, respectively.

7. CAPITALIZED SOFTWARE, NET:

A summary of the Company’s capitalized software, net is as follows:


	September 30, 2022		June 30, 2022
Capitalized software	$	92,782	$	83,682
Accumulated amortization	(50,086)		(43,680)
Capitalized software, net	$	42,696	$	40,002

Amortization expense for capitalized software was approximately $6,406 and $4,820 for the three months ended September 30, 2022 and 2021, respectively.

The following is a schedule of future amortization expense as of September 30, 2022:


2023 (remaining nine months)	$	17,369
2024	17,168
2025	7,894
2026	265

	$	42,696

8. GOODWILL AND INTANGIBLE ASSETS:

Changes in the carrying amount of goodwill are presented below:





Balance at June 30, 2022	$	750,155

Foreign currency translation	(934)
Balance at September 30, 2022	$	749,221

On August 7, 2022, the Company entered into a 16-year partnership with the Cincinnati Bengals of the National Football League that grants the Company the exclusive naming rights to Paycor Stadium, home to the Cincinnati Bengals since 2000. Contractual payments began in the period ended September 30, 2022 and end in 2038.

The naming rights have been recorded as an intangible asset equal to the present value of the future contractual cash flows with an offsetting liability for payments to be made in the future. The intangible asset reflects the naming rights to the Bengals stadium including co-branding and shared promotion, along with the right for the Company to place its logo on and around the stadium.

The discount between the offsetting liability and overall payment obligation is amortized to interest expense over the term of the agreement using the effective interest method. The intangible asset is being amortized over the life of the agreement on a straight-line basis through sales and marketing expense. The liability is included in accrued expenses and other current liabilities and other long-term liabilities within the unaudited condensed consolidated balance sheets.

Components of intangible assets were as follows:


	September 30, 2022		June 30, 2022
Cost:
Technology	$	142,165	$	142,165
Customer relationships	447,896		443,187
Trade name	105,670		105,672
Naming rights	78,135		—
Total cost	$	773,866	$	691,024
Accumulated amortization:
Technology	$	(137,110)	$	(135,982)
Customer relationships	(285,678)		(266,129)
Trade name	(27,606)		(25,844)
Naming rights	(827)		—
Total accumulated amortization	$	(451,221)	$	(427,955)
Intangible assets, net	$	322,645	$	263,069

Amortization expense for intangible assets was approximately $23,270 and $32,050 for the three months ended September 30, 2022 and 2021, respectively.

The following is a schedule of future amortization expense as of September 30, 2022:


2023 (remaining nine months)	$	73,323
2024	90,356
2025	36,590
2026	12,021
2027	12,004
Thereafter	98,351
	$	322,645

9. DEBT AGREEMENTS AND LETTERS OF CREDIT:

Credit Agreement

Paycor, Inc. is party to a credit agreement (as amended, the “Credit Agreement”) with PNC Bank, National Association (“PNC”), Fifth Third, National Association, and other lenders, providing a $200,000 senior secured revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility includes an “accordion feature” that allows the Company, under certain circumstances, to increase the size of the Revolving Credit Facility by an additional principal amount of up to $200,000,

with a resulting maximum principal amount of $400,000, subject to the participating lenders electing to increase their commitments or new lenders being added to the Credit Agreement. The Revolving Credit Facility will mature on June 11, 2026.

The Company had no outstanding borrowings under the Revolving Credit Facility as of September 30, 2022 or June 30, 2022. Additionally, the Company had no outstanding letters of credit as of September 30, 2022 or June 30, 2022.

10. LEASES:

The Company determines if an arrangement contains a lease at inception. The Company recognizes right-of-use (“ROU”) assets and liabilities associated with leases based on the present value of the future minimum lease payments over the lease term at the later of the commencement date of the lease or July 1, 2022. The Company uses its incremental borrowing rate at the recognition date in determining the present value of future payments for leases that do not have a readily determinable implicit rate. Lease terms reflect options to extend or terminate the lease when it is reasonably certain that the option will be exercised. ROU assets and obligations for short-term leases (leases with an initial term of 12 months or less) are not recognized in the consolidated balance sheet. The Company has agreements that contain lease and non-lease components. Generally, the Company accounts for the lease and non-lease components in the contract as a single lease component.

The Company has various lease agreements for office space and other leases which are classified as operating leases and for equipment which is classified as finance leases. Lease terms may include options to extend or terminate the lease, which are factored into the recognition of ROU assets and lease liabilities when it is reasonably certain that the Company will exercise that option. Lease costs for operating leases, including short-term leases, are recognized over the lease term on a straight-line basis.

The table below presents the Company’s leased assets and related lease liabilities:


Leases	Classification	September 30, 2022
Assets
Operating leases	Operating lease right-of-use assets	$	22,732
Finance lease assets	Property and equipment, net	725

Liabilities
Current:
Operating	Accrued expenses and other current liabilities	$	5,737
Finance	Accrued expenses and other current liabilities	287
Non-current:
Operating	Long-term operating leases	23,180
Finance	Other long-term liabilities	556

The table below presents the costs associated with the leased assets:


Leases	Classification	Three Months Ended September 30, 2022
Operating lease cost:
Short-term	General and administrative	$	9
Long-term	Cost of revenues, Sales and marketing and General and administrative	1,385
Finance lease cost:
Amortization of leased assets	Cost of revenues, Sales and marketing, General and administrative and Research and development	65
Interest on lease liabilities	Interest expense	11
Total lease cost		$	1,470
Sublease income	General and administrative	$	232

The future minimum lease payments required under all leases and the present value of net minimum lease payments as of September 30, 2022 are as follows:


Maturity of Lease Liabilities	Operating		Finance
2023 (remaining nine months)	$	5,115	$	242
2024	5,746		323
2025	4,826		296
2026	4,620		45
2027	4,333		—
Thereafter	9,435		—
Total minimum lease payments	34,075		906
Less: Amount representing interest	(5,158)		(63)
Present value of minimum lease payments	$	28,917	$	843

The table below summarizes the weighted average remaining lease term and weighted average discount rate used by lease type:


Lease Term and Discount Rate	September 30, 2022
Weighted average remaining lease term:
Operating leases	7.2 years
Finance leases	2.8 years
Weighted average discount rate:
Operating leases	3.6	%
Finance leases	5.0	%

The table below summarizes the impact to cash flows related to leases:


	Three Months Ended September 30, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used for operating leases	$	2,322
Operating cash flows used for finance leases	11
Financing cash flows used for finance leases	70
Leased assets obtained in exchange for new finance lease liabilities	—
Leased assets obtained in exchange for new operating lease liabilities	6,612

11. FAIR VALUE MEASUREMENTS:

U.S. GAAP defines fair value, establishes a framework for measuring fair value, and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income or cost approach are used to measure fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities the Company can access.

Level 2 inputs are inputs (other than quoted prices included within Level 1) that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs are unobservable inputs for the asset or liability and rely on management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

The fair value of certain assets, such as nonfinancial assets, primarily long-lived assets, goodwill, intangible assets and certain other assets, are recognized or disclosed in connection with impairment evaluations. All non-recurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.

The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, and accounts payable approximated fair value as of September 30, 2022 and June 30, 2022, because of the relatively short maturity of these instruments.

The following table presents information on the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and June 30, 2022:


	September 30, 2022
	Level 1		Level 2		Level 3		Total
Funds held for clients—cash and cash equivalents:
Demand deposit accounts and other cash equivalents	$	669,046	$	—	$	—	$	669,046
Funds held for clients—available-for-sale:
U.S. Treasury and direct obligations of U.S. government agencies	—		60,660		—		60,660
Corporate bonds	—		171,487		—		171,487
Commercial paper	—		16,294		—		16,294
Other securities	—		15,820		—		15,820
	$	669,046	$	264,261