Paylocity Holding Corp

(all amounts in thousands, except per share data)

(1) Organization and Description of Business

Paylocity Holding Corporation (the “Company”) is a cloud-based provider of human capital management (“HCM”), finance and IT software solutions. Services are provided in a Software-as-a-Service (“SaaS”) delivery model. The Company offers a product suite that enables businesses to streamline HR, finance, and IT operations, manage spend and talent, and build culture and connection with artificial intelligence (“AI”) embedded directly into everyday workflows.

(2) Summary of Significant Accounting Policies

(a)Basis of Presentation, Consolidation and Use of Estimates

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

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

Certain amounts in the prior period have been reclassified to conform to the current period presentation. Specifically, deferred contract costs are now presented in a single caption on the Consolidated Balance Sheets. These reclassifications had no material effect on the reported financial results.

(b)Interim Unaudited Consolidated Financial Information

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the Company’s financial position, results of operations, changes in stockholders’ equity and cash flows. The results of operations for the three months ended September 30, 2026 are not necessarily indicative of the results for the full year or the results for any future periods. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended June 30, 2026 included in the Company’s Annual Report on Form 10-K.

(c)Income Taxes

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

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

(d)Recently Issued Accounting Standards

In November 2024, the FASB issued Accounting Standards Update 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses ("ASU 2024-03"). ASU 2024-03 requires the disclosure of additional information about specific expense categories in the notes to the financial statements. The incremental disclosures may be presented on a prospective or retrospective basis. This ASU is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impacts of this ASU on its consolidated financial statement disclosures including the method and timing of adoption.

In September 2025, the FASB issued Accounting Standards Update 2025-06, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software ("ASU 2025-06"). ASU 2025-06 removes all references to software development stages in existing guidance and, instead, requires the capitalization of software development costs when the Company's management has authorized and committed to funding a project and it is probable the project will be completed and the software will be used to perform its intended function. This ASU may be applied on a prospective, retrospective or on a modified transition basis based on project and capitalization status before the adoption date. This ASU is effective for all fiscal years beginning after December 15, 2027 and interim periods beginning within those annual reporting periods, with early adoption permitted as of the beginning of an annual reporting period. The Company is currently assessing the impact of this ASU on its consolidated financial statements and is evaluating the method and timing of adoption.

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

(3) Revenue

The Company derives substantially all of its revenue from recurring service fees under customer contracts. While the majority of its agreements are generally cancellable by the client upon 60 days’ notice or less, the Company also offers term agreements to its clients, which are generallytwo years in length. Recurring fees are mostly derived from cloud-based payroll and HCM software solutions which include payroll processing and related services such as payroll reporting and tax filing services, time and labor services, time clock rentals, and HCM-related software solutions, including employee management and benefits enrollment and administration, substantially all of which are delivered on a monthly basis. Substantially all of the Company’s recurring fees are satisfied over time as services are provided. The performance obligations related to recurring services are generally satisfied monthly as services are provided, with fees charged and collected based on a per-employee-per-month fee. The Company has certain optional performance obligations that are satisfied at a point in time including the sales of time clocks and W-2 services. Implementation services and other consists primarily of nonrefundable implementation fees, which involve setting the client up in, and loading data into, the Company’s cloud-based solutions. These implementation activities are considered set-up activities. The Company has determined that the nonrefundable upfront fees provide certain clients with a material right to renew the contract.

Disaggregation of revenue

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

Deferred revenue

The timing of revenue recognition for recurring revenue is generally consistent with the timing of invoicing as they occur monthly as services are provided based on a per-employee-per-month fee. As such, the Company does not generally recognize contract assets or liabilities related to recurring revenue.

The Company defers and amortizes nonrefundable upfront fees related to implementation services generally over a period up to 24 months based on the type of contract. The following table summarizes the changes in deferred revenue (i.e., contract liability) related to these nonrefundable upfront fees as follows:

Deferred revenue related to these nonrefundable upfront fees is recorded within Accrued expenses and Other long-term liabilities on the Unaudited Consolidated Balance Sheets. The Company expects to recognize these deferred revenue balances as follows: $21,030 in fiscal 2027, $12,699 in fiscal 2028 and $3,095 in fiscal 2029 and thereafter.

Deferred contract costs

The Company defers certain selling and commission costs that meet the capitalization criteria under ASC 340-40. The Company also capitalizes certain costs to fulfill a contract related to its proprietary products if they are identifiable, generate or enhance resources used to satisfy future performance obligations and are expected to be recovered under ASC 340-40. Implementation fees are treated as nonrefundable upfront fees and the related implementation costs are required to be capitalized and amortized over the expected period of benefit, which is the period in which the Company expects to recover the costs and enhance its ability to satisfy future performance obligations.

The Company utilizes the portfolio approach to account for both the cost of obtaining a contract and the cost of fulfilling a contract. These capitalized costs are amortized over the expected period of benefit, which the Company increased from 7 years to 8 years effective June 30, 2026, on a prospective basis, based on the Company’s average client life and growth of term contract renewals beyond their initial terms. The Company does not incur any additional costs to obtain or fulfill contracts upon renewal. The Company recognizes additional selling and commission costs and fulfillment costs when an existing client purchases additional services. These additional costs only relate to the additional services purchased and do not relate to the renewal of previous services.

The following tables present the deferred contract costs and the related amortization expense for these deferred contract costs:

Deferred contract costs are recorded within Deferred contract costs and Long-term deferred contract costs on the Unaudited Consolidated Balance Sheets. Amortization of deferred contract costs is primarily recorded in Cost of revenues and Sales and marketing in the Unaudited Consolidated Statements of Operations and Comprehensive Income.

Remaining Performance Obligations

The balance of the Company’s remaining performance obligations related to minimum monthly fees on its term-based contracts was approximately $274,009 as of September 30, 2026, which will be generally recognized over the next 24 months. This balance excludes the value of unsatisfied performance obligations for contracts that have an original expected duration of one year or less and contracts for which the variable consideration is allocated entirely to wholly unsatisfied performance obligations.

(4) Business Combinations

The Company accounts for business combinations in accordance with ASC 805, Business Combinations. The Company recorded the acquisitions disclosed below using the acquisition method of accounting and recognized the assets and liabilities at their fair values as of the respective dates of acquisitions, with the excess recorded to goodwill.

On April 6, 2026, the Company acquired all of the outstanding shares of Grayscale Labs, Inc. ("Grayscale") through a merger for cash consideration of $50,361, which reflects working capital and other customary purchase price adjustments. Grayscale is an AI-powered recruiting automation company. This acquisition expands the Company's recruiting capabilities with AI-powered automation to enable its clients to engage candidates earlier and move faster through time-sensitive hiring workflows. The preliminary allocation of the purchase price for Grayscale, which reflects certain immaterial measurement period adjustments recorded during the three months ended September 30, 2026, was $36,010 of goodwill, $11,600 of proprietary technology, $3,200 of client relationships and other immaterial assets and liabilities.

On July 8, 2026, the Company acquired all of the outstanding shares of Aidora Inc. ("Aidora"), an AI-native leave management compliance software company, through a merger for cash consideration of $10,515, subject to working capital and other customary purchase price adjustments. The preliminary purchase price allocation for Aidora was $7,339 of goodwill, $3,200 of proprietary technology and other immaterial assets and liabilities.

The fair values of the assets acquired and liabilities assumed due to these acquisitions are currently provisional and are subject to change over their respective measurement periods, which will end no later than one year from the respective acquisition dates. The goodwill related to these transactions is primarily attributable to the assembled workforces and growth opportunities from the expansion and enhancement of the Company’s product offerings and is not deductible for income tax purposes. The results from these acquisitions have been included in the Company’s consolidated financial statements since the respective closing dates of the transactions. Direct costs related to the acquisitions were not material and were expensed as incurred as General and administrative expense in the Unaudited Consolidated Statements of Operations and Comprehensive Income. Pro forma information is not presented for the acquisitions because the effects of the acquisitions are not material to the Company’s consolidated financial statements.

(5) Balance Sheet Information

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

Activity in the allowance for credit losses related to accounts receivable was as follows:

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

Amortization of capitalized internal-use software costs is primarily included in Cost of revenues and amounted to $17,250 and $18,570 for the three months ended September 30, 2025 and 2026, respectively.

The major classes of property and equipment, net were as follows:

Depreciation expense amounted to $4,942 and $5,419 for the three months ended September 30, 2025 and 2026, respectively.

The following table summarizes changes in goodwill during the three months ended September 30, 2026:

Refer to Note 4 for further details on current year acquisition activity.

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

Amortization expense for acquired intangible assets was $5,261 and $5,915 for the three months ended September 30, 2025 and 2026, respectively, and is included in Cost of revenues and General and administrative.

Future amortization expense for acquired intangible assets as of September 30, 2026 is as follows:

The components of accrued expenses were as follows:

(6) Cash and Cash Equivalents and Funds Held for Clients

Cash and cash equivalents and Funds held for clients consisted of the following:

All available-for-sale securities were included in Funds held for clients at June 30, 2026 and September 30, 2026.

Cash and cash equivalents and funds held for clients’ cash and cash equivalents included demand deposit accounts and money market funds at June 30, 2026 and September 30, 2026.

Classification of investments on the Unaudited Consolidated Balance Sheets was as follows:

Available-for-sale securities in an unrealized loss position for a period of less and greater than 12 months as of June 30, 2026 and September 30, 2026 had fair market value as follows:

The Company regularly reviews the composition of its portfolio to determine the existence of credit impairment. The Company didnot recognize any credit impairment losses during the three months ended September 30, 2025 or 2026. All securities in the Company’s portfolio held an A rating or better as of September 30, 2026.

The Company did not make any material reclassification adjustments out of Accumulated other comprehensive income for realized gains and losses on the sale of available-for-sale securities during the three months ended September 30, 2025 or 2026. Realized gains or losses on sales of available-for-sale securities were immaterial for both the three months ended September 30, 2025 and 2026.

Expected maturities of available-for-sale securities at September 30, 2026 were as follows:

(7) Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

•Level 1—Quoted prices in active markets for identical assets and liabilities.

•Level 2—Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company measures cash and cash equivalents and funds held for clients' cash and cash equivalents at fair value on a recurring basis using Level 1 inputs. The carrying amounts of accounts receivable, accounts payable and client fund obligations approximate fair value due to the short-term nature of these instruments. The carrying value of the borrowings under the credit facility approximates fair value because the borrowings bear interest at market rates for debt instruments with similar terms and maturities. Accordingly, the Company considers the carrying amounts of these financial assets and liabilities to approximate their respective fair values at June 30, 2026 and September 30, 2026.

Marketable securities classified as available-for-sale are recorded at fair value on a recurring basis using Level 2 inputs obtained from an independent pricing service. Available-for-sale securities may include commercial paper, corporate bonds, asset-backed securities, certificates of deposit, U.S. treasury securities, and other securities. The independent pricing service utilizes a variety of inputs including benchmark yields, broker/dealer quoted prices, reported trades, issuer spreads as well as other available market data. The Company, on a sample basis, validates the pricing from the independent pricing service against another third-party pricing source for reasonableness. The Company has not adjusted any prices obtained by the independent pricing service, as it believes they are appropriately valued. There wereno available-for-sale securities classified in Level 3 of the fair value hierarchy at June 30, 2026 or September 30, 2026.

The fair value levels for the Company’s cash and cash equivalents and available-for-sale securities were as follows:

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

The Company records assets acquired and liabilities assumed in business combinations at fair value. Refer to Note 4 for further details on the fair value measurements of certain assets and liabilities recorded at fair value on a non-recurring basis using Level 3 inputs.

(8) Debt

In September 2026, the Company entered into an amended and restated revolving credit agreement ("credit agreement") with PNC Bank, National Association, and other lenders, which replaced the Company's previous credit agreement. The credit agreement is secured by substantially all of the Company’s assets, subject to certain exceptions, and provides for a senior secured revolving credit facility ("credit facility") with borrowing capacity up to $1,750,000, which may be increased up to $2,625,000, subject to obtaining additional lender commitments and certain approvals and satisfying other requirements. The credit facility includes a$175,000 sublimit for swing loans and a$175,000 sublimit for letters of credit. The credit facility is scheduled to expire in September 2031, but the Company may request up to two one-year maturity extensions. Any outstanding borrowings will mature and be payable upon expiration. At June 30, 2026, the Company had $81,250 in outstanding borrowings under its credit facility. During the three months ended September 30, 2026, the Company borrowed an additional $50,000 and made no repayments. As a result, $131,250 remained outstanding at September 30, 2026.

The proceeds of any borrowings are to be used to fund working capital, capital expenditures and general corporate purposes, including share repurchases and permitted acquisitions, investments, and distributions. The Company may generally borrow, prepay and reborrow under the credit facility and terminate or reduce the lenders’ commitments at any time prior to the credit facility expiration without a premium or a penalty, other than customary “breakage” costs.

Any borrowings under the credit facility will bear interest, at the Company’s option, at a rate per annum determined by reference to either the Term Secured Overnight Financing Rate ("SOFR") rate or an adjusted base rate, in each case plus an applicable margin ranging from 1.000% to 1.625% and 0.000% to 0.625%, respectively, based on the then-applicable net total leverage ratio. Additionally, the Company is required to pay certain commitment, letter of credit fronting and letter of credit participation fees on available and/or undrawn portions of the credit facility.

The Company is required to comply with certain customary affirmative and negative covenants, including a requirement to maintain a maximum net total leverage ratio of not greater than 4.00 to 1.00, and a minimum interest coverage ratio of not less than 2.00 to 1.00. As of September 30, 2026, the Company was in compliance with all of the aforementioned covenants.

(9) Stock-Based Compensation

As of September 30, 2026, the Company had 407 shares available for future grant under the amended and restated 2023 Equity Incentive Plan ("2023 Plan"), and 2,698 shares were subject to outstanding awards. Generally, the Company issues previously unissued shares for the vesting of awards; however, shares previously subject to 2023 Plan grants or awards that are forfeited or net settled at exercise or release may be reissued to satisfy future issuances.

Stock-based compensation expense related to restricted stock units ("RSUs"), performance stock units ("PSUs"), market stock units ("MSUs") and the Company's Employee Stock Purchase Plan is included in the following line items in the accompanying Unaudited Consolidated Statements of Operations and Comprehensive Income:

In addition, the Company capitalized $2,916 and $3,902 of stock-based compensation expense in its capitalized internal-use software costs for the three months ended September 30, 2025 and 2026, respectively.

The Company grants RSUs under the 2023 Plan with terms determined at the discretion of the Compensation Committee of the Company's board of directors ("the Committee"). RSUs are time-based awards that generally vest over four years following the grant date.

The following table represents RSU activity during the three months ended September 30, 2026:

The Company also grants PSUs under the 2023 Plan with terms determined at the discretion of the Committee. The actual number of PSUs that will be eligible to vest is based on the achievement of Recurring and other revenue targets over aone year period with vesting taking place annually over three years. Up to 200% of the target number of shares subject to each PSU are eligible to be earned.

The following table represents PSU activity during the three months ended September 30, 2026:

The Company also grants MSUs under the 2023 Plan with terms determined at the discretion of the Committee. The actual number of MSUs that will be eligible to vest is based on the achievement of a relative total shareholder return (“TSR”) target as compared to the TSR realized by each of the companies comprising the Russell 3000 Index over approximately three years. The MSUs vest at the end of each TSR measurement period, and up to 200% of the target number of shares subject to each MSU are eligible to be earned.

The following table represents MSU activity during the three months ended September 30, 2026:

The Company estimated the grant date fair value of the MSUs using a Monte Carlo simulation model that included the following assumptions:

At September 30, 2026, there was $259,713 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested RSUs, PSUs and MSUs. That cost is expected to be recognized over a weighted average period of 1.9 years.

(10) Litigation

On November 16, 2020, a potential class action complaint was filed against the Company with the Circuit Court of Cook County alleging that the Company violated the Illinois Biometric Information Privacy Act. The complaint sought statutory damages, attorney’s fees and other costs. On April 22, 2025, this matter was dismissed with prejudice. On May 21, 2025, the plaintiff filed a notice of appeal. The Company will continue to vigorously defend against this lawsuit on appeal.

In addition, from time to time, the Company is subject to litigation arising in the ordinary course of business. Many of these matters are covered in whole or in part by insurance. In the opinion of the Company’s management, the ultimate disposition of any matters currently outstanding or threatened will not have a material adverse effect on the Company’s financial position, results of operations, or liquidity. However, these matters are subject to inherent uncertainties and could materially impact the Company’s financial position, results of operations, or liquidity based on the final disposition of these matters.

(11) Income Taxes

The Company’s quarterly provision for income taxes is based on the annual effective rate method. The Company’s quarterly provision for income taxes also includes the tax impact of certain unusual or infrequently occurring items, if any, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, and other discrete items in the interim period in which they occur.

The Company's effective tax rate was 35.9% and 30.2% for the three months ended September 30, 2025 and 2026, respectively. The Company's effective tax rate for the three months ended September 30, 2025 was higher than the federal statutory rate of 21% primarily due to stock-based compensation shortfalls realized, state and local income taxes and an increase in the valuation allowance. The Company's effective tax rate for the three months ended September 30, 2026 was higher than the federal statutory rate of 21% primarily due to stock-based compensation shortfalls realized and state and local income taxes.

(12) Net Income Per Share

Basic net income per common share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares outstanding during the period and, if dilutive, potential common shares outstanding during the period. The Company’s potential common shares consist of the incremental common shares issuable upon the release of RSUs, PSUs and MSUs as of the balance sheet date. The following table presents the calculation of basic and diluted net income per share:

The following table summarizes the outstanding restricted stock units, performance stock units and market stock units as of September 30, 2025 and 2026 that were excluded from the diluted per share calculation for the periods presented because to include them would have been antidilutive:

(13) Segment Reporting

The Company determined that it operates asone reportable segment and derives revenues from customers by providing its HCM, finance and IT software solutions. The Company’s chief operating decision maker (“CODM”) is its president and chief executive officer. The CODM utilizes consolidated net income and certain non-GAAP measures, including adjusted EBITDA, along with other information contained in the consolidated financial statements to assess the Company’s performance and guide decisions on allocation of resources. The segment’s total assets are reported on the consolidated balance sheet.

The following table presents the Company’s revenue, significant expenses and other segment items as included in consolidated net income:

Other segment items primarily include amortization of capitalized internal-use software and acquired intangible assets and stock-based compensation expense.