# Paycom Software, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Paycom Software, Inc.](/companies/payc.md) (CIK 1590955)
- Form: 10-Q
- Filed: 2023-11-02
- Accepted by EDGAR: Nov 2, 2023, 16:05 ET
- Period: 2023-09-30
- Accession: 0000950170-23-058167
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1590955/000095017023058167/payc-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1590955/000095017023058167/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $406.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $1.26bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $68.9m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $201.6m | us-gaap:CostOfRevenue |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $51.9m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $143.7m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $240.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $712.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $96.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $344.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $222.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $1.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $26.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $101.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $75.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $259.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $1.30 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $4.46 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $1.30 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $4.48 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 57,966,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 58,056,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $350.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $135.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $43.4m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $75.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $484.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $2.56bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $3.86bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $2.07bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $2.43bn | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $29.0m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2023-09-30 | $1.42bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 51,996 characters.

*This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with management’s perspective on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and notes thereto for the three and nine months ended September 30, 2023, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2022 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 16, 2023 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K. Except for certain information as of December 31, 2022, all amounts herein are unaudited. Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer to Paycom Software, Inc. and its consolidated subsidiaries. All amounts presented in tables, other than per share amounts, are in thousands unless otherwise noted.*

### Special Note Regarding Forward-Looking Statements

The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are any statements that refer to Paycom’s estimated or anticipated results, other non-historical facts or future events and include, but are not limited to, statements regarding our business strategy; anticipated future operating results and operating expenses, cash flows, capital resources, dividends and liquidity; trends, opportunities and risks affecting our business, industry and financial results; future expansion or growth plans and potential for future growth, including internationally; our ability to attract new clients to purchase our solution; our ability to retain clients and induce them to purchase additional applications; our ability to accurately forecast future revenues and appropriately plan our expenses; market acceptance of our solution and applications; our expectations regarding future revenues generated by certain applications; our ability to attract and retain qualified employees and key personnel; future regulatory, judicial and legislative changes; how certain factors affecting our performance correlate to improvement or deterioration in the labor market; our plan to open additional sales offices and our ability to effectively execute such plan; the sufficiency of our existing cash and cash equivalents to meet our working capital and capital expenditure needs over the next 12 months; our plans regarding our capital expenditures and investment activity as our business grows, including with respect to research and development and the expansion of our corporate headquarters and other facilities; our plans to pay cash dividends; and our plans to repurchase shares of our common stock through a stock repurchase plan. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “anticipate,” “believe,” “could,” “estimate,” “expect,” “will,” “intend,” “may,” “might,” “plan,” “potential,” “should,” “would,” and similar expressions or the negative of such terms or other comparable terminology.

Forward-looking statements are neither historical facts nor assurances of future performance, and are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

- the possibility of security vulnerabilities, cyberattacks and network disruptions, including breaches of data security and privacy leaks, data loss, and business interruptions;
- changes in laws, government regulations and policies and interpretations thereof;
- our compliance with data privacy laws and regulations;
- our ability to develop enhancements and new applications, keep pace with technological developments and respond to future disruptive technologies;
- our ability to compete effectively;
- our ability to manage our rapid growth and organizational change effectively;
- fluctuations in our financial results due to factors beyond our control;
- the possibility that clients may not be satisfied with our deployment or technical support services, or that our solution fails to perform properly;
- our dependence on our key executives;
- our ability to attract and retain qualified personnel, including software developers and skilled IT, sales, marketing and operational personnel;
- the impact of adverse economic and market conditions, including those related to the global health crises and geopolitical conflicts;
- our failure to develop and maintain our brand cost-effectively;
- seasonality of certain operating results and financial metrics;
- our failure to adequately protect our intellectual property rights;
- our ability to manage risks associated with international operations and sales;
- our reliance on relationships with third parties;
- the possibility that the Affordable Care Act may be modified, repealed or declared unconstitutional; and
- the other factors set forth in Part I, Item 1A, “Risk Factors” of the Form 10-K and our other reports filed with the SEC.

Forward-looking statements are based only on information currently available to us and speak only as of the date of this Form 10-Q. We do not undertake any obligation to update or revise the forward-looking statements to reflect events that occur or circumstances that exist after the date on which such statements were made, except to the extent required by law.

### Overview

We are a leading provider of a comprehensive, cloud-based human capital management (“HCM”) solution delivered as Software-as-a-Service. We provide functionality and data analytics that businesses need to manage the complete employment lifecycle, from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources management applications. Our user-friendly software allows for easy adoption of our solution by employees, enabling self-management of their HCM activities in the cloud, which reduces the administrative burden on employers and increases employee productivity.

We generate revenues from (i) fixed amounts charged per billing period plus a fee per employee or transaction processed and (ii) fixed amounts charged per billing period. We do not require clients to enter into long-term contractual commitments with us. Our billing period varies by client based on when each client pays its employees, which may be weekly, bi-weekly, semi-monthly or monthly. We serve a diverse client base in terms of size and industry. None of our clients constituted more than one-half of one percent of our revenues for the nine months ended September 30, 2023. Our revenues are primarily generated through our sales force that solicits new clients and our client relations representatives (“CRRs”) who sell new applications to existing clients.

Our continued growth depends on attracting new clients through further penetration of our existing markets and geographic expansion into new markets, targeting a high degree of client employee usage across our solution, and introducing new applications to our existing client base. We believe our ability to continue to develop new applications and to improve existing applications will enable us to increase revenues in the future, and the number of our new applications adopted by our clients has been a significant factor in our revenue growth. We plan to open additional sales offices in the future to further expand our market presence.

Our principal marketing efforts include national and local advertising campaigns, email campaigns, social and digital media campaigns, search engine marketing methods, sponsorships, tradeshows, print advertising and outbound marketing including personalized direct mail campaigns. In addition, we generate leads and build recognition of our brand and thought leadership with relevant and informative content, such as white papers, blogs, podcast episodes and webinars.

Throughout our history, we have built strong relationships with our clients. As the HCM needs of our clients evolve, we believe that we are well-positioned to expand the HCM spending of our clients and we believe this opportunity is significant. To be successful, we must continue to demonstrate the operational and economic benefits of our solution, as well as effectively hire, train, motivate and retain qualified personnel.

### Growth Outlook, Opportunities and Challenges

As a result of our significant revenue growth and geographic expansion, we are presented with a variety of opportunities and challenges. Our payroll application is the foundation of our solution and all of our clients are required to utilize this application in order to access our other applications. Consequently, we have historically generated the majority of our revenues from our payroll applications, although our revenue mix has evolved and will continue to evolve as we develop and add new non-payroll applications to our solution. We believe our strategy of focusing on increased employee usage is an important differentiator for attracting new clients and is also key to long-term client satisfaction and client retention. For example, in 2021, we launched our industry-first Beti technology, which further automates and streamlines the payroll process by empowering employees to do their own payroll. Client adoption of new applications and, historically, client employee usage of both new and existing applications have been significant factors in our revenue growth. Nonetheless, because Beti is designed to eliminate payroll errors that lead to billable corrections and unscheduled payroll runs, we have experienced and expect to continue to experience a reduction in these activities that would otherwise generate additional revenue for us.

In order to increase revenues and continue to improve our operating results, we must also attract new clients. We intend to obtain new clients by (i) continuing to leverage our sales force productivity within markets where we currently have existing sales offices, (ii) expanding our presence in metropolitan areas where we currently have an existing sales office through adding sales teams or offices, thereby increasing the number of sales professionals within such markets, and (iii) opening sales offices in new metropolitan areas.

Historically, our target client size range has been organizations with 50 to 10,000 employees. We recently expanded our target client size range to include enterprise organizations with more than 10,000 employees. While we continue to serve a diversified client base ranging in size from one employee to many thousands of employees, the average size of our clients has grown significantly as we have organically grown our operations, increased the number of applications we offer and gained traction with larger companies. Furthermore, with the launch of our Global HCM solution and expansion of payroll services into Canada and Mexico, we expect that our ability to serve organizations with international employees makes our solution more attractive to larger companies, many of which have a global presence. We believe larger employers represent a substantial opportunity to increase our revenues per client, with limited incremental cost to us. Because we charge our clients on a per employee basis for certain services we provide, any increase or decrease in the number of employees of our clients will have a positive or negative impact, respectively, on our results of operations. A multitude of macroeconomic pressures, such as inflation and rising interest rates, impact our clients’ hiring practices to varying degrees and, in turn, impact our revenues. Generally, we expect that changes in certain factors affecting our performance will correlate with improvement or deterioration in the labor market.

We collect funds from clients in advance of either the applicable due date for payroll tax submissions or the applicable disbursement date for employee payment services. Those collections from clients are typically disbursed from one to 30 days after receipt, with some funds being held for up to 120 days. We typically invest funds held for clients in money market funds, demand deposit accounts, U.S. treasury securities, certificates of deposit and commercial paper until they are paid to the applicable tax or regulatory agencies or to client employees. As we introduce new applications, expand our client base and renew and expand relationships with existing clients, we expect our average funds held for clients balance and, accordingly, interest earned on funds held for clients, will increase; however, the amount of interest we earn can be positively or negatively impacted by changes in interest rates.

Growing our business has resulted in, and will continue to result in, substantial investments in sales professionals, operating expenses, system development and programming costs and general and administrative expenses, which have increased and will continue to increase our expenses. Specifically, our revenue growth and geographic expansion drive increases in our employee headcount, which in turn precipitates increases in (i) salaries and benefits, (ii) stock-based compensation expense and (iii) facility costs related to the expansion of our corporate headquarters and operations facilities and additional sales office leases.

We believe the challenges of managing the ever-changing complexity of payroll and human resources will continue to drive companies to turn to outsourced providers for help with their HCM needs. The HCM industry historically has been driven, in part, by legislation and regulatory action, including COBRA, changes to the minimum wage laws or overtime rules, and legislation from federal, state or municipal taxation authorities. The market for HCM software is highly competitive, rapidly evolving and fragmented, and we expect competition to continue to intensify as new market entrants emerge and increasingly aggressive pricing strategies persist.

Our revenues are seasonal in nature and generally we expect our first and fourth quarter recurring revenues to be higher than other quarters during the year. Recurring revenues include revenues relating to the annual processing of payroll tax filing forms and Affordable Care Act form filing requirements and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. As payroll tax forms are typically processed in the first quarter of the year, first quarter recurring revenues and margins are positively impacted. In addition, unscheduled payroll runs at the end of the year often result in increased recurring revenues in the fourth quarter. These seasonal fluctuations in revenues can also have an impact on gross profits. Historical results impacted by these seasonal trends should not be considered a reliable indicator of our future results of operations.

For the three months ended September 30, 2023 and 2022, our total gross margins were approximately 83% and 84%, respectively. For the nine months ended September 30, 2023 and 2022, our total gross margins were approximately 84% and 85%, respectively. Although our gross margins may fluctuate from quarter to quarter due to seasonality and hiring trends, we expect that our gross margins will remain relatively consistent in future periods.

### Results of Operations

The following table sets forth certain consolidated statements of comprehensive income data and such data as a percentage of total revenues for the periods presented:

| Revenues | Three Months Ended September 30, 2023 |  | 2022 |  | % Change | Nine Months Ended September 30, 2023 |  | 2022 |  | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Recurring | $398,763 | 98.1% | $328,150 | 98.2% | 21.5% | $1,237,706 | 98.3% | $987,848 | 98.3% | 25.3% |
| Implementation and other | 7,540 | 1.9% | 6,017 | 1.8% | 25.3% | 21,373 | 1.7% | 16,762 | 1.7% | 27.5% |
| Total revenues | 406,303 | 100.0% | 334,167 | 100.0% | 21.6% | 1,259,079 | 100.0% | 1,004,610 | 100.0% | 25.3% |
| **Cost of revenues** |  |  |  |  |  |  |  |  |  |  |
| Operating expenses | 55,600 | 13.7% | 44,169 | 13.2% | 25.9% | 163,302 | 13.0% | 122,265 | 12.2% | 33.6% |
| Depreciation and amortization | 13,341 | 3.3% | 10,935 | 3.3% | 22.0% | 38,299 | 3.0% | 31,405 | 3.1% | 22.0% |
| Total cost of revenues | 68,941 | 17.0% | 55,104 | 16.5% | 25.1% | 201,601 | 16.0% | 153,670 | 15.3% | 31.2% |
| **Administrative expenses** |  |  |  |  |  |  |  |  |  |  |
| Sales and marketing | 101,162 | 24.9% | 91,114 | 27.3% | 11.0% | 311,171 | 24.7% | 253,834 | 25.3% | 22.6% |
| Research and development | 51,864 | 12.8% | 40,366 | 12.1% | 28.5% | 143,651 | 11.4% | 108,774 | 10.8% | 32.1% |
| General and administrative | 71,827 | 17.7% | 60,693 | 18.1% | 18.3% | 213,397 | 16.9% | 179,109 | 17.8% | 19.1% |
| Depreciation and amortization | 15,608 | 3.8% | 12,625 | 3.8% | 23.6% | 44,660 | 3.6% | 36,378 | 3.6% | 22.8% |
| Total administrative expenses | 240,461 | 59.2% | 204,798 | 61.3% | 17.4% | 712,879 | 56.6% | 578,095 | 57.5% | 23.3% |
| Total operating expenses | 309,402 | 76.2% | 259,902 | 77.8% | 19.0% | 914,480 | 72.6% | 731,765 | 72.8% | 25.0% |
| Operating income | 96,901 | 23.8% | 74,265 | 22.2% | 30.5% | 344,599 | 27.4% | 272,845 | 27.2% | 26.3% |
| Interest expense | (222) | -0.1% | (1,018) | -0.3% | -78.2% | (1,661) | -0.1% | (1,587) | -0.2% | 4.7% |
| Other income (expense), net | 5,362 | 1.4% | 2,041 | 0.6% | 162.7% | 17,549 | 1.3% | 4,331 | 0.4% | 305.2% |
| Income before income taxes | 102,041 | 25.1% | 75,288 | 22.5% | 35.5% | 360,487 | 28.6% | 275,589 | 27.4% | 30.8% |
| Provision for income taxes | 26,822 | 6.6% | 23,135 | 6.9% | 15.9% | 101,456 | 8.0% | 74,151 | 7.3% | 36.8% |
| Net income | $75,219 | 18.5% | $52,153 | 15.6% | 44.2% | $259,031 | 20.6% | $201,438 | 20.1% | 28.6% |

### Revenues

The increase in total revenues for the three and nine months ended September 30, 2023 compared to the same periods in 2022 was primarily the result of the addition of new clients and productivity and efficiency gains in mature sales offices, which are offices that have been open for at least 24 months, and the sale of additional applications to our existing clients. In addition, the performance of our tax forms filing business in the first quarter contributed to the increase in total revenues for the nine months ended September 30, 2023 as compared to the same period in 2022. Because we charge our clients on a per-employee basis for certain services we provide, the drivers of revenue for the three and nine months ended September 30, 2023 described above were impacted by the headcount fluctuations within our client base. Additionally, rising interest rates and a higher average funds held for clients balance during the three and nine months ended September 30, 2023 as compared to the same periods in 2022, resulted in increased interest earned on funds held for clients, which had a positive impact on recurring revenue.

The increase in implementation and other revenues for the three and nine months ended September 30, 2023 from the same periods in 2022 was primarily the result of the increased non-refundable upfront conversion fees collected from the addition of new clients. These fees are deferred and recognized ratably over the ten-year estimated life of our clients.

### Expenses

### Cost of Revenues

During the three months ended September 30, 2023, operating expenses increased from the comparable prior year period by $11.4 million, primarily due to a $9.8 million increase in employee-related expenses attributable to growth in the number of operating personnel, a $0.7 million increase in automated clearing house fees related to increased revenues and a $0.4 million increase in shipping and supplies fees. Depreciation and amortization expense increased $2.4 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other fixed assets.

During the nine months ended September 30, 2023, operating expenses increased from the comparable prior year period by $41.0 million, primarily due to a $35.3 million increase in employee-related expenses attributable to growth in the number of operating personnel, a $3.0 million increase in shipping and supplies fees and a $1.4 million increase in automated clearing house fees related to increased revenues. Depreciation and amortization expense increased $6.9 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other fixed assets.

### Administrative Expenses

#### Sales and Marketing

During the three months ended September 30, 2023, sales and marketing expenses increased from the comparable prior year period by $10.0 million due to a $13.7 million increase in employee-related expenses, including commissions and bonuses, which were partially offset by a $3.7 million decrease in marketing and advertising expense primarily attributable to the timing of specific projects.

During the nine months ended September 30, 2023, sales and marketing expenses increased from the comparable prior year period by $57.3 million due to a $47.6 million increase in employee-related expenses, including commissions and bonuses, and a $9.7 million increase in marketing and advertising expense attributable to increased spending across most components of our marketing program.

#### Research and Development

During the three and nine months ended September 30, 2023, research and development expenses increased from the comparable prior year periods due to increases in employee-related expenses of $11.5 million and $34.9 million, respectively.

As we continue the ongoing development of our platform and product offerings, we generally expect research and development expenses (exclusive of stock-based compensation) to continue to increase, particularly as we hire more personnel to support our growth. While we expect this trend to continue on an absolute dollar basis and as a percentage of total revenues, we also anticipate the rate of increase to decline over time as we leverage our growth and realize additional economies of scale. As is customary for our business, we also expect fluctuations in research and development expense as a percentage of revenue on a quarter-to-quarter basis due to seasonal revenue trends, the introduction of new products, the amount and timing of research and development costs that may be capitalized and the timing of onboarding new hires and restricted stock vesting events.

Expenditures for software developed or obtained for internal use are capitalized and amortized over a three-year period on a straight-line basis. The nature of the development projects underway during a particular period, such as our recently announced international expansion, directly impacts the timing and extent of these capitalized expenditures and can affect the amount of research and development expenses in such period. The table below sets forth the amounts of capitalized and expensed research and development costs for the three and nine months ended September 30, 2023 and 2022:

|  | Three Months Ended September 30, 2023 | 2022 | % Change | Nine Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Capitalized portion of research and development | $26,578 | $16,995 | 56% | $70,809 | $48,835 | 45% |
| Expensed portion of research and development | 51,864 | 40,366 | 28% | 143,651 | 108,774 | 32% |
| Total research and development costs | $78,442 | $57,361 | 37% | $214,460 | $157,609 | 36% |

26

#### General and Administrative

During the three months ended September 30, 2023, general and administrative expenses increased $11.1 million from the comparable prior year period due an increase in employee-related expenses.

During the nine months ended September 30, 2023, general and administrative expenses increased $34.3 million from the comparable prior year period due to a $30.0 million increase in employee-related expenses and a $4.3 million increase in accounting and legal expenses.

### Non-Cash Stock-Based Compensation Expense

The following table presents the non-cash stock-based compensation expense that is included within the specified line items in our consolidated statements of comprehensive income:

| Non-cash stock-based compensation expense | Three Months Ended September 30, 2023 | 2022 | % Change | Nine Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Operating expenses | $2,868 | $1,396 | 105% | $8,606 | $3,725 | 131% |
| Sales and marketing | 6,851 | 5,280 | 30% | 18,367 | 13,186 | 39% |
| Research and development | 5,617 | 3,039 | 85% | 17,514 | 8,115 | 116% |
| General and administrative | 17,862 | 14,777 | 21% | 51,896 | 45,789 | 13% |
| Total non-cash stock-based compensation expense | $33,198 | $24,492 | 36% | $96,383 | $70,815 | 36% |

### Depreciation and Amortization

During the three and nine months ended September 30, 2023, depreciation and amortization expense increased from the comparable prior year periods primarily due to the development of additional technology and purchases of other related fixed assets.

### Interest Expense

The decrease in interest expense for the three months ended September 30, 2023, as compared to the prior year period, was primarily due to the timing of our expansion project at our corporate headquarters, which resulted in a higher capitalization rate of interest in 2023.

The increase in interest expense for the nine months ended September 30, 2023, as compared to the prior year period, was due to the timing of our entrance into the Credit Agreement (as defined below) on July 29, 2022.

### Other Income (Expense), net

The increases in other income (expense), net for the three and nine months ended September 30, 2023 were primarily due to income earned on our corporate funds of $6.5 million and $17.9 million, respectively. For the three and nine months ended September 30, 2022, we earned income on our corporate funds of $1.5 million and $2.1 million, respectively. Additionally, as a result of the termination of the Term Loan Facility (as defined below), we incurred a loss on the extinguishment of debt of $1.2 million in the three and nine months ended September 30, 2023, which consisted of the write-off of unamortized debt issuance costs. See Note 6 for additional information.

### Provision for Income Taxes

The provision for income taxes is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items. Our effective income tax rate was 28.1% and 26.9% for the nine months ended September 30, 2023 and 2022, respectively. The increase in effective tax rate for the nine months ended September 30, 2023 was related to a decrease of excess tax benefits from stock-based compensation.

### Liquidity and Capital Resources

Our principal sources of capital and liquidity are our operating cash flow and cash and cash equivalents. Our cash and cash equivalents consist primarily of demand deposit accounts, money market funds and certificates of deposit. Additionally, we maintain a $1.0 billion senior secured revolving credit facility (the “Revolving Credit Facility”), which can be accessed as needed to supplement our operating cash flow and cash balances. As of September 30, 2023, we have $29.0 million of outstanding borrowings under the Revolving Credit Facility.

We have historically funded our operations from cash flows generated from operations, cash from the sale of equity securities and debt financing. Although we have funded most of the costs for construction projects at our corporate headquarters and other facilities from available cash, we have incurred indebtedness for a portion of these costs. We are funding our current expansion projects from available cash. Further, to date, all cash dividends and purchases under our stock repurchase plans have been funded from available cash. We believe our existing cash and cash equivalents, cash generated from operations and available sources of liquidity will be sufficient to maintain operations, make necessary capital expenditures, pay dividends and opportunistically repurchase shares for at least the next 12 months. In addition, based on our strong profitability and continued growth, we expect to meet our longer-term liquidity needs with cash flows from operations and, as needed, financing arrangements.

*Credit Agreement*. On July 29, 2022, we entered into a new credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as a lender, swingline lender and issuing bank, the lenders from time to time party thereto (collectively with JPMorgan Chase Bank, N.A., the “Lenders”), and JPMorgan Chase Bank, N.A., as the administrative agent. The Credit Agreement initially provided for the Revolving Credit Facility in the aggregate principal amount of up to $650.0 million, and the ability to request an incremental facility of up to an additional $500.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The Credit Agreement includes a $25.0 million sublimit for swingline loans and a $6.5 million sublimit for letters of credit. The Credit Agreement also initially provided for a $750.0 million senior secured delayed draw term loan facility (the “Term Loan Facility”). As discussed below, the Term Loan Facility was terminated on July 28, 2023. All loans under the Credit Agreement will mature on July 29, 2027 (the “Scheduled Maturity Date”).

The borrowings under the Credit Agreement bear interest at a rate per annum equal to (i) the Alternate Base Rate (“ABR”) plus an applicable margin (“ABR Loans”) or (ii) (x) the term Secured Overnight Financing Rate (“SOFR”) plus 0.10% (the “Adjusted Term SOFR Rate”) or (y) the daily SOFR plus 0.10%, in each case plus an applicable margin (“SOFR Rate Loans”). ABR is calculated as the highest of (i) the rate of interest last quoted by The Wall Street Journal in the United States as the prime rate in effect, (ii) the federal funds rate plus 0.5% and (iii) the Adjusted Term SOFR Rate for a one-month interest period plus 1.00%; provided that, if the ABR as determined pursuant to the foregoing would be less than 1.00%, such rate shall be deemed to be 1.00%. The applicable margin for ABR Loans is (i) 0.25% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 0.50% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 0.75% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 1.00% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0. The applicable margin for SOFR Rate Loans is (i) 1.25% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 1.5% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 1.75% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 2.00% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0. We are required to pay a quarterly commitment fee on the daily amount of the undrawn portion of the revolving commitments under the Revolving Credit Facility and, prior to its termination, a quarterly ticking fee on the daily amount of the undrawn portion of the Term Loan Facility, in each case at a rate per annum of (i) 0.20% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 0.225% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 0.25% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 0.275% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0. We are also required to pay customary letter of credit fees upon drawing any letter of credit.

Under the Credit Agreement, we are required to maintain as of the end of each fiscal quarter a consolidated interest coverage ratio of not less than 3.0 to 1.0 and a consolidated leverage ratio of not greater than 3.75 to 1.0 initially, stepping down to 3.0 to 1.0 at intervals thereafter.

On July 29, 2022, we borrowed $29.0 million under the Revolving Credit Facility to repay the outstanding indebtedness under our prior credit facility, along with accrued interest, expenses and fees. The loan bears interest at the Adjusted Term SOFR Rate for the interest period in effect plus 1.25%.

On July 28, 2023, we entered into an amendment to the Credit Agreement (the “Credit Agreement Amendment”), pursuant to which the aggregate revolving commitments thereunder were increased from $650.0 million to $1.0 billion, the Term Loan Facility was terminated and the Credit Agreement was amended in contemplation of the formation and future operating activities of Paycom Client Trust (the “Client Trust”) and Paycom National Trust Bank, NA (the “Trust Bank”). We intend to form the Client Trust to hold client payroll and related funds and the Trust Bank to serve as trustee of the Client Trust. We did not make any draws under the Term Loan Facility prior to its termination.

*Stock Repurchase Plan and Withholding Shares to Cover Taxes.* In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. Most recently, in August 2022, our Board of Directors authorized the repurchase of up to $1.1 billion of our common stock. As of September 30, 2023, there was $1.0 billion available for repurchases under our stock repurchase plan. Our stock repurchase plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, shares withheld for taxes associated with the vesting of equity incentive awards and other corporate considerations. The current stock repurchase plan will expire on August 15, 2024.

During the nine months ended September 30, 2023, we repurchased an aggregate of 303,401 shares of our common stock at an average cost of $288.77 per share, including 43,891 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of equity incentive awards. Our payment of the taxes on behalf of those employees resulted in an aggregate cash expenditure of $12.6 million and, as such, we generally subtract the amounts attributable to such withheld shares from the aggregate amount available for future purchases under our stock repurchase plan.

*Dividends on Common Stock.* In May 2023, our Board of Directors adopted a dividend policy under which we intend to pay quarterly cash dividends on our common stock.

The following table summarizes dividend activity during 2023.

| Declaration Date | Record Date | Payment Date | Per Share Dividend | Total Cash Dividends Paid(1) |
| --- | --- | --- | ---: | ---: |
| October 30, 2023 | November 27, 2023 | December 11, 2023 | $0.375 | $―(2) |
| July 31, 2023 | August 28, 2023 | September 11, 2023 | 0.375 | 21,636 |
| May 15, 2023 | May 30, 2023 | June 12, 2023 | 0.375 | 21,731 |

(1) All unvested equity incentive awards currently outstanding are entitled to receive dividends or dividend equivalents, provided that such dividends or dividend equivalents are withheld by the Company and distributed to the applicable holder upon vesting of the award. Dividends declared, as reported in the consolidated statements of stockholders’ equity, includes dividends and dividend equivalents payable to holders of unvested equity incentive awards and, as a result, exceeds the amount of total cash dividends paid presented in this column.

(2) The total cash dividend to be paid on December 11, 2023 will be determined based on the number of shares outstanding as of November 27, 2023.

The declaration, timing and amount of each quarterly cash dividend are subject to the approval of the Board of Directors, including a determination that the dividend policy and the declaration of dividends thereunder are in the best interests of our stockholders and are in compliance with applicable law. The Board of Directors retains the power to modify, suspend, or cancel the dividend policy in any manner and at any time that it may deem necessary or appropriate.

### Cash Flow Analysis

Our cash flows from operating activities have historically been significantly impacted by profitability, implementation revenues received but deferred, our investment in sales and marketing to drive growth, and research and development. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives.

As our business grows, we expect our capital expenditures and our investment activity to continue to increase. For example, we estimate that the total cost of the current expansion project at our corporate headquarters will be between $70 million and $75 million. Capital expenditures related to this expansion began in the fourth quarter of 2021 and we expect construction to be completed in the first quarter of 2024. In addition, we purchased the naming rights to the downtown Oklahoma City arena that is home to the Oklahoma City Thunder National Basketball Association franchise. Under the terms of the naming rights agreement, we committed to make payments escalating annually from $4.0 million in 2021 to $6.1 million in 2035. The payments are due in the fourth quarter of each year. Upon the conclusion of the initial term, the agreement may be extended upon the mutual agreement of both parties for an additional five-year period. Depending on certain growth opportunities, we may choose to accelerate investments in sales and marketing, acquisitions, technology and services. Actual future capital requirements will depend on many factors, including our future revenues, cash from operating activities and the level of expenditures in all areas of our business.

As part of our payroll and payroll tax filing services, we collect funds from our clients for federal, state and local employment taxes, which we remit to the appropriate tax agencies. We typically invest these funds in money market funds, demand deposit accounts, certificates of deposit, commercial paper and U.S. treasury securities from which we earn interest income during the period between their receipt and disbursement.

Our cash flows from investing and financing activities are influenced by the amount of funds held for clients, which can vary significantly from quarter to quarter. The balance of the funds we hold depends on our clients’ payroll calendars, and therefore such balance changes from period to period in accordance with the timing of each payroll cycle.

Our cash flows from financing activities are also affected by the extent to which we use available cash to purchase shares of common stock under our stock repurchase plan as well as equity incentive award vesting events that result in net share settlements and the Company paying withholding taxes on behalf of certain employees. Additionally, we intend to continue to pay a quarterly cash dividend, subject to the discretion of the Board of Directors.

The following table summarizes the consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022:

| Net cash provided by (used in): | Nine Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: |
| Operating activities | $350,569 | $236,647 | 48% |
| Investing activities | (135,642) | (32,028) | 324% |
| Financing activities | (437,693) | (198,871) | 120% |
| Change in cash, cash equivalents, restricted cash and restricted cash equivalents | $(222,766) | $5,748 | -3976% |

#### Operating Activities

Cash provided by operating activities for the nine months ended September 30, 2023 primarily consisted of payments received from our clients and interest earned on funds held for clients. Cash used in operating activities primarily consisted of personnel-related expenditures to support the growth and infrastructure of our business. These payments included costs of operations, advertising and other sales and marketing efforts, IT infrastructure development, product research and development and security and administrative costs. Compared to the nine months ended September 30, 2022, our operating cash flows for the nine months ended September 30, 2023 were positively impacted by the growth of our business.

#### Investing Activities

Cash flows used in investing activities for the nine months ended September 30, 2023 increased from the comparable prior year period due to a $303.7 million decrease in proceeds from investments from funds held for clients and a $43.7 million increase in purchases of property and equipment, which were partially offset by a $243.7 million decrease in purchases of investments from funds held for clients and a $0.1 million increase in proceeds from the sale of property and equipment.

#### Financing Activities

Cash used in financing activities for the nine months ended September 30, 2023 increased from the comparable prior year period primarily due to the impact of a $213.6 million change related to the client funds obligation, which is due to the timing of receipts from our clients and payments made to our clients’ employees and applicable taxing authorities on their behalf, the payment of $43.4 million in cash dividends, a decrease in proceeds from the issuance of debt of $29.0 million and a $7.6 million increase in withholding taxes paid related to net share settlements. The increase in cash flows used in financing activities was partially offset by a $29.3 million decrease in payments of long-term debt, a $19.7 million decrease in repurchases of common stock, and a $5.8 million decrease in payment of debt issuance costs.

### Contractual Obligations

Our principal commitments primarily consist of long-term debt, leases for office space and the naming rights agreement. Except as described above with respect to the Credit Agreement Amendment, there have been no material changes to our contractual obligations disclosed in the contractual obligations section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K that was filed with the SEC on February 16, 2023. For additional information regarding our naming rights agreement, leases, long-term debt and our commitments and contingencies, see “Note 4. Goodwill and Intangible Assets, Net”, “Note 5. Leases”, “Note 6. Long-Term Debt, Net” and “Note 13. Commitments and Contingencies” in the Form 10-K and “Note 5. Goodwill and Intangible Assets, Net”, “Note 6. Long-Term Debt”, and “Note 13. Commitments and Contingencies” in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.

### Critical Accounting Policies and Estimates

Our consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions to ensure that management believes them to be reasonable under the then-current facts and circumstances. Actual amounts and results may materially differ from these estimates made by management under different assumptions and conditions.

Certain accounting policies that require significant management estimates, and are deemed critical to our results of operations or financial position, are discussed in the critical accounting policies and estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K. There have been no material changes to the critical accounting policies disclosed in the Form 10-K.

### Adoption of Accounting Pronouncements

Discussion of our recently adopted accounting pronouncements can be found in Note 2 in this Form 10-Q.

### Non-GAAP Financial Measures

Management uses adjusted EBITDA and non-GAAP net income as supplemental measures to review and assess the performance of our core business operations and for planning purposes. We define (i) adjusted EBITDA as net income plus interest expense, taxes, depreciation and amortization, non-cash stock-based compensation expense, certain transaction expenses that are not core to our operations (if any), the change in fair value of our interest rate swap and any loss on the extinguishment of debt and (ii) non-GAAP net income as net income plus non-cash stock-based compensation expense, certain transaction expenses that are not core to our operations (if any), the change in fair value of our interest rate swap and any loss on the extinguishment of debt, all of which are adjusted for the effect of income taxes. Adjusted EBITDA and non-GAAP net income are metrics that provide investors with greater transparency to the information used by management in its financial and operational decision-making. We believe these metrics are useful to investors because they facilitate comparisons of our core business operations across periods on a consistent basis, as well as comparisons with the results of peer companies, many of which use similar non-GAAP financial measures to supplement results under U.S. GAAP. In addition, adjusted EBITDA is a measure that provides useful information to management about the amount of cash available for reinvestment in our business, repurchasing common stock and other purposes. Management believes that the non-GAAP measures presented in this Form 10-Q, when viewed in combination with our results prepared in accordance with U.S. GAAP, provide a more complete understanding of the factors and trends affecting our business and performance.

Adjusted EBITDA and non-GAAP net income are not measures of financial performance under U.S. GAAP, and should not be considered a substitute for net income, which we consider to be the most directly comparable U.S. GAAP measure. Adjusted EBITDA and non-GAAP net income have limitations as analytical tools, and when assessing our operating performance, you should not consider adjusted EBITDA or non-GAAP net income in isolation, or as a substitute for net income or other consolidated statements of comprehensive income data prepared in accordance with U.S. GAAP. Adjusted EBITDA and non-GAAP net income may not be comparable to similarly titled measures of other companies and other companies may not calculate such measures in the same manner as we do.

The following tables reconcile net income to adjusted EBITDA, net income to non-GAAP net income and earnings per share to non-GAAP net income per share on a basic and diluted basis:

| Net income to adjusted EBITDA: | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $75,219 | $52,153 | $259,031 | $201,438 |
| Interest expense | 222 | 1,018 | 1,661 | 1,587 |
| Provision for income taxes | 26,822 | 23,135 | 101,456 | 74,151 |
| Depreciation and amortization | 28,949 | 23,560 | 82,959 | 67,783 |
| EBITDA | 131,212 | 99,866 | 445,107 | 344,959 |
| Non-cash stock-based compensation expense | 33,198 | 24,492 | 96,383 | 70,815 |
| Loss on extinguishment of debt | 1,222 | — | 1,222 | — |
| Change in fair value of interest rate swap | — | 1,668 | — | — |
| Adjusted EBITDA | $165,632 | $126,026 | $542,712 | $415,774 |

32

| Net income to non-GAAP net income: | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $75,219 | $52,153 | $259,031 | $201,438 |
| Non-cash stock-based compensation expense | 33,198 | 24,492 | 96,383 | 70,815 |
| Loss on extinguishment of debt | 1,222 | — | 1,222 | — |
| Change in fair value of interest rate swap | — | 1,668 | — | — |
| Income tax effect on non-GAAP adjustments | (7,263) | (4,882) | (17,347) | (15,180) |
| Non-GAAP net income | $102,376 | $73,431 | $339,289 | $257,073 |
| Weighted average shares outstanding: |  |  |  |  |
| Basic | 57,825 | 57,865 | 57,871 | 57,949 |
| Diluted | 57,966 | 58,033 | 58,056 | 58,193 |
| Earnings per share, basic | $1.30 | $0.90 | $4.48 | $3.48 |
| Earnings per share, diluted | $1.30 | $0.90 | $4.46 | $3.46 |
| Non-GAAP net income per share, basic | $1.77 | $1.27 | $5.86 | $4.44 |
| Non-GAAP net income per share, diluted | $1.77 | $1.27 | $5.84 | $4.42 |

| Earnings per share to non-GAAP net income per share, basic: | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Earnings per share, basic | $1.30 | $0.90 | $4.48 | $3.48 |
| Non-cash stock-based compensation expense | 0.57 | 0.42 | 1.67 | 1.22 |
| Loss on extinguishment of debt | 0.02 | — | 0.02 | — |
| Change in fair value of interest rate swap | — | 0.03 | — | — |
| Income tax effect on non-GAAP adjustments | (0.12) | (0.08) | (0.31) | (0.26) |
| Non-GAAP net income per share, basic | $1.77 | $1.27 | $5.86 | $4.44 |

| Earnings per share to non-GAAP net income per share, diluted: | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Earnings per share, diluted | $1.30 | $0.90 | $4.46 | $3.46 |
| Non-cash stock-based compensation expense | 0.57 | 0.42 | 1.66 | 1.22 |
| Loss on extinguishment of debt | 0.02 | — | 0.02 | — |
| Change in fair value of interest rate swap | — | 0.03 | — | — |
| Income tax effect on non-GAAP adjustments | (0.12) | (0.08) | (0.30) | (0.26) |
| Non-GAAP net income per share, diluted | $1.77 | $1.27 | $5.84 | $4.42 |

33

## Market risk

As filed, 3,509 characters.

### Interest Rate Sensitivity

As of September 30, 2023, we had corporate cash and cash equivalents totaling $484.0 million and funds held for clients cash and cash equivalents totaling $1.7 billion. These amounts are invested primarily in demand deposit accounts and money market funds. We consider all highly liquid debt instruments purchased with a maturity of three months or less and SEC-registered money market mutual funds to be cash equivalents. Additionally, we had available-for-sale securities totaling $197.0 million included within funds held for clients on the consolidated balance sheets as of September 30, 2023. Our available-for-sale securities consisted of U.S. treasury securities with an original maturity greater than one year and certificates of deposit. The primary objectives of our investing activities are capital preservation, meeting our liquidity needs and, with respect to investing client funds, generating interest income while maintaining the safety of principal. We do not enter into investments for trading or speculative purposes.

Our investments are subject to market risk due to changes in interest rates. The market value of fixed rate securities may be adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. We classify all debt securities as available-for-sale and, as a result, no gains or losses are recognized due to changes in interest rates until such securities are sold or decreases in fair value are determined to be nonrecoverable. To date, we have not recorded any credit impairment losses on our portfolio.

As of September 30, 2023, a hypothetical increase or decrease in interest rates of 100 basis points would result in an approximately $22.0 million increase or decrease, respectively, in interest earned on funds held for clients over the ensuing 12-month period. Interest earned on funds held for clients is included in recurring revenues in the consolidated statements of comprehensive income. There are no incremental costs of revenue associated with changes in interest earned on funds held for clients.

An immediate increase in interest rates of 100 basis points would have resulted in a $2.0 million reduction in the aggregate market value of our fixed rate securities as of September 30, 2023. An immediate decrease in interest rates of 100 basis points would have resulted in a $2.0 million increase in the aggregate market value of our fixed rate securities as of September 30, 2023. These estimates are based on a sensitivity model that measures market value changes when changes in interest rates occur.

As of September 30, 2023, we had $29.0 million of indebtedness outstanding under the Revolving Credit Facility. Our borrowings under the Revolving Credit Facility bear interest at the Adjusted Term SOFR Rate for the interest period in effect plus 1.25%, and as a result, we may be exposed to increased interest rate risk. As of September 30, 2023, a hypothetical 100 basis point change in the applicable reference rates would result in a less than $1.0 million change in our interest expense over the ensuing 12-month period. Please refer to Note 6, “Debt” for additional information.

## Controls and procedures

As filed, 1,699 characters.

### Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our chief executive officer and chief financial officer, evaluated, as of September 30, 2023, the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2023 to ensure that information required to be disclosed by us in this Form 10-Q is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosures.

We believe, however, that a controls system, no matter how well designed and operated, can only provide reasonable assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

### Changes in Internal Control over Financial Reporting

There have been no material changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### PART II

### OTHER INFORMATION

## Risk factors

As filed, 12,227 characters.

Except as set forth below, there have been no material changes from the information set forth in “Item 1A. Risk Factors” in the Form 10-K filed with the SEC on February 16, 2023.

***If our security measures are breached, or unauthorized access to our clients’ or their employees’ or potential employees’ sensitive data is otherwise obtained, our solution may not be perceived as being secure, clients may reduce the use of or stop using our solution, our ability to attract new clients may be harmed and we may incur significant liabilities.***

Our solution involves the collection, storage and transmission of clients’ and their employees’ and potential employees’ confidential and proprietary information, including personal identifying information, as well as financial and payroll data. HCM software is often targeted in cyber attacks, including computer viruses, worms, phishing attacks, malicious software programs and other information security breaches, which could result in unauthorized access to or release, gathering, monitoring, misuse, loss or destruction of our or our clients’ sensitive data or otherwise disrupt our or our clients’ business operations. If cybercriminals are able to circumvent our security measures, or if we are unable to detect an intrusion into our systems and contain such intrusion in a reasonable amount of time, our or our clients’ sensitive data may be compromised. Further, certain of our employees have access to sensitive information about our clients’ employees. While we conduct background checks of our employees and limit access to systems and data, it is possible that one or more of these individuals may circumvent these controls, resulting in a security breach.

In certain limited circumstances, we utilize relationships with third parties to aid in data management and transaction processing. Certain third parties with which we do business have been subject to cyber attacks, one of which resulted in unauthorized access to data of certain Company clients and their employees as well as Company data and employee records. These third parties may be sources of cybersecurity or other technological risks in the future, including operational errors, system interruptions or breaches, unauthorized disclosure of confidential information and misuse of intellectual property.

Although we have security measures in place to protect client information and prevent data loss and other security breaches, these measures could be breached as a result of third-party action, employee error, third-party or employee malfeasance or otherwise. Globally, cybersecurity attacks are increasing in number and the attackers are increasingly organized and well financed, or at times supported by state actors. In addition, geopolitical tensions or conflicts, such as Russia’s invasion of Ukraine or increasing tension with China, may create a heightened risk of cybersecurity attacks. Because the techniques used to obtain unauthorized access or to sabotage systems change frequently, we may not be able to anticipate these techniques and implement adequate preventative or protective measures. While we currently maintain a cyber liability insurance policy, cyber liability insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our cyber liability insurance policy may not cover all claims made against us, and defending a suit, regardless of its merit, could be costly and divert management’s attention from our business and operations.

Any actual or perceived breach of our security could damage our reputation, cause existing clients to discontinue the use of our solution, prevent us from attracting new clients, or subject us to third-party lawsuits, regulatory fines or other actions or liabilities, any of which could adversely affect our business, operating results or financial condition.

***As we continue to enhance our solution to serve clients located outside of the United States, our business will be subject to risks associated with international operations.***

An element of our growth strategy is to expand our operations and client base. We have recently begun to expand our operations into markets outside of the United States. Doing business internationally involves a number of risks, including but not limited to:

- multiple, conflicting and changing laws and regulations such as privacy regulations, tax laws, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits, and licenses;
- failure to obtain and maintain regulatory approvals for the use of our products in various countries;
- complexities and difficulties in obtaining protection and enforcing our intellectual property;
- difficulties in staffing and managing foreign operations;
- limits in our ability to penetrate international markets;
- financial risks, such as the impact of local and regional financial crises on demand for our products and exposure to foreign currency exchange rate fluctuations;
- natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions;
- certain expenses including, among others, expenses for travel, translation and insurance; and
- regulatory and compliance risks that relate to maintaining accurate information and control over sales and activities that may fall within the purview of the U.S. Foreign Corrupt Practices Act, its books and records provisions or its anti-bribery provisions.

Our expansion into international markets requires significant resources and management attention and subjects us to regulatory, economic and political risks that differ from those in the United States. Because of our inexperience with international operations, we cannot ensure that our expansion into international markets will be successful, and the impact of such expansion may adversely affect our business, operating results or financial condition.

***Our background check business is subject to significant governmental regulation, and changes in law or regulation, or a failure to correctly identify, interpret, comply with and reconcile the laws and regulations to which it is subject, could materially adversely affect our revenue or profitability.***

We offer a background screening application called Enhanced Background Checks. In the course of providing background checks, we search and report public and non-public consumer information and records, including criminal records, employment and education history, credit history, driving records and drug screening results. Consequently, we are subject to extensive, evolving and often complex laws and governmental regulations, such as the Fair Credit Reporting Act (the “FCRA”), the Drivers’ Privacy Protection Act, state consumer reporting agency laws, state licensing and registration requirements, and various other foreign, federal, state and local laws and regulations. These laws and regulations set forth restrictions and process requirements concerning what may be reported about an individual, when, to whom, and for what purposes, and how the subjects of background checks are to be treated. Compliance with these laws and regulations requires significant expense and resources, which could increase significantly as these laws and regulations evolve. Such increase in restrictions and compliance costs could negatively affect our ability to provide other services expected by our clients and adversely affect our offerings and revenue.

Changes in law, regulation, or administrative enforcement and interpretations or other limitations and prohibitions related to the provision of consumer information and records could materially adversely affect our revenue and profitability. For example, numerous state and local authorities have implemented “ban the box” and “fair chance” hiring laws that limit or prohibit employers from inquiring or using a candidate’s criminal history to make employment decisions and many of these authorities have in recent years amended these laws to increase the restrictions on the use of such information. In addition, redaction of personal identifying information in criminal records (such as date of birth), and court rules or lawsuits that limit or restrict access to identifiers in criminal records, may negatively impact our ability to perform complete criminal background checks. The enactment of new restrictive legislation and the requirements, restrictions, and limitations imposed by changing interpretations and court decisions on such laws and regulations could prevent our customers from using the full functionality of our background screening application, which may reduce demand for such solution.

***We could face liability from of our background check services and the information we report or fail to report in our background checks, which may not be covered or fully covered by insurance.***

We face potential liability from individuals, classes of individuals, clients or regulatory bodies for claims based on the nature, content or accuracy of our background check services and the information we use and report. Our potential exposure to lawsuits or government investigations may increase depending in part on our clients’ compliance with these laws and regulations and applicable employment laws in their procurement and use of our background checks as part of their hiring process, which is generally outside of our control. Our potential liability includes claims of non-compliance with the FCRA, U.S. state consumer reporting agency laws or regulations, foreign regulations or applicable employment laws, as well as other claims of defamation, invasion of privacy, negligence, copyright, patent or trademark infringement. In some cases we may be subject to strict liability.

We also face potential liability from our clients, and possibly third parties, in the event we fail to report information, particularly criminal records or other potentially negative information, or wrongly report such information. From time to time, we have been subject to claims and lawsuits by current and potential employees of our clients, alleging that we provided to our clients inaccurate or improper information that negatively affected the clients’ hiring decisions. Although the resolutions of these lawsuits have not had a material adverse effect on us to date, the costs of such claims, including settlement amounts or punitive damages, could be material in the future, could cause adverse publicity and reputational damage, could divert the attention of our management, could subject us to equitable remedies relating to the operation of our business and provision of services and result in significant legal expenses, all of which could have a material adverse effect on our business, financial condition and results of operations and adverse publicity, and could result in the loss of existing clients and make it difficult to attract new clients. Insurance may not be adequate to cover us for all risks to which we are exposed or may not be available to cover these claims at all. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of our insurance coverage, could have a material adverse effect on our business, financial condition or results of operations. Additionally, we cannot be certain that our insurance coverage, including any applicable deductibles, copays and other policy limits, will continue to be available to us at a reasonable cost or will be adequate to cover any claims or lawsuits we may face in the future or that we will be able to renew our insurance policies on favorable terms, or at all.

***We may not continue to pay dividends or to pay dividends at the same rate as announced in May 2023.***

Our payment of dividends, as well as the rate at which we pay dividends, are solely at the discretion of our Board of Directors. Further, dividend payments, if any, are subject to our financial results and the availability of statutory surplus. These factors could result in a change to our recently adopted dividend policy.

Filed Nov 2, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-058167. Last ingested by Listed: Oct 24, 2026, 15:14 ET. No prices; not investment advice.