What changed in this filing

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Item 1. Financial Statements

2021-05-06 compared with 2020-11-05 · 127 added, 135 removed, 381 unchanged (41% of the section changed)

3 unchanged sentences

(in thousands, except per share amounts)

September 30, 2020

March 31, 2021

December 31, 2020

13 unchanged sentences

Accounts payable

Income tax payable

Accrued commissions and bonuses

14 unchanged sentences

Stockholders' equity:

Common stock, $ 0.01 par value ( 100,000 shares authorized, 61,639 and 61,350 shares issued at September 30, 2020 and December 31, 2019, respectively;

57,605 and 57,660 shares outstanding at September 30, 2020 and December 31, 2019, respectively)

Common stock, $ 0.01 par value ( 100,000 shares authorized, 61,864 and 61,861 shares issued at March 31, 2021 and December 31, 2020, respectively;

57,741 and 57,739 shares outstanding at March 31, 2021 and December 31, 2020, respectively)

Additional paid-in capital

Retained earnings

Treasury stock, at cost ( 4,034 and 3,689 shares at September 30, 2020 and December 31, 2019, respectively)

Treasury stock, at cost ( 4,123 and 4,122 shares at March 31, 2021 and December 31, 2020, respectively)

Total stockholders' equity

4 unchanged sentences

(in thousands, except per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Implementation and other

31 unchanged sentences

Balances at March 31, 2020

Vesting of restricted stock

Stock-based compensation

Repurchases of common stock

Balances at June 30, 2019

Vesting of restricted stock

Stock-based compensation

Repurchases of common stock

Balances at September 30, 2019

Treasury Stock

6 unchanged sentences

Balances at March 31, 2021

Vesting of restricted stock

Stock-based compensation

Repurchases of common stock

Balances at June 30, 2020

Vesting of restricted stock

Stock-based compensation

Repurchases of common stock

Balances at September 30, 2020

See accompanying notes to the unaudited consolidated financial statements.

2 unchanged sentences

(in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities

2 unchanged sentences

Accretion of discount on available-for-sale securities

Loss on disposition of property and equipment

Amortization of debt issuance costs

1 unchanged sentence

Cash paid for derivative settlement

Loss on derivative

(Gain)/loss on derivative

Deferred income taxes, net

14 unchanged sentences

Purchases of property and equipment

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities

3 unchanged sentences

Net change in client funds obligation

Payment of debt issuance costs

Net cash used in financing activities

Decrease in cash, cash equivalents, restricted cash and restricted cash equivalents

Net cash provided by (used in) financing activities

Increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents

Cash, cash equivalents, restricted cash and restricted cash equivalents

1 unchanged sentence

Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period

Nine Months Ended September 30,

Three Months Ended March 31,

Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents

13 unchanged sentences

Paycom Software, Inc.

(“Software”) and its wholly-owned subsidiaries (collectively, the “Company”) is a leading provider of comprehensive, cloud-based human capital management (“HCM”) software delivered as Software-as-a-Service.

(“Software”) and its wholly-owned subsidiaries (collectively, the “Company”) is a leading provider of a comprehensive, cloud-based human capital management (“HCM”) solution delivered as Software-as-a-Service.

Unless we state otherwise or the context otherwise requires, the terms “we,” “our,” “us” and the “Company” refer to Software and its consolidated subsidiaries.

9 unchanged sentences

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes presented in the Form 10-K.

The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results expected for the full year.

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results expected for the full year.

Recently Adopted Accounting Pronouncements

In January 2021, we adopted Accounting Standards Update (“ASU”) No.

2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes” (“ASU 2019-12”) utilizing the prospective transition method.

The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income tax in an interim period and the recognition of deferred tax liabilities for outside basis differences.

ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes.

The adoption of this guidance did not have a material impact on our unaudited interim consolidated financial statements.

In January 2020, we adopted ASU No.

2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2018-15”).

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2018-15”) utilizing the prospective transition method.

ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

5 unchanged sentences

Notes to Financial Statements,” including consideration of costs and benefits.

The adoption of ASU 2018-13 removed or modified disclosure requirements retrospectively to all periods presented, whereas any new requirements have been applied prospectively from the adoption date.

The adoption of this guidance did not have a material impact on our unaudited interim consolidated financial statements.

2 unchanged sentences

GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

Significant estimates include income taxes, loss contingencies, the useful life of property and equipment and intangible assets, the life of our client relationships, the fair value of our stock-based awards and the fair value of our financial instruments, intangible assets and goodwill.

Significant estimates include income taxes, loss contingencies, the useful life of property and equipment, the life of our client relationships, the fair value of our stock-based awards and the fair value of our financial instruments and goodwill.

These estimates are based on historical experience where applicable and other assumptions that management believes are reasonable under the circumstances.

18 unchanged sentences

The client funds obligation represents liabilities that will be repaid within one year of the consolidated balance sheet date.

As of September 30, 2020 and December 31, 2019, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper with a maturity duration less than three months and certificates of deposit.

As of March 31, 2021 and December 31, 2020, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper with a maturity duration less than three months and certificates of deposit.

Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item in the consolidated balance sheets.

5 unchanged sentences

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

As of September 30, 2020, there was $ 172.0 million available for repurchases under our stock repurchase plan.

As of March 31, 2021, there was $ 134.9 million available for repurchases under our stock repurchase plan.

Our stock repurchase plan may be suspended or discontinued at any time.

1 unchanged sentence

The current stock repurchase plan will expire on March 12, 2022 .

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.

During the three months ended March 31, 2021, we repurchased an aggregate of 919 shares of our common stock at an average cost of $ 410.07 per share, all of which were shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock.

Recently Issued Accounting Pronouncements

In March 2020, the Financial Accounting Standard Board issued ASU No.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2020-04, “Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”).

4 unchanged sentences

ASU 2020-04 is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022.

We are currently assessing the impact that this guidance will have on our financial position and results of operations, if any.

We are currently assessing the impact that this guidance will have on our consolidated financial statements.

In January 2021, the FASB issued ASU No.

2021-01, “Reference Rate Reform (Topic 848) Scope” (“ASU 2021-01”), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to

Paycom Software, Inc.

1 unchanged sentence

(tabular dollars and shares in thousands, except per share amounts)

In December 2019, the Financial Accounting Standards Board issued ASU No.

2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Ta xes” (“ASU 2019-12”).

ASU 2019-12 also clarifies and simplifies other aspects of the account ing for income taxes.

This guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with ea rly adoption permitted.

We are currently evaluating the impact that this guidance will have on our financial position and results of operations, if any.

derivative instruments that are affected by the discounting transition.

ASU 2021-01 amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

ASU 2021-01 is currently effective and upon adoption may be applied to contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued.

We are currently assessing the impact that this guidance will have on our consolidated financial statements .

Revenues are recognized when control of the promised goods or services is transferred to our clients in an amount that reflects the consideration we expect to be entitled to for those goods or services.

7 unchanged sentences

Talent management includes our employee self-service, compensation budgeting, performance management, executive dashboard and Paycom learning and course content applications.

HR management includes our document and task management, government and compliance, beneﬁts administration, COBRA administration, personnel action forms, surveys and enhanced Affordable Care Act applications.

HR management includes our document and task management, government and compliance, beneﬁts administration, benefit enrollment services, COBRA administration, personnel action forms, surveys and enhanced Affordable Care Act applications.

The performance obligations related to recurring revenues are satisfied during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll.

22 unchanged sentences

Therefore, we do not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.

Changes in deferred revenue related to material right performance obligations as of September 30, 2020 and 2019 were as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Changes in deferred revenue related to material right performance obligations as of March 31, 2021 and 2020 were as follows:

Three Months Ended March 31,

Balance, beginning of period

19 unchanged sentences

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

As of and for the Three Months Ended September 30, 2020

Capitalization

Costs to obtain a contract

Costs to fulfill a contract

As of and for the Three Months Ended September 30, 2019

Capitalization

Costs to obtain a contract

Costs to fulfill a contract

As of and for the Nine Months Ended September 30, 2020

As of and for the Three Months Ended March 31, 2021

Capitalization

1 unchanged sentence

Costs to fulfill a contract

As of and for the Nine Months Ended September 30, 2019

As of and for the Three Months Ended March 31, 2020

Capitalization

3 unchanged sentences

Property and equipment and accumulated depreciation and amortization were as follows:

September 30, 2020

March 31, 2021

December 31, 2020

8 unchanged sentences

We capitalize computer software development costs related to software developed for internal use in accordance with ASC 350-40.

For the three and nine months ended September 30, 2020, we capitalized $ 11.7 million and $ 32.4 million, respectively, of computer software development costs related to software developed for internal use.

For the three and nine months ended September 30, 2019, we capitalized $ 7.1 million and $ 22.7 million, respectively, of computer software development costs related to software developed for internal use.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share amounts)

For the three months ended March 31, 2021 and 2020, we capitalized $ 12.3 million and $ 9.7 million, respectively, of computer software development costs related to software developed for internal use.

Rental clocks included in property and equipment, net represent time clocks issued to clients under month-to-month operating leases.

1 unchanged sentence

We capitalize interest incurred for indebtedness related to construction in progress.

For the three and nine months ended September 30, 2020, we incurred interest costs of $ 0.4 million and $ 1.1 million, respectively, of which we capitalized $ 0.4 million and $ 1.1 million, respectively.

For the three and nine months ended September 30, 2019, we incurred interest costs of $ 0.3 million and $ 1.1 million, respectively, of which we capitalized $ 0.2 million and $ 0.4 million, respectively.

Included in the construction in progress balance at September 30, 2020 and December 31, 2019 is $ 2.9 million and $ 2.2 million in retainage, respectively.

Depreciation and amortization expense for property and equipment was $ 13.8 million and $ 39.1 million, respectively, for the three and nine months ended September 30, 2020.

Depreciation and amortization expense for property and equipment was $ 10.9 million and $ 30.5 million, respectively, for the three and nine months ended September 30, 2019.

GOODWILL AND INTANGIBLE ASSETS, NET

As of both September 30, 2020 and December 31, 2019, goodwill was $ 51.9 million.

For both the three months ended March 31, 2021 and 2020, we incurred interest costs of $ 0.4 million, of which we capitalized $ 0.4 million.

Included in the construction in progress balance at March 31, 2021 and December 31, 2020 is $ 4.2 million and $ 3.5 million in retainage, respectively.

Depreciation and amortization expense for property and equipment was $ 14.9 million and $ 12.2 million for the three months ended March 31, 2021 and 2020, respectively.

As of both March 31, 2021 and December 31, 2020, goodwill was $ 51.9 million.

We have selected June 30 as our annual goodwill impairment testing date.

We have elected to perform a qualitative analysis of the fair value of our goodwill and determined there was no impairment as of June 30, 2020.

As of September 30, 2020 and December 31, 2019, there were no indicators of impairment.

All of our intangible assets other than goodwill are considered to have definite lives and, as such, are subject to amortization.

The following tables provide the components of intangible assets, which are included in Other assets in our consolidated balance sheets:

September 30, 2020

Weighted Average Remaining

December 31, 2019

Weighted Average Remaining

The weighted average remaining useful life of our intangible assets was 1.8 years as of September 30, 2020.

Amortization of intangible assets for the three and nine months ended September 30, 2020 was less than $ 0.1 million and $ 0.2 million, respectively.

Amortization of intangible assets for the three and nine months ended September 30, 2019 was $ 0.1 million and $ 0.2 million, respectively.

As of March 31, 2021 and December 31, 2020, there were no indicators of impairment.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share amounts)

LONG-TERM DEBT, NET

Long-term debt consisted of the following:

September 30, 2020

March 31, 2021

December 31, 2020

3 unchanged sentences

Total long-term debt, net

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share amounts)

On December 7, 2017 , we entered into a senior secured term credit agreement (as amended from time to time, the “Term Credit Agreement”), pursuant to which JPMorgan Chase Bank, N.A., Bank of America, N.A.

2 unchanged sentences

The Term Loans mature on September 7, 2025 and bear interest, at our option, at either (a) a prime rate plus 1.0 % or (b) an adjusted LIBOR rate for the interest period in effect for such Term Loan plus 1.5 %.

As of September 30, 2020, our indebtedness of $ 29.6 million consisted solely of Term Loans made under the Term Credit Agreement.

Unamortized debt issuance costs of $ 0.2 million as of both September 30, 2020 and December 31, 2019 are presented as a direct deduction from the carrying amount of the debt liability.

As of March 31, 2021, our indebtedness of $ 28.7 million consisted solely of Term Loans made under the Term Credit Agreement.

Unamortized debt issuance costs of $ 0.2 million as of both March 31, 2021 and December 31, 2020 are presented as a direct deduction from the carrying amount of the debt liability.

Under the Term Credit Agreement, we are subject to two material financial covenants, which require us to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0.

As of September 30, 2020, we were in compliance with these covenants.

As of March 31, 2021, we were in compliance with these covenants.

On February 12, 2018 , we entered into a senior secured revolving credit agreement (the “Revolving Credit Agreement”) with JPMorgan Chase Bank, N.A.

9 unchanged sentences

Letters of credit are to be issued only to support our business operations.

As of September 30, 2020, we did no t have any borrowings outstanding under the Facility.

As of March 31, 2021, we did no t have any borrowings outstanding under the Facility.

Under the Revolving Credit Agreement, we are required to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0 .

Additionally, the Revolving 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 certain 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 facility of the size and type of the Facility.

As of September 30, 2020, we were in compliance with all covenants related to the Revolving Credit Agreement.

As of September 30, 2020 and December 31, 2019, the carrying value of our total long-term debt approximated its fair value as of such date.

As of March 31, 2021, we were in compliance with all covenants related to the Revolving Credit Agreement.

As of March 31, 2021 and December 31, 2020, the carrying value of our total long-term debt approximated its fair value as of such date.

The fair value of our long-term debt is estimated based on the borrowing rates currently available to us for bank loans with similar terms and maturities.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share amounts)

DERIVATIVE INSTRUMENTS

7 unchanged sentences

The objective of the interest rate swap is to reduce the variability in the forecasted interest payments of the Term Loans, which is based on a one-month LIBOR rate versus a fixed interest rate of 2.54 % on a notional value of $ 35.5 million.

Under the terms of the interest rate swap agreement, we will receive quarterly variable interest payments based on the LIBOR rate and will pay interest at a fixed rate.

Under the terms of the interest rate swap agreement, we receive quarterly variable interest payments based on the LIBOR rate and pay interest at a fixed rate.

The interest rate swap agreement has a maturity date of September 7, 2025 .

For the three months ended September 30, 2020, we recorded a gain of $ 0.1 million and for the nine months ended September 30, 2020, we recorded 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 recorded losses 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 (expense), net in the consolidated statements of income.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share amounts)

For the three months ended March 31, 2021, we recorded a gain of $ 0.7 million for the change in fair value of the interest rate swap and for the three months ended March 31, 2020, we recorded a loss of $ 1.6 million, for the change in fair value of the interest rate swap.

The change in the fair value of the interest rate swap is included in Other income (expense), net in the consolidated statements of income.

FAIR VALUE OF FINANCIAL INSTRUMENTS

5 unchanged sentences

These available-for-sale securities are recognized in the consolidated balance sheets at fair value, which approximates the amortized cost of the securities.

As of September 30, 2020 and December 31, 2019, all available-for-sale securities and certificates of deposit were due in thirteen months or less.

As discussed in Note 7, during the year ended December 31, 2017, we entered into an interest rate swap.

4 unchanged sentences

Level 3 – Unobservable inputs in which there is little or no market data

Included in the following tables are the Company’s major categories of assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019:

September 30, 2020

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share amounts)

Included in the following tables are the Company’s major categories of assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020:

March 31, 2021

Commercial paper

11 unchanged sentences

The QACA matching contributions as well as the discretionary matching and profit sharing contributions vest 100 % after two years of employment from the date of hire.

Matching contributions were $ 1.9 million and $ 6.3 million for the

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share amounts)

three and nine months ended September 30, 2020 , respectively.

Matching contributions were $ 1.5 million and $ 4.8 million for the three and nine months ended September 30 , 2019, respectively.

Matching contributions were $ 3.3 million and $ 2.2 million for the three months ended March 31, 2021 and 2020, respectively.

The ESPP has overlapping offering periods, with each offering period lasting approximately 24 months.

4 unchanged sentences

The maximum aggregate number of shares of the Company’s common stock that may be purchased by all participants under the ESPP is 2.0 million shares.

Eligible employees purchased 42,966 and 39,137 shares of the Company’s common stock under the ESPP during the nine months ended September 30, 2020 and 2019, respectively.

Eligible employees purchased 15,762 and 25,564 shares of the Company’s common stock under the ESPP during the three months ended March 31, 2021 and 2020, respectively.

Compensation expense related to the ESPP is recognized on a straight-line basis over the requisite service period.

Our compensation expense related to the ESPP was $ 0.7 million and $ 1.5 million for the three and nine months ended September 30, 2020, respectively.

Our compensation expense related to the ESPP was $ 0.4 million and $ 1.3 million for the three and nine months ended September 30, 2019, respectively.

Our compensation expense related to the ESPP was $ 0.7 million and $ 0.4 million for the three months ended March 31, 2021 and 2020, respectively.

EARNINGS PER SHARE

4 unchanged sentences

The unvested shares of restricted stock granted in 2015 are considered participating securities, while all other unvested shares of restricted stock are not considered participating securities.

As of December 31, 2020, all shares of restricted stock granted in 2015 have vested.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share amounts)

The following is a reconciliation of net income and the shares of common stock used in the computation of basic and diluted earnings per share:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

income allocable to participating securities

7 unchanged sentences

Earnings per share:

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share amounts)

STOCK-BASED COMPENSATION

The following table summarizes restricted stock awards activity for the nine months ended September 30, 2020:

Restricted Stock Awards

During the three months ended March 31, 2021, we issued an aggregate of 145,416 restricted shares of common stock to certain non-executive employees under the Paycom Software, Inc.

2014 Long-Term Incentive Plan (the “LTIP”), consisting of 42,912 shares subject to market-based vesting conditions (“Market-Based Shares”) and 102,504 shares subject to time-based vesting conditions (“Time-Based Shares”).

The Market-Based Shares will vest 50 % on the first date, if any, that the Company’s VWAP Value equals or exceeds $ 520 per share and 50 % on the first date, if any, that the Company’s VWAP Value equals or exceeds $ 600 per share, in each case provided that (i) such date occurs on or before the eighth anniversary of the grant date and (ii) the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the LTIP and the applicable restricted stock award agreement.

The Time-Based Shares will vest 21 % on a specified initial vesting date, 21 % on the first anniversary of such initial vesting date, 25 % on the second anniversary of such initial vesting date, and 33 % on the on the third anniversary of such initial vesting date, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the LTIP and the applicable restricted stock award agreement.

The following table summarizes restricted stock awards activity for the three months ended March 31, 2021:

Restricted Stock Awards

Weighted Average

3 unchanged sentences

Unvested shares of restricted stock outstanding at December 31, 2020

Unvested shares of restricted stock outstanding at September 30, 2020

During the nine months ended September 30, 2020, we issued an aggregate of 507,860 restricted shares of common stock to our executive officers and certain non-executive employees under the Paycom Software, Inc.

2014 Long-Term Incentive Plan (the “LTIP”), consisting of 360,948 shares subject to market-based vesting conditions (“Market-Based Shares”) and 146,912 shares subject to time-based vesting conditions (“Time-Based Shares”).

Market-Based Shares for executive officers will vest 50 % on the first date, if any, that the Company’s total enterprise value (calculated as defined in the applicable restricted stock award agreement) (“TEV”) equals or exceeds $ 23.75 billion and 50 % on the first date, if any, that the Company’s TEV equals or exceeds $ 27.7 billion, in each case provided that (i) such date occurs on or before the sixth anniversary of the grant date and (ii) the recipient is employed by, or providing services to, the Company on the applicable vesting date.

Market-Based Shares for non-executive employees will vest 50 % on the first date, if any, that the Company’s TEV equals or exceeds $ 19.8 billion and 50 % on the first date, if any, that the Company’s TEV equals or exceeds $ 22.15 billion, in each case provided that (i) such date occurs on or before the sixth anniversary of the grant date and (ii) the recipient is employed by, or providing services to, the Company on the applicable vesting date.

Time-Based Shares granted to non-executive employees will vest over periods ranging from three to four years , provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date .

On April 27, 2020, we issued an aggregate of 5,970 restricted shares of common stock under the LTIP to the non-employee members of our Board of Directors.

For the three and nine months ended September 30, 2020, our total compensation expense related to restricted stock was $ 19.5 million and $ 56.5 million, respectively.

For the three and nine months ended September 30, 2019, our total compensation expense related to restricted stock was $ 4.5 million and $ 41.1 million, respectively.

There was $ 106.3 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested shares of restricted stock outstanding as of September 30, 2020.

The unrecognized compensation cost for the unvested shares is expected to be recognized over a weighted average period of 1.6 years as of September 30, 2020.

We capitalized stock-based compensation costs related to software developed for internal use of $ 1.6 million and $ 5.3 million for the three and nine months ended September 30, 2020, respectively.

We capitalized stock-based compensation costs related to software developed for internal use of $ 0.3 million and $ 4.3 million for the three and nine months ended September 30, 2019, respectively.

Unvested shares of restricted stock outstanding at March 31, 2021

Paycom Software, Inc.

1 unchanged sentence

(tabular dollars and shares in thousands, except per share amounts)

Performance-Based Restricted Stock Units

In February 2021, the Compensation Committee of the Board of Directors authorized the granting of performance-based restricted stock units (“PSUs”) to certain executive officers pursuant to the LTIP (the “PSU Awards”).

Each PSU granted under the LTIP represents a notional share of the Company’s common stock.

The PSU Awards represented an aggregate of 52,470 target units that may increase to an aggregate of 131,176 awarded units based upon the Company’s performance over two separate performance periods:

(i) a two-year performance period commencing on January 1, 2021 and ending on December 31, 2022 (the “Two-Year Performance Period”);

and (ii) a three-year performance period commencing on January 1, 2021 and ending on December 31, 2023 (the “Three-Year Performance Period”).

Up to 25 % of the PSUs will be eligible to vest no later than March 1, 2023 , for the Two-Year Performance Period, and up to 75 % of the PSUs will be eligible to vest no later than February 29, 2024 , for the Three-Year Performance Period, provided that the grantee remains employed by or providing services to the Company on the applicable vesting date, and subject to the terms and conditions of the LTIP and the Restricted Stock Unit Award Agreement – Performance Based Vesting (the “PSU Award Agreement”).

The number of PSUs that will vest and be converted into shares of common stock will depend on the Company’s “Relative Total Stockholder Return” (“Relative TSR”), expressed as a percentile ranking of the Company’s “Total Stockholder Return” (“TSR”) as compared to the Company’s peer group set forth in the PSU Award Agreement.

For purposes of the PSU Awards, TSR is determined by dividing (i) the sum of (A) the average daily volume weighted average price (or “VWAP” as defined in the PSU Award Agreement) of a share of the Company’s common stock or the common stock of a peer company, as applicable, during the final 60 trading day period of the applicable performance period, less (B) the average VWAP of a share of the Company’s common stock or the common stock of a peer company, as applicable, during the 60 trading day period ending on December 31, 2020, plus (C) the sum of all dividends which are paid by the Company (or the member of the peer group) to its stockholders, assuming such dividends are reinvested in the applicable company through the applicable performance period, by (ii) the average VWAP of a share of the Company’s common stock or the common stock of a peer company, as applicable, during the 60 trading day period ending on December 31, 2020.

The Company’s peer group includes 34 publicly traded companies, which are reflective of the S&P 500 Software & Services index and were selected by the Compensation Committee.

The following table summarizes PSU activity for the three months ended March 31, 2021:

Weighted Average

Grant Date Fair

Unvested PSUs outstanding at December 31, 2020

Unvested PSUs outstanding at March 31, 2021 (1)

A maximum of 131,176 units could be awarded based upon Paycom’s Relative TSR over the applicable performance periods.

For the three months ended March 31, 2021 and 2020, our total compensation expense related to restricted stock awards and PSU awards, in the aggregate, was $ 23.6 million and $ 15.8 million, respectively.

The following table presents the unrecognized compensation cost and the related weighted average recognition period associated with unvested restricted stock awards and unvested PSU awards as of March 31, 2021.

Restricted Stock

Unrecognized compensation cost

Weighted average period for recognition (years)

We capitalized stock-based compensation costs related to software developed for internal use of $ 1.5 million and $ 1.6 million for the three months ended March 31, 2021 and 2020, respectively.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share amounts)

COMMITMENTS AND CONTINGENCIES

1 unchanged sentence

In connection with this matter, we identified less than 250 affected clients, representing approximately 0.5 % of our client base as of December 31, 2020.

Since December 2019, we have been in the process of notifying clients affected by such charges between approximately 2011 and September 2020 and have refunded approximately $ 2.5 million, in the aggregate, to such clients.

We have made diligent efforts to notify clients, and reached substantially all, that were affected by such charges between approximately 2011 and September 2020 and have refunded approximately $ 3.0 million, in the aggregate, to such clients.

This issue did not have a material impact on our financial results for any prior period.

3 unchanged sentences

Although we cannot predict the outcome of these proceedings, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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

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

The Company’s effective income tax rate was 32.1 % and 28.7 % for the three months ended March 31, 2021 and 2020, respectively.

The higher effective tax rate for the three months ended March 31, 2021 is primarily related to an increase in nondeductible expenses.

SUBSEQUENT EVENTS

On October 22, 2020, the Company’s TEV exceeded $ 19.8 billion, which resulted in the vesting of 40,146 Market-Based Shares issued on January 30, 2020.

For additional information on our stock-based compensation, see “Note 11.

Stock-Based Compensation” in this Form 10-Q.

On April 2, 2021, Jeffrey D.

York resigned from his position as Chief Sales Officer of the Company and accepted a new role as Leadership Strategist of the Company.

In connection with the change in Mr.

York’s role, the Company and Mr.

York entered into a letter agreement that, among other things, (i) amends that certain Amended and Restated Executive Employment Agreement, dated March 9, 2020, by and between the Company and Mr.

York, to, among other things, reflect the change in Mr.

York’s role, eliminate certain executive-level benefits and remove the termination and severance provisions, and (ii) forfeits and releases the performance-based restricted stock unit award granted to Mr.

York on February 10, 2021.

On April 2, 2021, the Board of Directors appointed Holly Faurot to succeed Mr.

York as Chief Sales Officer of the Company.

In connection with her appointment, Mrs.

Faurot was granted an award of PSUs pursuant to the LTIP.

Consistent with the PSU awards granted to certain other executive officers of the Company on February 10, 2021, Mrs.

Faurot received 5,445 target PSUs that will vest based on the Company’s total stockholder return relative to a peer group of 34 publicly traded companies, subject to the terms and conditions of the LTIP and the PSU Award Agreement.

On April 27, 2021, we issued an aggregate of 26,755 restricted shares of common stock to certain non-executive employees under the LTIP consisting of Time-Based Shares that will vest in three equal tranches annually, beginning on the first anniversary of the grant date, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the LTIP and the applicable restricted stock award agreement.

On May 3, 2021, we issued an aggregate of 3,558 restricted shares of common stock under the LTIP to the non-employee members of our board of directors.

Such shares of restricted stock will cliff-vest on the seventh day following the first anniversary of the date of grant, provided that such director is providing services to the Company through the applicable vesting date, and subject to the terms and conditions of the LTIP and the applicable restricted stock award agreement .

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 1. Financial Statements