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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 87 added, 87 removed, 304 unchanged (36% of the section changed)

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This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management 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 six months ended June 30, 2020, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 13, 2020 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K.

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, 2020, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 13, 2020 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, 2019, all amounts herein are unaudited.

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our compliance with data privacy laws and regulations;

the possibility that the Affordable Care Act may be modified, repealed or declared unconstitutional;

our ability to develop enhancements and new applications, keep pace with technological developments and respond to future disruptive technologies;

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seasonality of certain operating results and financial metrics;

the possibility that the Affordable Care Act may be modified or repealed;

our failure to adequately protect our intellectual property rights;

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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 six months ended June 30, 2020.

None of our clients constituted more than one-half of one percent of our revenues for the nine months ended September 30, 2020.

Our revenues are primarily generated through our sales force that solicits new clients and our client relations representatives who sell new applications to existing clients.

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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 June 30, 2020 and 2019, our total gross margins were approximately 84% and 85%, respectively.

For the six months ended June 30, 2020 and 2019, our total gross margins were approximately 86% and 85%, respectively.

For the three months ended September 30, 2020 and 2019, our total gross margins were approximately 84% and 85%, respectively.

For the nine months ended September 30, 2020 and 2019, our total gross margins were approximately 85% 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.

Nonetheless, as discussed in further detail below, operational challenges resulting from the ongoing COVID-19 crisis may negatively impact our gross margins throughout 2020.

Impact of the COVID-19 Pandemic

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Our sales employees have been conducting all meetings with current and prospective clients virtually since March 2020, and we expect this practice to continue for the foreseeable future.

As of June 30, 2020, 96% of our employees were working remotely.

As of September 30, 2020, 95% of our employees were working remotely.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees and clients.

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Across many industries, temporary and permanent business closures as well as business occupancy limitations have resulted in significant layoffs and employee furloughs since late March 2020.

Because we charge our clients on a per-employee basis for certain services we provide, decreases in headcount at our clients negatively impacted our recurring revenue in the second quarter of 2020, and we expect that our recurring revenue in future periods will continue to be negatively impacted by such headcount reductions until employment levels among our existing client base return to pre-pandemic levels.

Because we charge our clients on a per-employee basis for certain services we provide, decreases in headcount at our clients as of the onset of the pandemic negatively impacted our recurring revenue in the third quarter of 2020, and we expect that our recurring revenue in future periods will continue to be negatively impacted by such headcount reductions until employment levels among such client base return to pre-pandemic levels.

Further, at the onset of the COVID-19 pandemic, a limited number of new clients temporarily delayed service implementation.

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In addition, during 2019, interest earned on funds held for clients contributed to growth in recurring revenue , due to both higher average interest rates and an increased average funds held for clients balance.

Since August 2019, the Federal Open Market Committee has reduced the target range for short-term interest rates several times, with the most significant rate cut occurring in

March 2020 to support the economy and potentially reduce the impacts of the COVID-19 pandemic.

Further , a provision in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) allows employers to delay the payment of the employer’s share of Social Security taxes to a future date.

To the extent our clients make such election, we are collecting less money from them to hold and then remit to the appropriate taxing authorities, which adversely affects our average funds held for clients balance and, consequently, interest earned on funds held for clients.

In the second quarter of 2020, despite the growth in the number of clients in our base, employee headcount reductions at our clients as well as clients electing to defer payment of their share of Social Security taxes under the CARES A ct resulted in no growth in our average funds held for clients balance, relative to the second quarter of 2019.

Due to s ignificantly lower average interest rates in 2020 and, to a lesser extent , the lack of growth of our average funds held for clients balance, interest earned on funds held for clients for the three and six months ended June 30, 2020 decreased from the comparable prior year periods , which had a negative effect on recurring revenue growth.

Demand for our solutions remains high and, in the second quarter of 2020, we continued to aggressively invest in sales and marketing and in research and development to drive future growth and expand our market share.

Lower headcount at our clients and the other pandemic-related factors described above, which had and may continue to have a negative impact on recurring revenue, combined with increased sales and marketing and research and development expenses, resulted in decreases in net income for the three and six months ended June 30, 2020 as compared to the respective prior year periods.

Since August 2019, the Federal Open Market Committee has reduced the target range for short-term interest rates several times, with the most significant rate cut occurring in March 2020 to support the economy and potentially reduce the impacts of the COVID-19 pandemic.

Further, a provision in the

Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) allows employers to delay the payment of the employer’s share of Social Security taxes to a future date.

In the third quarter of 2020, despite the growth in the number of clients in our base, employee headcount reductions at our clients as well as clients electing to defer payment of their share of Social Security taxes under the CARES A ct resulted in nominal growth in our average funds held for clients balance, relative to the third quarter of 2019.

Due to significantly lower average interest rates in 2020 and, to a lesser extent, the lack of growth of our average funds held for clients balance, interest earned on funds held for clients for the three and nine months ended September 30, 2020 decreased from the comparable prior year periods , which had a negative effect on recurring revenue growth.

Demand for our solutions remains high and, in the third quarter of 2020, we continued to aggressively invest in sales and marketing and in research and development to drive future growth and expand our market share.

Lower headcount at our clients and the other pandemic-related factors described above, which had and may continue to have a negative impact on recurring revenue, combined with increased sales and marketing and research and development expenses, resulted in decreases in net income for the three and nine months ended September 30, 2020 as compared to the respective prior year periods.

Through the remainder of 2020, we expect net income to be negatively affected by the impact of the pandemic on our recurring revenue and our deliberate, increased level of investment to drive the growth of our business.

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Implementation and other

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Provision for income taxes

The increase in total revenues for the three and six months ended June 30, 2020 compared to the same periods in 2019 was primarily the result of (i) 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, (ii) contributions from new sales offices opened in 2018 and 2019 that are progressing to maturity and (iii) the sale of additional applications to our existing clients.

In addition, the strong performance of our tax forms filing business in the first quarter contributed to the increase in total revenues for the six months ended June 30, 2020 as compared to the same period in 2019.

The increase in total revenues for the three and nine months ended September 30, 2020 compared to the same periods in 2019 was primarily the result of (i) 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, (ii) contributions from new sales offices opened in 2018 and 2019 that are progressing to maturity and (iii) the sale of additional applications to our existing clients.

In addition, the strong 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, 2020 as compared to the same period in 2019.

The COVID-19 pandemic has resulted in, and may continue to result in, headcount reductions across our client base.

Because we charge our clients on a per-employee basis for certain services we provide, the drivers of revenue for the three and six months ended June 30, 2020 described above were partially offset by the negative impact of headcount reductions within our existing client base.

Additionally, lower employee headcount at our clients as well as clients electing the Social Security tax deferral under the CARES Act negatively impacted our average funds held for clients balance for the three and six months ended June 30, 2020.

Significantly lower average interest rates in the first six months of 2020 as compared to the same period in 2019, as well as no growth in the average funds held for clients balance, resulted in a decrease in interest earned on funds held for clients and, consequently, had a negative effect on recurring revenue growth for the three and six months ended June 30, 2020.

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, 2020 described above were partially offset by the negative impact of headcount reductions within our client base as of the onset of the pandemic.

Significantly lower average interest rates in the first nine months of 2020 as compared to the same period in 2019, as well as minimal growth in the average funds held for clients balance, resulted in a decrease in interest earned on funds held for clients and, consequently, had a negative effect on recurring revenue growth for the three and nine months ended September 30, 2020.

We expect that the foregoing adverse macroeconomic factors will continue to have a negative effect on recurring revenues in future periods for so long as such conditions persist.

The increase in implementation and other revenues for the three and six months ended June 30, 2020 from the same periods in 2019 was primarily the result of the increased recognition of non-refundable upfront conversion fees that are charged to new clients to offset the expense of new client set up.

The increase in implementation and other revenues for the three and nine months ended September 30, 2020 from the same periods in 2019 was primarily the result of the increased recognition of non-refundable upfront conversion fees that are charged to new clients to offset the expense of new client set up.

These fees are deferred and recognized ratably over the ten-year estimated life of our clients.

Cost of Revenues

During the three months ended June 30, 2020, cost of revenues increased from the comparable prior year period by $4.3 million.

During the three months ended September 30, 2020, cost of revenues increased from the comparable prior year period by $4.5 million.

Depreciation and amortization expense increased $1.3 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other fixed assets.

Additionally, for the three months ended June 30, 2020, as compared to the same period in 2019, employee-related expenses increased $1.8 million due to growth in the number of operating personnel, non-cash stock-based compensation increased $1.4 million, and automated clearing house fees increased $0.1 million in connection with the increase in revenues.

These increases in cost of revenues were partially offset by a $0.4 million decrease in shipping and supplies fees during the three months ended June 30, 2020, as compared to the prior year period, primarily due to the remote work environment.

During the six months ended June 30, 2020, cost of revenues increased from the comparable prior year period by $5.0 million.

Additionally, for the three months ended September 30, 2020, as compared to the same period in 2019, employee-related expenses increased $1.7 million due to growth in the number of operating personnel, shipping and supplies fees increased $0.6 million, non-cash stock-based compensation increased $0.5 million, and automated clearing house fees increased $0.5 million in connection with the increase in revenues.

During the nine months ended September 30, 2020, cost of revenues increased from the comparable prior year period by $9.6 million.

Depreciation and amortization expense increased $4.1 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other fixed assets.

Additionally, for the six months ended June 30, 2020, as compared to the same period in 2019, employee-related expenses increased $2.6 million due to growth in the number of operating personnel, and automated clearing house fees increased $0.4 million in connection with the increase in revenues.

These increases in cost of revenues were partially offset by a $0.3 million decrease in non-cash stock-based compensation and a $0.6 million decrease in shipping and supplies fees during the six months ended June 30, 2020, as compared to the prior year period.

Additionally, for the nine months ended September 30, 2020, as compared to the same period in 2019, employee-related expenses increased $4.3 million due to growth in the number of operating personnel, and non-cash stock-based compensation increased $0.2 million.

Automated clearing house fees also increased $0.9 million in connection with the increase in revenues.

Administrative Expenses

Sales and Marketing

During the three months ended June 30, 2020, sales and marketing expenses increased from the comparable prior year period by $14.5 million due to a $14.0 million increase in marketing and advertising expense due to increased spending across most components of our marketing program and a $1.3 million increase in non-cash stock-based compensation.

These increases in sales and marketing expenses were partially offset by a $0.7 million decrease in employee-related expenses primarily related to our current work-from-home mandate.

During the six months ended June 30, 2020, sales and marketing expenses increased from the comparable prior year period by $29.9 million due to a $21.1 million increase in marketing and advertising expense due to increased spending across most components of our marketing program, a $6.9 million increase in employee-related expenses, including commissions and bonuses, and a $1.9 million increase in non-cash stock-based compensation.

During the three months ended September 30, 2020, sales and marketing expenses increased from the comparable prior year period by $15.1 million due to a $10.4 million increase in marketing and advertising expense attributable to increased spending across most components of our marketing program, a $3.5 million increase in non-cash stock-based compensation, and a $1.2 million increase in employee-related expenses, including commissions and bonuses.

During the nine months ended September 30, 2020, sales and marketing expenses increased from the comparable prior year period by $44.9 million due to a $31.5 million increase in marketing and advertising expense attributable to increased spending across most components of our marketing program, a $8.1 million increase in employee-related expenses, including commissions and bonuses, and a $5.3 million increase in non-cash stock-based compensation.

Based on positive results from recent advertising campaigns, we plan to continue to make significant investments in our marketing program and may increase spending in future periods as we see opportunities for returns on our investments.

Research and Development

During the three months ended June 30, 2020, research and development expenses increased from the comparable prior year period due to a $5.0 million increase in employee-related expenses, including a $2.5 million increase in non-cash stock-based compensation expense.

During the six months ended June 30, 2020, research and development expenses increased from the comparable prior year period due to an $8.1 million increase in employee-related expenses, including a $1.6 million increase in non-cash stock-based compensation expense.

During the three months ended September 30, 2020, research and development expenses increased from the comparable prior year period due to a $2.2 million increase in employee-related expenses, including a $0.5 million increase in non-cash stock-based compensation expense.

During the nine months ended September 30, 2020, research and development expenses increased from the comparable prior year period due to a $10.3 million increase in employee-related expenses, including a $2.1 million increase in non-cash stock-based compensation expense.

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.

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The nature of the development projects underway during a particular period 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 six months ended June 30 , 2020 and 2019:

Three Months Ended June 30,

Six Months Ended June 30,

The table below sets forth the amounts of capitalized and expensed research and development costs for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended September 30,

Nine Months Ended September 30,

Capitalized portion of research and development

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General and Administrative

During the three months ended June 30, 2020, general and administrative expenses increased $13.4 million from the comparable prior year period primarily due to a $10.4 million increase in non-cash stock-based compensation and a $5.4 million increase in employee related expenses.

During the three months ended September 30, 2020, general and administrative expenses increased $14.8 million from the comparable prior year period primarily due to a $10.6 million increase in non-cash stock-based compensation and a $4.4 million increase in employee-related expenses.

These increases in general and administrative expenses were partially offset by a $0.2 million decrease in accounting and legal expenses.

During the six months ended June 30, 2020, general and administrative expenses increased $8.3 million from the comparable prior year period primarily due to an $8.9 million increase in employee-related expenses and a $2.2 million increase in accounting and legal expenses related to regulatory and compliance matters.

These increases in general and administrative expenses were partially offset by a $2.8 million decrease in non-cash stock-based compensation.

During the nine months ended September 30, 2020, general and administrative expenses increased $23.1 million from the comparable prior year period primarily due to a $13.4 million increase in employee-related expenses, a $7.7 million increase in stock-based compensation, and a $2.0 million increase in accounting and legal expenses related to regulatory and compliance matters.

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 income:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Non-cash stock-based compensation expense

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Total non-cash stock-based compensation expense

During the three months ended June 30, 2020, our non-cash stock-based compensation expense increased $15.6 million from the comparable prior year period primarily due to the timing of vesting events for restricted stock subject to market-based vesting conditions during the first quarter of 2019.

During the six months ended June 30, 2020, our non-cash stock-based compensation expense increased $0.4 million from the comparable prior year period.

During the three months ended September 30, 2020, our non-cash stock-based compensation expense increased $15.0 million from the comparable prior year period primarily due to the timing of vesting events for restricted stock subject to market-based vesting conditions during the first quarter of 2019.

During the nine months ended September 30, 2020, our non-cash stock-based compensation expense increased $15.4 million from the comparable prior year period due to an increase in both the number of employees who received awards and the grant date fair value associated with the issuances in 2020.

Depreciation and Amortization

During the three and six months ended June 30, 2020, depreciation and amortization expense increased from the respective comparable prior year periods primarily due to the development of additional technology and purchases of other related fixed assets.

During the three and nine months ended September 30, 2020, depreciation and amortization expense increased from the respective comparable prior year periods primarily due to the development of additional technology and purchases of other related fixed assets.

Interest Expense

The decreases in interest expense for the three and six months ended June 30, 2020, as compared to the comparable prior year periods were due to the timing of construction of our expanded operations facility in Grapevine, Texas, which resulted in more capitalized interest in 2020.

The decreases in interest expense for the three and nine months ended September 30, 2020, as compared to the comparable prior year periods were due to the timing of construction of our expanded operations facility in Grapevine, Texas, which resulted in more capitalized interest in 2020.

Other Income (Expense), net

The increase in other income (expense), net for the three months ended June 30, 2020 and the decrease in other income (expense), net for the six months ended June 30, 2020, was primarily due to the change in the fair value of our interest rate swap as compared to the three and six months ended June 30, 2019, respectively.

The increase in other income (expense), net for the three months ended September 30, 2020 and the decrease in other income (expense), net for the nine months ended September 30, 2020, was primarily due to the change in the fair value of our interest rate swap as compared to the three and nine months ended September 30, 2019, respectively.

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 20.4% and 16.1 % for the six months ended June 30, 2020 and 2019, respectively.

The higher effective income tax rate for the six months ended June 30, 2020 primarily resulted from a decrease in excess tax benefits from stock-based compensation related to vesting events as compared to the six months ended June 30, 2019.

Our effective income tax rate was 20.3% and 18.0 % for the nine months ended September 30, 2020 and 2019, respectively.

The higher effective income tax rate for the nine months ended September 30, 2020 primarily resulted from a decrease in excess tax benefits from stock-based compensation related to vesting events as compared to the nine months ended September 30, 2019.

Liquidity and Capital Resources

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Our cash and cash equivalents consist primarily of demand deposit accounts, money market funds and certificates of deposit.

Additionally, we maintain a senior secured revolving credit facility (the “Facility”), which can be accessed as needed to supplement our operating cash flow and cash balances.

The Facility provides us the ability to borrow funds in the aggregate principal amount of $75.0 million, which may be increased to $125.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions.

Additionally, we maintain a

senior secured revolving credit facility (the “Facility”), which can be accessed as needed to supplement our operatin g cash flow and cash balances.

We believe our existing cash and cash equivalents and cash generated from operations will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months.

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Term Credit Agreement.

As of June 30, 2020, our indebtedness consisted solely of term loans (the “Term Loans”) made under a senior secured term credit agreement (as amended from time to time, the “Term Credit Agreement”) among the Company, certain of our subsidiaries, JPMorgan Chase Bank, N.A., Bank of America, N.A.

As of September 30, 2020, our indebtedness consisted solely of term loans (the “Term Loans”) made under a senior secured term credit agreement (as amended from time to time, the “Term Credit Agreement”) among the Company, certain of our subsidiaries, JPMorgan Chase Bank, N.A., Bank of America, N.A.

and Kirkpatrick Bank.

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Additionally, the Term Credit Agreement contains customary affirmative and negative covenants, including covenants limiting our ability to, among other things, grant liens, incur debt, effect certain mergers, make investments, dispose of assets, enter into certain transactions including swap agreements and sale and leaseback transactions, pay dividends or distributions on our capital stock, and enter into transactions with affiliates, in each case subject to customary exceptions for a credit agreement of this size and type.

As of June 30, 2020, we were in compliance with all covenants set forth in the Term Credit Agreement.

As of September 30, 2020, we were in compliance with all covenants set forth in the Term Credit Agreement.

Interest Rate Swap Agreement.

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We have elected not to designate this interest rate swap as a hedge and, as such, changes in the fair value of the derivative instrument are recognized in our consolidated statements of income.

For the three and six months ended June 30, 2020, we recognized a loss of $0.1 million and $1.7 million, respectively, for the change in fair value of the interest rate swap, which is included in Other income (expense), net in the consolidated statements of income.

For the three and six months ended June 30, 2019, we recognized a loss of $0.8 million and $1.4 million, respectively, for the change in fair value of the interest rate swap, which is included in Other income, net in the consolidated statements of income.

For the three months ended September 30, 2020, we recognized a gain of $0.1 million and for the nine months ended September 30, 2020, we recognized a loss of $1.6 million, for the change in fair value of the interest rate swap, which is included in Other income (expense), net in the consolidated statements of income.

For the three and nine months ended September 30, 2019, we recognized a loss of $0.4 million and $1.8 million, respectively, for the change in fair value of the interest rate swap, which is included in Other income, net in the consolidated statements of income.

Revolving Credit Agreement.

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On April 15, 2019, we entered into the First Amendment to Revolving Credit Agreement (the “First Amendment”).

Pursuant to First Amendment, Wells Fargo Bank, N.A.

was added as a lender and the Revolving Commitment was

increased to $75.0 million, which may be further increased to $125.0 million subject to obtaining additional lender commitments and certain approvals and satisfying other conditions , and the scheduled maturity date of the Facility was extended to April 15, 2022.

Pursuant to the First Amendment, Wells Fargo Bank, N.A.

was added as a lender and the Revolving Commitment was increased to $75.0 million, which may be further increased to $125.0 million subject to obtaining additional lender commitments and certain approvals and satisfying other conditions, and the scheduled maturity date of the Facility was extended to April 15, 2022.

Borrowings under the Facility will generally bear interest at a prime rate plus 1.0% or, at our option, an adjusted LIBOR rate for the interest period in effect for such borrowing plus 1.5%, in each case subject to certain conditions set forth in the Revolving Credit Agreement.

As of June 30, 2020, we did not have any borrowings outstanding under the Facility.

As of September 30, 2020, we did not have any borrowings outstanding under the Facility.

Stock Repurchase Plan and Withholding Shares to Cover Taxes.

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Most recently, in March 2020, our Board of Directors authorized the repurchase of up to $250.0 million of our common stock.

As of June 30, 2020, there was $174.8 million available for repurchases under our stock repurchase plan.

As of September 30, 2020, there was $172.0 million 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 restricted stock and other corporate considerations.

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 restricted stock and o ther corporate considerations.

The current stock repurchase plan will expire on March 12, 202 2 .

During the six months ended June 30, 2020, we repurchased an aggregate of 295,227 shares of our common stock at an average cost of $227.35 per share, including 90,157 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted common stock.

During the nine months ended September 30, 2020, we repurchased an aggregate of 344,216 shares of our common stock at an average cost of $227.00 per share, including 99,785 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock.

Our payment of the taxes on behalf of those employees resulted in an aggregate cash expenditure of $26.1 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.

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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 restricted stock vesting events that result in net share settlements and the Company paying withholding taxes on behalf of certain employees.

The following table summarizes the consolidated statements of cash flows for the six months ended June 30, 2020 and 2019:

Six Months Ended June 30,

The following table summarizes the consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019:

Nine Months Ended September 30,

Net cash provided by (used in):

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Operating Activities

Cash provided by operating activities for the six months ended June 30, 2020 primarily consisted of payments received from our clients and interest earned on funds held for clients.

Cash provided by operating activities for the nine months ended September 30, 2020 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 six months ended June 30, 2019, our operating cash flows for the six months ended June 30, 2020 decreased primarily due to our increased spending across most components of our marketing program and the impact of COVID-19 conditions on our revenues.

Compared to the nine months ended September 30, 2019, our operating cash flows for the nine months ended September 30, 2020 decreased primarily due to our increased spending across most components of our marketing program and the impact of COVID-19 conditions on our revenues.

Investing Activities

Cash flows used in investing activities for the six months ended June 30, 2020 increased from the comparable prior year period due to a $161.5 million increase in purchases of short-term investments from funds held for clients and a $17.8 million increase in cash used for purchases of property and equipment.

The increase in cash used in investing activities was partially offset by a $36.1 million increase in proceeds from maturities of short-term investments from funds held for clients.

Cash flows used in investing activities for the nine months ended September 30, 2020 increased from the comparable prior year period due to a $156.6 million increase in purchases of short-term investments from funds held for clients and a $2.4 million increase

in cash used for purchases of property and equipment.

The in crease in cash used in investing activities was partially offset by a $ 39 .

4 million in crease in proceeds from maturities of short-term investments from funds held for clients.

Financing Activities

Cash flows used in financing activities for the six months ended June 30, 2020 increased from the comparable prior year period primarily due to the impact of a $788.3 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.

Additionally, cash flows used in financing activities increased by $52.0 million in repurchases of common stock.

These cash flows used in financing activities were partially offset by a $15.1 million decrease in withholding taxes paid related to net share settlements and a less than $0.1 million decrease in payments for debt issuance costs.

Cash flows used in financing activities for the nine months ended September 30, 2020 increased from the comparable prior year period primarily due to $52.0 million in repurchases of common stock.

Additionally, cash flows used in financing activities increased by the impact of an $8.6 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.

These cash flows used in financing activities were partially offset by a $16.1 million decrease in withholding taxes paid related to net share settlements.

Contractual Obligations

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Off-Balance Sheet Arrangements

As of June 30, 2020, we did not have any off-balance sheet arrangements that had or were reasonably likely to have an effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources that may be material to investors.

As of September 30, 2020, we did not have any off-balance sheet arrangements that had or were reasonably likely to have an effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources that may be material to investors.

Critical Accounting Policies and Estimates

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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 income data prepared in accordance with U.S.

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.

income data prepared in accordance with U.S.

Adjusted EBITDA and non-GAAP net income may not be comparable to similar ly 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:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Net income to adjusted EBITDA:

5 unchanged sentences

Adjusted EBITDA

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Net income to non-GAAP net income:

3 unchanged sentences

Non-GAAP net income

Weighted average shares outstanding:

Earnings per share, basic

2 unchanged sentences

Non-GAAP net income per share, diluted

Weighted average shares outstanding:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Earnings per share to non-GAAP net income per share, basic:

4 unchanged sentences

Non-GAAP net income per share, basic

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Earnings per share to non-GAAP net income per share, diluted:

6 unchanged sentences

Interest Rate Sensitivity

We had cash and cash equivalents totaling $113.5 million as of June 30, 2020.

We had cash and cash equivalents totaling $156.4 million as of September 30, 2020.

These amounts are invested primarily in demand deposit accounts and money market funds.

9 unchanged sentences

The Interest Rate Swap Agreement has effectively fixed our interest rate at 4.0%, eliminating a portion of the variable rate and coinciding interest rate risk associated with the Term Loans.

As of June 30, 2020, an increase or decrease in interest rates of 100-basis points would not have had a material effect on our operating results or financial condition.

As of September 30, 2020, an increase or decrease in interest rates of 100-basis points would not have had a material effect on our operating results or financial condition.

As described elsewhere in this Form 10-Q, the Revolving Credit Agreement, as amended, provides for a Facility in the aggregate amount of $75.0 million, which may be increased to up to $125.0 million.

Borrowings under the Facility will generally bear interest at a prime rate plus 1.0% or, at our option, an adjusted LIBOR rate for the interest period in effect for such borrowing plus 1.5%.

As of June 30, 2020, we have not made any draws under the Facility.

As of September 30, 2020, we have not made any draws under the Facility.

To the extent we make draws under the Facility in the future, we may be exposed to increased interest rate risk.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis