SEC Filing | PAYCOR HCM, INC.

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pycr-20230331

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 March 31, 2023


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

————————

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 April 30, 2023, the number of shares of the Registrant’s Common Stock outstanding was 176,535,103 shares.

Table of Contents


Part I - FINANCIAL INFORMATION
Item 1. Financial Statements			5
Unaudited Condensed Consolidated Balance Sheets as of March 31, 202 3 and June 30, 2022			5
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 202 3 and 20 2 2			6
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended March 31, 202 3 and 20 2 2			7
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended March 31, 202 3 and 20 2 2			8
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 202 3 and 20 2 2			10
Notes to the Unaudited Condensed Consolidated Statements			11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			42
Item 4. Controls and Procedures			43
Part II - OTHER INFORMATION
Item 1. Legal Proceedings			45
Item 1A. Risk Factors			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3. Defaults Upon Senior Securities			45
Item 4. Mine Safety Disclosures			45
Item 5. Other Information			45
Item 6. Exhibits			46
Signatures			47

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 downturn or 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 our 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)


	March 31, 2023		June 30, 2022
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	82,858	$	133,041
Accounts receivable, net	30,506		21,511
Deferred contract costs	49,982		37,769
Prepaid expenses	17,256		9,421
Other current assets	3,533		1,874
Current assets before funds held for clients	184,135		203,616
Funds held for clients	1,258,249		1,715,916
Total current assets	1,442,384		1,919,532
Property and equipment, net	31,404		31,675
Operating lease right-of-use assets	17,500		—
Goodwill	761,425		750,155
Intangible assets, net	282,956		263,069
Capitalized software, net	49,819		40,002
Long-term deferred contract costs	153,519		125,705
Other long-term assets	3,991		1,179
Total assets	$	2,742,998	$	3,131,317
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	20,987	$	13,945
Accrued expenses and other current liabilities	18,954		13,907
Accrued payroll and payroll related expenses	36,515		44,592
Deferred revenue	12,724		11,742
Current liabilities before client fund obligations	89,180		84,186
Client fund obligations	1,260,057		1,719,047
Total current liabilities	1,349,237		1,803,233
Deferred income taxes	21,848		31,895
Long-term operating leases	16,644		—
Other long-term liabilities	70,005		11,458

Total liabilities	1,457,734		1,846,586
Commitments and contingencies (Note 15)

Stockholders' equity:
Common stock $0.001 par value per share, 500,000,000 shares authorized, 176,440,422 shares outstanding at March 31, 2023 and 174,909,539 shares outstanding at June 30, 2022	176		175
Treasury stock, at cost, 10,620,260 shares at March 31, 2023 and June 30, 2022	(245,074)		(245,074)
Preferred stock, $0.001 par value, 50,000,000 shares authorized, — shares outstanding at March 31, 2023 and June 30, 2022	—		—

Additional paid-in capital	1,991,298		1,926,800
Accumulated deficit	(459,244)		(395,389)
Accumulated other comprehensive loss	(1,892)		(1,781)
Total stockholders' equity	1,285,264		1,284,731
Total liabilities and stockholders' equity	$	2,742,998	$	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 March 31,				Nine Months Ended March 31,
	2023		2022		2023		2022
Revenues:
Recurring and other revenue	$	150,757	$	122,189	$	389,908	$	317,334
Interest income on funds held for clients	10,725		408		22,741		1,062
Total revenues	161,482		122,597		412,649		318,396
Cost of revenues	49,323		41,157		138,692		127,850
Gross profit	112,159		81,440		273,957		190,546
Operating expenses:
Sales and marketing	55,499		41,487		155,607		127,957
General and administrative	51,033		54,090		151,405		141,963
Research and development	13,658		9,324		39,935		30,120
Total operating expenses	120,190		104,901		346,947		300,040
Loss from operations	(8,031)		(23,461)		(72,990)		(109,494)
Other (expense) income:
Interest expense	(1,970)		(101)		(3,461)		(448)
Other	2,003		(12)		2,514		1,540
Loss before benefit for income taxes	(7,998)		(23,574)		(73,937)		(108,402)
Income tax benefit	(658)		(6,876)		(10,082)		(24,204)
Net loss	(7,340)		(16,698)		(63,855)		(84,198)
Less: Accretion of redeemable noncontrolling interests	—		—		—		11,621
Net loss attributable to Paycor HCM, Inc.	$	(7,340)	$	(16,698)	$	(63,855)	$	(95,819)
Basic and diluted net loss attributable to Paycor HCM, Inc. per share	$	(0.04)	$	(0.10)	$	(0.36)	$	(0.56)
Weighted average common shares outstanding:
Basic and diluted	176,306,017		174,819,649		175,879,962		171,881,617

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				Nine Months Ended
	March 31,				March 31,
	2023		2022		2023		2022
Net loss	$	(7,340)	$	(16,698)	$	(63,855)	$	(84,198)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on foreign currency translation	21		97		(286)		(74)
Unrealized gain (loss) on available-for-sale securities, net of tax	641		(1,291)		175		(1,736)
Other comprehensive income (loss), net of tax	662		(1,194)		(111)		(1,810)
Comprehensive loss	(6,678)		(17,892)		(63,966)		(86,008)
Less: Comprehensive income attributable to redeemable noncontrolling interests	—		—		—		11,621
Comprehensive loss attributable to Paycor HCM, Inc.	$	(6,678)	$	(17,892)	$	(63,966)	$	(97,629)

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 March 31, 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, December 31, 2021	—	$	—	—	$	—	174,429,903	$	174	$	(245,074)	$	1,891,259	$	(354,872)	$	583	$	1,292,070
Net loss attributable to Paycor HCM, Inc.	—	—		—	—		—	—		—		—		(16,698)		—		(16,698)
Stock-based compensation expense	—	—		—	—		—	—		—		16,294		—		—		16,294

Issuance of common stock under employee stock plans	—	—		—	—		473,102	1		—		3,186		—		—		3,187
Other comprehensive loss	—	—		—	—		—	—		—		—		—		(1,194)		(1,194)
Other	—	—		—	—		—	—		—		6		—		—		6
Balance, March 31, 2022	—	$	—	—	$	—	174,903,005	$	175	$	(245,074)	$	1,910,745	$	(371,570)	$	(611)	$	1,293,665


	Three Months Ended March 31, 2023
	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, December 31, 2022	—	$	—	—	$	—	175,856,650	$	176	$	(245,074)	$	1,967,352	$	(451,904)	$	(2,554)	$	1,267,996
Net loss attributable to Paycor HCM, Inc.	—	—		—	—		—	—		—		—		(7,340)		—		(7,340)
Stock-based compensation expense	—	—		—	—		—	—		—		20,384		—		—		20,384

Net settlement for taxes	—	—		—	—		—	—		—		(423)		—		—		(423)
Issuance of common stock under employee stock plans	—	—		—	—		583,772	—		—		3,985		—		—		3,985
Other comprehensive income	—	—		—	—		—	—		—		—		—		662		662

Balance, March 31, 2023	—	$	—	—	$	—	176,440,422	$	176	$	(245,074)	$	1,991,298	$	(459,244)	$	(1,892)	$	1,285,264

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)


	Nine Months Ended March 31, 2022
	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.	—	—		—	—		—	—		—		—		(95,819)		—		(95,819)
Stock-based compensation expense	—	—		—	—		—	—		—		55,321		—		—		55,321
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	—		—		—		—		—		—
Issuance of common stock under employee stock plans	—	—		—	—		473,102	1		—		3,186		—		—		3,187
Other comprehensive loss	—	—		—	—		—	—		—		—		—		(1,810)		(1,810)


Other	—	—		—	—		—	—		—		1,953		—		(1,953)		—
Balance, March 31, 2022	—	$	—	—	$	—	174,903,005	$	175	$	(245,074)	$	1,910,745	$	(371,570)	$	(611)	$	1,293,665


	Nine Months Ended March 31, 2023
	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.	—	—		—	—		—	—		—		—		(63,855)		—		(63,855)
Stock-based compensation expense	—	—		—	—		—	—		—		58,019		—		—		58,019

Net settlement for taxes	—	—		—	—		—	—		—		(2,150)		—		—		(2,150)
Issuance of common stock under employee stock plans	—	—		—	—		1,530,883	1		—		8,629		—		—		8,630
Other comprehensive loss	—	—		—	—		—	—		—		—		—		(111)		(111)

Balance, March 31, 2023	—	$	—	—	$	—	176,440,422	$	176	$	(245,074)	$	1,991,298	$	(459,244)	$	(1,892)	$	1,285,264

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)


	Nine Months Ended
	March 31,
	2023		2022
Cash flows from operating activities:
Net loss	$	(63,855)	$	(84,198)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation	3,571		5,113
Amortization of intangible assets and software	92,727		95,556
Amortization of deferred contract costs	33,246		22,330
Stock-based compensation expense	58,019		55,321

Deferred tax benefit	(10,287)		(24,227)
Bad debt expense	3,233		1,655
Loss (gain) on sale of investments	232		(9)
Gain on installment sale	—		(1,359)
Loss on foreign currency exchange	381		101
Loss on lease exit	950		9,055
Naming rights accretion expense	3,198		—
Change in fair value of deferred consideration	—		(138)

Other	(930)		66
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable	(12,063)		(5,391)
Prepaid expenses and other assets	(6,510)		(5,195)

Accounts payable	6,229		(160)
Accrued liabilities and other	(19,602)		618
Deferred revenue	1,119		943

Deferred contract costs	(73,273)		(58,450)
Net cash provided by operating activities	16,385		11,631
Cash flows from investing activities:
Purchases of client funds available-for-sale securities	(365,196)		(178,362)
Proceeds from sale and maturities of client funds available-for-sale securities	259,097		127,603
Purchase of property and equipment	(3,285)		(1,861)
Proceeds from note receivable on installment sale	—		3,040
Acquisition of intangible assets	(18,842)		(4,640)


Acquisition of Talenya Ltd., net of cash acquired	(18,793)		—
Internally developed software costs	(30,600)		(22,667)
Net cash used in investing activities	(177,619)		(76,887)
Cash flows from financing activities:
Net change in cash and cash equivalents held to satisfy client funds obligations	(453,685)		1,204,091


Payment of deferred consideration	—		(2,752)


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

Repayments of debt and capital lease obligations	(211)		—


Proceeds from the issuance of common stock sold in the IPO, net of offering costs and underwriting discount	—		454,915
Redemption of Redeemable Series A Preferred Stock (acquisition of noncontrolling interest)	—		(260,044)
Withholding taxes paid related to net share settlements	(2,150)		—
Proceeds from exercise of stock options	345		—
Proceeds from employee stock purchase plan	8,285		3,186

Other financing activities	—		(395)
Net cash (used in) provided by financing activities	(447,416)		1,349,901
Impact of foreign exchange on cash and cash equivalents	(15)		18
Net change in cash, cash equivalents, restricted cash and short-term investments, and funds held for clients	(608,665)		1,284,663
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	$	1,074,258	$	1,844,663
Supplemental disclosure of non-cash investing, financing and other cash flow information:
Capital expenditures in accounts payable	$	2	$	25
Cash paid for interest	—		154

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	$	82,858	$	134,004

Funds held for clients	991,400		1,710,659
Total cash, cash equivalents, restricted cash and short-term investments, and funds held for clients	$	1,074,258	$	1,844,663

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 investment 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 nine months ended March 31, 2022, $3,827 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 noncontrolling 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 any 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 $6,144 and $3,268 as of March 31, 2023 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 $8,014 and $5,354 for the three months ended March 31, 2023 and 2022, respectively. Advertising and promotion expense totaled approximately $21,415 and $15,229 for the nine months ended March 31, 2023 and 2022, 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 March 31, 2023 and 2022 of $20,384 and $16,294, respectively. The Company recognized stock-based compensation expense for the nine months ended March 31, 2023 and 2022 of $58,019 and $55,321, 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 $17,457 and $24,626, 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, which will be adopted within the current fiscal year, but does not expect it to have a material impact.

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 March 31,				Nine Months Ended March 31,
	2023		2022		2023		2022
Recurring fees	$	147,491	$	119,108	$	380,426	$	307,873
Implementation services and other	3,266		3,081		9,482		9,461
Recurring and other revenue	$	150,757	$	122,189	$	389,908	$	317,334

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 March 31,				Nine Months Ended March 31,
	2023		2022		2023		2022
Balance, beginning of period	$	17,037	$	15,289	$	17,046	$	16,047
Deferred revenue acquired	7		—		300		—
Deferral of revenue	6,279		6,467		16,186		15,868
Revenue recognized	(4,949)		(4,816)		(15,052)		(14,926)
Impact of foreign exchange	(4)		32		(110)		(17)
Balance, end of period	$	18,370	$	16,972	$	18,370	$	16,972

Deferred revenue is recorded within deferred revenue and other long-term liabilities on the unaudited condensed consolidated balance sheets. The Company will recognize deferred revenue of $3,967 in fiscal year 2023, $10,610 in fiscal year 2024, $3,793 in fiscal year 2025 and $0 thereafter.

Deferred contract costs

The following table presents the deferred contract costs balance and related amortization expense for these deferred contract costs.


	As of and for the Three Months Ended March 31, 2023
	Beginning Balance		Capitalization of Costs		Amortization		Ending Balance
Costs to obtain a contract	$	82,423	$	10,559	$	(5,316)	$	87,666
Costs to fulfill a contract	107,482		15,189		(6,836)		115,835
Total	$	189,905	$	25,748	$	(12,152)	$	203,501


	As of and for the Three Months Ended March 31, 2022
	Beginning Balance		Capitalization of Costs		Amortization		Ending Balance
Costs to obtain a contract	$	62,471	$	9,076	$	(3,713)	$	67,834
Costs to fulfill a contract	76,543		11,681		(4,555)		83,669
Total	$	139,014	$	20,757	$	(8,268)	$	151,503


	As of and for the Nine Months Ended March 31, 2023
	Beginning Balance		Capitalization of Costs		Amortization		Ending Balance
Costs to obtain a contract	$	72,342	$	29,949	$	(14,625)	$	87,666
Costs to fulfill a contract	91,132		43,324		(18,621)		115,835
Total	$	163,474	$	73,273	$	(33,246)	$	203,501


	As of and for the Nine Months Ended March 31, 2022
	Beginning Balance		Capitalization of Costs		Amortization		Ending Balance
Costs to obtain a contract	$	52,926	$	25,006	$	(10,098)	$	67,834
Costs to fulfill a contract	62,457		33,444		(12,232)		83,669
Total	$	115,383	$	58,450	$	(22,330)	$	151,503

Deferred contract costs are recorded within deferred contract costs and long-term deferred contract costs on the unaudited 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 operati