Paycom Software, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with management’s perspective on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and notes thereto for the three months ended March 31, 2022, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2021 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 17, 2022 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, 2021, all amounts herein are unaudited. Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer to Paycom Software, Inc. and its consolidated subsidiaries. All amounts presented in tables, other than per share amounts, are in thousands unless otherwise noted. Forward-Looking Statements The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are any statements that look to future events and include, but are not limited to, statements regarding our business strategy; anticipated future operating results and operating expenses, cash flows, capital resources, dividends and liquidity; trends, opportunities and risks affecting our business, industry and financial results; future expansion or growth plans and potential for future growth; our ability to attract new clients to purchase our solution; our ability to retain clients and induce them to purchase additional applications; our ability to accurately forecast future revenues and appropriately plan our expenses; market acceptance of our solution and applications; our expectations regarding future revenues generated by certain applications; our ability to attract and retain qualified employees and key personnel; future regulatory, judicial and legislative changes; how certain factors affecting our performance correlate to improvement or deterioration in the labor market; our plan to open additional sales offices and our ability to effectively execute such plan; the sufficiency of our existing cash and cash equivalents to meet our working capital and capital expenditure needs over the next 12 months; our plans regarding our capital expenditures and investment activity as our business grows, including with respect to research and development and the expansion of our corporate headquarters and other facilities; the expected impact on our consolidated financial statements of new accounting pronouncements; our plans to repurchase shares of our common stock through a stock repurchase plan; our expected income tax rate for future periods; and the impact of the novel coronavirus (COVID-19) pandemic on our business, results of operations, cash flows, financial condition and liquidity. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “anticipate,” “believe,” “could,” “estimate,” “expect,” “will,” “intend,” “may,” “might,” “plan,” “potential,” “should,” “would,” and similar expressions or the negative of such terms or other comparable terminology. Forward-looking statements are neither historical facts nor assurances of future performance, and are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: • changes in laws, government regulations and policies and interpretations thereof; • the possibility of security vulnerabilities, cyberattacks and network disruptions, including breaches of data security and privacy leaks, data loss, and business interruptions; • the impact of the COVID-19 pandemic on the U.S. economy, including reductions in employment levels, business disruptions resulting from government-mandated mitigation measures and an increase in business failures; • our compliance with data privacy laws and regulations; • our ability to develop enhancements and new applications, keep pace with technological developments and respond to future disruptive technologies; • our ability to compete effectively; • fluctuations in our financial results due to factors beyond our control; • our ability to manage our rapid growth and organizational change effectively; • the possibility that clients may not be satisfied with our deployment or technical support services, or that our solution fails to perform properly; • our dependence on our key executives; • our ability to attract and retain qualified personnel, including software developers and skilled IT, sales, marketing and operational personnel; • the possibility that the Affordable Care Act may be modified, repealed or declared unconstitutional; • our failure to develop and maintain our brand cost-effectively; • seasonality of certain operating results and financial metrics; 20 • our failure to adequately protect our intellectual property rights; • our reliance on relationships with third parties; and • the other factors set forth in Part I, Item 1A, “Risk Factors” of the Form 10-K and our other reports filed with the SEC. Forward-looking statements are based only on information currently available to us and speak only as of the date of this Form 10-Q and are subject to business and economic risks. We do not undertake any obligation to update or revise the forward-looking statements to reflect events that occur or circumstances that exist after the date on which such statements were made, except to the extent required by law. Overview We are a leading provider of a comprehensive, cloud-based human capital management (“HCM”) solution delivered as Software-as-a-Service. We provide functionality and data analytics that businesses need to manage the complete employment lifecycle, from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources management applications. Our user-friendly software allows for easy adoption of our solution by employees, enabling self-management of their HCM activities in the cloud, which reduces the administrative burden on employers and increases employee productivity. We generate revenues from (i) fixed amounts charged per billing period plus a fee per employee or transaction processed and (ii) fixed amounts charged per billing period. We do not require clients to enter into long-term contractual commitments with us. Our billing period varies by client based on when each client pays its employees, which may be weekly, bi-weekly, semi-monthly or monthly. We serve a diverse client base in terms of size and industry. None of our clients constituted more than one-half of one percent of our revenues for the three months ended March 31, 2022. 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. Our continued growth depends on attracting new clients through further penetration of our existing markets and geographic expansion into new markets, targeting a high degree of client employee usage across our solution, and introducing new applications to our existing client base. We believe our ability to continue to develop new applications and to improve existing applications will enable us to increase revenues in the future, and the number of our new applications adopted by our clients has been a significant factor in our revenue growth. In January 2022, we added new sales teams in Las Vegas, Jacksonville, New England and South Jersey, bringing our total to 55 sales teams (including one team consisting of client relations representatives and inside sales representatives) located in 28 states. We plan to open additional sales offices in the future and leverage virtual sales meetings to further expand our market presence. Our principal marketing efforts include national and local advertising campaigns, email campaigns, social and digital media campaigns, search engine marketing methods, tradeshows, print advertising and outbound marketing including personalized direct mail campaigns. In addition, we generate leads and build recognition of our brand and thought leadership with relevant and informative content, such as white papers, blogs, podcast episodes and webinars. Throughout our history, we have built strong relationships with our clients. As the HCM needs of our clients evolve, we believe that we are well-positioned to expand the HCM spending of our clients and we believe this opportunity is significant. To be successful, we must continue to demonstrate the operational and economic benefits of our solution, as well as effectively hire, train, motivate and retain qualified personnel. 21 Growth Outlook, Opportunities and Challenges As a result of our significant revenue growth and geographic expansion, we are presented with a variety of opportunities and challenges. Our payroll application is the foundation of our solution and all of our clients are required to utilize this application in order to access our other applications. Consequently, we have historically generated the majority of our revenues from our payroll applications, although our revenue mix has evolved and will continue to evolve as we develop and add new non-payroll applications to our solution. We believe our strategy of focusing on increased employee usage is key to long-term client satisfaction and client retention. Client adoption of new applications and client employee usage of both new and existing applications have been significant factors in our revenue growth, and we expect the continuation of this trajectory will depend, in part, on the introduction of applications to our existing client base that encourage and promote more employee usage. For example, in 2021, we launched our industry-first Beti technology, which further automates and streamlines the payroll process by empowering employees to do their own payroll. Moreover, in order to increase revenues and continue to improve our operating results, we must also attract new clients. We intend to obtain new clients by (i) continuing to leverage our sales force productivity within markets where we currently have existing sales offices, (ii) expanding our presence in metropolitan areas where we currently have an existing sales office through adding sales teams or offices, thereby increasing the number of sales professionals within such markets, and (iii) opening sales offices in new metropolitan areas. Our target client size range is 50 to 10,000 employees. While we continue to serve a diversified client base ranging in size from one employee to many thousands of employees, the average size of our clients has grown significantly as we have organically grown our operations, increased the number of applications we offer and gained traction with larger companies. We believe larger employers represent a substantial opportunity to increase the number of potential clients and to increase our revenues per client, with limited incremental cost to us. Because we charge our clients on a per employee basis for certain services we provide, any increase or decrease in the number of employees of our clients will have a positive or negative impact, respectively, on our results of operations. As discussed in more detail below, client headcount fluctuations are particularly relevant in light of the ongoing COVID-19 pandemic. Generally, we expect that changes in certain factors affecting our performance will correlate with improvement or deterioration in the labor market. We collect funds from clients in advance of either the applicable due date for payroll tax submissions or the applicable disbursement date for employee payment services. Those collections from clients are typically disbursed from one to 30 days after receipt, with some funds being held for up to 120 days. We typically invest funds held for clients in money market funds, demand deposit accounts, U.S. treasury securities, commercial paper and certificates of deposit until they are paid to the applicable tax or regulatory agencies or to client employees. As we introduce new applications, expand our client base and renew and expand relationships with existing clients, we expect our average funds held for clients balance and, accordingly, interest earned on funds held for clients, will increase; however, the amount of interest we earn can be positively or negatively impacted by changes in interest rates. Growing our business has resulted in, and will continue to result in, substantial investments in sales professionals, operating expenses, system development and programming costs and general and administrative expenses, which have increased and will continue to increase our expenses. Specifically, our revenue growth and geographic expansion drive increases in our employee headcount, which in turn precipitates increases in (i) salaries and benefits, (ii) stock-based compensation expense and (iii) facility costs related to the expansion of our corporate headquarters and operations facilities and additional sales office leases. We believe the challenges of managing the ever-changing complexity of payroll and human resources will continue to drive companies to turn to outsourced providers for help with their HCM needs. The HCM industry historically has been driven, in part, by legislation and regulatory action, including COBRA, changes to the minimum wage laws or overtime rules, and legislation from federal, state or municipal taxation authorities. Our revenues are seasonal in nature and generally we expect our first and fourth quarter recurring revenues to be higher than other quarters during the year. Recurring revenues include revenues relating to the annual processing of payroll tax filing forms and ACA form filing requirements, such as Form W-2, Form 1099, and Form 1095 and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. As payroll tax forms are typically processed in the first quarter of the year, first quarter recurring revenues and margins are positively impacted. In addition, unscheduled payroll runs at the end of the year often result in increased recurring revenues in the fourth quarter. These seasonal fluctuations in revenues can also have an impact on gross profits. Historical results impacted by these seasonal trends should not be considered a reliable indicator of our future results of operations. For the three months ended March 31, 2022 and 2021, our total gross margins were approximately 86% and 87%, 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. 22 Impact of the COVID-19 Pandemic The COVID-19 pandemic has created uncertainty and disrupted the operations of many of our clients and client prospects, and may continue to do so for an indefinite period of time . Across many industries, temporary and permanent business closures as well as business occupancy limitations resulted in significant layoffs and employee furloughs beginning in late March 2020. Because we charge our clients on a per-employee basis for certain services we provide, our recurring revenue has been negatively impacted by headcount reductions among our client base . Nonetheless, demand for our solution remains high and, despite the economic challenges brought on by the COVID-19 pandemic, we remain confident in the overall health of our business, the strength of our product offerings, and our ability to continue to execute on our strategy. Prior to the COVID-19 pandemic, our sales force frequently met with prospective clients in-person to sell our solution. The remote work environment resulting from the COVID-19 pandemic has presented an opportunity for our sales force, who have primarily been conducting meetings with current and prospective clients virtually since March 2020. Each sales employee is able to meet with a greater number of client prospects in a given day than he or she would if conducting only in-person meetings. As the COVID-19 pandemic has changed how our clients and client prospects meet, we are adapting our sales process to align with our clients’ and client prospects’ meeting preferences, whether virtually, in-person or a combination. We are monitoring developments related to U.S. federal, state and local vaccination mandates and testing requirements and are evaluating the impact such mandates and requirements may have on our business and results of operations, including any potential impact on our employees or the employees of our clients. We 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. We are unable to estimate the full impact that the COVID -19 pandemic could have on our business and results of operations in the future due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, the emergence of different COVID-19 variants, actions that may be taken by governmental authorities, the impact to the business of our clients and other factors identified in Part I, Item 1A “Risk Factors” in our Form 10-K that was filed with the SEC on February 17, 2022. Further, while our revenue and earnings are relatively predictable, the effect of the ongoing COVID-19 pandemic may not be fully reflected in our results of operations and overall financial performance until future periods. Results of Operations The following table sets forth certain consolidated statements of comprehensive income data and such data as a percentage of total revenues for the periods presented: Three Months Ended March 31, 2022 2021 % Change Revenues Recurring $ 348,164 98.5 % $ 267,774 98.4 % 30.0% Implementation and other 5,355 1.5 % 4,424 1.6 % 21.1% Total revenues 353,519 100.0 % 272,198 100.0 % 29.9% Cost of revenues Operating expenses 38,492 10.9 % 29,073 10.7 % 32.4% Depreciation and amortization 9,992 2.8 % 7,200 2.6 % 38.8% Total cost of revenues 48,484 13.7 % 36,273 13.3 % 33.7% Administrative expenses Sales and marketing 74,996 21.2 % 62,761 23.1 % 19.5% Research and development 31,605 8.9 % 24,711 9.1 % 27.9% General and administrative 60,504 17.1 % 46,191 17.0 % 31.0% Depreciation and amortization 11,663 3.3 % 7,716 2.8 % 51.2% Total administrative expenses 178,768 50.5 % 141,379 52.0 % 26.4% Total operating expenses 227,252 64.2 % 177,652 65.3 % 27.9% Operating income 126,267 35.8 % 94,546 34.7 % 33.6% Interest expense (215 ) -0.1 % — 0.0 % 100.0% Other income (expense), net 1,412 0.4 % 629 0.2 % 124.6% Income before income taxes 127,464 36.1 % 95,175 34.9 % 33.9% Provision for income taxes 35,534 10.1 % 30,559 11.2 % 16.3% Net income $ 91,930 26.0 % $ 64,616 23.7 % 42.3% 23 Revenues The increase in total revenues for the three months ended March 31, 2022 compared to the same period in 2021 was primarily the result of the addition of new clients and productivity and efficiency gains in mature sales offices, which are offices that have been open for at least 24 months, and the sale of additional applications to our existing clients. In addition, the performance of our tax forms filing business contributed to the increase in total revenues for the three months ended March 31, 2022 as compared to the same period in 2021. The COVID-19 pandemic has resulted in, and may continue to result in, headcount fluctuations 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 months ended March 31, 2022 described above were impacted by the headcount fluctuations within our client base. The negative effects on our client revenue of lower headcount resulting from the pandemic were more than offset by headcount additions from new clients added since the beginning of the pandemic and modestly improved headcount levels among our pre-pandemic client base beginning in the second quarter of 2021. Additionally, a higher average funds held for clients balance during the three months ended March 31, 2022 as compared to the same period in 2021, resulted in increased interest earned on funds held for clients, which had a positive impact on recurring revenue. The increase in implementation and other revenues for the three months ended March 31, 2022 from the same period in 2021 was primarily the result of the increased non-refundable upfront conversion fees collected from the addition of new clients. These fees are deferred and recognized ratably over the ten-year estimated life of our clients . Expenses Cost of Revenues During the three months ended March 31, 2022, operating expenses increased from the comparable prior year period by $9.4 million due to a $7.5 million increase in employee-related expenses primarily attributable to growth in the number of operating personnel, a $1.0 million increase in shipping and supplies fees and a $0.9 million increase in automated clearing house fees in connection with the increase in revenues. Depreciation and amortization expense increased $2.8 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other fixed assets. Administrative Expenses Sales and Marketing During the three months ended March 31, 2022, sales and marketing expenses increased from the comparable prior year period by $12.2 million due to a $9.3 million increase in employee-related expenses, including commissions and bonuses, and a $2.9 million increase in marketing and advertising expense attributable to increased spending across most components of our marketing program. Based on positive results from our advertising campaigns, we plan to continue to make significant investments in our marketing program and may adjust spending levels in future periods as we see opportunities for returns on our investments. Research and Development During the three months ended March 31, 2022, research and development expenses increased from the comparable prior year period due to an increase in employee-related expenses of $6.9 million. As we continue the ongoing development of our platform and product offerings, we generally expect research and development expenses (exclusive of stock-based compensation) to continue to increase, particularly as we hire more personnel to support our growth. While we expect this trend to continue on an absolute dollar basis and as a percentage of total revenues, we also anticipate the rate of increase to decline over time as we leverage our growth and realize additional economies of scale. As is customary for our business, we also expect fluctuations in research and development expense as a percentage of revenue on a quarter-to-quarter basis due to seasonal revenue trends, the introduction of new products, the amount and timing of research and development costs that may be capitalized and the timing of onboarding new hires and restricted stock vesting events. Expenditures for software developed or obtained for internal use are capitalized and amortized over a three-year period on a straight-line basis. The nature of the development projects underway during a particular period 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 months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 % Change Capitalized portion of research and development $ 15,400 $ 12,295 25% Expensed portion of research and development 31,605 24,711 28% Total research and development costs $ 47,005 $ 37,006 27% 24 General and Administrative During the three months ended March 31, 2022, general and administrative expenses increased $14.3 million from the comparable prior year period due to a $14.2 million increase in employee-related expenses, including $5.7 million associated with an increase in additional paid time off and benefits awarded to employees, and a $0.1 million increase in accounting and legal expenses. Non-Cash Stock-Based Compensation Expense The following table presents the non-cash stock-based compensation expense that is included within the specified line items in our consolidated statements of comprehensive income: Three Months Ended March 31, 2022 2021 % Change Non-cash stock-based compensation expense Operating expenses $ 982 $ 995 -1% Sales and marketing 2,877 3,511 -18% Research and development 2,219 1,567 42% General and administrative 15,977 17,508 -9% Total non-cash stock-based compensation expense $ 22,055 $ 23,581 -6% During the three months ended March 31, 2022, our non-cash stock-based compensation expense decreased $1.5 million from the comparable prior year period due to the vesting of awards that were outstanding during the first quarter of 2021 that were no longer outstanding during the first quarter of 2022. Depreciation and Amortization During the three months ended March 31, 2022, depreciation and amortization expense increased from the comparable prior year period primarily due to the development of additional technology and purchases of other related fixed assets. Interest Expense The increase in interest expense for the three months ended March 31, 2022, as compared to the comparable prior year period, is due the timing and progress of construction of the expansion of our corporate headquarters and our expanded operations facility, which resulted in a lower capitalization rate of interest in 2022. Other Income (Expense), net The change in other income (expense), net for the three months ended March 31, 2022 was primarily due to the increase in the fair value of our interest rate swap as compared to the comparable prior year period. Provision (Benefit) for Income Taxes The provision (benefit) 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 27.9% and 32.1 % for the three months ended March 31, 2022 and 2021, respectively. The lower effective income tax rate for the three months ended March 31, 2022 is primarily related to a decrease in nondeductible expenses as compared to the three months ended March 31, 2021. Liquidity and Capital Resources Our principal sources of capital and liquidity are our operating cash flow and cash and cash equivalents. Our cash and cash equivalents consist primarily of demand deposit accounts, money market funds and certificates of deposit. Additionally, we maintain a senior secured revolving credit facility (the “2022 Facility”), which can be accessed as needed to supplement our operating cash flow and cash balances. The 2022 Facility provides us the ability to borrow funds in the aggregate principal amount of up to $250.0 million, and the ability to request an incremental facility of up to an additional $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. As of May 4, 2022, we have $29.0 million of outstanding borrowings under the 2022 Facility. We have historically funded our operations from cash flows generated from operations, cash from the sale of equity securities and debt financing. Although we have funded most of the costs for construction projects at our corporate headquarters and other facilities from available cash, we have incurred indebtedness for a portion of these costs. We are funding the current building expansion at our Oklahoma City headquarters from available cash. Further, all purchases under our stock repurchase plans were paid for from available cash. We believe our existing cash and cash equivalents, cash generated from operations and available sources of liquidity will be sufficient to maintain operations, make necessary capital expenditures and opportunistically repurchase shares for at least the next 12 months. In addition, based on our strong profitability and continued growth, we expect to meet our longer-term liquidity needs with cash flows from operations and, as needed, financing arrangements. 25 Term Credit Agreement. As of March 31 , 202 2 , 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 Ameri ca, N.A. and Kirkpatrick Bank. All Term Loans were used to finance construction projects at our corporate headquarters . Our obligations under the Term Loans we re secured by a mortgage and first priority security interest in our corporate headquarters property. The Term Loans were due to mature on September 7, 2025 and b o r e 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%. Under the Term Credit Agreement, we were required to comply with certain financial and non-financial covenants, including maintaining 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 Term Credit Agreement contained 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 March 31, 2022, we were in compliance with all covenants set forth in the Term Credit Agreement. As discussed below, the Term Loans were repaid in full on May 4, 2022 and the Term Credit Agreement was terminated. Interest Rate Swap Agreement. In connection with entering into the Term Credit Agreement, we also entered into a floating-to-fixed interest rate swap agreement to limit the exposure to interest rate risk related to the Term Loans (the “Interest Rate Swap Agreement”). The Interest Rate Swap Agreement, which has a maturity date of September 7, 2025, provides that we receive quarterly variable interest payments based on the LIBOR rate and pay interest at a fixed rate. 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 comprehensive income. For the three months ended March 31, 2022 and 2021, we recorded gains of $1.3 million and $0.7 million, respectively, for the change in fair value of the interest rate swap. The change in fair value of the interest rate swap is included in Other income (expense), net in the consolidated statements of comprehensive income . 2018 Revolving Credit Agreement. On February 12, 2018, we entered into a senior secured revolving credit agreement (the “2018 Revolving Credit Agreement”) with JPMorgan Chase Bank, N.A. and Bank of America, N.A. that provided for a senior secured revolving credit facility (the “2018 Facility”) in the aggregate principal amount of $50.0 million (the “2018 Revolving Commitment”), which could have been increased to up to $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The 2018 Facility included a $5.0 million sublimit for swingline loans and a $2.5 million sublimit for letters of credit. The 2018 Facility was scheduled to mature on February 12, 2020. On April 15, 2019, we entered into the First Amendment to Revolving Credit Agreement, pursuant to which (i) Wells Fargo Bank, N.A. was added as a lender, (ii) the 2018 Revolving Commitment was increased to $75.0 million, which could have been further increased to $125.0 million subject to obtaining additional lender commitments and certain approvals and satisfying other conditions, and (iii) the scheduled maturity date of the 2018 Facility was extended to April 15, 2022. As of March 31, 2022, we did not have any borrowings outstanding under the 2018 Facility. The 2018 Facility matured pursuant to its terms on April 15, 2022. 2022 Revolving Credit Agreement . On May 4, 2022, we entered into a new credit agreement (the “2022 Revolving Credit Agreement”) providing for a $250.0 million senior secured revolving credit facility and the ability to request an incremental facility of up to an additional $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The 2022 Facility includes a $25.0 million sublimit for swingline loans and a $2.5 million sublimit for letters of credit. On May 4, 2022, we borrowed $29.0 million under the 2022 Facility to repay the Term Loans, along with accrued interest, expenses and fees. See Part II, Item 5, “Other Information,” in this Form 10-Q for additional information. Stock Repurchase Plan and Withholding Shares to Cover Taxes. In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. Most recently, in May 2021, our Board of Directors authorized the repurchase of up to $300.0 million of our common stock. As of March 31, 2022, there was $266.1 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 current stock repurchase plan will expire on May 13, 2023. During the three months ended March 31, 2022, we repurchased an aggregate of 594 shares of our common stock at an average cost of $366.49 per share, all of which were 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 $0.2 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. 26 Cash Flow Analysis Our cash flows from operating activities have historically been significantly impacted by profitability, implementation revenues received but deferred, our investment in sales and marketing to drive growth, and research and development. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives. As our business grows, we expect our capital expenditures and our investment activity to continue to increase. We are currently focused on the expansion of our corporate headquarters. Capital expenditures related to this expansion began in the fourth quarter of 2021. We estimate that the total cost of the project will be between $60 million and $70 million and we expect construction will take approximately two years to complete. In addition, we have purchased the naming rights to the downtown Oklahoma City arena that is home to the Oklahoma City Thunder National Basketball Association franchise. Under the terms of the naming rights agreement, we have committed to make payments escalating annually from $4.0 million in 2021 to $6.1 million in 2035. The payments are due in the fourth quarter of each year. Upon the conclusion of the initial term, the agreement may be extended upon the mutual agreement of both parties for an additional five-year period. Depending on certain growth opportunities, we may choose to accelerate investments in sales and marketing, acquisitions, technology and services. Actual future capital requirements will depend on many factors, including our future revenues, cash from operating activities and the level of expenditures in all areas of our business. As part of our payroll and payroll tax filing services, we collect funds from our clients for federal, state and local employment taxes, which we remit to the appropriate tax agencies. We invest these funds in money market funds, demand deposit accounts, commercial paper, U.S. treasury securities and certificates of deposit from which we earn interest income during the period between their receipt and disbursement. Our cash flows from investing and financing activities are influenced by the amount of funds held for clients, which can vary significantly from quarter to quarter. The balance of the funds we hold depends on our clients’ payroll calendars, and therefore such balance changes from period to period in accordance with the timing of each payroll cycle. Our cash flows from financing activities are also affected by the extent to which we use available cash to purchase shares of common stock under our stock repurchase plan as well as 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 three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 % Change Net cash provided by (used in): Operating activities $ 117,231 $ 89,457 31% Investing activities (67,626 ) 7,455 1007% Financing activities 2,098,868 685,369 206% Change in cash, cash equivalents, restricted cash and restricted cash equivalents $ 2,148,473 $ 782,281 175% Operating Activities Cash provided by operating activities for the three months ended March 31, 2022 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 three months ended March 31, 2021, our operating cash flows for the three months ended March 31, 2022 were positively impacted by the growth of our business. Investing Activities Cash flows used in investing activities for the three months ended March 31, 2022 increased from the comparable prior year period due to a $121.9 million increase in purchases of investments from funds held for clients and a $9.1 million increase in purchases of property and equipment. The increase in cash flows used in investing activities was slightly offset by $56.0 million increase in proceeds from maturities of investments from funds held for clients. Financing Activities Cash flows provided by financing activities for the three months ended March 31, 2022 increased from the comparable prior year period primarily due to the impact of a $1,413.3 million change related to the client funds obligation, which is due to the timing 27 of receipts from our clients and payments made to our clients’ employees and applicable taxin g authorities on their behalf as well as a $ 0 . 2 million decrease in the withholding taxes paid related to net share settlements . Contractual Obligations Our principal commitments primarily consist of long-term debt, leases for office space and the naming rights agreement. As discussed in “Note 6. Long-Term Debt, Net” and elsewhere in this Form 10-Q, the 2018 Revolving Credit Agreement matured on April 15, 2022, and on May 4, 2022, we entered into the 2022 Revolving Credit Agreement, repaid the Term Loans and terminated the Term Credit Agreement. Outside of the maturation of the 2018 Revolving Credit Agreement, changes related to the 2022 Revolving Credit Agreement, repayment of the Term Loans and termination of the Term Credit Agreement, there have been no material changes to our contractual obligations disclosed in the contractual obligations section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K that was filed with the SEC on February 17, 2022. For additional information regarding our naming rights agreement, leases, long-term debt and our commitments and contingencies, see “Note 4. Goodwill and Intangible Assets, Net”, “Note 5. Leases”, “Note 6. Long-Term Debt, Net” and “Note 12. Commitments and Contingencies” in the Form 10-K and “Note 5. Goodwill and Intangible Assets, Net”, “Note 6. Long-Term Debt, Net”, “Note 13. Commitments and Contingencies” and “Note 15. Subsequent Events” in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q. Critical Accounting Policies and Estimates Our consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions to ensure that management believes them to be reasonable under the then-current facts and circumstances. Actual amounts and results may materially differ from these estimates made by management under different assumptions and conditions. Certain accounting policies that require significant management estimates, and are deemed critical to our results of operations or financial position, are discussed in the critical accounting policies and estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K. There have been no material changes to the critical accounting policies disclosed in the Form 10-K. Adoption of Accounting Pronouncements Discussion of our recently adopted accounting pronouncements can be found in Note 2 in this Form 10-Q. 28 Non-GAAP Financial Measures Management uses adjusted EBITDA and non-GAAP net income as supplemental measures to review and assess the performance of our core business operations and for planning purposes. We define (i) adjusted EBITDA as net income plus interest expense, taxes, depreciation and amortization, non-cash stock-based compensation expense, certain transaction expenses that are not core to our operations (if any) and the change in fair value of our interest rate swap and (ii) non-GAAP net income as net income plus non-cash stock-based compensation expense, certain transaction expenses that are not core to our operations (if any) and the change in fair value of our interest rate swap, all of which are adjusted for the effect of income taxes. Adjusted EBITDA and non-GAAP net income are metrics that provide investors with greater transparency to the information used by management in its financial and operational decision-making. We believe these metrics are useful to investors because they facilitate comparisons of our core business operations across periods on a consistent basis, as well as comparisons with the results of peer companies, many of which use similar non-GAAP financial measures to supplement results under U.S. GAAP. In addition, adjusted EBITDA is a measure that provides useful information to management about the amount of cash available for reinvestment in our business, repurchasing common stock and other purposes. Management believes that the non-GAAP measures presented in this Form 10-Q, when viewed in combination with our results prepared in accordance with U.S. GAAP, provide a more complete understanding of the factors and trends affecting our business and performance. Adjusted EBITDA and non-GAAP net income are not measures of financial performance under U.S. GAAP, and should not be considered a substitute for net income, which we consider to be the most directly comparable U.S. GAAP measure. Adjusted EBITDA and non-GAAP net income have limitations as analytical tools, and when assessing our operating performance, you should not consider adjusted EBITDA or non-GAAP net income in isolation, or as a substitute for net income or other consolidated statements of comprehensive income data prepared in accordance with U.S. GAAP. Adjusted EBITDA and non-GAAP net income may not be comparable to similarly titled measures of other companies and other companies may not calculate such measures in the same manner as we do. The following tables reconcile net income to adjusted EBITDA, net income to non-GAAP net income and earnings per share to non-GAAP net income per share on a basic and diluted basis: Three Months Ended March 31, 2022 2021 Net income to adjusted EBITDA: Net income $ 91,930 $ 64,616 Interest expense 215 — Provision for income taxes 35,534 30,559 Depreciation and amortization 21,655 14,916 EBITDA 149,334 110,091 Non-cash stock-based compensation expense 22,055 23,581 Change in fair value of interest rate swap (1,263 ) (656 ) Adjusted EBITDA $ 170,126 $ 133,016 Three Months Ended March 31, 2022 2021 Net income to non-GAAP net income: Net income $ 91,930 $ 64,616 Non-cash stock-based compensation expense 22,055 23,581 Change in fair value of interest rate swap (1,263 ) (656 ) Income tax effect on non-GAAP adjustments (2,074 ) (1,633 ) Non-GAAP net income $ 110,648 $ 85,908 Weighted average shares outstanding: Basic 58,014 57,740 Diluted 58,219 58,394 Earnings per share, basic $ 1.58 $ 1.12 Earnings per share, diluted $ 1.58 $ 1.11 Non-GAAP net income per share, basic $ 1.91 $ 1.49 Non-GAAP net income per share, diluted $ 1.90 $ 1.47 29 Three Months Ended March 31, 2022 2021 Earnings per share to non-GAAP net income per share, basic: Earnings per share, basic $ 1.58 $ 1.12 Non-cash stock-based compensation expense 0.38 0.41 Change in fair value of interest rate swap (0.02 ) (0.01 ) Income tax effect on non-GAAP adjustments (0.03 ) (0.03 ) Non-GAAP net income per share, basic $ 1.91 $ 1.49 Three Months Ended March 31, 2022 2021 Earnings per share to non-GAAP net income per share, diluted: Earnings per share, diluted $ 1.58 $ 1.11 Non-cash stock-based compensation expense 0.38 0.40 Change in fair value of interest rate swap (0.02 ) (0.01 ) Income tax effect on non-GAAP adjustments (0.04 ) (0.03 ) Non-GAAP net income per share, diluted $ 1.90 $ 1.47 30