HealthEquity FY2018 Annual Report
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IN HIS ICONIC SKETCH,
comedian Jack Benny is confronted by a robber, “Your money or your life.” Benny
pauses, then snaps back, “I’m thinking it over!”.
Today, the tradeoff between health and wealth is no laughing matter. According to
the Bureau of Labor Statistics, the typical working family has just $10,000 of annual
earnings to both fund healthcare costs and to save for retirement.
At HealthEquity, we connect health and wealth, turning tradeoffs into win-wins.
HealthEquity members use health savings accounts (HSAs) and other tax-advantaged
accounts to become more confident consumers of healthcare today and more effective
builders of health and retirement savings for tomorrow. Every day, we see examples of
HealthEquity members driving the healthcare system to become more efficient, effective
and responsive. We believe savers have the power to save healthcare. That is why we
embrace with passion the vision of HSAs becoming ubiquitous, and as important for
family financial success as retirement accounts are today.
During Fiscal 2018, HealthEquity made record breaking strides towards that vision,
with each of our four key metrics reaching new highs:
• Revenue increased 29% to $229.5 million
• Adjusted EBITDA grew an even faster 35% to $84.7 million
• HSA members grew 24% to 3.4 million
• Custodial assets of our HSA members grew 35% to $6.8 billion
HealthEquity again outpaced the rest of the HSA market during Fiscal 2018. Based on
independent findings from Devenir Research, the market-wide HSA membership (or
accounts) and custodial assets grew by 16%1 and 22% respectively. HealthEquity
accounted for nearly a quarter of all account growth and 30% of custodial asset growth
market-wide, nearly double our largest competitors.
We are helping Americans more than ever to
connect their health and wealth by empowering
them in four important ways:
1. Education and tools
1. Education and tools
Our proprietary platform has more than 2,680 distinct integrations with other actors
in the health benefits ecosystem. HealthEquity provides 1,500 unique health plan and
telemedicine providers, creating an added value to our members’ benefits package.
When HealthEquity members use these price transparency tools, they spend less and
save more, decreasing the amount employers spend on healthcare.
1 Devenir Research 2017 Year-End HSA Market and Statistic reported 11% HSA growth. The subsequent Devenir Blog, “What
Happened to HSA Account Growth in 2017?”, stated the adjusted account growth was closer to 15-16%.
821353cvr.indd 2
Copyright © 2018 HealthEquity, Inc. All rights reserved
2. Engagement
2. Engagement
Personalized messaging and engagement helps our members become more confident
consumers of healthcare and healthier savers in their HSAs. By providing more insight
on claims analysis, we provide data driven guidance to help families make informed
healthcare decisions by delivering the right information at the right time in their efforts
to build wealth and retirement healthcare savings.
3. Investing
3. Investing
We are helping our members’ balances grow more quickly by keeping investment
fund costs low and providing advisory tools unmatched in the industry, like our HSA
investment platform which was rated #1 by Morningstar. The number of investing
HealthEquity members grew by 85% in fiscal year 2018. We believe at market maturity,
the average HSA will have $15,000 to $20,000 of invested assets.
4. Retirement planning
4. Retirement planning
We believe HealthEquity is the first HSA administrator with the capability to provide
members with a holistic view of their retirement resources. Both 401K and HSA balances
are available on one convenient platform, regardless of who administers their 401K,
which allows members to make the most effective allocation and contribution decisions
to maximize their tax savings. With more than 10,000 baby boomers turning 65 each day,
our mission to help individuals prepare for and meet the financial burden of healthcare in
retirement is becoming more important each day. As much as 25% of retirement income
may go towards healthcare expenses that are not covered by Medicare.
HealthEquity is uniquely positioned to rescue members from the Jack Benny conundrum.
By providing tools and creating a nation of informed health savers, HealthEquity is
connecting health and wealth, rather than making our members choose one over the
other. We remain committed to being the best at connecting health and wealth, growing
account contributions and balances, all while staying passionate about delivering
remarkable “purple” experiences to our members, clients and partners. We thank you
for your support in pursuing this important mission, vision and passion.
Sincerely,
Jon Kessler
President, Chief Executive
Officer and Director
Steve Neeleman, M.D.
Founder, Vice Chairman
and Director
Copyright © 2018 HealthEquity, Inc. All rights reserved success HIGHLIGHTS
Number of HSAs
(in thousands, except percentages)
Revenue
(in millions, except percentages)
Net new HSAs
Beginning HSAs
Total HSAs
714
6
4
7
,
2
1
4
1
,
2
657
605
3
0
4
3
,
1,427
2,141
2,746
$229.5
$178.4
$126.8
FY16
FY17
FY18
FY16FY16
FY17
FY18
2244%
FY17-18
Year over year
HSA growth
2929%
FY17-18
Year over year
revenue growth
124 HEALTH PLAN AND
ADMINISTRATOR PARTNERS
40,000+ EMPLOYERS
SERVED
Adjusted EBITDA
(in millions, except percentages)
Custodial assets
(in millions, except percentages)
$84.7
$62.6
$40.6
$1,289
Investment assets
Cash assets
Total assets
$$406
5
8
6
3
$
,
$$659659
9
3
0
5
$
,
8
7
7
,
6
$
FY16
FY17FY17
FY18
FY16
FY17
$3,279
$4,380
$5,489
FY18
3535%%
FY17-18
Year over year adjusted
EBITDA growth
3355%%
FY17-18
Year over year
custodial asset growth
Copyright © 2018 HealthEquity, Inc. All rights reserved UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36568
HEALTHEQUITY, INC.
(Exact name as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
7389
(Primary Standard Industrial
Classification Code Number)
52-2383166
(I.R.S. Employer
Identification Number)
15 West Scenic Pointe Drive
Suite 100
Draper, Utah 84020
(801) 727-1000
(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common stock, par value $0.0001 per share
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Emerging growth company
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant on July 31, 2017, based on the closing price of $45.87 for shares of the registrant’s common
stock as reported by the NASDAQ Global Select Market was approximately $2.3 billion. For purposes of determining whether a stockholder was an affiliate of the registrant at July 31, 2017, the
registrant assumed that a stockholder was an affiliate of the registrant at July 31, 2017 if such stockholder (i) beneficially owned 10% or more of the registrant’s capital stock, as determined based on
public filings, and/or (ii) was an executive officer or director, or was affiliated with an executive officer or director of the registrant, at July 31, 2017. This determination of affiliate status is not necessarily
a conclusive determination for other purposes.
As of February 28, 2018, there were 60,952,042 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement related to its 2018 annual meeting of shareholders (the "2018 Proxy Statement") are incorporated by reference into Part III of this Annual Report
on Form 10-K where indicated. The 2018 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
HealthEquity, Inc. and subsidiaries
Form 10-K annual report
Table of contents
Part I.
Item 1.
Business ...........................................................................................................................................
Item 1A. Risk factors ......................................................................................................................................
Item 1B. Unresolved staff comments ..............................................................................................................
Item 2.
Item 3.
Item 4.
Part II.
Item 5.
Properties .........................................................................................................................................
Legal proceedings ............................................................................................................................
Mine safety disclosures ....................................................................................................................
Market for registrant's common equity, related stockholder matters and issuer purchases of
equity securities ...............................................................................................................................
Item 6.
Selected financial data .....................................................................................................................
Item 7.
Management's discussion and analysis of financial condition and results of operations ..................
Item 7A. Quantitative and qualitative disclosures about market risk ...............................................................
Item 8.
Financial statements and supplementary data .................................................................................
Item 9.
Changes in and disagreements with accountants on accounting and financial disclosure...............
Item 9A. Controls and procedures ..................................................................................................................
Item 9B. Other information .............................................................................................................................
Part III.
Item 10. Directors, executive officers and corporate governance ...................................................................
Item 11.
Executive compensation ..................................................................................................................
Item 12.
Security ownership of certain beneficial owners and management and related stockholder
matters .............................................................................................................................................
Item 13. Certain relationships and related transactions, and director independence .....................................
Item 14.
Principal accounting fees and services ............................................................................................
Part IV.
Item 15.
Exhibits and financial statement schedules ......................................................................................
Item 16.
Form 10-K Summary ........................................................................................................................
Signatures ........................................................................................................................................
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements that involve risks and uncertainties, including
in the sections entitled “Business,” “Risk factors,” and “Management’s discussion and analysis of financial condition
and results of operations.” These forward-looking statements include, without limitation, statements regarding our
industry, business strategy, plans, goals and expectations concerning our markets and market position, future
operations, expenses and other results of operations, margins, profitability, tax rates, capital expenditures, liquidity
and capital resources and other financial and operating information. When used in this discussion, the words “may,”
“believes,” “intends,” “seeks,” “anticipates,” “plans,” “estimates,” “expects,” “should,” “assumes,” “continues,” “could,”
“will,” “future” and the negative of these or similar terms and phrases are intended to identify forward-looking
statements in this report.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These
expectations may or may not be realized. Although we believe the expectations reflected in the forward-looking
statements are reasonable, we can give you no assurance these expectations will prove to be correct. Some of
these expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events,
results and outcomes may differ materially from our expectations due to a variety of known and unknown risks,
uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include,
among others, risks related to the following:
•
•
•
•
•
•
•
•
•
•
•
•
our ability to compete effectively in a rapidly evolving healthcare industry;
our dependence on the continued availability and benefits of tax-advantaged health savings accounts;
the significant competition we face and may face in the future, including from those with greater resources than
us;
cybersecurity breaches of our platform and other data interruptions, including resulting costs and liabilities,
reputational damage and loss of business;
the current uncertain healthcare environment, including changes in healthcare programs and expenditures and
related regulations;
our ability to comply with current and future privacy, healthcare, tax, investment advisor and other laws
applicable to our business;
our reliance on partners and third party vendors for distribution and important services;
our ability to successfully identify, acquire and integrate additional portfolio purchases or acquisition targets;
our ability to develop and implement updated features for our platform and successfully manage our growth;
our ability to protect our brand and other intellectual property rights;
our reliance on our management team and key team members; and
other risks and factors listed under “Risk factors” and elsewhere in this report.
Unless the context otherwise indicates or requires, the terms “we,” “our,” “us,” “HealthEquity,” and the “Company,”
as used in this Annual Report on Form 10-K, refer to HealthEquity, Inc. and its subsidiaries as a combined entity,
except where otherwise stated or where it is clear that the terms mean only HealthEquity, Inc. exclusive of its
subsidiaries.
-1-
Part I
Item 1. Business
Company overview
We are a leader and an innovator in the high growth category of technology-enabled services platforms that
empower consumers to make healthcare saving and spending decisions. Our platform provides an ecosystem
where consumers can access their tax-advantaged healthcare savings, compare treatment options and pricing,
evaluate and pay healthcare bills, receive personalized benefit and clinical information, earn wellness incentives,
and make educated investment choices to grow their tax-advantaged healthcare savings. We can integrate with any
health plan or banking institution to be the independent and trusted partner that enables consumers as they seek to
manage, save and spend their healthcare dollars. We believe the secular shift to greater consumer responsibility for
healthcare costs will require a significant portion of the approximately 190 million under-age 65 consumers with
private health insurance in the United States to use a platform such as ours.
The core of our ecosystem is the health savings account, or HSA, a financial account through which consumers
spend and save long term for healthcare on a tax-advantaged basis. We refer to the HSAs for which we serve as
custodian as our HSA Members. As of January 31, 2018, we were the integrated HSA platform for 124 health plan
and administrator partners and for employees at more than 40,000 employer clients. Our customers include
individuals, employers of all sizes, health plans, and administrators. We refer to our individual customers as our
members, our health plan and administrator customers as our Health Plan and Administrator Partners and our
employer clients as our Employer Partners. Our Health Plan and Administrator Partners and Employer Partners
collectively constitute our Network Partners. As of January 31, 2018, we had over 3.4 million HSAs on our platform.
Management estimates that this represents over 7.5 million lives. During the years ended January 31, 2018, 2017
and 2016, we added approximately 723,000, 703,000 and 751,000 new HSA Members, representing approximately
1.6 million, 1.5 million and 1.7 million lives, respectively.
We have developed technology and a differentiated focus on the consumer to facilitate the transition to a more
consumer-centric approach to healthcare saving and spending. Our solution is deployed as a cloud-based platform
that is accessible to our customers through the Internet and on mobile devices and is hosted on private servers,
which allows us to scale on demand. Core to our technology is a configurable framework and open platform that we
believe provides us greater functionality and flexibility than generic technologies used by our legacy competitors
and requires less investment and time to configure and customize to our customers’ needs.
We are able to seamlessly integrate third-party applications into our platform, which has afforded us an advantage
in an expanding consumer healthcare landscape. A growing number of companies are attempting to integrate into
the consumer's daily healthcare spending experience by leveraging our platform. These companies offer functions
such as price transparency, benefits enrollment, population health, wellness, analytics, health insurance and
investment services, and are looking to reach the consumer at the critical "save" and "spend" moment. In an effort
to capitalize on this opportunity, we continue to expand the number of ecosystem partners with whom our platform
is integrated.
Our business model provides strong visibility into our future operating performance. As of the beginning of the past
several fiscal years, we had approximately 90% visibility into the revenue of the subsequent fiscal year. We earn
monthly service revenue primarily through contracts with our Network Partners and our custodial agreements with
individual members. We earn custodial revenue primarily from our custodial cash assets that are deposited with our
FDIC-insured custodial depository bank partners or invested in an annuity contract with our insurance company
partner. In addition, we earn recordkeeping fees in respect of assets held with our investments partner and we earn
fees for investment advisory services through our registered investment advisor subsidiary. We also earn
interchange revenue, which is primarily interchange fees charged to merchants on payments made with our cards
via payment networks. Monthly service revenue, custodial revenue, and interchange revenue are recurring in
nature, providing strong visibility into our future business.
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Our products and services
Healthcare saving and spending platform. We offer a cloud-based platform, accessed by our members online
via a desktop or mobile device, through which individuals can make health saving and spending decisions, pay
healthcare bills, compare treatment options and prices, receive personalized benefit and clinical information, earn
wellness incentives, grow their savings and make investment choices. The platform provides users with access to
services we provide as well as services provided by third parties selected by us or by our Network Partners.
Among other features, the platform includes the capability to present to users medical bills upon adjudication by a
health plan, including details such as the amount paid by insurance, specific nature of the medical service provided,
and diagnostic code. Users of the platform can pay these bills from an account of ours or from any bank account,
online, via a mobile device, or using our payment card. All users of the platform gain access to our healthcare
consumer specialists, available every hour of every day, via a toll-free telephone number or email. Our specialists
can assist users with such tasks as contacting a medical provider to dispute a bill, negotiating a payment schedule,
optimizing the use of tax-advantaged accounts to reduce medical spending or selecting from among medical plans
offered by an employer or health plan.
Health savings accounts. The Medicare Modernization Act of 2003 created HSAs, a tax-exempt trust or
custodial account managed by a custodian that is a bank, an insurance company, or a non-bank custodian
specifically authorized by the Internal Revenue Service, or IRS, as meeting certain ownership, capitalization,
expertise and governance requirements. We are an IRS approved non-bank custodian of our members' HSAs,
designated to serve as both a passive and non-passive non-bank custodian of HSAs.
To be eligible to contribute to an HSA, an individual must be covered under a high deductible healthcare plan, or
HDHP, have no additional health coverage, not be enrolled in Medicare, and not be claimed as a dependent on
someone else’s tax return. HSAs have several tax-advantaged benefits, which we call the "triple tax savings":
(1) individuals can claim a tax deduction for contributions they make to their HSAs, and contributions that their
employers make to their HSAs may be excluded from their gross income for purposes of federal and most state
income and employment tax; (2) the interest or earnings on the assets in the account, including reinvestment,
accumulate without being subject to tax; and (3) distributions may be tax free if they are used to pay qualified
medical expenses. There is no requirement to provide receipts to us to substantiate HSA distributions to members,
whether made through our payment card or directly from our online platform. Additionally, taxable distributions other
than for qualified medical expenses are permitted without penalty (although subject to income tax) after age 65.
Balances remain in the account until used, i.e., there is no “use or lose” requirement. An HSA is owned by the
account holder; it remains the account holder’s property upon a change of employment, health plan or retirement.
Investment platform and advisory services. We offer a mutual fund investment platform and an online-only
automated investment advisory service to all of our members whose account balances exceed a stated threshold.
These services are entirely elective to the member. The advisory service is delivered through a web-based tool,
AdvisorTM, which is offered and managed by HealthEquity Advisors, LLC, our SEC-registered investment adviser
subsidiary. HealthEquity Advisors, LLC provides investment advice to its clients exclusively through the AdvisorTM
tool on an interactive website. Members who utilize our mutual fund investment platform or subscribe for AdvisorTM
services pay asset-based fees, which include the cost of the advisory service and all trading commissions and other
expenses associated with transactions made through these online tools.
AdvisorTM provides investment education guidance and management, including maintaining HSA cash (liquidity) in
amounts directed by the member, targeting risk appropriate portfolio diversification, and mutual fund selection.
We offer three levels of service to investors:
• Self-driven: For members who do not subscribe for AdvisorTM, we provide a mutual fund investment platform to
invest HSA balances. Neither we nor AdvisorTM provides advice to members in respect of investments among
funds on the platform;
• GPS: AdvisorTM provides guidance and advice, but the member makes the final investment decisions and
implements portfolio allocation and investment advice through the HealthEquity platform; and
• Auto-pilot: AdvisorTM manages the account and implements portfolio allocation and investment advice
automatically for the member.
Regardless of the level of service selected, members are responsible for their proportionate share of fees and
expenses payable by the underlying mutual funds and other investment vehicles in which they invest.
Reimbursement arrangements. Reimbursement arrangements, or RAs, include health reimbursement
arrangements, or HRAs, and flexible spending arrangements, or FSAs. An RA may be administered by any third-
-3-
party administration, or TPA, firm. Most HSA custodians are not TPAs, and most TPAs are not HSA custodians. We
are among only a few firms that are able to administer HSAs and RAs on the same technology platform.
RAs are employer sponsored accounts that employees can use to reimburse qualified medical or dependent care
expenses. Before payment can be made, expenses must be substantiated using electronic claims from a health
plan, data gleaned from operation of our payment card where permitted, or submission of receipts or other
documentation by the employee. Like HSAs, amounts allocated to RAs and reimbursements from RAs may be
excluded from employees’ gross income for federal and most state income and employment tax purposes. RAs are
not portable, however; any value remaining upon termination of employment is forfeited (subject to COBRA). In
addition, FSAs are subject to “use or lose” restrictions that limit to $500 the amount that may be rolled over from
year to year. As of January 31, 2018, we had approximately 559,000 RAs on our platform.
HealthEquity retirement. Through our subsidiary HealthEquity Retirement Services, LLC, we offer ERISA plan
administration and investment services (with partnered advisors and record keepers) that can help reduce the cost,
risk, and work of managing a 401(k) or similar retirement plan. In addition to these plan services, we are able to
connect third party retirement solutions to our HSA platform, allowing users to manage their HSA and 401(k)
balances from a single convenient dashboard, with a common set of investment options to enhance financial
literacy and help optimize health and wealth savings.
Our technology
Our proprietary technology is deployed as a cloud-based solution that is accessible to customers through the web
and mobile devices. We utilize a multi-tenant architecture that allows changes made for one Network Partner to be
extended to all others. This architecture provides operating leverage by reducing costs and improving efficiencies,
enabling us to maximize the utilization of our infrastructure capacity with a reduction in required maintenance. We
are continually improving and devoting resources to our technology. During the years ended January 31, 2018,
2017, and 2016, we capitalized software development costs of $8.1 million, $7.7 million and $5.6 million,
respectively. In addition, we incurred $12.2 million, $10.0 million and $7.6 million, respectively, in software
development costs primarily related to the post-implementation and operation stages of our proprietary software.
Our solution is hosted on a virtual private cloud with an ability to scale on demand. This allows us to quickly support
our current and projected growth. We utilize two redundant third-party data centers to ensure continuous access
and data availability. The data centers are purpose-built facilities for hosting mission critical systems with multiple
built-in redundancy layers to minimize service disruptions and meet industry-standard measures.
Due to the sensitive nature of our customers’ data, we have a heightened focus on data security and protection. We
have implemented industry-standard processes, policies and tools through all levels of our software development
and network administration, reducing the risk of vulnerabilities in our system.
Our competitive landscape
We view our competition in terms of direct and indirect competitors. Our direct competitors are HSA custodians that
include state or federally chartered banks, insurance companies and non-bank trustees approved by the IRS as
meeting certain ownership, capitalization, expertise and governance requirements. Our indirect competitors are
benefits administration and payment technology and service providers that work with other HSA custodians to
market to health plans and/or employers.
We believe that the primary competitive factors in the market for technology platforms that empower healthcare
consumers are: integration with the broader healthcare system; level of consumer education and support; breadth
of product offering; flexibility of technology to meet partner requirements; brand strength and reputation; and price.
We believe that many of our large financial competitors may view their HSA businesses as non-core and have
historically under-invested in developing these businesses. Many of our competitors have not incorporated personal
health information into their offerings, as this would require significant upfront investment in technology, training,
and segregation of business operations from other bank or custodial operations, as well as integration with data
sources such as health plans and pharmacy benefits managers. We believe competitors within the technology,
payments or benefits administration service provider sector are limited from expanding their presence in this area
due to regulatory requirements for capital adequacy and demonstrated expertise in custodial operations. However,
we experience significant competition from banks, insurance companies, and other financial institutions that have
greater resources than us, and the intensity of competition may increase over time.
-4-
Our competitive strengths
We believe we are well-positioned to benefit from the transformation of the healthcare benefits market. Our platform
is aligned with a healthcare environment that rewards consumer engagement and fosters an integrated consumer
experience.
Leadership and first-mover advantage. We have established a defensible leadership position in the HSA
industry through our first-mover advantage, focus on innovation and differentiated capabilities. Our leadership
position is evidenced by the tripling of our market share (measured by custodial assets), from 4% in December
2010 to 13% in December 2017, as noted by the 2017 Devenir HSA Research Report, which indicates we are the
third largest HSA custodian by market share.
Complete solution for managing consumer healthcare saving and spending. Our members utilize our
platform in a number of ways and in varying frequencies. For example, our members utilize our platform to evaluate
and pay healthcare bills through the member portal, which allows members to pay their healthcare providers,
receive reimbursements and learn of savings opportunities for prescription drugs. Members also utilize the
platform’s mobile app to view and pay claims on-the-go, including uploading medical and insurance documentation
to the platform with their mobile phone cameras. During the year ended January 31, 2018, our platform experienced
36.3 million logons and, on average, every month 22% of our members signed into our platform.
Proprietary and integrated technology platform. We have a proprietary cloud-based technology platform,
developed and refined during more than a decade of operations, which we believe is highly differentiated in the
marketplace for a number of key reasons:
• Purpose-built technology: Our platform was designed specifically to serve the needs of healthcare
consumers, health plans and employers. We believe it provides greater functionality and flexibility than the
technologies used by our competitors, many of which were originally developed for banking, benefits
administration or retirement services. We believe we are one of few providers with a platform that
encompasses all of the core functionality of healthcare saving and spending in a single secure and
compliant system, including custodial administration of individual savings and investment accounts, card
and electronic funds transaction processing, benefits enrollment and eligibility, electronic and paper medical
claims processing, medical bill presentment, tax-advantaged reimbursement account and health incentive
administration, HSA trust administration, online investment advice and sophisticated analytics.
• Data integration: Our technology platform allows us to integrate data from disparate sources, which
enables us to seamlessly incorporate personal health information, clinical insight and individually tailored
strategies into the consumer experience. We currently have more than 2,680 distinct integrations with
health plans, pharmacy benefit managers, employers and other benefits provider systems. Many of our
partners’ systems rely on custom data models, non-standard formats, complex business rules and security
protocols that are difficult or expensive to change.
• Configurability: Our flexible technology platform enables us to create a unique solution for each of our
Network Partners. For example, a HealthEquity team member can readily configure more than 250 product
attributes, including integration with a partner’s chosen healthcare price transparency or wellness tools,
single sign on, sales and broker support sites, branding, member communication, custom fulfillment and
payment card, savings options and interest rates, fees and mutual fund investment choices. We currently
have more than 1,500 unique partner configurations of our offerings in use.
Differentiated consumer experience. We have designed our solutions and support services to deliver a
differentiated consumer experience, which is a function of our culture and technology. We believe this provides a
significant competitive advantage relative to legacy competitors whom we believe prioritize transaction processing
and benefits administration.
• Culture: We call our culture “DEEP Purple,” which we define as driving excellence, ethics, and process
while providing remarkable service. Our DEEP Purple culture is a significant factor in our ability to attract
and retain customers and to address nimbly opportunities in the rapidly changing healthcare sector.
• Technology: Our technology helps us to deliver on our commitment to DEEP Purple. We tailor the content
of our platform and the guidance of our experts to be timely, personal and relevant to each member. For
example, our technology generates health savings strategies that are delivered to our members when they
interact with our platform or call us. We employ individuals, which we refer to as Member Education
Specialists, who provide real-time assistance to our members via telephone.
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We believe our DEEP Purple culture drives our success. Our commitment to DEEP Purple has been rewarded with
consumer loyalty scores that far exceed those of most banks and traditional health insurers.
Large and diversified channel access. We believe our differentiated distribution platform provides a
competitive advantage by efficiently enabling us to reach a growing consumer market. Our platform is built on a
business-to-business-to-consumer, or B2B2C, channel strategy, whereby we rely on our Network Partners to reach
consumers instead of marketing our services to these potential members directly. Reaching the consumer is critical
in order for us to increase the number of our HSA Members.
We work directly with our Network Partners to reach the consumer in various ways. Our Health Plan and
Administrator Partners collectively employ thousands of sales representatives and account managers who promote
both the Health Plan and Administrators Partner’s health insurance products, such as HDHPs, and our HSAs. Our
Employer Partners collectively employ thousands of human resources professionals who are tasked with explaining
the benefits of our HSAs to their employees. Our sales and account management teams work with and train the
sales representatives and account management teams and the human resource professionals of our Network
Partners on the benefits of enrolling in, contributing to, and saving and spending through our HSAs, and our
Network Partners then convey these benefits to prospective members. As a result of this collaboration, we develop
relationships with each member who enrolls in an HSA with us. This constitutes our B2B2C channel strategy.
Scalable operating model. We believe that our technology is scalable because our products and services are
accessed primarily through our technology platform, which is cloud based. After initial on-boarding and a period of
education, our service costs for any given customer typically decline over time. Our opportunity to earn high-margin
revenue from existing HSA Members grows over time because our HSA Members’ balances typically grow,
increasing custodial revenue without significant incremental cost to us.
Strong customer retention rates. Retention of our HSA Members has been consistent over time. Retention
rates for the years ended January 31, 2018, 2017 and 2016 were 97.6%, 95.5% and 97.4%, respectively.
Individually owned trust accounts, including HSAs, have inherently high switching costs, as switching requires a
certain amount of effort on the part of the account holder and may result in closure fees. We believe that our
retention rates are also high due to our technology platform’s integration with the broader healthcare system used
by our HSA members and our focus on the consumer experience.
Selectively pursue strategic acquisitions. We have a successful history of acquiring HSA portfolios and
businesses that strengthen our platform. We expect to continue this growth strategy and regularly evaluate
opportunities. During the year ended January 31, 2018, we acquired two HSA portfolios. We have developed an
internal capability to source, evaluate and integrate acquisitions that have created value for shareholders. We
believe the nature of our competitive landscape provides significant acquisition opportunities. Many of our
competitors view their HSA businesses as non-core functions. We believe they may look to divest these assets and,
in certain cases, be limited from making acquisitions due to depository capital requirements.
Government regulation
Our business is subject to extensive, complex and rapidly changing federal and state laws and regulations.
IRS regulations
We are subject to applicable IRS regulations, which lay the foundation for tax savings and eligible expenses under
the HSAs, HRAs and FSAs we administer. The IRS issues guidance regarding these regulations regularly. In
addition, we are subject to conflict of interest and other prohibited transaction rules that are enforced through excise
taxes under the Internal Revenue Code. Although the excise taxes are enforced by the IRS, the underlying rules are
promulgated by the Department of Labor.
In February 2006, HealthEquity, Inc. received designation by the U.S. Department of Treasury to act as a passive
non-bank custodian, which allows HealthEquity, Inc. to hold custodial assets for individual account holders. In July
2017, HealthEquity, Inc. received designation by the U.S. Department of Treasury to act as both a passive and non-
passive non-bank custodian, which allows HealthEquity, Inc. to hold custodial assets for individual account holders
and use discretion to direct investment of such assets held. As a passive and non-passive non-bank custodian, the
Company must maintain net worth (assets minus liabilities) greater than 2% of passive custodial funds held at each
calendar year-end and 4% of the non-passive custodial funds held at each calendar year-end in order to take on
additional custodial assets. As of December 31, 2017, the Company's year-end for trust and tax purposes, the net
worth of the Company exceeded the required thresholds.
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Privacy and data security regulations
In the provision of HSA custodial services and directed TPA services for RAs, we are subject to the Financial
Services Modernization Act of 1999 (Gramm-Leach-Bliley Act or GLBA), the Health Insurance Portability and
Accountability Act of 1996 (HIPAA, as amended by the Health Information Technology for Economic and Clinical
Health Act), and similar state laws.
GLBA imposes financial privacy and security requirements on financial institutions that relate to the collection,
storage, use, and disclosure of an account holder’s nonpublic personal information. Nonpublic personal information
includes information that is collected or generated in the course of offering a financial product or service. For
example, nonpublic personal information includes information submitted by a prospective account holder in an
application, an account holder’s name and contact information, and transaction information. Because part of our
business is the administration of financial products such as HSAs, we are required under the Consumer Financial
Protection Bureau’s financial privacy rule under GLBA to send a notice of privacy practices to account holders and
to comply with restrictions on the disclosure of nonpublic personal information to non-affiliated third parties. We are
also required under GLBA to establish reasonable administrative, technical, and physical safeguards to protect the
security, confidentiality, and integrity of nonpublic personal information pursuant to the Federal Trade Commission’s
safeguards rule. Violations of GLBA can result in civil and criminal penalties.
HIPAA covered entities and their business associates are required to adhere to HIPAA privacy and security
standards. Covered entities include most healthcare providers, health plans, and healthcare clearinghouses.
Because we perform services (such as RA services) for covered entities that include processing protected health
information, we are a business associate and subject to HIPAA. The two rules that most significantly affect our
business are: (i) the Standards for Privacy of Individually Identifiable Health Information, or the Privacy Rule; and (ii)
the Security Standards for the Protection of Electronic Protected Health Information, or the Security Rule. The
Privacy Rule restricts the use and disclosure of protected health information, and requires us to safeguard that
information and provide certain rights to individuals with respect to that information. The Security Rule establishes
requirements for safeguarding protected health information transmitted or stored electronically. Both civil and
criminal penalties apply for violating HIPAA, which may be enforced by both the Department of Health and Human
Services’ Office for Civil Rights and state attorneys general. Violations of HIPAA may also subject us to contractual
remedies under the terms of agreements with covered entities.
States also have laws and regulations that impose additional restrictions on our collection, storage, and use of
personally identifiable information, and we strive to adhere to all such applicable laws.
ERISA
Our private-sector clients’ FSAs, HRAs, and 401(k) and other account-based retirement plans are covered by the
Employee Retirement Income Security Act of 1974, as amended, or ERISA, which governs “employee benefits
plans.” Title I of ERISA does not generally apply to HSAs. ERISA generally imposes extensive reporting
requirements on employers, as well as an obligation to provide various disclosures to covered employees and
beneficiaries; and employers and third-party administrators that have authority or discretion over management,
administration, or investment of plan assets are subject to fiduciary responsibility under ERISA. ERISA's
requirements affect our RA and 401(k) businesses, including HealthEquity Retirement Services, LLC. The
Department of Labor can bring enforcement actions or assess penalties against employers, investment advisers,
administrators, and other service providers for failing to comply with ERISA’s requirements. Participants and
beneficiaries may also file lawsuits against employers, investment advisers, administrators, and other service
providers under ERISA.
Department of Labor
The Department of Labor, or the DOL, regulates plans that are subject to ERISA, including health FSAs, HRAs, and
401(k) and other retirement plans. The DOL also issues guidance related to fiduciary responsibility and prohibited
transactions under ERISA and the Internal Revenue Code that affect administration of HSAs (as well as health
FSAs, HRAs, and retirement plans).
The DOL issues regulations, technical releases and other guidance that apply to employee benefit plans and tax-
favored savings arrangements (including HSAs) generally. In addition, in response to a request by an individual or
an organization, the DOL’s Employee Benefits Security Administration may issue an advisory opinion that interprets
and applies ERISA and/or corresponding prohibited transaction rules under the Internal Revenue Code to a specific
situation, including issues related to consumer-centric healthcare accounts and retirement plans.
In April 2016, the DOL issued a new regulation that expanded the types of conduct and communication that are
treated as fiduciary investment advice, resulting in increased responsibility for service providers to retirement
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accounts and HSAs. The rule became effective in June 2017, subject to a transition period and delayed
applicability of certain elements of the rule until July 1, 2019. The DOL is currently studying the regulation’s impacts
and considering whether to make changes. We have updated certain procedures to comply with the rule. However,
in March 2018, the rule was vacated by the Fifth Circuit Court of Appeals, and accordingly its future is uncertain.
Healthcare reform
In March 2010, the federal government enacted significant reforms to healthcare benefits through the Affordable
Care Act. The legislation amended various provisions in many federal laws, including the Internal Revenue Code
and ERISA. The reforms included new excise taxes that incentivize employers to provide health benefits (including
HSA-compatible benefits) to all full-time employees and new coverage mandates for health plans. The new rules
directly affect health FSAs and HRAs and have an indirect effect on HSAs. Further changes to the Affordable Care
Act and related healthcare regulation remain under consideration.
Investment Advisers Act of 1940
Our subsidiary HealthEquity Advisors, LLC is an SEC-registered investment adviser that provides web-only
automated investment advisory services to members. As an SEC-registered adviser, it must comply with the
requirements of the Investment Advisers Act of 1940, or the Advisers Act, and related Securities and Exchange
Commission, or SEC, regulations and is subject to periodic inspections by the SEC staff. Such requirements relate
to, among other things, fiduciary duties to clients, disclosure obligations, recordkeeping and reporting requirements,
marketing restrictions limitations on agency cross and principal transactions between the adviser and its clients, and
general anti-fraud prohibitions. The SEC is authorized to institute proceedings and impose sanctions for violations
of the Advisers Act, ranging from fines and censure to termination of an investment adviser’s registration.
Investment advisers also are subject to certain state securities laws and regulations. Failure to comply with the
Advisers Act or other federal and state securities and regulations could result in investigations, sanctions, profit
disgorgement, fines or other similar consequences.
Intellectual property
Intellectual property is important to our success. We have registered our trademark “HealthEquity” with the U.S.
Patent and Trademark Office and maintain trademark rights to the mark “Building Health Savings.”
We also rely on other forms of intellectual property rights and measures, including trade secrets, know-how and
other unpatented proprietary processes, and nondisclosure agreements, to maintain and protect proprietary aspects
of our products and technologies. We require our team members and consultants to execute confidentiality
agreements in connection with their employment or consulting relationships with us. We also require our team
members and consultants to disclose and assign to us all inventions conceived during the term of their employment
or engagement while using our property or which relate to our business.
Geographic areas
Our sole geographic market is the U.S.
Employees
We refer to our employees as our team members. As of January 31, 2018, we had 1,027 team members, including
717 in service delivery, 143 in technology and development and 167 in sales, general and administrative. We
consider our relationship with our team members to be good. None of our team members are represented by a
labor union or party to a collective bargaining agreement.
Corporate information
HealthEquity, Inc. was incorporated as a Delaware corporation on September 18, 2002. Our principal business
office is located at 15 W. Scenic Pointe Dr., Ste. 100, Draper, Utah 84020. Our website address is
www.healthequity.com. We do not incorporate the information contained on, or accessible through, our corporate
website into this Annual Report on Form 10-K, and you should not consider it to be part of this report.
Where you can find additional information
Our website is located at www.healthequity.com, and our investor relations website is located at ir.healthequity.com.
Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended, or the Exchange Act, are available, free of charge, on our investor relations website as
soon as reasonably practicable after we file such material electronically with or furnish it to the SEC. The SEC also
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maintains a website that contains our SEC filings. The address of the site is www.sec.gov. Further, a copy of this
Annual Report on Form 10-K is located at the SEC's Public Reference Room at 100F Street, NE, Washington, D.C.
20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-
SEC-0330.
Item 1A. Risk factors
You should carefully consider the risks described below together with the other information set forth in this Annual
Report on Form 10-K, which could materially affect our business, financial condition and future results. The risks
described below are not the only risks facing our company. Risks and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially adversely affect our business, financial condition and
operating results. If any of the following risks are realized, our business, financial condition, results of operations
and prospects could be materially and adversely affected. In that event, the trading price of our common stock could
decline.
Risks relating to our business and industry
The healthcare industry is rapidly evolving and the market for technology-enabled services that empower
healthcare consumers is relatively immature and unproven. If we are not successful in promoting and
improving the benefits of our platform, our growth may be limited and our business may be adversely
affected.
The market for our products and services is subject to rapid and significant change and competition. The market for
technology-enabled services that empower healthcare consumers is characterized by rapid technological change,
new product and service introductions, evolving industry standards, changing customer needs, existing competition
and the entrance of non-traditional competitors. In addition, there may be a limited-time opportunity to achieve and
maintain a significant share of this market due in part to the rapidly evolving nature of the healthcare and technology
industries and the substantial resources available to our existing and potential competitors. The market for
technology-enabled services that empower healthcare consumers is relatively new and unproven, and it is uncertain
whether this market will achieve and sustain high levels of demand and market adoption. In order to remain
competitive, we are continually involved in a number of projects to develop new services or compete with these new
market entrants. These projects carry risks, such as cost overruns, delays in delivery, performance problems and
lack of acceptance by our customers.
Our success depends to a substantial extent on the willingness of consumers to increase their use of technology
platforms to manage their healthcare saving and spending, the ability of our platform to increase consumer
engagement, and our ability to demonstrate the value of our platform to our existing customers and potential
customers. If our existing customers do not recognize or acknowledge the benefits of our platform or our platform
does not drive consumer engagement, then the market for our products and services might develop more slowly
than we expect, which could adversely affect our operating results. In addition, we have limited insight into trends
that might develop and affect our business. We might make errors in predicting and reacting to relevant business,
legal and regulatory trends, which could harm our business. If any of these events occur, it could materially
adversely affect our business, financial condition or results of operations.
Finally, our competitors may have the ability to devote more financial and operational resources than we can to
developing new technologies and services, including services that provide improved operating functionality, and
adding features to their existing service offerings. If successful, their development efforts could render our services
less desirable, resulting in the loss of our existing customers or a reduction in the fees we earn from our products
and services.
Our business is dependent upon the availability of tax-advantaged health accounts to consumers and
employers. Any diminution in, elimination of, or change in the availability or use of these accounts would
materially adversely affect our results of operations, financial condition, business and prospects.
Substantially all of our revenue is earned from transactions involving tax-advantaged health accounts, such as
HSAs, HRAs and FSAs. Based on our experience with our customers, we believe that many consumers are not
familiar with, or do not fully appreciate, the tax-advantaged benefits of HSAs and other similar tax-advantaged
healthcare savings arrangements. If employers reduce or cease to offer HSA, HRA or FSA programs, the tax
benefits for these accounts are reduced, or consumer adoption of these accounts decreases, our results of
operations, financial condition, business and prospects would be materially adversely affected.
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We may be unable to compete effectively against our current and future competitors, which could have a
material adverse effect on our results of operations, financial condition, business and prospects.
The market for our products and services is highly competitive, rapidly evolving and fragmented. We view our
competition in terms of direct and indirect competitors. Our direct competitors are HSA custodians that include state
or federally chartered banks, such as Webster Bank and Optum Bank, and non-bank custodians approved by the
U.S. Treasury as meeting certain ownership, capitalization, expertise and governance requirements, such as
Payflex Systems USA, Inc. This market is highly fragmented. We also have numerous indirect competitors,
including benefits administration technology and service providers that work with other HSA custodians to sell into
health plans and/or employer channels. Increased focus on HSA-favorable healthcare regulatory reforms may
create renewed interest and investment by our competitors in their HSA offerings and lead to greater competition,
which could make it harder for us to maintain our growth trajectory. Our competitors may also offer reduced fee or
no-fee HSAs, which may permit them to increase market share in our market and lead to customer and Network
Partner attrition, or cause us to reduce our fees; and this risk could be compounded if legal requirements or
administrative rules are interpreted in a way that makes compliance more onerous for us than for our competitors.
Furthermore, if one or more of our competitors were to merge or partner with another of our competitors, the
change in the competitive landscape could materially adversely affect our ability to compete effectively. Our
competitors may also establish or strengthen cooperative relationships with our current or future Network Partners
or other strategic partners, thereby limiting our ability to promote our solution with these parties. Our Health Plan
and Administrator Partners may also decide to offer HSAs directly, which would significantly reduce our channel
partner opportunities.
Many of our competitors, in particular banks, insurance companies, and other financial institutions, have longer
operating histories and significantly greater financial, technical, marketing and other resources than we have. As a
result, some of these competitors may be in a position to devote greater resources to the development, promotion,
sale and support of their products and services and have offered, or may in the future offer, a wider range of
products and services that may be more attractive to potential customers, and they may also use advertising and
marketing strategies that (including loss-leaders) achieve broader brand recognition or acceptance.
In addition, well-known retail mutual fund companies, such as Vanguard, who currently do not have a strong
presence or have somewhat limited products in the market for technology-enabled services that empower
healthcare consumers may in the future decide to expand their products or attempt to grow their presence in the
market. These investment companies have significant advantages over us in terms of brand name recognition,
years of experience managing tax-advantaged retirement accounts (e.g., 401(k) and IRA), highly developed
recordkeeping, trust functions, and fund advisory and customer relations management, among others. If we are
unable to compete effectively with new competitors, our results of operations, financial condition, business and
prospects could be materially adversely affected.
Developments in the rapidly changing healthcare industry could adversely affect our business.
Substantially all of our revenue is derived from healthcare-related saving and spending by consumers, which could
be affected by changes affecting the broader healthcare industry, including decreased spending in the industry
overall. General reductions in expenditures by healthcare industry participants could result from, among other
things:
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government regulation or private initiatives that affect the manner in which healthcare industry participants
interact with consumers and the general public;
consolidation of healthcare industry participants;
reductions in governmental funding for healthcare; and
adverse changes in general business or economic conditions affecting healthcare industry participants.
Even if general expenditures by industry participants remain the same or increase, developments in the healthcare
industry may result in reduced spending in some or all of the specific market segments that we serve now or in the
future. The healthcare industry has changed significantly in recent years, and we expect that significant changes will
continue to occur. However, the timing and impact of developments in the healthcare industry are difficult to predict.
We cannot assure you that the demand for our products and services will continue to exist at current levels or that
we will have adequate technical, financial and marketing resources to react to changes in the healthcare industry.
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If our members do not continue to utilize our payment cards, our results of operations, business and
prospects would be materially adversely affected.
We derived 22%, 23% and 22% of our total revenue during the years ended January 31, 2018, 2017 and 2016,
respectively, from fees that are paid to us when our customers utilize our payment cards. These fees represent a
percentage of the expenses transacted on each card. If our customers do not use these payment cards at the rate
we expect, if they elect to withdraw funds using a non-revenue generating mechanism such as direct
reimbursement, or if other alternatives to these payment cards develop, our results of operations, business and
prospects would be materially adversely affected.
Data security, technological and intellectual property risks
If our security measures are breached or unauthorized access to data is otherwise obtained, our platform
may be perceived as not being secure, our customers may reduce the use of, or stop using, our products
and services, we may incur significant liabilities, our reputation may be harmed and we could lose sales
and customers.
Our proprietary technology platform enables the exchange of, and access to, sensitive information, and security
breaches could result in the loss of this sensitive information, theft or loss of actual funds, litigation, indemnity
obligations to our customers, fines and other liabilities, including under laws that protect the privacy of personal
information, disrupt our operations and the services we provide to our members and Network Partners, damage our
reputation and cause a loss of confidence in our products and services. While we have security measures in place,
we have experienced limited data privacy incidents in the past. If in the future our security measures are breached
or unauthorized access to data is otherwise obtained as a result of third-party action, employee error or otherwise,
our reputation could be significantly damaged, our business may suffer and we could incur substantial liability which
could result in loss of sales and customers. If third parties improperly obtain and use the personal information of our
customers, we may be required to expend significant resources to resolve these problems. A major breach of our
network security and systems could have serious negative consequences for our businesses, including:
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possible fines, penalties and damages;
reduced demand for our services;
an unwillingness of consumers and other data owners to provide us with their payment information;
an unwillingness of customers and other data owners to provide us with personal information; and
harm to our reputation and brand.
Because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally
are not identified until they are launched against a target, we may be unable to anticipate these techniques or to
implement adequate preventative measures. Any or all of these issues could negatively impact our ability to attract
new customers and increase engagement by existing customers, and/or subject us to third-party lawsuits,
regulatory fines, contractual liability and/or other action or liability, thereby harming our operating results.
We have incurred, and expect to continue to incur, significant costs to protect against security breaches.
We may incur significant additional costs in the future to address problems caused by any actual or
perceived security breaches. Cybersecurity breaches could compromise our data and the data of our
customers and partners, which may expose us to liability and would likely cause our business and
reputation to suffer.
Our ability to ensure the security of our online platform and thus sensitive customer and partner information is
critical to our operations. We rely on standard Internet and other security systems to provide the security and
authentication necessary to effect secure transmission of data. Despite our security measures, our information
technology and infrastructure may be vulnerable to cybersecurity threats, including attacks by hackers and other
malfeasance. Any such security breach could compromise our networks and result in the information stored or
transmitted there to be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of
information could result in legal claims or proceedings leading to liability, including under laws that protect the
privacy of personal information, disrupt our operations and the services we provide to our clients, damage our
reputation and cause a loss of confidence in our products and services, which could adversely affect our business,
operations and competitive position.
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Fraudulent and other illegal activity involving our products and services, including our payment cards,
could lead to reputational damage to us and reduce the use and acceptance of our platform.
Criminals are using increasingly sophisticated methods to capture personal information in order to engage in illegal
activities such as counterfeiting and identity theft. We rely upon third parties for some transaction processing
services, data feeds, and vendors, which subjects us to risks related to the vulnerabilities of those third parties. For
example, we are exposed to risks relating to the theft of payment card numbers housed in a merchant's point of sale
systems if our members use our payment cards at a merchant whose systems are compromised. We may make our
customers whole for losses sustained when using our payment cards, even in instances where we are not directly
responsible for the underlying cause of such loss. A single significant incident of fraud, or increases in the overall
level of fraud, involving our payment cards, our custodial accounts or our reimbursement administration services,
could result in financial and reputational damage to us, which could reduce the use and acceptance of our products
and services, or cause our customers to cease doing business with us.
We rely on software licensed from third parties that may be difficult to replace or that could cause errors or
failures of our online platform that could lead to lost customers or harm to our reputation.
We rely on certain cloud-based software licensed from third parties to run our business. This software may not
continue to be available to us on commercially reasonable terms and any loss of the right to use any of this software
could result in delays in the provisioning of our products and services until equivalent technology is either developed
by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, we have
certain service level agreements with certain of our employer clients for which the availability of this software is
critical. Any decrease in the availability of our service as a result of errors, defects, a disruption or failure of our
licensed software may require us to provide significant fee credits or refunds to our customers. Our software
licensed from third parties is also subject to change or upgrade, which may result in our incurring significant costs to
implement such changes or upgrades.
Developing and implementing new and updated applications, features and services for our technology
platform may be more difficult than expected, may take longer and cost more than expected, or may result
in the platform not operating as expected, which may harm our operating results or may not result in
sufficient increases in revenue to justify the costs.
Attracting and retaining new customers requires us to continue to improve the technology underlying our proprietary
technology platform and requires our technology to operate as expected. Accordingly, we must continue to develop
new and updated applications, features and services, and maintain existing applications, features and services. If
we are unable to do so on a timely basis or if we are unable to implement new applications, features and services
that enhance our customers’ experience without disruption to our existing ones or if we encounter technical
obstacles that result in the technology not operating properly, we may lose potential and existing customers. We rely
on a combination of internal development, strategic relationships, licensing and acquisitions to develop our content
offerings and healthcare saving and spending services. These efforts may:
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cost more than expected;
take longer than originally expected;
require more testing than originally anticipated;
require significant cost to address or resolve technical defects or obstacles;
require additional advertising and marketing costs; and
require the acquisition of additional personnel and other resources.
The revenue opportunities earned from these efforts may fail to justify the amounts spent. In addition, material
performance problems, defects or errors in our existing or new software may occur in the future, which may harm
our operating results.
Our online platform is hosted from two data centers. Any disruption of service at our facilities or our third-
party hosting providers could interrupt or delay our customers’ access to our products and services, which
could harm our operating results.
The ability of our team members, members, Health Plan and Administrator Partners and Employer Partners to
access our technology platform is critical to our business. We currently serve our customers from data centers
located in Draper, Utah, with a backup site in Austin, Texas. We cannot ensure that the measures we have taken will
be effective to prevent or minimize interruptions to our operations. Our facilities are vulnerable to interruption or
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damage from a number of sources, many of which are beyond our control, including, without limitation:
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extended power loss;
telecommunications failures from multiple telecommunications providers;
natural disaster or an act of terrorism;
software and hardware errors, or failures in our own systems or in other systems;
network environment disruptions such as computer viruses, hacking and similar problems in our own
systems and in other systems;
theft and vandalism of equipment; and
actions or events caused by or related to third parties.
We attempt to mitigate these risks through various business continuity efforts, including redundant infrastructure,
24/7/365 system activity monitoring, backup and recovery procedures, use of a secure storage facility for backup
media, separate test systems and change management and system security measures, but our precautions may
not protect against all potential problems. Our data recovery center is equipped with physical space, power, storage
and networking infrastructure and Internet connectivity to support our online platform in the event of the interruption
of services at our primary data center. Even with this data recovery center, however, our operations would be
interrupted during the transition process should our primary data center experience a failure. Disruptions at our data
centers could cause disruptions to our online platform and data loss or corruption. We have experienced
interruptions and delays in service and availability for data centers, and bandwidth and other technology issues in
the past. Any future errors, failure, interruptions or delays experienced in connection with these third-party
technologies could delay our customers’ access to our products, which would harm our business. This could
damage our reputation, subject us to potential liability or costs related to defending against claims or cause our
customers and strategic partners to cease doing business with us, any of which could negatively impact our
revenue.
Interruption or failure of our information technology and communications systems could impair our ability
to effectively deliver our products and services, which could cause us to lose customers and harm our
operating results.
Our business depends on the continuing operation of our technology infrastructure and systems. Any damage to or
failure of our systems could result in interruptions in our ability to deliver our products and services. Interruptions in
our service could reduce our revenue and profits, and our reputation could be damaged if people believe our
systems are unreliable. Our systems and operations are vulnerable to damage or interruption from earthquakes,
terrorist attacks, floods, fires, power loss, break-ins, hardware or software failures, telecommunications failures,
computer viruses or other attempts to harm our systems and similar events.
Any unscheduled interruption in our service would result in an immediate loss of revenue. Frequent or persistent
system failures that result in the unavailability of our platform or slower response times could reduce our customers’
ability to access our platform, impair our delivery of our products and services and harm the perception of our
platform as reliable, trustworthy and consistent. Our insurance policies provide only limited coverage for service
interruptions and may not adequately compensate us for any losses that may occur due to any failures or
interruptions in our systems.
We must adequately protect our brand and the intellectual property rights related to our products and
services and avoid infringing on the proprietary rights of others.
We believe that the HealthEquity brand is critical to the success of our business, and we utilize trademark
registration and other means to protect it. Our business would be harmed if we were unable to protect our brand
against infringement and its value was to decrease as a result.
We rely on a combination of trademark and copyright laws, trade secret protection and confidentiality and license
agreements to protect the intellectual property rights related to our products and services such as our applications
and the content on our website. We also rely on intellectual property licensed from third parties. We may
unknowingly violate the intellectual property or other proprietary rights of others and, thus, may be subject to claims
by third parties. If so, we may be required to devote significant time and resources to defending against these
claims or to protecting and enforcing our own rights. As a result of any such dispute, we may have to:
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develop non-infringing technology;
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pay damages;
enter into royalty or licensing agreements;
cease providing certain products or services; or
take other actions to resolve the claims.
Additionally, we have largely relied, and expect to continue to rely, on copyright, trade secret and trademark laws, as
well as generally relying on confidentiality procedures and agreements with our team members, consultants,
customers and vendors, to control access to, and distribution of, technology, software, documentation and other
confidential information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain,
use or distribute our technology without authorization, particularly in foreign jurisdictions where some of our
intellectual property rights may not be protected by intellectual property laws. If this were to occur, we could lose
revenue as a result of competition from products infringing or misappropriating our technology and intellectual
property and we may be required to initiate litigation to protect our proprietary rights and market position. U.S.
copyright, trademark and trade secret laws offer us only limited protection and the laws of some foreign countries do
not protect proprietary rights to the same extent. Accordingly, defense of our trademarks and proprietary technology
may become an increasingly important issue as we continue to expand our operations.
Policing unauthorized use of our trademarks and technology is difficult and the steps we take may not prevent
misappropriation of the trademarks or technology on which we rely. If competitors are able to use our trademarks or
technology without recourse, our ability to compete would be harmed and our business would be materially and
adversely affected. We may elect to initiate litigation in the future to enforce or protect our proprietary rights or to
determine the validity and scope of the rights of others.
The loss of our intellectual property or the inability to secure or enforce our intellectual property rights or to defend
successfully against an infringement action could harm our business, results of operations, financial condition and
prospects.
If we fail to develop further brand awareness cost-effectively, our business may suffer.
We believe that developing and maintaining awareness of our brand in a cost-effective manner is critical to
achieving widespread acceptance of our products and services and attracting new customers and strategic
partners. Brand promotion activities may not generate customer awareness or increase revenue, and even if they
do, any increase in revenue may not offset the expenses we incur in building our brand. If we fail to successfully
promote and maintain our brand, or incur substantial expenses, we may fail to attract or retain a sufficient number of
customers and strategic partners necessary to realize a sufficient return on our brand-building efforts, or to achieve
the widespread brand awareness that is critical for broad customer adoption of our products and services.
Confidentiality arrangements with team members and others may not adequately prevent disclosure of
trade secrets and other proprietary information.
We have devoted substantial resources to the development of our technology, business operations and business
plans. In order to protect our trade secrets and proprietary information, we rely in significant part on confidentiality
arrangements with our team members, independent contractors, advisers and customers. These arrangements may
not be effective to prevent disclosure of confidential information, including trade secrets, and may not provide an
adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may
independently discover trade secrets and proprietary information, and in such cases we would not be able to assert
trade secret rights against such parties. The loss of trade secret protection could make it easier for third parties to
compete with our products and services by copying functionality. In addition, any changes in, or unexpected
interpretations of, the trade secret and other intellectual property laws may compromise our ability to enforce our
trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and
determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could
adversely affect our competitive business position.
If we cannot protect our domain name, our ability to successfully promote our brand will be impaired.
We currently own the web domain name www.healthequity.com, which is critical to the operation of our business.
The acquisition and maintenance of domain names, or Internet addresses, is generally regulated by governmental
agencies and their designees. The regulation of domain names in the U.S. is subject to change. Governing bodies
may establish additional top-level domains, appoint additional domain name registrars or modify the requirements
for holding domain names. Furthermore, it is unclear whether laws protecting trademarks and similar proprietary
rights will be extended to protect domain names. Therefore, we may be unable to prevent third parties from
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acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and
other proprietary rights. We may not be able to successfully implement our business strategy of establishing a
strong brand for HealthEquity if we cannot prevent others from using similar domain names or trademarks. This
failure could impair our ability to increase our market share and revenue.
Legal and regulatory risks
The healthcare regulatory and political framework is uncertain and evolving, and we cannot predict the
effect that further healthcare reform and other changes in government programs may have on our
business, financial condition or results of operations.
Healthcare laws and regulations are rapidly evolving and may change significantly in the future, which could
adversely affect our financial condition and results of operations. For example, the Affordable Care Act, which
includes a variety of healthcare reform provisions and requirements that may become effective at varying times
through 2022, substantially changes the way healthcare is financed by both governmental and private insurers, and
may significantly impact our industry. Further changes to the Afforable Care Act and related healthcare regulation
remain under consideration. The full impact of recent healthcare reform and other changes in the healthcare
industry and in healthcare spending is unknown, and we are unable to predict accurately what effect the Affordable
Care Act or other healthcare reform measures that may be adopted in the future will have on our business.
Changes in applicable federal and state laws relating to the tax benefits available through tax-advantaged
healthcare accounts such as HSAs would materially adversely affect our business.
The efforts of governmental and third-party payers to raise revenue or contain or reduce the costs of healthcare as
well as legislative and regulatory proposals aimed at changing the U.S. healthcare system, which could include
restructuring the tax benefits available through HSAs, FSAs, and similar tax-advantaged healthcare accounts, may
adversely affect our business, operating results, and financial condition. For example, the federal government or
states may seek to raise revenues by enacting tax laws that eliminate the tax deductions available to individuals
who contribute to HSAs. Our business is substantially dependent on the tax benefits available through HSAs. We
cannot predict if any new healthcare reforms will ultimately become law, or if enacted, what their terms or the
regulations promulgated pursuant to such reforms will be. If the laws or regulations are changed to limit or eliminate
the tax benefits available through these accounts, such a change would have a material adverse effect on our
business.
We are subject to privacy regulations regarding the access, use and disclosure of personally identifiable
information. If we or any of our third-party vendors experience a breach of personally identifiable
information, it could result in substantial financial and reputational harm, including possible criminal and
civil penalties.
State and federal laws and regulations govern the collection, dissemination, access and use of personally
identifiable information, including HIPAA and HITECH, which govern the treatment of protected health information,
and the Gramm-Leach Bliley Act, which governs the treatment of nonpublic personal information. In the provision of
services to our customers, we and our third-party vendors may collect, access, use, maintain and transmit
personally identifiable information in ways that are subject to many of these laws and regulations. If we or any of
our third-party vendors experience a breach of personally identifiable information, it could result in substantial
financial and reputational harm, including possible criminal and civil penalties. Additionally, we may be required to
report breaches to partners, regulators, state attorney generals, and impacted individuals depending on the severity
of the breach, our role, legal requirements and contractual obligations. Although we have implemented measures to
comply with privacy laws, rules and regulations, we have experienced limited data privacy issues in recent years.
Continued compliance with privacy laws, rules and regulations in a rapidly changing technology environment could
result in higher compliance and technology costs for us.
Changes in laws and regulations relating to interchange fees on payment card transactions would
adversely affect our revenue and results of operations.
Existing laws and regulations limit the fees or interchange rates that can be charged on payment card transactions.
For example, the Federal Reserve Board has the power to regulate payment card interchange fees and has issued
a rule setting a cap on the interchange fee an issuer can receive from a single payment card transaction. Our HSA-
linked payment cards are exempt from this rule (although we are subject to a general requirement of reasonable
compensation for services rendered). To the extent that our payment cards lose their exempt status, the interchange
rates applicable to transactions involving our payment cards could be impacted, which would decrease our revenue
and profit and could have a material adverse effect on our financial condition and results of operations.
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Our investment advisory, custodial, and retirement services are subject to complex regulation, and any
compliance failures or regulatory action could adversely affect our business.
Our subsidiary HealthEquity Advisors, LLC is an SEC-registered investment adviser that provides automated web-
only investment advisory services. As such, it must comply with the requirements of the Advisers Act and related
SEC regulations and is subject to periodic inspections by the SEC staff. Such requirements relate to, among other
things, fiduciary duties to clients, disclosure obligations, recordkeeping and reporting requirements, marketing
restrictions, limitations on agency cross and principal transactions between the adviser and its clients, and general
anti-fraud prohibitions. The SEC is authorized to institute proceedings and impose sanctions for violations of the
Advisers Act, ranging from fines and censure to termination of an investment adviser’s registration. Investment
advisers also are subject to certain state securities laws and regulations.
Our subsidiary HealthEquity Trust Company is a non-depository trust company and subject to regulation and
supervision by the Wyoming Division of Banking. Compliance with regulatory requirements may divert internal
resources and take significant time and effort. Any claim of non-compliance, regardless of merit or ultimate
outcome, could subject us to investigation by the SEC, the Wyoming Division of Banking or other regulatory
authorities. This in turn could result in additional claims or class action litigation brought on behalf of our members
or Network Partners, any of which could result in substantial cost to us and divert management’s attention and other
resources away from our operations. Furthermore, investor perceptions of us may suffer, and this could cause a
decline in the market price of our common stock. Our compliance processes may not be sufficient to prevent
assertions that we failed to comply with any applicable law, rule or regulation. In addition, all of our business are
subject, to varying degrees, to fiduciary and other service provider obligations under ERISA, the Internal Revenue
Code, and underlying regulations. A failure to comply could subject us to disgorgement of profits, excise taxes, civil
penalties, private lawsuits, and other costs, including reputational harm.
If we are unable to meet or exceed the net worth test required by the IRS, we could be unable to maintain
our non-bank custodian status, which would have a material adverse impact on our ability to operate our
business.
As a non-bank custodian, we are required to comply with Treasury Regulations Section 1.408-2(e), or the Treasury
Regulations, including the net worth requirements set forth therein. If we should fail to comply with the Treasury
Regulations’ non-bank custodian requirements, including the net worth requirements, such failure would materially
and adversely affect our ability to maintain our current custodial accounts and grow by adding additional custodial
accounts, and it could result in the institution of procedures for the revocation of our authorization to operate as a
non-bank custodian.
Risks relating to our partners and service providers
Our distribution model relies on the cooperation of our Network Partners. If our Network Partners choose to
partner with other providers of technology-enabled services that empower healthcare consumers, including
HSA services, our business could be materially and adversely affected.
Our business depends on our Network Partners’ willingness to partner with us to offer their customers and/or
employees our products and services. In particular, certain of our Health Plan and Administrator Partners enjoy
significant market share in various geographic regions. If these Health Plan and Administrator Partners choose to
partner with our competitors, our results of operations, business and prospects could be materially adversely
affected.
We rely on a single bank identification number sponsor for our payment cards, and a change in relationship
with this sponsor or its failure to comply with certain banking regulations could materially and adversely
affect our business.
We rely on a single bank identification number, or BIN, sponsor in relation to the payment cards we issue. A BIN
sponsor is a bank or credit union that provides the BIN that allows a prepaid card program to run on one of the
major card brand networks (e.g., VISA, MasterCard, Discover or American Express). Our BIN sponsor enables us to
link the payment cards that we offer our members to the VISA network, thereby allowing our members to use our
payment cards to pay for healthcare-related expenses with a “swipe” of the card. If any material adverse event were
to affect our BIN sponsor, including a significant decline in its financial condition, a decline in the quality of its
service, its inability to comply with applicable banking and financial service regulatory requirements, systems failure
or its inability to pay us fees, our business, financial condition and results of operations could be materially and
adversely affected because we may be forced to reduce the availability of, or eliminate entirely, our payment card
offering. In addition, we do not have a long-term contract with our BIN sponsor, and it may increase the fees it
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charges us or terminate its relationship with us. If we were required to change BIN sponsors, we could not
accurately predict the success of such change or that the terms of our agreement with a new BIN sponsor would be
as favorable to us, especially in light of the recent increased regulatory scrutiny of the payment card industry, which
has rendered the market for BIN sponsor services less competitive.
We rely on our FDIC-insured custodial depository bank partners for certain custodial account services from
which we earn fees. A business failure in any FDIC-insured custodial depository bank partner would
materially and adversely affect our business.
As a non-bank custodian, we rely on our FDIC-insured custodial bank partners to hold and invest our custodial cash
assets. If any material adverse event were to affect one of our FDIC-insured custodial depository bank partners,
including a significant decline in its financial condition, a decline in the quality of its service, loss of deposits, its
inability to comply with applicable banking and financial services regulatory requirements, systems failure or its
inability to pay us fees, our business, financial condition and results of operations could be materially and adversely
affected. If we were required to change custodial depository banking partners, we could not accurately predict the
success of such change or that the terms of our agreement with a new banking partner would be as favorable to us
as our current agreements, especially in light of the consolidation in the banking industry, which has rendered the
market for FDIC-insured retail banking services less competitive.
We receive important services from third-party vendors. Replacing them would be difficult and disruptive to
our business.
We have entered into contracts with third-party vendors to provide critical services relating to our business,
including fraud management and other customer verification services, transaction processing and settlement,
telephony services, and card production. In the event that these service providers fail to maintain adequate levels of
support, do not provide high quality service, increase the fees they charge us, discontinue their lines of business,
terminate our contractual arrangements or cease or reduce operations, we may suffer additional costs and be
required to pursue new third-party relationships, which could materially disrupt our operations and our ability to
provide our products and services, and could divert management’s time and resources. If we are unable to
complete a transition to a new provider on a timely basis, or at all, we could be forced to temporarily or permanently
discontinue certain services, which could disrupt services to our customers and adversely affect our business,
financial condition and results of operations. We may also be unable to establish comparable new third-party
relationships on as favorable terms or at all, which could materially and adversely affect our business, financial
condition and results of operations.
Acquisition and growth-related risks
We have in the past completed acquisitions and may acquire or invest in other companies or technologies
in the future, which could divert management’s attention, fail to meet our expectations, result in additional
dilution to our stockholders, increase expenses, disrupt our operations and harm our operating results.
We have in the past acquired, and we may in the future acquire or invest in, assets, businesses, products or
technologies that we believe could complement or expand our products and services, enhance our technical
capabilities or otherwise offer growth opportunities. There is no assurance that we will realize the anticipated
benefits of these or any future acquisitions. The pursuit of potential acquisitions may divert the attention of
management and cause us to incur various expenses related to identifying, investigating and pursuing suitable
acquisitions, whether or not they are consummated.
There are inherent risks in integrating and managing acquisitions. If we acquire additional businesses, we may not
be able to assimilate or integrate the acquired personnel, operations and technologies successfully or effectively
manage the combined business following the acquisition, and our management may be distracted from operating
our business. We also may not achieve the anticipated benefits from the acquired business due to a number of
factors, including, without limitation:
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unanticipated costs or liabilities associated with the acquisition;
incurrence of acquisition-related costs, which would be recognized as a current period expense;
inability to earn sufficient revenue to offset acquisition or investment costs;
the inability to maintain relationships with customers and partners of the acquired business;
the difficulty of incorporating acquired technology and rights into our platform and of maintaining quality and
security standards consistent with our brand;
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•
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the need to integrate or implement additional controls, procedures and policies;
harm to our existing business relationships with customers and strategic partners as a result of the
acquisition;
the diversion of management’s time and resources from our core business;
the potential loss of key team members;
use of resources that are needed in other parts of our business and diversion of management and
employee resources;
our ability to coordinate organizations that are geographically diverse and that have different business
cultures;
our inability to comply with the regulatory requirements applicable to the acquired business;
the inability to recognize acquired revenue in accordance with our revenue recognition policies; and
use of substantial portions of our available cash or the incurrence of debt to consummate the acquisition.
Acquisitions also increase the risk of unforeseen legal liability, including for potential violations of applicable law or
industry rules and regulations, arising from prior or ongoing acts or omissions by the acquired businesses which are
not discovered by due diligence during the acquisition process. Generally, if an acquisition fails to meet our
expectations, our operating results, business and financial condition may suffer. Acquisitions could also result in
dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our business, results of
operations or financial condition. Even if we are successful in completing and integrating an acquisition, the
acquisition may not perform as we expect or enhance the value of our business as a whole.
We must be able to operate and scale our technology effectively to match our business growth.
Our ability to continue to provide our products and services to a growing number of customers, as well as to
enhance our existing products and services, attract new customers and strategic partners, and offer new products
and services, is dependent on our information technology systems. If we are unable to manage the technology
associated with our business effectively, we could experience increased costs, reductions in system availability and
customer loss. We are currently investing in significant upgrading of the capacity and performance of our proprietary
technology platform and database design to ensure continued performance at scale, to reduce spending on
maintenance activities and to enable us to execute technology innovation more quickly. If we are unsuccessful in
implementing these upgrades to our platform, we may be unable to adequately meet the needs of our customers
and/or implement technology-based innovation in response to a rapidly changing market, which could harm our
reputation and adversely impact our business, financial condition and results of operations.
Failure to manage future growth effectively could have a material adverse effect on our business, financial
condition and results of operations.
The continued rapid expansion and development of our business may place a significant strain upon our
management and administrative, operational and financial infrastructure. As of January 31, 2018, we had
approximately 3.4 million HSA Members and $6.8 billion in custodial assets representing growth of 24% and 35%,
respectively, from January 31, 2017. For the year ended January 31, 2018, our total revenue and Adjusted EBITDA
were approximately $229.5 million and $84.7 million, respectively, which represents year-over-year annual growth
rates of approximately 29% and 35%, respectively. See “Key financial and operating metrics” for the definition of
Adjusted EBITDA and a reconciliation of net income, the most comparable GAAP measure, to Adjusted EBITDA.
While to date we believe we have effectively managed the effect on our operations resulting from the rapid growth
of our business, our growth strategy contemplates further increasing the number of our HSA Members and our
custodial assets at relatively higher growth rates than industry averages. However, the rate at which we have been
able to attract new HSA Members in the past may not be indicative of the rate at which we will be able to attract
additional HSA Members in the future.
Our success depends in part upon the ability of our executive officers to manage growth effectively. Our ability to
grow also depends upon our ability to successfully hire, train, supervise, and manage new team members, obtain
financing for our capital needs, expand our systems effectively, control increasing costs, allocate our human
resources optimally, maintain clear lines of communication between our operational functions and our finance and
accounting functions, and manage the pressures on our management and administrative, operational and financial
infrastructure. There can be no assurance that we will be able to accurately anticipate and respond to the changing
demands we will face as we continue to expand our operations or that we will be able to manage growth effectively
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or to achieve further growth at all. If our business does not continue to grow or if we fail to effectively manage any
future growth, our business, financial condition and results of operations could be materially and adversely affected.
We plan to extend and expand our products and services and introduce new products and services, and we
may not accurately estimate the impact of developing, introducing and updating these products and
services on our business.
We intend to continue to invest in technology and development to create new and enhanced products and services
to offer our customers and to enhance our platform’s compatibilities. We may not be able to anticipate or manage
new risks and obligations or legal, compliance or other requirements that may arise in these areas. The anticipated
benefits of such new and improved products and services may not outweigh the costs and resources associated
with their development. Some new services may be received negatively by our existing and/or potential customers
and strategic partners and have to be put on hold or canceled entirely.
Our ability to attract and retain new customer revenue from existing customers will depend in large part on our
ability to enhance and improve our existing products and services and to introduce new products and services. The
success of any enhancement or new product or service depends on several factors, including the timely completion,
introduction and market acceptance of the enhancement or new product or service. Any new product or service we
develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve the broad
market acceptance necessary to earn significant revenue. If we are unable to successfully develop or acquire new
products or services or enhance our existing products or services to meet member or network partner requirements,
our results of operations, financial condition, business or prospects may be materially adversely affected.
We have recorded a significant amount of intangible assets. We may need to record write-downs from
future impairments of identified intangible assets and goodwill, which could adversely affect our costs and
business operations.
Our consolidated balance sheet includes significant intangible assets, including approximately $4.7 million in
goodwill and $83.6 million in intangible assets, together representing approximately 24% of our total assets as of
January 31, 2018. The determination of related estimated useful lives and whether these assets are impaired
involves significant judgments. We test our goodwill for impairment each fiscal year, but we also test goodwill and
other intangible assets for impairment at any time when there is a change in circumstances that indicates that the
carrying value of these assets may be impaired. Any future determination that these assets are carried at greater
than their fair value could result in substantial non-cash impairment charges, which could significantly impact our
reported operating results.
Risks relating to our service and culture
Any failure to offer high-quality customer support services could adversely affect our relationships with our
customers and strategic partners and our operating results.
Our customers depend on our support and customer education organizations to educate them about, and resolve
technical issues relating to, our products and services. We may be unable to respond quickly enough to
accommodate short-term increases in customer demand for education and support services. Increased customer
demand for these services, without a corresponding increase in revenue, could increase costs and adversely affect
our operating results. In addition, our sales process is highly dependent on the reputation of our products, services
and business and on positive recommendations from our existing customers. Any failure to maintain high-quality
education and technical support, or a market perception that we do not maintain high-quality education support,
could adversely affect our reputation, our ability to sell our products and services to existing and prospective
customers and our business and operating results. We promote 24/7/365 education and support along with our
proprietary technology platform. Interruptions or delays that inhibit our ability to meet that standard may hurt our
reputation or ability to attract and retain customers.
We rely on our management team and key team members and our business could be harmed if we are
unable to retain qualified personnel.
Our success depends, in part, on the skills, working relationships and continued services of our founder and senior
management team and other key personnel. While we have entered into offer letters or employment agreements
with certain of our executive officers, all of our team members are “at-will” employees, and their employment can be
terminated by us or them at any time, for any reason and without notice, subject, in certain cases, to severance
payment rights. In order to retain valuable team members, in addition to salary and cash incentives, we provide
stock options and other equity-based awards that vest over time or based on performance. The value to team
members of these awards will be significantly affected by movements in our stock price that are beyond our control
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and may at any time be insufficient to counteract offers from other organizations. The departure of key personnel
could adversely affect the conduct of our business. In such event, we would be required to hire other personnel to
manage and operate our business, and there can be no assurance that we would be able to employ a suitable
replacement for the departing individual, or that a replacement could be hired on terms that are favorable to us.
Volatility or lack of performance in our stock price may affect our ability to attract replacements should key
personnel depart.
Our success also depends on our ability to attract, retain, and motivate additional skilled management personnel.
Although we have not historically experienced unique difficulties attracting qualified team members, we could
experience such problems in the future. For example, competition for qualified personnel in our field is intense due
to the limited number of individuals who possess the skills and experience required by our industry. In addition, we
have experienced employee turnover and expect to continue to experience employee turnover in the future. New
hires require significant training and, in most cases, take significant time before they achieve full productivity. New
team members may not become as productive as we expect, and we may be unable to hire or retain sufficient
numbers of qualified individuals. If our retention efforts are not successful or our employee turnover rate increases
in the future, our business will be harmed.
If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork, passion
and focus on execution that we believe contribute to our success, and our business may be harmed.
We believe that a critical component to our success has been our corporate culture. We have invested substantial
time and resources in building our team. As we continue to grow, we may find it difficult to maintain these important
aspects of our corporate culture. Any failure to preserve our culture could negatively affect our future success,
including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.
Financing, tax and related risks
We may require significant capital to fund our business, and our inability to generate and obtain such
capital could harm our business, operating results, financial condition, and prospects.
To fund our expanding business, we must have sufficient working capital to continue to make significant investments
in our service offerings, advertising, technology, and other activities. As a result, in addition to the revenue we earn
from our business, we may need additional equity or debt financing to provide the funds required for these
endeavors. If such financing is not available on satisfactory terms or at all, we may be unable to operate or expand
our business in the manner and at the rate desired. Debt financing increases expenses, may contain covenants
that restrict the operation of our business and must be repaid regardless of operating results. Equity financing, or
debt financing that is convertible into equity, could result in additional dilution to our existing stockholders, and any
new securities we issue could have rights, preferences and privileges superior to those associated with our
common stock. Furthermore, the current economic environment may make it difficult for us to raise additional
capital or obtain additional credit, when needed, on acceptable terms or at all.
Our inability to generate or obtain the financial resources needed to fund our business and growth strategies may
require us to delay, scale back or eliminate some or all of our operations or the expansion of our business, which
may have a material adverse effect on our business, operating results, financial condition and prospects.
A decline in interest rate levels may reduce our ability to earn income on our custodial cash assets and to
attract HSA contributions, which would adversely affect our profitability.
As a non-bank custodian, we partner with FDIC-insured custodial depository banks to hold our custodial cash
assets. We earn a significant portion of our consolidated revenue from fees we earn from our FDIC-insured
custodial depository bank partners. For example, during the years ended January 31, 2018, 2017 and 2016, we
earned an increasing portion (approximately 38%, 33% and 30%, respectively) of our total revenue from custodial
revenue. A decline in prevailing interest rates may negatively affect our business by reducing the yield we realize on
our custodial cash assets. In addition, if we do not offer competitive interest rates, our members may choose
another HSA custodian. Any such scenario could materially and adversely affect our business and results of
operations.
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Covenants in our debt agreements could adversely affect our liquidity and financial condition.
Our revolving credit facility, or credit agreement, with JPMorgan Chase Bank, N.A., provides for a secured revolving
credit facility for a term of five years. Our credit agreement is required to be guaranteed by our material domestic
subsidiaries, and it is secured by substantially all of our assets as well as substantially all assets of any subsidiary
that becomes a guarantor. The credit agreement contains restrictive financial and other covenants which affect,
among other things, the manner in which we may structure or operate our business. A failure by us to comply with
our contractual obligations under the credit agreement, including restrictive, financial and other covenants, could
result in a variety of material adverse consequences, including the acceleration of our indebtedness under the credit
agreement and the exercise of remedies by our creditors thereunder. We cannot assure you that our assets or cash
flow would be sufficient to fully repay borrowings under the credit agreement, either upon maturity or if accelerated
upon an event of default, or that we would be able to refinance or restructure the payments becoming due on the
credit agreement. Also, the lenders under the credit agreement could foreclose upon all or substantially all of the
assets securing our obligations thereunder.
Our ability to secure insurance may not be sufficient to cover potential liabilities.
We maintain various forms of liability insurance coverage, including coverage for errors and omissions, fiduciary,
cybersecurity, employment practices, directors and officers insurance. It is possible, however, that claims could
exceed the amount of our applicable insurance coverage, if any, or that this coverage may not continue to be
available on acceptable terms or in sufficient amounts. Even if these claims do not result in liability to us,
investigating and defending against them could be expensive and time-consuming and could divert management’s
attention away from our operations. In addition, negative publicity caused by these events may affect the current
market acceptance of our products and services, any of which could materially adversely affect our reputation and
our business.
We are subject to taxes in numerous jurisdictions. Legislative, regulatory and legal developments involving
income taxes could adversely affect our results of operations and cash flows.
We are subject to U.S. federal, U.S. state income, payroll, property, sales and use, and other types of taxes in
numerous jurisdictions. Significant judgment is required in determining our provisions for income taxes. Changes in
tax rates, enactments of new tax laws, revisions of tax regulations, and claims or litigation with taxing authorities
could result in substantially higher taxes. As a result of the Tax Cuts and Jobs Act enacted on December 22, 2017,
the reduction in the corporate income tax rate reduced the value of our existing deferred tax assets and
consequently we recorded a provisional charge of $458,000 in the fiscal year ending January 31, 2018 related to
this item. Other significant provisions of this tax reform are effective as of January 1, 2018, including, but not limited
to: a limitation on the deductibility of net interest expense, changes in the deductibility of certain meals and
entertainment business expenses, as well as moving expenses, transportation expenses, and other fringe benefits,
and changes in the deductibility of certain employee remuneration in excess of $1 million. While we have applied
these provisions in our accounting for income taxes using our interpretations and available guidance, the net impact
of tax reform remains uncertain at this time and is subject to any other regulatory or administrative developments,
including any regulations or other guidance promulgated by the U.S. Internal Revenue Service as well as state
governments and may adversely affect our earnings.
If one or more jurisdictions successfully assert that we should have collected or in the future should collect
additional sales and use taxes on our fees, we could be subject to additional liability with respect to past or
future sales and the results of our operations could be adversely affected.
We do not collect sales and use taxes in all jurisdictions in which our customers are located, based on our belief
that such taxes are not applicable. Sales and use tax laws and rates vary by jurisdiction and such laws are subject
to interpretation. In those jurisdictions and in those cases where we do believe sales taxes are applicable, we
collect and file timely sales tax returns. Currently, such taxes are minimal. Jurisdictions in which we do not collect
sales and use taxes may assert that such taxes are applicable, which could result in the assessment of such taxes,
interest and penalties, and we could be required to collect such taxes in the future. This additional sales and use tax
liability could adversely affect the results of our operations.
-21-
Acts of terrorism, acts of war and other unforeseen events may cause damage or disruption to us or our
customers, which could materially and adversely affect our business, financial condition and operating
results.
Natural disasters, acts of war, terrorist attacks and the escalation of military activity in response to such attacks or
otherwise may have negative and significant effects, such as imposition of increased security measures, changes in
applicable laws, market disruptions and job losses. Such events may have an adverse effect on the economy in
general. Moreover, the potential for future terrorist attacks and the national and international responses to such
threats could affect the business in ways that cannot be predicted. The effect of any of these events or threats could
have a material adverse effect on our business, financial condition and results of operations.
Risks relating to owning our common stock
If we are unable to maintain effective internal controls over financial reporting in the future, investors may
lose confidence in the accuracy and completeness of our financial reports and the market price of our
common stock could be adversely affected.
As a public company, we are required to maintain internal controls over financial reporting and to report any material
weaknesses in such internal controls. A material weakness is a deficiency, or a combination of deficiencies, in
financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or
interim financial statements will not be prevented or detected on a timely basis. Section 404 of the Sarbanes-Oxley
Act, or Sarbanes-Oxley, requires that we evaluate and determine the effectiveness of our internal controls over
financial reporting and provide a management report on internal controls over financial reporting. Sarbanes-Oxley
also requires that our management report on internal controls over financial reporting be attested to by our
independent registered public accounting firm.
If we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely
basis and our financial statements may be materially misstated. If we identify material weaknesses in our internal
controls over financial reporting, if we are unable to comply with the requirements of Section 404 of Sarbanes-Oxley
in a timely manner, if we are unable to assert that our internal controls over financial reporting are effective, or if our
independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal
controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial
reports and the market price of our common stock could be adversely affected. In addition, we could become
subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory
authorities, which could require additional financial and management resources.
Our quarterly operating results may fluctuate significantly from period to period, which could adversely
impact the value of our common stock.
Our quarterly operating results, including our revenue, gross profit, net income and cash flows, may vary
significantly in the future, which could cause our stock price to decline rapidly, may lead analysts to change their
long-term models for valuing our common stock, could cause short-term liquidity issues, may impact our ability to
retain or attract key personnel or cause other unanticipated issues. If our quarterly operating results or guidance fall
below the expectations of research analysts or investors, the price of our common stock could decline substantially.
Our quarterly operating expenses and operating results may vary significantly in the future and period-to-period
comparisons of our operating results may not be meaningful. You should not rely on the results of one quarter as an
indication of future performance.
The market price of our common stock may be volatile.
The stock market in general has been highly volatile. As a result, the market price and trading volume for our
common stock may also be highly volatile, and investors in our common stock may experience a decrease in the
value of their shares, including decreases unrelated to our operating performance or prospects. Factors that could
cause the market price of our common stock to fluctuate significantly include:
•
•
•
•
our operating and financial performance and prospects and the performance of other similar companies;
our quarterly or annual earnings or those of other companies in our industry;
conditions that impact demand for our products and services;
the public’s reaction to our press releases, financial guidance and other public announcements, and filings
with the SEC;
-22-
•
changes in earnings estimates or recommendations by securities or research analysts who track our
common stock;
• market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
•
•
•
•
•
•
•
strategic actions by us or our competitors, such as acquisitions or restructurings;
any data breaches or interruptions in our services;
changes in government and other regulations, particularly those relating to the benefits of HSAs;
changes in accounting standards, policies, guidance, interpretations or principles;
arrival and departure of key personnel;
sales of common stock by us, our investors or members of our Board and management team; and
changes in general market, economic and political conditions in the U.S. and global economies or financial
markets, including those resulting from natural disasters, telecommunications failure, cyber attack, civil
unrest in various parts of the world, acts of war, terrorist attacks or other catastrophic events.
Any of these factors may result in large and sudden changes in the trading volume and market price of our common
stock and may prevent you from being able to sell your shares at or above the price you paid for your shares of our
common stock. Following periods of volatility in the market price of a company’s securities, stockholders often file
securities class-action lawsuits against such company. Our involvement in a class-action lawsuit could divert our
senior management’s attention and, if adversely determined, could have a material and adverse effect on our
business, financial condition and results of operations.
We do not intend to pay regular cash dividends on our common stock and, consequently, your ability to
achieve a return on your investment will depend on appreciation in the price of our common stock.
We have no current plans to declare and pay any cash dividends for the foreseeable future. We currently intend to
retain all our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on
your common stock for the foreseeable future and the success of an investment in our common stock will depend
upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or
even maintain the price at which our stockholders have purchased their shares.
Future offerings of debt or equity securities, which may rank senior to our common stock, may adversely
affect the market price of our common stock.
If we decide to issue debt securities in the future, which would rank senior to shares of our common stock, it is likely
that they will be governed by an indenture or other instrument containing covenants restricting our operating
flexibility. Additionally, any equity securities or convertible or exchangeable securities that we issue in the future
may have rights, preferences and privileges more favorable than those of our common stock and may result in
dilution to owners of our common stock. We and, indirectly, our stockholders will bear the cost of issuing and
servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend
on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or
nature of our future offerings. Thus, holders of our common stock will bear the risk of our future offerings reducing
the market price of our common stock and diluting the value of their shareholdings in us.
Provisions in our charter documents and under Delaware law could discourage a takeover that
stockholders may consider favorable.
Certain provisions in our governing documents could make a merger, tender offer or proxy contest involving us
difficult; even if such events would be beneficial to the interests of our stockholders. These provisions include the
inability of our stockholders to act by written consent and certain advance notice procedures with respect to
stockholder proposals and nominations for candidates for the election of directors. In addition, because we are
incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits stockholders owning in excess of 15% of our outstanding voting
stock from merging or combining with us. Accordingly, our board of directors could rely upon these or other
provisions in our governing documents and Delaware law to prevent or delay a transaction involving a change in
control of our company, even if doing so would benefit our stockholders.
-23-
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of
Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which
could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our
directors, officers or team members.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware
is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim for
breach of a fiduciary duty owed by any of our directors and officers to us or our stockholders, any action asserting a
claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated
certificate of incorporation or our amended and restated bylaws, or any action asserting a claim governed by the
internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial
forum that it finds favorable for disputes with us or our directors, officers or other team members, which may
discourage such lawsuits against us and our directors, officers and other team members. Alternatively, if a court
were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be
inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in
other jurisdictions, which could adversely affect our business and financial condition.
Item 1B. Unresolved staff comments
None.
Item 2. Properties
We do not currently own any of our facilities. Our principal executive offices are located in Draper, Utah, where we
lease approximately 187,000 square feet of office space under a lease that expires in March 2027. We also lease
approximately 3,000 square feet of office space in Overland Park, Kansas under a lease that expires in February
2019 and lease additional space at data centers located in Draper, Utah and Austin, Texas, pursuant to leases
expiring in July 2020 and November 2020, respectively. We believe that our current facilities are sufficient to meet
our current needs.
Item 3. Legal proceedings
From time-to-time, we may be subject to various legal proceedings and claims that arise in the normal course of our
business activities. As of the date of this Annual Report on Form 10-K, we are not a party to any litigation whereby
the outcome of such litigation, if determined adversely to us, would individually or in the aggregate be reasonably
expected to have a material adverse effect on our results of operations, prospects, cash flows, financial position or
brand.
Item 4. Mine safety disclosures
Not applicable.
-24-
Part II.
Item 5. Market for registrant's common equity, related stockholder matters and issuer
purchases of equity securities
Market information
Our common stock began trading publicly on the NASDAQ Global Select Market under the symbol "HQY" on July
31, 2014. Prior to that time, there was no public market for our common stock.
Holders
As of February 28, 2018, there were approximately 27 holders of record of our common stock. This stockholder
figure does not include a substantially greater number of holders whose shares are held of record by banks, brokers
and other financial institutions.
Stock price
The following table sets forth the high and low sales prices for our common stock as reported by the NASDAQ
Global Select Market for the indicated periods:
Fiscal year ended January 31, 2018:
Fourth Quarter .............................................................................................................
Third Quarter ...............................................................................................................
Second Quarter ...........................................................................................................
First Quarter ................................................................................................................
Fiscal year ended January 31, 2017:
Fourth Quarter .............................................................................................................
Third Quarter ...............................................................................................................
Second Quarter ...........................................................................................................
First Quarter ................................................................................................................
Dividend policy
$
$
$
$
$
$
$
$
High
55.31
52.87
54.50
47.91
High
49.25
38.80
31.69
26.75
$
$
$
$
$
$
$
$
Price Range
Low
42.92
40.21
43.51
37.62
Price Range
Low
30.34
28.12
22.26
15.80
We have no current plans to pay dividends on our common stock. Any decision to declare and pay dividends in the
future will be made at the sole discretion of our board of directors and will depend on, among other things, our
results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board
of directors may deem relevant.
Securities authorized for issuance under equity compensation plans
For information regarding securities authorized for issuance under equity compensation plans, see Part III, Item 12
of this Annual Report on Form 10-K.
-25-
Performance graph
This performance graph shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise
subject to the liabilities under that section, and shall not be deemed to be incorporated by reference into any of our
filings under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in
such filing.
The following graph compares the cumulative total return of our common stock with the total return of the NASDAQ
Composite Index (the "NASDAQ Composite"), and the Russell 3000 Index (the "Russell 3000") from July 31, 2014
(the date our common stock commenced trading on the NASDAQ Global Select Market) through January 31, 2018.
The chart assumes $100 was invested on July 31, 2014 in the common stock of HealthEquity, Inc., the NASDAQ
Composite and the Russell 3000, and assumes reinvestment of any dividends. The stock price performance on the
following graph is not necessarily indicative of future stock price performance.
Use of proceeds from sale of registered equity securities
On August 5, 2014, we closed our initial public offering of 10,465,000 shares of common stock sold by us. The offer
and sale of all of the shares in the initial public offering were registered under the Securities Act pursuant to a
registration statement on Form S-1 (File No. 333-196645), which was declared effective by the SEC on July 30,
2014. JP Morgan & Chase Co. and Wells Fargo acted as the lead underwriters. The public offering price of the
shares sold in the offering was $14.00 per share. The total gross proceeds from the offering to us were
approximately $146.5 million. After deducting underwriting discounts and commissions of approximately $10.2
million and offering expenses payable by us of approximately $3.7 million, we received approximately $132.6
million. There has been no material change in the planned use of proceeds from our initial public offering as
described in our final prospectus (dated July 30, 2014) filed with the SEC on August 1, 2014 pursuant to Rule
424(b) of the Securities Act. In connection with the completion of our initial public offering, we paid a previously
declared cash dividend of $50.0 million on shares of our common stock outstanding on August 4, 2014. In addition,
-26-
we paid a cash dividend of $347,000 on shares of our outstanding series D-3 redeemable convertible preferred
stock accrued through the date of conversion of such shares into common stock, which occurred on August 4, 2014.
On May 11, 2015, we closed our public offering of 972,500 shares of common stock sold by us. The offer and sale
of all of the shares in the public offering were registered under the Securities Act pursuant to registration statements
on Form S-1 (File Nos. 333-203190 and 333-203888), which became effective on May 5, 2015. Wells Fargo acted
as the lead underwriter. The public offering price of the shares sold in the offering was $25.90 per share. Certain
selling stockholders sold 3,455,000 shares of common stock in the offering, including 380,000 shares of common
stock which were issued upon the exercise of outstanding options. The Company received net proceeds of
approximately $23.5 million after deducting underwriting discounts and commissions of approximately $1.0
million and other offering expenses payable by the Company of approximately $688,000. The Company did not
receive any proceeds from the sale of shares by the selling stockholders other than $222,000 representing the
exercise price of the options that were exercised by certain selling stockholders in connection with the offering. We
paid all of the expenses related to the registration and offering of the shares sold by the selling stockholders, other
than underwriting discounts and commissions relating to those shares. Other than these expenses, we made no
payments directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10%
or more of any class of our equity securities, or (iii) any of our affiliates. There has been no material change in the
planned use of proceeds from our public offering as described in our final prospectus (dated May 5, 2015) filed with
the SEC on May 6, 2015 pursuant to Rule 424(b) of the Securities Act.
During the year ended January 31, 2016, the Company used funds received from the offerings to acquire the rights
to be the custodian of the Bancorp and M&T Bank HSA portfolios for approximately $34.2 million and approximately
$6.2 million, respectively.
During the year ended January 31, 2018, the Company used funds received from the offerings to acquire the rights
to be custodian of two HSA portfolios for approximately $6.4 million and $8.0 million in cash, respectively, the assets
of BenefitGuard LLC, a 401(k) provider that offers plan administrator and named fiduciary services for 401(k)
employer sponsors, for approximately $2.9 million, and the rights to be the sole administrator of a portfolio of HSA
Members for $3.3 million.
The remainder of the funds received have been invested in registered money market accounts and mutual funds.
Unregistered sales of equity securities
None.
Purchases of equity securities by the issuer and affiliated purchasers
None.
-27-
Item 6. Selected financial data
The following selected consolidated financial data is derived from our consolidated financial statements. As our
operating results are not necessarily indicative of future operating results, this data should be read in conjunction
with the consolidated financial statements and notes thereto, and with Item 7. Management’s discussion and
analysis of financial condition and results of operations.
(in thousands, except for per share data)
2018
2017
2016
2015
2014
Year ended January 31,
Consolidated statements of operations data:
Revenue .......................................................... $
229,525
$
178,370
$
126,786
$
87,855
$
Cost of revenue ...............................................
Gross profit ......................................................
Operating expenses ........................................
Income from operations ...................................
Other expense .................................................
Income before income taxes ...........................
Income tax provision (1) ....................................
94,609
134,916
80,498
54,418
(2,229)
52,189
4,827
72,015
106,355
65,143
41,212
(1,092)
40,120
13,744
54,188
72,598
46,455
26,143
(589)
25,554
8,941
39,882
47,973
31,100
16,873
(1,109)
15,764
5,598
Net income ................................................... $
47,362
$
26,376
$
16,613
$
10,166
$
Net income (loss) attributable to common
stockholders:
Basic ............................................................. $
Diluted .......................................................... $
Net income (loss) per share attributable to
common stockholders:
Basic ............................................................. $
Diluted .......................................................... $
Weighted-average number of shares used in
computing net income per share attributable
to common stockholders:
47,362
47,362
0.79
0.77
$
$
$
$
26,376
26,376
0.45
0.44
$
$
$
$
16,613
16,613
0.29
0.28
$
$
$
$
12,058
10,901
0.39
0.21
$
$
$
$
Basic .............................................................
Diluted ..........................................................
60,304
61,854
58,615
59,894
56,719
58,863
31,181
51,856
Consolidated balance sheet data:
Cash, cash equivalents and marketable
securities ......................................................... $
Working capital ................................................
Total assets .....................................................
Total liabilities ..................................................
Total redeemable convertible preferred stock..
240,269
$
180,359
$
123,775
$
111,005
$
244,906
369,159
22,885
—
185,116
279,136
17,196
—
130,942
219,795
16,338
—
115,888
158,769
14,674
—
62,015
29,213
32,802
21,278
11,524
(6,150)
5,374
4,141
1,233
(7,132)
(7,132)
(1.26)
(1.26)
5,651
5,651
13,917
14,327
55,090
21,082
46,714
Total stockholders' equity (deficit) .................... $
346,274
$
261,940
$
203,457
$
144,095
$
(12,706)
(1) For the year ended January 31, 2018, the Company recorded excess tax benefits of $14.1 million within its
provision for income taxes in the consolidated statements of operations and comprehensive income due to the
adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.
-28-
Item 7. Management’s discussion and analysis of financial condition and results of
operations
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report
on Form 10-K. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs,
and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements as a result of several factors, including those discussed in the
section titled “Risk factors” included under Part I, Item 1A and elsewhere in this report. See “Special note regarding
forward-looking statements.”
Overview
We are a leader and an innovator in the high-growth category of technology-enabled services platforms that
empower consumers to make healthcare saving and spending decisions. Our platform provides an ecosystem
where consumers can access their tax-advantaged healthcare savings, compare treatment options and pricing,
evaluate and pay healthcare bills, receive personalized benefit and clinical information, earn wellness incentives,
and make educated investment choices to grow their tax-advantaged healthcare savings.
The core of our ecosystem is the HSA, a financial account through which consumers spend and save long-term for
healthcare on a tax-advantaged basis. We are the integrated HSA platform for 124 Health Plan and Administrator
Partners and over 40,000 employer clients.
Since our inception in 2002, we have been committed to developing technology solutions that empower healthcare
consumers. In 2003, we began offering live 24/7/365 consumer support from health saving and spending experts. In
2005, we integrated HSAs with our first health plan partner, and in 2006, we were authorized to act as an HSA
custodian by the U.S. Department of the Treasury. In 2009, we integrated HSAs with multiple health plans of a
single large employer, began delivering integrated wellness incentives through an HSA, and partnered with a
private health insurance exchange as its preferred HSA partner. In 2011, we integrated HSAs, RAs, and investment
accounts on one website, and in 2013, our registered investment advisor subsidiary began delivering HSA-specific
investment advice online. In 2015, we launched our HSA Optimizer, which helps HSA members optimize their
accounts based on their individual preferences and goals. In 2016, we launched a new feature which provides
account holders advance access to funds.
We earn revenue primarily from three sources: service revenue, custodial revenue and interchange revenue. We
earn service revenue by providing monthly account services on our platform, primarily through contracts with our
Network Partners, and custodial agreements with individual members. We earn custodial revenue from custodial
cash assets deposited with our FDIC-insured custodial depository bank partners and with our insurance company
partner, and recordkeeping fees we earn in respect of mutual funds in which our members invest. We also earn
interchange revenue from interchange fees that we earn on payments that our members make using our physical
and virtual payment cards.
Key factors affecting our performance
We believe that our performance and future success are driven by a number of factors, including those identified
below. Each of these factors presents both significant opportunities and significant risks to our future performance.
See the section entitled “Risk factors” included in Part 1, Item 1A of this Annual Report on Form 10-K.
Structural change in U.S. private health insurance
Substantially all of our revenue is derived from healthcare-related saving and spending by consumers in the United
States, which is impacted by changes affecting the broader healthcare industry in the U.S. The healthcare industry
has changed significantly in recent years, and we expect that significant changes will continue to occur that will
result in increased participation in HDHPs and other consumer-centric health plans. In particular, we believe that
continued growth in healthcare costs, and related factors will spur HDHP and HSA growth; however, the timing and
impact of these and other developments in the healthcare industry are difficult to predict, and changes in U.S.
healthcare policy could adversely affect our business.
-29-
Attracting and penetrating network partners
We created our business model to take advantage of the changing dynamics of the U.S. private health insurance
market. Our model is based on a B2B2C distribution strategy, meaning that we rely on our Employer Partners and
Health Plan and Administrator Partners to reach potential members to increase the number of our HSA Members.
Our success depends in large part on our ability to further penetrate our existing Network Partners by adding new
HSA Members from these partners and adding new Network Partners.
Our innovative technology platform
We believe that innovations incorporated in our technology that enable consumers to make healthcare saving and
spending decisions differentiate us from our competitors and drive our growth in revenue, HSA Members, Network
Partners and custodial assets. Similarly, these innovations underpin our ability to provide a differentiated consumer
experience in a cost-effective manner. For example, we are currently undertaking a significant update of our
proprietary platform’s architecture, which will allow us to improve our transaction processing capabilities and related
platform infrastructure to support continued account and transaction growth. We intend to continue to invest in our
technology development to enhance our platform’s capabilities and infrastructure.
Our “DEEP Purple” culture
The new healthcare consumer needs education and guidance delivered by people as well as technology. We
believe that our "DEEP Purple" culture which we define as driving excellence, ethics, and process while providing
remarkable service, is a significant factor in our ability to attract and retain customers and to address nimbly
opportunities in the rapidly changing healthcare sector. We make significant efforts to promote and foster DEEP
Purple within our workforce. We invest in and intend to continue to invest in human capital through technology-
enabled training, career development and advancement opportunities.
Interest rates
As a non-bank custodian, we contract with FDIC-insured custodial depository bank partners and an insurance
company partner to hold custodial cash assets on behalf of our members, and we earn a significant portion of our
total revenue from interest rates offered to us by these partners. The contract terms range from three to five years
and have either fixed or variable interest rates. As our custodial assets increase and existing agreements expire, we
seek to enter into new contracts with FDIC-insured custodial depository bank partners, the terms of which are
impacted by the then-prevailing interest rate environment. The diversification of deposits among bank partners and
varied contract terms substantially reduces our exposure to short-term fluctuations in prevailing interest rates and
mitigates the short-term impact of a sustained increase or decline in prevailing interest rates on our custodial
revenue. A sustained decline in prevailing interest rates may negatively affect our business by reducing the size of
the interest rate yield, or yield, available to us and thus the amount of the custodial revenue we can realize.
Conversely, a sustained increase in prevailing interest rates can increase our yield over time. An increase in our
yield would increase our custodial revenue as a percentage of total revenue. In addition, as our yield increases, we
expect the spread to grow between the interest offered to us by our custodial depository bank partners and the
interest retained by our members, thus increasing our profitability. However, we may be required to increase the
interest retained by our members in a rising prevailing interest rate environment. Changes in prevailing interest
rates are driven by macroeconomic trends and government policies over which we have no control.
Our competition and industry
Our direct competitors are HSA custodians. Many of these are state or federally chartered banks and other financial
institutions for which we believe technology-based healthcare services are not a core business. Certain of our direct
competitors have chosen to exit the market despite increased demand for these services. This has created, and we
believe will continue to create, opportunities for us to leverage our technology platform and capabilities to increase
our market share. However, some of our direct competitors are in a position, should they choose, to devote more
resources to the development, sale and support of their products and services than we have at our disposal. In
addition, numerous indirect competitors, including benefits administration technology and service providers, partner
with banks and other HSA custodians to compete with us. Our Health Plan and Administrator Partners may also
choose to offer technology-based healthcare services directly, as some health plans have done. Our success
depends on our ability to predict and react quickly to these and other industry and competitive dynamics.
Regulatory environment
Federal law and regulations, including the Affordable Care Act, the Internal Revenue Code and IRS regulations, the
Employee Retirement Income Security Act and Department of Labor regulations, and public health regulations that
govern the provision of health insurance, play a pivotal role in determining our market opportunity. Privacy and data
-30-
security-related laws such as the Health Insurance Portability and Accountability Act, or HIPAA, and the Gramm-
Leach-Bliley Act, laws governing the provision of investment advice to consumers, such as the Investment Advisers
Act of 1940, or the Advisers Act, the USA PATRIOT Act, anti-money laundry laws, and the Federal Deposit
Insurance Act, all play a similar role in determining our competitive landscape. In addition, state-level regulations
also have significant implications for our business in some cases. For example, our subsidiary HealthEquity Trust
Company is regulated by the Wyoming Division of Banking, and several states are considering, or have already
passed, new fiduciary rules that can affect our business. Our ability to predict and react quickly to relevant legal and
regulatory trends and to correctly interpret their market and competitive implications is important to our success.
Our acquisition strategy
We have a successful history of acquiring complementary assets and businesses that strengthen our platform. We
seek to continue this growth strategy and are regularly engaged in evaluating different opportunities. We have
developed an internal capability to source, evaluate and integrate acquisitions that have created value for
shareholders. We believe the nature of our competitive landscape provides a significant acquisition opportunity.
Many of our competitors view their HSA businesses as non-core functions. We believe more of them will look to
divest these assets and, in certain cases, be limited from making acquisitions due to depository capital
requirements. We intend to continue to pursue acquisitions of complementary assets and businesses that we
believe will strengthen our platform.
Key financial and operating metrics
Our management regularly reviews a number of key operating and financial metrics to evaluate our business,
determine the allocation of our resources, make decisions regarding corporate strategies and evaluate forward-
looking projections and trends affecting our business. We discuss certain of these key financial metrics, including
revenue, below in the section entitled “Key components of our results of operations.” In addition, we utilize other key
metrics as described below.
HSA Members
The following table sets forth our HSA Members for the periods indicated:
January 31, 2018 January 31, 2017 January 31, 2016
2017 to 2018
2016 to 2017
% change from
% change from
HSA Members ...........................................
Average HSA Members - Year-to-date ......
Average HSA Members - Quarter-to-date .
HSA Members with investments................
3,402,889
2,951,790
3,188,927
121,614
2,746,132
2,339,091
2,519,382
65,906
2,140,631
1,600,327
1,850,843
44,680
24%
26%
27%
85%
28%
46%
36%
48%
HSA Members is critical because our service revenue is driven by the amount we charge per HSA Member.
The number of our HSA Members increased by approximately 657,000, or 24%, from January 31, 2017 to
January 31, 2018, and by approximately 606,000, or 28%, from January 31, 2016 to January 31, 2017.
The increase in the number of our HSA Members in these periods was primarily driven by the addition of new
Network Partners and further penetration into existing Network Partners. In addition, during the year ended
January 31, 2018, we acquired the rights to be custodian of First Interstate Bancsystem and Alliant Credit Union
portfolios consisting of approximately 14,000 and 40,000 HSA Members, respectively. During the year ended
January 31, 2016, we acquired the rights to be the custodian of the Bancorp Bank and M&T Bank HSA portfolios
consisting of approximately 160,000 and 35,000 HSA Members, respectively, the latter of which transitioned to our
platform during the year ended January 31, 2017.
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Custodial assets
The following table sets forth our custodial assets for the periods indicated:
(in thousands, except percentages)
January 31, 2018
January 31, 2017
January 31, 2016
2017 to 2018
2016 to 2017
Custodial cash .....................................................
Custodial investments ..........................................
Total custodial assets........................................
Average daily custodial cash - Year-to-date.........
Average daily custodial cash - Quarter-to-date....
$
$
$
$
5,489,617
$
4,380,487
$
1,288,693
6,778,310
4,571,341
4,876,438
$
$
$
658,580
5,039,067
3,661,058
3,854,518
$
$
$
3,278,628
405,878
3,684,506
2,326,506
2,682,827
25%
96%
35%
25%
27%
34%
62%
37%
57%
44%
% change from
% change from
Our custodial assets, which are our HSA Members' assets for which we are the custodian, consist of the following
components: (1) custodial cash deposits, which are deposits with our FDIC-insured custodial depository bank
partners, (2) custodial cash deposits invested in an annuity contract with our insurance company partner and (3)
members' investments in mutual funds through our custodial investment fund partner. Measuring our custodial
assets is important because our custodial revenue is directly affected by average daily custodial balances.
Our total custodial assets increased by $1.7 billion, or 35%, from January 31, 2017 to January 31, 2018. Our total
custodial assets increased by $1.4 billion, or 37%, from January 31, 2016 to January 31, 2017. The increase in total
custodial assets in these periods was driven by additional custodial assets from our existing HSA Members and
new custodial assets from new HSA Members added during the fiscal year. In addition, during the year ended
January 31, 2018, we acquired the rights to be custodian of First Interstate Bancsystem and Alliant Credit Union
portfolios consisting of approximately $55.0 million and $109.0 million of custodial assets, respectively.
During the year ended January 31, 2016, we acquired the rights to be the custodian of the Bancorp Bank and M&T
Bank HSA portfolios consisting of approximately $390.0 million and $63.0 million of custodial assets, respectively,
the latter of which transitioned to our platform during the year ended January 31, 2017.
Adjusted EBITDA
We define Adjusted EBITDA, which is a non-GAAP financial metric, as adjusted earnings before interest, taxes,
depreciation and amortization, stock-based compensation expense, and certain other non-cash statement of
operations items. We believe that Adjusted EBITDA provides useful information to investors and analysts in
understanding and evaluating our operating results in the same manner as our management and our board of
directors because it reflects operating profitability before consideration of non-operating expenses and non-cash
expenses, and serves as a basis for comparison against other companies in our industry.
The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to
Adjusted EBITDA for each of the periods indicated:
Year ended January 31,
(in thousands)
2018
2017
Net income ..........................................................................................................................
$
47,362
$
26,376
$
Interest income .................................................................................................................
Interest expense ...............................................................................................................
Income tax provision .........................................................................................................
Depreciation and amortization ..........................................................................................
Amortization of acquired intangible assets .......................................................................
Stock-based compensation expense ................................................................................
Other (1) ...........................................................................................................................
(734)
274
4,827
11,089
4,863
14,310
2,689
(531)
275
13,744
8,889
4,297
8,398
1,348
2016
16,613
(414)
91
8,941
6,393
2,208
5,883
910
Adjusted EBITDA ................................................................................................................
$
84,680
$
62,796
$
40,625
(1) For the years ended January 31, 2018, 2017 and 2016, Other consisted of non-income based taxes of $439, $358 and $334, acquisition-
related costs of $2,197, $631 and $471, and other costs of $53, $359 and $105, respectively.
The following table sets forth our Adjusted EBITDA:
(in thousands, except percentages)
2018
2017
2016
2017 to 2018
2016 to 2017
Adjusted EBITDA ................................................... $
84,680
$
62,796
$
40,625
35%
55%
As a percentage of revenue ...................................
37%
35%
32%
Year ended January 31, % change from % change from
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Our Adjusted EBITDA increased by $21.9 million, or 35%, from $62.8 million for the year ended January 31, 2017 to
$84.7 million for the year ended January 31, 2018. The increase in Adjusted EBITDA was driven by the overall
growth of our business, including a $13.2 million, or 32%, increase in income from operations.
Our Adjusted EBITDA increased by $22.2 million, or 55%, from $40.6 million for the year ended January 31, 2016 to
$62.8 million for the year ended January 31, 2017. The increase in Adjusted EBITDA was driven by the overall
growth of our business, including a $15.1 million, or 58%, increase in income from operations.
Our use of Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as a
substitute for analysis of our results as reported under GAAP.
Key components of our results of operations
Revenue
The following table sets forth our revenue for the periods indicated:
(in thousands, except percentages)
2018
2017
Service revenue ........................................................... $
91,619
$
77,254
$
Custodial revenue ........................................................
Interchange revenue ....................................................
87,160
50,746
59,593
41,523
2016
61,608
37,755
27,423
Total revenue ............................................................. $
229,525
$
178,370
$
126,786
2017 to 2018
2016 to 2017
19%
46%
22%
29%
25%
58%
51%
41%
Year ended January 31, % change from % change from
We earn revenue from three primary sources: service revenue, custodial revenue and interchange revenue.
Service revenue. We earn service revenue from the fees we charge our Network Partners, employer clients and
individual members for the administration services we provide in connection with the HSAs and RAs we offer. With
respect to our Network Partners, our fees are generally based on a fixed tiered structure for the duration of our
agreement with the relevant Network Partner and are paid to us on a monthly basis. We recognize revenue on a
monthly basis as services are rendered under our written service agreements.
Custodial revenue. We earn custodial revenue from our custodial cash assets deposited with our FDIC-insured
custodial depository bank partners and with our insurance company partner, and recordkeeping fees we earn in
respect of mutual funds in which our members invest. As a non-bank custodian, we deposit our custodial cash with
our various bank partners pursuant to contracts that (i) have terms up to five years, (ii) provide for a fixed or variable
interest rate payable on the average daily cash balances deposited with the relevant bank partner, and (iii) have
minimum and maximum required deposit balances. We earn custodial revenue on our custodial cash that is based
on the interest rates offered to us by these bank partners. In addition, once a member’s HSA cash balance reaches
a certain threshold, the member is able to invest his or her HSA assets in mutual funds through our custodial
investment partner. We receive a recordkeeping fee related to such custodial investments.
Interchange revenue. We earn interchange revenue each time one of our members uses one of our payment
cards to make a qualified purchase. This revenue is collected each time a member “swipes” our payment card to
pay a healthcare-related expense. We recognize interchange revenue monthly based on reports received from third
parties, namely, the card-issuing bank and the card processor.
Cost of revenue
Cost of revenue includes costs related to servicing member accounts, managing customer and partner relationships
and processing reimbursement claims. Expenditures include personnel-related costs, depreciation, amortization,
stock-based compensation, common expense allocations (such as office rent, supplies, and other overhead
expenses), new member and participant supplies, and other operating costs related to servicing our members.
Other components of cost of revenue include interest retained by members on custodial cash and interchange costs
incurred in connection with processing card transactions for our members.
Service costs. Service costs include the servicing costs described above. Additionally, for new accounts, we incur
on-boarding costs associated with the new accounts, such as new member welcome kits, the cost associated with
issuance of new payment cards and costs of marketing materials that we produce for our Network Partners.
Custodial costs. Custodial costs are comprised of interest retained by our HSA Members and fees we pay to
banking consultants whom we use to help secure agreements with our FDIC-insured custodial depository banking
partners. Interest retained by HSA Members is calculated on a tiered basis. The interest rates retained by HSA
Members can change based on a formula or upon required notice.
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Interchange costs. Interchange costs are comprised of costs we incur in connection with processing payment
transactions initiated by our members. Due to the substantiation requirement on RA-linked payment card
transactions, which is the requirement that we confirm each purchase involves a qualified medical expense as
defined under applicable law, payment card costs are higher for RA card transactions. In addition to fixed per card
fees, we are assessed additional transaction costs determined by the amount of the transaction.
Gross profit and gross margin
Our gross profit is our total revenue minus our total cost of revenue, and our gross margin is our gross profit
expressed as a percentage of our total revenue. Our gross margin has been and will continue to be affected by a
number of factors, including the amount we charge our partners and members, interest rates, how many services
we deliver per account, and payment processing costs per account. We expect our annual gross margin to remain
relatively steady over the near term, although our gross margin could fluctuate from period to period depending on
the interplay of these factors.
Operating expenses
Sales and marketing. Sales and marketing expenses consist primarily of personnel and related expenses for our
sales and marketing staff, including sales commissions for our direct sales force, external agent/broker commission
expenses, marketing expenses, depreciation, amortization, stock-based compensation, and common expense
allocations.
Technology and development. Technology and development expenses include personnel and related expenses
for software engineering, information technology, and product development. Technology and development
expenses also include software engineering services, the costs of operating our on-demand technology
infrastructure, depreciation, amortization of capitalized software development costs, stock-based compensation,
and common expense allocations.
General and administrative. General and administrative expenses include personnel and related expenses of, and
professional fees incurred by our executive, finance, legal, compliance, and people departments. They also include
depreciation, amortization, stock-based compensation and common expense allocations.
Amortization of acquired intangible assets. Amortization of acquired intangible assets results primarily from our
acquisition of intangible member assets. We acquired these intangible member assets from third-party custodians.
We amortize these assets over the assets’ estimated useful life of 15 years. We also acquired other intangible
assets, which are 401(k) customer relationships, in connection with an acquisition of a business. We amortize these
assets over the assets' estimated useful life of 10 years. We evaluate our acquired intangible assets for impairment
at least each year, or at a triggering event.
Other expense, net
Other expense primarily consists of interest expense associated with our credit facility, miscellaneous taxes, and
acquisition-related expenses.
Income tax provision
We are subject to federal and state income taxes in the United States based on a calendar tax year which differs
from our fiscal year-end for financial reporting purposes. We use the asset and liability method to account for
income taxes, under which current tax liabilities and assets are recognized for the estimated taxes payable or
refundable on the tax returns for the current fiscal year. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases, net operating loss carryforwards, and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted statutory tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be realized or settled. As of
January 31, 2018, we recorded a net non-current deferred tax asset.
Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to
be realized. Due to the positive evidence of historical profits coupled with forecasted profitability, no valuation
allowance was required as of January 31, 2018.
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Results of operations
Service revenue
The $14.4 million, or 19%, increase in service revenue from the year ended January 31, 2017 to the year ended
January 31, 2018 was primarily due to an increase in the number of our HSA Members, partially offset by the lower
service revenue per HSA Member described below. The $15.6 million, or 25%, increase in service revenue from the
year ended January 31, 2016 to the year ended January 31, 2017 was also primarily due to an increase in the
number of our HSA Members. The number of our HSA Members increased by approximately 657,000, or 24%, from
January 31, 2017 to January 31, 2018, and by approximately 606,000, or 28%, from January 31, 2016 to
January 31, 2017.
Service revenue per HSA Member decreased by approximately 6% from the year ended January 31, 2017 to the
year ended January 31, 2018, and 14% from the year ended January 31, 2016 to the year ended January 31, 2017.
Our service revenue tier structure incentivizes Network Partners to add HSA Members by charging a lower rate as
additional HSA Members are added. Accordingly, as Network Partners add more HSA Members, the service
revenue per HSA Member will continue to decrease. Additionally, as RAs grow less rapidly than HSAs, service
revenue per HSA Member will decrease. The decrease in service revenue per HSA Member was partially offset by
an increase in custodial revenue per HSA Member described below.
Custodial revenue
The $27.6 million, or 46%, increase in custodial revenue from the year ended January 31, 2017 to the year ended
January 31, 2018 was primarily due to an increase in average daily custodial cash of $910.3 million, or 25%, and an
increase in the yield on average custodial cash from 1.58% in the year ended January 31, 2017 to 1.83% in the
year ended January 31, 2018.
The $21.8 million, or 58%, increase in custodial revenue from the year ended January 31, 2016 to the year ended
January 31, 2017 was primarily due to an increase in average daily custodial cash of $1.3 billion, or 57%, as well as
a slight increase in the yield on average custodial cash from 1.57% in the year ended January 31, 2016 to 1.58% in
the year ended January 31, 2017.
Custodial revenue as a percentage of our total revenue continues to increase primarily due to our entry into new
custodial depository agreements with higher interest rates payable on average cash balances deposited
thereunder, and also due to average daily custodial cash assets growing at a faster rate than the number of HSA
Members, which is evidenced by an increase in custodial cash per HSA, which was $1,613, $1,595, and $1,532 as
of January 31, 2018, 2017 and 2016, respectively.
Custodial revenue per HSA Member increased by approximately 16% from the year ended January 31, 2017 to the
year ended January 31, 2018, and approximately 8% from the year ended January 31, 2016 to the year ended
January 31, 2017, primarily due to the higher yield and higher average custodial cash balances.
Interchange revenue
The $9.2 million, or 22%, increase in interchange revenue from the year ended January 31, 2017 to the year ended
January 31, 2018 was due to an overall increase in the number of our HSA Members and payment activity, partially
offset by the lower interchange revenue per HSA Member described below. In addition, we continued to see a trend
toward more HSA spending through payment card transaction swipes and less by checks and ACH or electronic
reimbursements, which increased our interchange revenue.
The $14.1 million, or 51%, increase in interchange revenue from the year ended January 31, 2016 to the year
ended January 31, 2017 was due to an overall increase in the number of our HSA Members and payment activity.
Interchange revenue per HSA Member decreased by approximately 3% from the year ended January 31, 2017 to
the year ended January 31, 2018, primarily due to a decrease in payment activity per HSA Member. Interchange
revenue per HSA Member increased by approximately 4% from the year ended January 31, 2016 to the year ended
January 31, 2017, as a result of our efforts increase card spend on our platform.
Total revenue
Total revenue per HSA Member increased by 2% from the year ended January 31, 2017 to the year ended
January 31, 2018, due to the increase in custodial revenue per HSA Member, largely offset by the decreases in
service revenue and interchange revenue per HSA Member. Total revenue per HSA Member decreased by 4% from
the year ended January 31, 2016 to the year ended January 31, 2017, due to decreases in service revenue per
HSA Member partially offset by increases in custodial and interchange revenue per HSA Member.
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Cost of revenue
The following table sets forth our cost of revenue for the periods indicated:
(in thousands, except percentages)
2018
2017
Service costs ................................................. $
70,426
$
51,868
$
Custodial costs ..............................................
Interchange costs ..........................................
11,400
12,783
9,767
10,380
Total cost .................................................... $
94,609
$
72,015
$
2016
39,418
6,522
8,248
54,188
2017 to 2018
2016 to 2017
36%
17%
23%
31%
32%
50%
26%
33%
Year ended January 31,
% change from
% change from
Service costs
The $18.6 million, or 36%, increase in service costs from the year ended January 31, 2017 to the year ended
January 31, 2018 was due to the higher volume of total accounts being serviced. The $18.6 million increase
includes $11.0 million related to the hiring of additional personnel to implement and support our new Network
Partners and HSA Members, increased activation and processing costs of $4.4 million related to account and card
activation, monthly processing of statements and other communications, as well as fraud prevention measures,
stock compensation of $814,000, depreciation and amortization of $614,000, general overhead allocation of
$748,000 and $1.2 million in other expenses.
The $12.5 million, or 32%, increase in service costs from the year ended January 31, 2016 to the year ended
January 31, 2017 was due to the higher volume of total accounts being serviced. The $12.5 million increase
includes $6.1 million related to the hiring of additional personnel to implement and support our new Network
Partners and HSA Members, increased activation and processing costs of $2.9 million related to account and card
activation as well as monthly processing of statements and other communications, stock compensation of
$692,000, depreciation and amortization of $495,000, general overhead allocation of $1.6 million and $393,000 in
other expenses.
Custodial costs
The $1.6 million, or 17%, increase in custodial costs from the year ended January 31, 2017 to the year ended
January 31, 2018 was due to an increase in average daily custodial cash from $3.66 billion for the year ended
January 31, 2017 to $4.57 billion during the year ended January 31, 2018, which was partially offset by a decrease
in custodial costs on average custodial cash from 0.27% for the year ended January 31, 2017 to 0.25% for the year
ended January 31, 2018.
The $3.2 million, or 50%, increase in custodial costs from the year ended January 31, 2016 to the year ended
January 31, 2017 was due to an increase in average daily custodial cash from $2.33 billion for the year ended
January 31, 2016 to $3.64 billion during the year ended January 31, 2017, which was partially offset by a decrease
in custodial costs on average custodial cash from 0.28% for the year ended January 31, 2016 to 0.27% for the year
ended January 31, 2017.
Interchange costs
The $2.4 million, or 23%, increase in interchange costs from the year ended January 31, 2017 to the year ended
January 31, 2018, and the $2.1 million, or 26%, increase from the year ended January 31, 2016 to the year ended
January 31, 2017, was a result of the overall increase in payment activity, which is attributable to the growth in HSA
Members.
Cost of revenue
As we continue to add HSA Members, we expect that our cost of revenue will increase in dollar amount to support
our Network Partners and members. Cost of revenue will continue to be affected by a number of different factors,
including our ability to implement new technology in our Member Education Center as well as scaling our Network
Partner implementation and account management functions.
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Operating expenses
The following table sets forth our operating expenses for the periods indicated:
Year ended January 31,
% change from
% change from
(in thousands, except percentages)
2018
2017
Sales and marketing ............................................ $
23,139
$
18,320
$
Technology and development...............................
General and administrative ..................................
Amortization of acquired intangible assets ...........
27,385
25,111
4,863
22,375
20,151
4,297
Total operating expenses ................................... $
80,498
$
65,143
$
2016
13,302
16,832
14,113
2,208
46,455
2017 to 2018
2016 to 2017
26%
22%
25%
13%
24%
38%
33%
43%
95%
40%
Sales and marketing
The $4.9 million, or 26%, increase in sales and marketing expenses from the year ended January 31, 2017 to the
year ended January 31, 2018 primarily consisted of increased staffing and sales commissions of $2.7 million,
increased stock-based compensation expense of $1.1 million, increased partner commissions of $345,000, and an
increase in other expenses of $703,000.
The $5.0 million, or 38%, increase in sales and marketing expenses from the year ended January 31, 2016 to the
year ended January 31, 2017 primarily consisted of increased staffing and sales commissions of $2.3 million,
increased partner commissions of $928,000, increased travel and marketing expenses of $862,000, increased
promotion discounts of $418,000, and an increase in other expenses of $502,000.
We expect our sales and marketing expenses to increase for the foreseeable future as we continue to increase the
size of our sales and marketing organization and expand into new markets. On an annual basis, we expect our
sales and marketing expenses to remain steady as a percentage of our total revenue over the near term. However,
our sales and marketing expenses may fluctuate as a percentage of our total revenue from period to period due to
the seasonality of our total revenue and the timing and extent of our sales and marketing expenses.
In addition, we expect the adoption of the new revenue standard to have a material impact on total sales and
marketing expenses. We expect to capitalize incremental contract acquisition costs, such as sales commissions
included in sales and marketing expenses in the consolidated statement of operations, and amortize these costs
over the average economic life of an HSA Member. The Company's current practice is to fully expense sales
commissions when the member is added to the Company's platform.
Technology and development
The $5.0 million, or 22%, increase in technology and development expenses from the year ended January 31, 2017
to the year ended January 31, 2018 resulted primarily from the hiring of additional personnel of $4.4 million,
increased amortization and depreciation of $1.6 million, stock compensation of $1.4 million, and other expenses of
$81,000, which were partially offset by a decrease in professional services of $2.0 million and an increase in
capitalized engineering costs of $341,000 associated with the development and enhancement of our proprietary
technology platform.
The $5.5 million, or 33%, increase in technology and development expenses for the year ended January 31, 2016
to the year ended January 31, 2017 resulted primarily from the hiring of additional personnel of $3.4 million,
increased amortization and depreciation of $1.9 million, information technology expenses of $1.1 million, stock
compensation of $889,000, professional services of $726,000, and other expenses of $548,000, which were offset
by an increase in capitalized engineering costs of $2.1 million associated with the development and enhancement
of our proprietary technology platform, and redeployment of resources from technology and development to general
and administrative of $855,000.
We expect our technology and development expenses to increase for the foreseeable future as we continue to
invest in the development of our proprietary system. On an annual basis, we expect our technology and
development expenses to increase as a percentage of our total revenue. Our technology and development
expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our
total revenue and the timing and extent of our technology and development expenses.
General and administrative
The $5.0 million, or 25%, increase in general and administrative expenses from the year ended January 31, 2017 to
the year ended January 31, 2018 was primarily attributable to the hiring of additional personnel of $3.3 million,
-37-
increased stock compensation of $2.6 million and other expenses of $1.1 million, which were offset by a decrease
in professional services of $2.0 million.
The $6.0 million, or 43%, increase in general and administrative expenses from the year ended January 31, 2016 to
the year ended January 31, 2017 was primarily attributable to the hiring of additional personnel of $2.4 million,
increased professional fees of $1.1 million, stock compensation of $922,000 and other expenses of $814,000, and
redeployment of resources from technology and development to general and administrative of $855,000.
We expect our general and administrative expenses to increase for the foreseeable future due to the additional
demands on our legal, compliance, accounting, insurance, and investor relations functions that we continue to incur
as a public company, as well as other costs associated with continuing to grow our business. On an annual basis,
we expect our general and administrative expenses to remain steady as a percentage of our total revenue. Our
general and administrative expenses may fluctuate as a percentage of our total revenue from period to period due
to the seasonality of our total revenue and the timing and extent of our general and administrative expenses.
Amortization of acquired intangible assets
The $566,000 and $2.1 million increase in amortization of acquired intangible assets for the years ended
January 31, 2018 and 2017, respectively, was attributable to the HSA portfolio asset acquisitions and acquisition of
a business. On an annual basis, we expect total amortization of acquired intangible assets to remain steady.
Other expense
The change in other income and expense, net for the year ended January 31, 2018 is primarily attributable to an
increase in ongoing acquisition-related activity costs.
The change in other income and expense, net for the year ended January 31, 2017 is primarily attributable to an
increase in ongoing acquisition-related activity costs and interest expense.
Income tax provision
Income tax provision for the years ended January 31, 2018, 2017, and 2016 was $4.8 million, $13.7 million, and
$8.9 million, respectively. The decrease in income tax provision during the year ended January 31, 2018 compared
to the year ended January 31, 2017 was primarily the result of a $14.1 million decrease related to excess tax
benefits on stock-based compensation expense recognized in the provision for income taxes, pursuant to the
adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting as well as an increase in
federal and state income taxes driven by an increase in income before income taxes netted with a decrease. The
increase in income tax provision during the year ended January 31, 2017 compared to the year ended January 31,
2016 was primarily the result of an increase in federal and state income taxes driven by an increase in income
before income taxes netted with an increase in research and development credits claimed.
Our effective income tax rate for the years ended January 31, 2018, 2017 and 2016 was 9.2%, 34.3%, and 35.0%,
respectively. The difference between the effective income tax rate and the U.S. federal statutory income tax rate
each period is impacted by a number of factors, including the relative mix of earnings among state jurisdictions,
credits, excess tax benefits or shortfalls on stock-based compensation expense due to the adoption of ASU
2016-09, and other discrete items. The decrease in the effective tax rate for the year ended January 31, 2018
compared to the year ended January 31, 2017 was primarily the result of excess tax benefits on stock-based
compensation expense. The decrease in the effective tax rate for the year ended January 31, 2017 compared to the
year ended January 31, 2016 was primarily the result of an increase in research and development credits.
The Tax Cuts and Jobs Act, which was enacted on December 22, 2017, reduced the statutory federal income tax
rate from a top rate of 35% to 21% effective January 1, 2018. Refer to Note 8. Income Taxes, within the notes to the
consolidated financial statements for further discussion of the impact of this tax reform on our consolidated financial
statements.
Seasonality
Seasonal concentration of our growth combined with our recurring revenue model create seasonal variation in our
results of operations. A significant number of new and existing Network Partners bring us new HSA Members
beginning in January of each year concurrent with the start of many employers’ benefit plan years. Before we
realize any revenue from these new HSA Members, we incur costs related to implementing and supporting our new
Network Partners and new HSA Members. These costs of services relate to activating accounts and hiring
additional staff, including seasonal help to support our member support center. These expenses begin to ramp up
during our third fiscal quarter with the majority of expenses incurred in our fourth fiscal quarter.
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We also experience higher operating expenses in our fourth fiscal quarter due to sales commissions for new
accounts activated in January. Beginning in the year ended January 31, 2019, the Company will adopt ASU
2014-09, Revenue from Contracts with Customers. As a result of this adoption, the Company will capitalize
incremental contract acquisition costs, such as sales commissions, and amortize these costs over the average
economic life of a member.
Liquidity and capital resources
Cash and marketable securities overview
As of January 31, 2018, our principal source of liquidity was our current cash and marketable securities balances,
collections from our service, custodial and interchange revenue activities, and availability under our credit facility.
We rely on cash provided by operating activities to meet our short-term liquidity requirements, which primarily relate
to the payment of corporate payroll and other operating costs, and capital expenditures.
As of January 31, 2018 and 2017, cash, cash equivalents and marketable securities were $240.3 million and
$180.4 million, respectively.
Capital resources
As a result of our follow-on offering in May 2015, we received net proceeds of approximately $23.5 million from the
sale of 972,500 shares of our common stock.
On September 9, 2015, we filed a shelf registration statement on Form S-3 with the SEC. This shelf
registration statement, which includes a base prospectus, allows us at any time to offer any combination of
securities described in the prospectus in one or more offerings. Unless otherwise specified in a prospectus
supplement accompanying the base prospectus, we would use the net proceeds from the sale of any securities
offered pursuant to the shelf registration statement for general corporate purposes, including, but not limited to,
working capital, sales and marketing activities, general and administrative matters and capital expenditures, and if
opportunities arise, for the acquisition of, or investment in, assets, technologies, solutions or businesses that
complement our business. Pending such uses, we may invest the net proceeds in interest-bearing securities. In
addition, we may conduct concurrent or other financings at any time.
On September 30, 2015, we entered into a $100.0 million credit facility. The credit facility has a term of five years.
The new credit facility contains covenants and events of default customary for facilities of this type. There were no
borrowings under the facility as of January 31, 2018. We were in compliance with all covenants as of January 31,
2018.
Use of cash
Capital expenditures for the years ended January 31, 2018, 2017, and 2016 were $15.8 million, $12.7 million, and
$9.3 million, respectively. We expect to continue our increased capital expenditures during the year ending January
31, 2019 as we continue to devote a significant amount of our capital expenditures to improving the architecture
and functionality of our proprietary system. Costs to improve the architecture of our proprietary system include
software engineering services, computer hardware, and personnel and related costs for software engineering.
We believe our existing cash, cash equivalents and marketable securities, will be sufficient to meet our operating
and capital expenditure requirements for at least the next 12 months. To the extent these current and anticipated
future sources of liquidity are insufficient to fund our future business activities and requirements we may need to
raise additional funds through public or private equity or debt financing. In the event that additional financing is
required, we may not be able to raise it on favorable terms, if at all.
The following table shows our cash flows from operating activities, investing activities and financing activities for the
stated periods:
(in thousands)
2018
2017
Net cash provided by operating activities .........................................................................
$
81,702
$
45,591
$
Net cash used in investing activities ................................................................................
Net cash provided by financing activities .........................................................................
Increase (decrease) in cash and cash equivalents .......................................................
Beginning cash and cash equivalents ..............................................................................
(36,748)
14,564
59,518
139,954
(13,054)
23,776
56,313
83,641
Ending cash and cash equivalents ................................................................................
$
199,472
$
139,954
$
2016
26,541
(90,552)
36,647
(27,364)
111,005
83,641
Year ended January 31,
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Cash flows provided by operating activities. Net cash provided by operating activities during the year ended
January 31, 2018 resulted primarily from our net income of $47.4 million adjusted for the following non-cash items:
depreciation and amortization of $16.0 million and stock-based compensation of $14.3 million, and changes in
deferred taxes of $4.3 million, accrued compensation of $3.8 million, other long-term liabilities of $939,000, and
amortization of deferred financing costs, bad debt expense, changes in inventories and accrued liabilities and other
totaling $1.1 million. These were offset by changes in accounts receivable of $4.7 million and other assets and
accounts payable of $1.3 million.
Net cash provided by operating activities during the year ended January 31, 2017 resulted primarily from our net
income of $26.4 million adjusted for the following non-cash items: depreciation and amortization of $13.2
million and stock-based compensation of $8.4 million, and changes in accrued liabilities of $1.7 million, other long-
term liabilities of $1.2 million, accrued compensation of $946,000, and accounts payable, amortization of deferred
financing costs, bad debt expense, and inventories totaling of $698,000. These were offset by changes in deferred
income taxes of $2.9 million, accounts receivable of $2.7 million and other assets of $1.3 million.
Net cash provided by operating activities during the year ended January 31, 2016 resulted primarily from our net
income of $16.6 million adjusted for the following non-cash items: depreciation and amortization of $8.6 million and
stock-based compensation of $5.9 million, changes in accrued compensation of $2.5 million, and accounts payable
of $1.0 million. These were offset by changes in accounts receivable of $5.2 million, deferred income taxes of
$2.2 million, and accrued liabilities, other long-term liabilities and other assets of $742,000.
Cash flows used in investing activities. We continued to increase our purchases of software and capitalized
software development costs due to continued growth. During the years ended January 31, 2018, 2017 and 2016,
purchases of software and capitalized software development costs were $10.4 million, $9.0 million, and $6.9 million,
respectively. We also increased our purchases of property and equipment to $5.5 million, $3.6 million and $2.4
million, respectively, due to our continued growth.
Net cash used in investing activities during the year ended January 31, 2018 was primarily the result of the
acquisition of the right to be the custodian of the First Interstate Bancsystem and Alliant Credit Union HSA portfolio
acquisitions for $6.4 million and $8.0 million, respectively, as well as our acquisition of the rights to be the sole
administrator of a portfolio of HSA Members for $3.3 million and an acquisition of a business for $2.9 million.
Net cash used in investing activities during the year ended January 31, 2016 was primarily the result of the
acquisition of the right to be the custodian of the Bancorp and M&T HSA portfolios totaling $40.5 million, the
purchases of marketable securities of $40.3 million, and a $500,000 investment in a limited partnership that
engages in the development of technology-based financial healthcare products.
Cash flows provided by financing activities. Cash flow provided by financing activities during the year ended
January 31, 2018 resulted primarily from proceeds associated with the exercise of stock options of $14.6 million.
Cash flow provided by financing activities during the year ended January 31, 2017 resulted primarily from proceeds
associated with the exercise of stock options of $7.1 million, and the associated tax benefits of $16.6 million.
Cash flow used in financing activities during the year ended January 31, 2016 resulted primarily from our follow-on
offering, from which we received net proceeds of $23.5 million from the sale of 972,500 shares of our common
stock, proceeds associated with the exercise of stock options of $1.9 million, and the associated tax benefits of
$11.6 million. These items were offset by deferred financing costs paid of $317,000 in conjunction with the credit
agreement entered into during the year.
Contractual obligations
We lease office space, data storage facilities, equipment and certain maintenance requirements under long-term
non-cancelable operating leases. Future minimum lease payments required under non-cancelable obligations as of
January 31, 2018 are as follows:
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(in thousands)
Less than
1 year
1-3
years
3-5
years
More than
5 years
Total
Payment due by period
Office lease obligations .........................................................
$
3,904
$
7,944
$
8,501
$
17,034
$
37,383
Data storage and equipment lease obligations .....................
Processing services agreement ............................................
Telephony services ...............................................................
Other .....................................................................................
343
825
288
856
301
1,650
—
2,252
68
—
—
1,396
—
—
—
—
712
2,475
288
4,504
Total ....................................................................................
$
6,216
$
12,147
$
9,965
$
17,034
$
45,362
Office lease obligations—On May 15, 2015, the Company entered into a lease agreement to expand its
headquarters in Draper, Utah. The lease provides for the new landlord to construct a building at its cost. The lease
commenced upon the substantial completion and delivery of the building to the Company on July 1, 2016 and has
an initial term of 129 months thereafter, with an option for the Company to extend the lease for two additional five-
year periods. The Company is responsible for payment of taxes and operating expenses for its portion of the
building, in addition to an annual base rent in the initial amount of approximately $1.0 million, with 2.5% annual
increases. In conjunction with the aforementioned lease, the Company entered into an amended and restated lease
agreement for its existing office space at its headquarters in Draper, Utah. The lease commenced on July 1, 2015
and has an initial term of 129 months thereafter, with an option for the Company to extend the lease for two
additional five-year periods. The Company is responsible for payment of taxes and operating expenses for its
portion of the building, in addition to an annual base rent in the initial amount of approximately $1.6 million,
with 2.5% annual increases.
On September 16, 2016, the Company amended its lease to expand its current office space. The term of the lease
commenced on July 1, 2016 and will expire on March 31, 2027. The Company is responsible for payment of taxes
and operating expenses for its portion of the building, in addition to an annual base rent in the initial amount of
approximately $569,000, with 2.5% annual increases.
On May 31, 2017, the Company entered into an amendment to its lease agreement, dated May 15, 2015, to expand
its current office space. The term of the lease commenced on January 1, 2018 and will expire on March 31, 2027.
The Company is responsible for payment of taxes and operating expenses for its portion of the building, in addition
to an annual base rent in the initial amount of approximately $513,000, with annual increases ranging
from 2.5% to 3.1%.
Lease expense for office space for the years ended January 31, 2018, 2017 and 2016 totaled $4.3 million, $3.3
million and $2.1 million, respectively. The Company also leases office space in Overland Park, Kansas, which
expires in February 2019.
Data storage and equipment lease obligations—The data storage and equipment leases relate to our offsite data
storage facility and office equipment leases. All of these leases expire during the year ended January 31, 2020.
Telephony services—The telephony service agreement relates to our 24/7/365 member support center. The
agreement expires in September 2019.
Processing services agreement—The Company's processing services agreement with a vendor expires December
31, 2020 and requires the Company to pay a minimum processing fee based on the processing year of the
agreement. The Company may terminate the agreement beginning January 1, 2020 by providing 180 days’ written
notice.
If the processing agreement is terminated prior to December 31, 2020, the Company is required to pay the vendor a
termination fee, equal to 75% of the aggregate value of the minimum processing fees for the remaining years of the
agreement, plus a portion of the account-boarding incentive fee.
For each of the years ended January 31, 2018, 2017 and 2016, the Company exceeded the minimum amounts
required under the agreement.
The Company also has agreements with several entities for access to technology and software. The agreements
are based on usage, and there are no minimum required monthly payments.
-41-
Off-balance sheet arrangements
Except as disclosed in the notes to our financial statements, we do not have any relationships with unconsolidated
organizations or financial partnerships, such as structured finance or special purpose entities, that would have been
established for the purpose of facilitating off-balance sheet arrangements.
Critical accounting policies and significant management estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these
consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances. In many
instances, we could have reasonably used different accounting estimates, and in other instances, changes in the
accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ
significantly from the estimates made by our management. To the extent that there are material differences between
these estimates and actual results, our future financial statement presentation, financial condition, results of
operations and cash flows will be affected.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not
require management’s judgment in its application, while in other cases, management’s judgment is required in
selecting among available alternative accounting standards that allow different accounting treatment for similar
transactions. We believe that there are several accounting policies that are critical to understanding our business
and prospects for future performance, as these policies affect the reported amounts of revenue and other significant
areas that involve management’s judgment and estimates. These significant policies and our procedures related to
these policies are described in detail below.
Revenue recognition
We earn revenue primarily from three sources: service revenue, custodial revenue and interchange revenue. We
recognize revenue when the following criteria are met: (1) collectability is reasonably assured; (2) delivery has
occurred; (3) persuasive evidence of an arrangement exists; and (4) there is a fixed or determinable fee.
• Service revenue: We charge our Network Partners or individual members a monthly service fee once a
member account is set up on our system. We recognize revenue on the monthly service fees in the month
during which we service each member account. In addition, we earn fees paid by employer partners and plan
participants in connection with plan administrator and fiduciary services for 401(k) employer sponsors. The fees
are paid on a quarterly basis and revenue is recognized in the month in which it is earned.
• Custodial revenue: We earn interest on custodial cash. This interest is earned from various FDIC-insured
bank partners and from an annuity contract with our insurance company partner with whom we deposit our
members’ HSA cash assets. We also receive certain administrative and recordkeeping fees for custodial
investments from our investment partners and customers. We recognize this revenue in the month in which it is
earned.
Interchange revenue: We earn interchange revenue from card transaction “swipes” by our members when our
members use our payment cards to pay healthcare-related claims and expenses. We recognize this revenue in
the month in which it is earned.
•
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Marketable securities
Marketable securities consist primarily of mutual funds invested in corporate bonds, U.S. government agency
securities, U.S. treasury bills, commercial paper, certificates of deposit, municipal notes, and bonds with original
maturities beyond three months at the time of purchase. Marketable securities are classified as available-for-sale,
held-to-maturity, or trading at the date of purchase. We classify marketable securities, including securities with
maturities beyond twelve months, as current assets in the consolidated balance sheets. All marketable securities
are recorded at their estimated fair value. Unrealized gains and losses for available-for-sale securities are recorded
in other comprehensive income, net of the related tax effect. We evaluate marketable securities to assess whether
those with unrealized loss positions are other-than-temporarily impaired. We consider impairments to be other than
temporary if they are related to deterioration in credit risk or if it is likely it will sell the securities before the recovery
of their cost basis. Realized gains and losses and declines in value judged to be other-than-temporary are
determined based on the specific identification method and are reported in other expense, net in the consolidated
statements of operations and comprehensive income.
Capitalized software development costs
We account for the costs of computer software developed or obtained for internal use in accordance with
Accounting Standards Codification, or ASC, 350-40, “Internal-Use Software.” Costs incurred during operation and
post-implementation stages are charged to expense. Costs incurred that are directly attributable to developing or
obtaining software for internal use incurred in the application development stage are capitalized. Management’s
judgment is required in determining the point when various projects enter the stages at which costs may be
capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives
over which the costs are amortized.
Acquisitions
To determine whether an acquisition qualifies as a business combination or an asset acquisition, we make certain
judgments, which include assessment of the inputs, processes, and outputs associated with the acquired group of
assets. If we determine that the acquisition consists of inputs, as well as processes that when applied to those
inputs have the ability to create outputs, the acquisition is determined to be a business combination. In instances
where the acquired group of assets does not include sufficient inputs and processes to produce outputs, the
acquisition is determined to be an asset acquisition. Under the asset acquisition method of accounting, the
Company is required to fair value the assets transferred. The cost of the assets acquired is allocated to the
individual assets acquired based on their relative fair values and does not give rise to goodwill.
If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in
the consolidated statements of operations and comprehensive income. If an acquisition qualifies as an asset
acquisition, the related transaction costs are capitalized and subsequently amortized over the useful life of the
acquired assets.
Goodwill and intangible assets
We apply ASC 805, ‘‘Business Combinations,’’ and ASC 350, ‘‘Intangibles—Goodwill and Other’’ to account for
goodwill and intangible assets. In accordance with these standards, we amortize all finite lived intangible assets
over their respective estimated useful lives, while goodwill has an indefinite life and is not amortized. We review
finite lived intangible assets subject to amortization for impairment whenever events or circumstances indicate that
the associated carrying amount may not be recoverable. Goodwill is not amortized but is tested for impairment at
least annually or more frequently whenever a triggering event or change in circumstances occurs, at the reporting
unit level. We are required to recognize an impairment charge if the carrying amount of the reporting unit exceeds
its fair value.
Prior to our initial public offering, management used all available information to make this fair value determination,
including the present values of expected future cash flows using discount rates commensurate with the risks
involved in the assets and observed market multiples of operating cash flows and net income. After the
consummation of our initial public offering, our stock price and associated market capitalization were also
considered in the determination of reporting unit fair value. In addition, if the estimated fair value of the reporting
unit is less than the book value (including the goodwill), further management judgment must be applied in
determining the fair values of individual assets and liabilities. No impairments for goodwill or other intangible assets
were recorded during the years ended January 31, 2018, 2017 and 2016. However, a lower fair value estimate in
the future could result in impairment. A prolonged or significant decline in our stock price could provide evidence of
a need to record a material impairment of goodwill.
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Income taxes
We account for income taxes and the related accounts under the liability method as set forth in the authoritative
guidance for accounting for income taxes. Under this method, current tax liabilities and assets are recognized for
the estimated taxes payable or refundable on the tax returns for the current fiscal year. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases, for net operating losses, and for
tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted statutory tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.
The effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is provided for when it is more likely than not that some or all of
the deferred tax assets may not be realized in future years.
We use the tax law ordering approach of intraperiod allocation in determining when excess tax benefits have been
realized for provisions of the tax law that identify the sequence in which those amounts are utilized for tax purposes.
We have also elected to exclude the indirect tax effects of share-based compensation deductions in computing the
income tax provision recorded within the Consolidated Statement of Operations and Comprehensive Income. Also,
we use the portfolio approach in releasing income tax effects from accumulated other comprehensive income.
We recognize the tax benefit from an uncertain tax position taken or expected to be taken in a tax return using a
two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by
determining if the weight of available evidence indicates that it is more likely than not that the tax position will be
sustained upon examination by the relevant taxing authorities, based on the technical merits of the position. For tax
positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit in
the financial statements as the largest benefit that has a greater than 50% likelihood of being sustained upon
settlement. We recognize interest and penalties, if any, related to unrecognized tax benefits as a component of
other income (expense) in the Statements of Operations and Comprehensive Income. Significant judgment is
required to evaluate uncertain tax positions. Changes in facts and circumstances could have a material impact on
our effective tax rate and results of operations. In light of the recently enacted Tax Cuts and Jobs Act, refer to Note
8. Income Taxes, within the notes to the consolidated financial statements for further discussion of the impact of this
tax reform on our consolidated financial statements.
Stock-based compensation
Stock options. We award time-based and performance-based stock options to team members, directors, and
executive officers. Stock-based compensation costs related to stock options granted are measured at the date of
grant based on the estimated fair value of the award, net of estimated forfeitures. We estimate the grant date fair
value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. With
respect to time-based stock options, the grant date fair value of stock-based awards is recognized on a straight-line
basis over the requisite service period, which is generally the vesting period of the award. With respect to
performance-based stock options, stock compensation expense is recognized over the requisite service period
using the graded-vesting attribution method when it is probable that the performance condition will be achieved.
Each reporting period, we evaluate the probability of achieving the performance criteria and of the number of shares
that are expected to vest; compensation expense is then adjusted to reflect the number of shares expected to vest.
Accordingly, the expense recognized is an estimate that may change over time as key assumptions are updated.
We expect to continue to grant stock options in the future, and to the extent that we do, our stock-based
compensation expense recognized in future periods will likely increase.
The Black-Scholes option-pricing model requires the use of highly subjective assumptions to estimate the fair value
of stock-based awards. If we had made different assumptions, our stock-based compensation expense, net income
and net income per share of common stock could have been significantly different. These assumptions include:
• Expected volatility: As we do not have adequate length of trading history for our common stock, the expected
stock price volatility for our common stock was estimated by taking the average historical price volatility for
industry peers based on daily price observations. We did not rely on implied volatilities of traded options in our
industry peers’ common stock because the volume of activity was relatively low. We intend to continue to
consistently apply this process using the same or similar public companies until a sufficient amount of historical
information regarding the volatility of our own common stock price becomes available, or unless circumstances
change such that the identified companies are no longer similar to us, in which case, more suitable companies
whose share prices are publicly available would be utilized in the calculation.
-44-
• Expected term: The expected term represents the period that our stock-based awards are expected to be
outstanding. We use the "simplified" method to estimate the expected term as determined under Staff
Accounting Bulletin No. 110 due to the lack of option exercise history as a public company.
• Risk-free interest rate: The risk-free interest rate is based on the yields of U.S. Treasury securities with
maturities similar to the expected term of the options for each option group.
• Expected dividend yield: We have never declared or paid any cash dividends to our common stockholders
and do not presently plan to pay any cash dividends in the foreseeable future, other than in connection with the
special dividend described in Item 5- Market for registrant's common equity, related stockholders matters and
issuer purchases of equity securities. Consequently, we used an expected dividend yield of zero.
The following table presents the weighted-average assumptions used to estimate the fair value of options granted
during the periods presented:
Expected dividend yield .......................................
Year ended January 31,
2018
—%
2017
—%
2016
—%
Expected stock price volatility ..............................
37.79% - 38.01%
38.01% - 38.37%
38.29% - 40.29%
Risk-free interest rate ..........................................
1.18% - 2.07%
1.18% - 2.18%
1.47% - 1.80%
Expected life of options .......................................
4.50 - 6.25 years
4.50 - 6.25 years
5.43 - 6.25 years
We will continue to use judgment in evaluating the assumptions utilized for our stock-based compensation expense
calculations on a prospective basis.
The estimated fair value of a stock option using the Black-Scholes option-pricing model is impacted significantly by
changes in a company’s stock price. For example, all other assumptions being equal, the estimated fair value of a
stock option will increase as the closing price of a company’s stock increases, and vice versa. Prior to the closing of
the IPO, we were a private company and, as such, we were required to estimate the fair value of our common
stock. In the absence of a public trading market, we determined a reasonable estimate of the then-current fair value
of our common stock for purposes of granting stock-based compensation based on multiple criteria. We estimated
the fair value of our common stock utilizing methodologies, approaches and assumptions consistent with the
American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held-Company Equity
Securities Issued as Compensation", or the AICPA Practice Aid. After closing of the IPO, the fair value of our
common stock is no longer an estimate as it is based upon the closing price of our stock on the NASDAQ Market on
the date of grant.
Restricted stock units. Restricted stock units and performance-based RSUs are valued based on the current
value of the Company's closing stock price on the date of grant, less the present value of future expected dividends
discounted at the risk-free interest rate. Expense for restricted stock units is recognized on a straight-line basis over
the requisite service period. Expense for performance-based RSUs is recognized when it is considered probable
that the performance conditions will be met.
Self insurance
We are self-insured for medical and dental benefits for all qualifying employees. The medical plan carries a stop-
loss policy which will protect from individual claims during the plan year exceeding $110,000. We record estimates
of costs of claims incurred but not reported based on an analysis of historical data and independent estimates.
Recent accounting pronouncements
See Note 1. Summary of business and significant accounting policies within the financial statements included in this
Form 10-K for further discussion.
Item 7A. Quantitative and qualitative disclosures about market risk
Market risk
Concentration of market risk. We derive a substantial portion of our revenue from providing services to tax-
advantaged healthcare account holders. A significant downturn in this market or changes in state and/or federal
laws impacting the preferential tax treatment of healthcare accounts such as HSAs could have a material adverse
effect on our results of operations. During the years ended January 31, 2018, 2017, and 2016, no one customer
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accounted for greater than 10% of our total revenue. We monitor market and regulatory changes regularly and
make adjustments to our business if necessary.
Inflation. Inflationary factors may adversely affect our operating results. Althought we do not believe that inflation
has had a material impact on our financial position or results of operations to date, a high rate of inflation in the
future may have an adverse effect on our ability to maintain current levels of expenses as a percentage of revenue
if our revenue does not correspondingly increase with inflation.
Concentration of credit risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash, cash
equivalents and marketable securities. We maintain our cash, cash equivalents and marketable securities in bank
and other depository accounts, which, at times, may exceed federally insured limits. Our cash, cash equivalents
and marketable securities as of January 31, 2018 were $240.3 million, of which $750,000 was covered by federal
depository insurance. We have not experienced any material losses in such accounts and believe we are not
exposed to any significant credit risk with respect to our cash, cash equivalents, and marketable securities. Our
accounts receivable balance as of January 31, 2018 was $21.6 million. We have not experienced any significant
write-offs to our accounts receivable and believe that we are not exposed to significant credit risk with respect to our
accounts receivable. We continue to monitor our credit risk and place our cash, cash equivalents, and marketable
securities with reputable financial institutions.
Interest rate risk
Custodial cash assets. Our custodial cash assets consists of custodial HSA funds we hold in custody on behalf
of our members. As of January 31, 2018, we had custodial cash of approximately $5.5 billion. As a non-bank
custodian, we contract with FDIC-insured custodial depository bank partners and an insurance company partner to
hold custodial cash assets on behalf of our members, and we earn a significant portion of our total revenue from
interest rates offered to us by these partners. The contract terms range from three to five years and have either
fixed or variable interest rates. As our custodial assets increase and existing agreements expire, we seek to enter
into new contracts with FDIC-insured custodial depository bank partners, the terms of which are impacted by the
then-prevailing interest rate environment. The diversification of deposits among bank partners and varied contract
terms substantially reduces our exposure to short-term fluctuations in prevailing interest rates and mitigates the
short-term impact of a sustained increase or decline in prevailing interest rates on our custodial revenue. A
sustained decline in prevailing interest rates may negatively affect our business by reducing the size of the interest
rate yield, or yield, available to us and thus the amount of the custodial revenue we can realize. Conversely, a
sustained increase in prevailing interest rates can increase our yield. An increase in our yield would increase our
custodial revenue as a percentage of total revenue. In addition, as our yield increases, we expect the spread to
grow between the interest offered to us by our custodial depository bank partners and the interest retained by our
members, thus increasing our profitability. However, we may be required to increase the interest retained by our
members in a rising prevailing interest rate environment. Changes in prevailing interest rates are driven by
macroeconomic trends and government policies over which we have no control.
Cash, cash equivalents and marketable securities. We consider all highly liquid investments purchased with
an original maturity of three months or less to be unrestricted cash equivalents. Our unrestricted cash and cash
equivalents are held in institutions in the U.S. and include deposits in a money market account that is unrestricted
as to withdrawal or use. As of January 31, 2018, we had unrestricted cash and cash equivalents of $199.5 million.
Due to the short-term nature of these instruments, we believe that we do not have any material exposure to
changes in the fair value of our cash and cash equivalents as a result of changes in interest rates.
As of January 31, 2018, we had marketable securities of $40.8 million. Marketable securities are recorded at their
estimated fair value. We do not enter into investments for trading or speculative purposes. Our marketable
securities are exposed to market risk due to a fluctuation in interest rates, which may affect the fair market value of
our marketable securities. However, because we classify our marketable securities as "available-for-sale," no gains
or losses are recognized in net income due to changes in interest rates unless such securities are sold prior to
maturity or declines in fair value are determined to be other-than-temporary.
-46-
Item 8. Financial statements and Supplementary Data
HealthEquity, Inc. and subsidiaries
Index to consolidated financial statements
Report of Independent Registered Public Accounting Firm ...........................................................................
Consolidated Balance Sheets as of January 31, 2018 and 2017 ..................................................................
Consolidated Statements of Operations and Comprehensive Income for the years ended January 31,
2018, 2017 and 2016 ....................................................................................................................................
Consolidated Statements of Stockholders' Equity for the years ended January 31, 2018, 2017 and 2016 ...
Consolidated Statements of Cash Flows for the years ended January 31, 2018, 2017 and 2016 ................
Notes to consolidated financial statements ...................................................................................................
Page
48
50
51
52
53
55
-47-
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of HealthEquity, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of HealthEquity, Inc. and its subsidiaries as of
January 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive income, of
stockholders' equity and of cash flows for each of the three years in the period ended January 31, 2018, including
the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the
Company's internal control over financial reporting as of January 31, 2018, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of January 31, 2018 and 2017, and the results of their operations and their
cash flows for each of the three years in the period ended January 31, 2018 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of January 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's report on internal control over financial reporting. Our
responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's
internal control over financial reporting based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud, and whether effective internal control over financial
reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
-48-
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Salt Lake City, Utah
March 28, 2018
We have served as the Company’s auditor since 2013.
-49-
HealthEquity, Inc. and subsidiaries
Consolidated Balance Sheets
(in thousands, except par value)
January 31, 2018
January 31, 2017
Assets
Current assets
Cash and cash equivalents ................................................................................................ $
199,472
$
Marketable securities, at fair value .....................................................................................
Total cash, cash equivalents and marketable securities ..................................................
Accounts receivable, net of allowance for doubtful accounts of $208 and $75 as of
January 31, 2018 and 2017, respectively ...........................................................................
Inventories ..........................................................................................................................
Other current assets ...........................................................................................................
Total current assets .......................................................................................................
Property and equipment, net ..............................................................................................
Intangible assets, net
.........................................................................................................
Goodwill
.............................................................................................................................
Deferred tax asset ..............................................................................................................
Other assets .......................................................................................................................
40,797
240,269
21,602
215
3,310
265,396
7,836
83,635
4,651
5,461
2,180
139,954
40,405
180,359
17,001
592
2,867
200,819
5,170
65,020
4,651
1,615
1,861
Total assets ................................................................................................................... $
369,159
$
279,136
Liabilities and stockholders’ equity
Current liabilities
Accounts payable ............................................................................................................... $
2,420
$
Accrued compensation .......................................................................................................
Accrued liabilities ................................................................................................................
Total current liabilities ....................................................................................................
Long-term liabilities
Other long-term liabilities ....................................................................................................
Deferred tax liability ............................................................................................................
Total long-term liabilities ................................................................................................
Total liabilities ................................................................................................................
Commitments and contingencies (see note 6)
Stockholders’ equity
Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and
outstanding as of January 31, 2018 and 2017 ....................................................................
Common stock, $0.0001 par value, 900,000 shares authorized, 60,825 and 59,538
shares issued and outstanding as of January 31, 2018 and 2017, respectively .................
Additional paid-in capital .......................................................................................................
Accumulated other comprehensive loss, net .........................................................................
Accumulated earnings ...........................................................................................................
Total stockholders’ equity ..............................................................................................
12,549
5,521
20,490
2,395
—
2,395
22,885
—
6
261,237
(269)
85,300
346,274
Total liabilities and stockholders’ equity ......................................................................... $
369,159
$
The accompanying notes are an integral part of the consolidated financial statements.
3,221
8,722
3,760
15,703
1,456
37
1,493
17,196
—
6
232,114
(165)
29,985
261,940
279,136
-50-
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Operations and Comprehensive
Income
(in thousands, except per share data)
2018
2017
2016
Year ended January 31,
Revenue
Service revenue ...................................................................................... $
91,619
$
77,254
$
Custodial revenue ...................................................................................
Interchange revenue ...............................................................................
Total revenue .......................................................................................
Cost of revenue
Service costs ..........................................................................................
Custodial costs .......................................................................................
Interchange costs ...................................................................................
Total cost of revenue ............................................................................
Gross profit ...............................................................................................
Operating expenses
Sales and marketing ...............................................................................
Technology and development .................................................................
General and administrative .....................................................................
Amortization of acquired intangible assets ..............................................
Total operating expenses .....................................................................
Income from operations ............................................................................
Other expense
Other expense, net .................................................................................
Total other expense ..................................................................................
Income before income taxes .....................................................................
Income tax provision .................................................................................
87,160
50,746
229,525
70,426
11,400
12,783
94,609
134,916
23,139
27,385
25,111
4,863
80,498
54,418
(2,229)
(2,229)
52,189
4,827
59,593
41,523
178,370
51,868
9,767
10,380
72,015
106,355
18,320
22,375
20,151
4,297
65,143
41,212
(1,092)
(1,092)
40,120
13,744
Net income ............................................................................................... $
47,362
$
26,376
$
Net income per share:
Basic ........................................................................................................ $
Diluted ...................................................................................................... $
0.79
0.77
$
$
0.45
0.44
$
$
Weighted-average number of shares used in computing net income per
share:
Basic ........................................................................................................
Diluted ......................................................................................................
60,304
61,854
58,615
59,894
Comprehensive income:
61,608
37,755
27,423
126,786
39,418
6,522
8,248
54,188
72,598
13,302
16,832
14,113
2,208
46,455
26,143
(589)
(589)
25,554
8,941
16,613
0.29
0.28
56,719
58,863
Net income .............................................................................................. $
47,362
$
26,376
$
16,613
Other comprehensive loss:
Unrealized loss on available-for-sale marketable securities, net of tax
(59)
(67)
Comprehensive income .......................................................................... $
47,303
$
26,309
$
(98)
16,515
The accompanying notes are an integral part of the consolidated financial statements.
-51-
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Stockholders’ Equity
(in thousands, except exercise prices)
Shares
Amount
Balance as of January 31, 2015..................................
54,802 $
5 $
Common stock
Additional
paid-in
capital
157,094 $
Accumulated
compre-
hensive loss
— $
Accumulated
earnings
(deficit)
(13,004) $
Total
stockholders'
equity
144,095
Stockholders’ equity
Issuance of common stock:
Exercise of 1,951 options at $0.98 per share...........
Issuance of common stock .......................................
Stock-based compensation .........................................
Tax benefit on stock options exercised .......................
Other comprehensive loss, net of tax..........................
Net income ..................................................................
1,951
973
—
—
—
—
1
—
—
—
—
—
1,914
23,492
5,883
11,557
—
—
Balance as of January 31, 2016..................................
57,726 $
6 $
199,940 $
Issuance of common stock:
Issuance of common stock upon exercise of
options, and for restricted stock units.......................
Stock-based compensation .........................................
Tax benefit on stock options exercised .......................
Other comprehensive loss, net of tax..........................
Net income ..................................................................
1,812
—
—
—
—
—
—
—
—
—
7,142
8,398
16,634
—
—
—
—
—
—
(98)
—
(98) $
—
—
—
(67)
—
—
—
—
—
—
16,613
3,609 $
—
—
—
—
26,376
Balance as of January 31, 2017..................................
59,538 $
6 $
232,114 $
(165) $
29,985 $
Issuance of common stock:
Issuance of common stock upon exercise of
options, and for restricted stock units.......................
Stock-based compensation .........................................
Cumulative effect from adoption of ASU 2016-09 .......
Adoption of ASU 2018-02............................................
Other comprehensive loss, net of tax..........................
Net income ..................................................................
1,287
—
—
—
—
—
—
—
—
—
—
—
14,564
14,310
249
—
—
—
—
—
—
(45)
(59)
—
—
—
7,908
45
—
47,362
Balance as of January 31, 2018..................................
60,825 $
6 $
261,237 $
(269) $
85,300 $
The accompanying notes are an integral part of the consolidated financial statements.
1,915
23,492
5,883
11,557
(98)
16,613
203,457
7,142
8,398
16,634
(67)
26,376
261,940
14,564
14,310
8,157
—
(59)
47,362
346,274
-52-
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Year ended January 31,
2018
2017
2016
Net income .......................................................................................................................... $
47,362
$
26,376
$
16,613
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ...........................................................................................
Deferred taxes ...................................................................................................................
Stock-based compensation ................................................................................................
Bad debt expense ..............................................................................................................
Amortization of deferred financing costs and loss on other investments ............................
Changes in operating assets and liabilities:
15,952
4,306
14,310
133
87
Accounts receivable ...........................................................................................................
(4,734)
Inventories .........................................................................................................................
Other assets ......................................................................................................................
Accounts payable ...............................................................................................................
Accrued compensation ......................................................................................................
Accrued liabilities ...............................................................................................................
Other long-term liabilities ...................................................................................................
Net cash provided by operating activities ............................................................................
Cash flows from investing activities:
Purchase of marketable securities .....................................................................................
Purchase of property and equipment .................................................................................
Purchase of software and capitalized software development costs ...................................
Acquisition of intangible member assets ............................................................................
Acquisition of a business ...................................................................................................
Purchases of other investments ...........................................................................................
377
(760)
(581)
3,827
484
939
81,702
(483)
(5,458)
(10,380)
(17,545)
(2,882)
—
13,186
(2,891)
8,398
35
68
(2,728)
28
(1,343)
567
946
1,729
1,220
45,591
(379)
(3,645)
(9,030)
—
—
—
8,601
(2,178)
5,883
24
23
(5,174)
5
(107)
1,011
2,475
(383)
(252)
26,541
(40,291)
(2,376)
(6,896)
(40,489)
—
(500)
Net cash used in investing activities ....................................................................................
(36,748)
(13,054)
(90,552)
Cash flows from financing activities:
Proceeds from follow-on offering, net of payments for offering costs .................................
Proceeds from exercise of common stock options .............................................................
Tax benefit from exercise of common stock options ...........................................................
Deferred financing costs paid .............................................................................................
Net cash provided by financing activities .............................................................................
Increase (decrease) in cash and cash equivalents ..............................................................
Beginning cash and cash equivalents ..................................................................................
—
14,564
—
—
14,564
59,518
139,954
—
7,142
16,634
—
23,776
56,313
83,641
Ending cash and cash equivalents ...................................................................................... $
199,472
$
139,954
$
23,492
1,915
11,557
(317)
36,647
(27,364)
111,005
83,641
The accompanying notes are an integral part of the consolidated financial statements.
-53-
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
Supplemental cash flow data:
Year ended January 31,
2018
2017
2016
Interest expense paid in cash .............................................................................................. $
(203) $
(213) $
Income taxes paid in cash, net of refunds received .............................................................
27
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of intangible member assets accrued at period end ..........................................
1,409
Purchase price adjustment of acquired intangible members assets ....................................
Purchases of property and equipment included in accounts payable or accrued liabilities
at period end .......................................................................................................................
Purchases of software and capitalized software development costs included in accounts
payable or accrued liabilities at period end ..........................................................................
—
—
3
The accompanying notes are an integral part of the consolidated financial statements.
863
—
—
25
330
(51)
1,356
—
104
45
127
-54-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies
HealthEquity, Inc. was incorporated in the state of Delaware on September 18, 2002, and was organized to offer a
full range of innovative solutions for managing health care accounts (Health Savings Accounts ("HSAs"), Health
Reimbursement Arrangements ("HRAs"), and Flexible Spending Accounts ("FSAs")) for health plans, insurance
companies, and third-party administrators.
In February 2006, HealthEquity, Inc. received designation by the U.S. Department of Treasury to act as a passive
non-bank custodian, which allows HealthEquity, Inc. to hold custodial assets for individual account holders. On July
24, 2017, HealthEquity, Inc. received designation by the U.S. Department of Treasury to act as both a passive and
non-passive non-bank custodian, which allows HealthEquity, Inc. to hold custodial assets for individual account
holders and use discretion to direct investment of such assets held. As a passive and non-passive non-bank
custodian according to Treasury Regulations section 1.408-2(e)(5)(ii)(B), the Company must maintain net worth
(assets minus liabilities) greater than 2% of passive custodial funds held at each calendar year-end and 4% of the
non-passive custodial funds held at each calendar year-end in order to take on additional custodial assets.
The accompanying financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, or GAAP, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The financial statements and notes are representations of the
Company's management, which is responsible for their integrity and objectivity. These accounting policies conform
to accounting principles generally accepted in the United States of America and have been consistently applied in
the preparation of the consolidated financial statements, except for the new accounting pronouncements, which
were adopted during the year ended January 31, 2018 as described below.
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Principles of consolidation—The consolidated financial statements include the accounts of HealthEquity, Inc. and its
wholly owned subsidiaries, HealthEquity Trust Company, HEQ Insurance Services, Inc., HealthEquity Advisors, LLC
and HealthEquity Retirement Services, LLC (collectively referred to as the "Company").
During the year ended January 31, 2015, the Company and an unrelated company formed a limited partnership for
investment in and the management of early stage companies in the healthcare industry. The Company has a 22%
ownership interest in such partnership that is accounted for using the equity method of accounting. The investment
was approximately $206,000 as of January 31, 2018 and is included in other assets on the accompanying
consolidated balance sheets.
During the year ended January 31, 2016, the Company purchased an approximate 2% ownership interest in a
limited partnership that engages in the development of technology-based financial healthcare products. The
Company determined there was no significant influence and therefore the investment was accounted for using the
cost method of accounting. Under the cost method of accounting, the fair value of an investment is not estimated if
there are no identified events or changes in circumstances that may have a significant adverse effect on the fair
value of the investment. The investment was $500,000 as of January 31, 2018 and is included in other assets on
the accompanying consolidated balance sheet.
During the year ended January 31, 2017, the Company formed HealthEquity Trust Company, a Wyoming
corporation and non-depository trust company, to act as the master custodian of all investment assets held in HSAs
administered by the Company.
During the year ended January 31, 2018, the Company formed HealthEquity Retirement Services, LLC, a Delaware
limited liability company, to acquire and own the assets of BenefitGuard LLC and provide ERISA plan fiduciary
services.
All significant intercompany balances and transactions have been eliminated.
Segments—The Company operates in one segment. Management uses one measurement of profitability and does
not segregate its business for internal reporting. All long-lived assets are maintained in the United States of
America.
-55-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
Cash, cash equivalents—The Company considers all highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents. The Company’s cash and cash equivalents were held in institutions
in the U.S. and include deposits in a money market account that was unrestricted as to withdrawal or use.
Marketable securities—Marketable securities consist primarily of mutual funds invested in corporate bonds,
U.S. government agency securities, U.S. treasury bills, commercial paper, certificates of deposit, municipal notes,
and bonds with original maturities beyond three months at the time of purchase. Marketable securities are classified
as available-for-sale, held-to-maturity, or trading at the date of purchase. As of January 31, 2018, all marketable
securities have been classified as available-for-sale. The Company may sell these securities at any time for use in
current operations or for other purposes even if they have not yet reached maturity. As a result, the Company
classifies its marketable securities, including securities with maturities beyond twelve months, as current assets in
the accompanying consolidated balance sheets. All marketable securities are recorded at their estimated fair value.
Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive income, net of the
related tax effect. The Company evaluates its marketable securities to assess whether those with unrealized loss
positions are other-than-temporarily impaired. The Company considers impairments to be other than temporary if
they are related to deterioration in credit risk or if it is likely it will sell the securities before the recovery of their cost
basis. Realized gains and losses and declines in value judged to be other-than-temporary are determined based on
the specific identification method and are reported in other expense, net in the consolidated statements of
operations and comprehensive income.
Accounts receivable—Accounts receivable represent monies due to the Company for monthly service revenue,
custodial revenue and interchange revenue. As of January 31, 2018, accounts receivable consisted of $7.9 million
of service revenue, $9.0 million of custodial revenue, and $4.7 million of interchange revenue. The Company
maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivable amounts. In
evaluating the Company’s ability to collect outstanding receivable balances, the Company considers various factors
including the age of the balance, the creditworthiness of the customer, which is assessed based on ongoing credit
evaluations and payment history, and the customer’s current financial condition. As of January 31, 2018 and 2017,
the Company had allowance for doubtful accounts of $208,000 and $75,000, respectively.
Inventories—Inventories consist of new member and participant supplies and are recorded at the lower of cost or
market using an average cost basis.
Other assets—Other assets consist primarily of prepaid expenditures, income tax receivables, and various other
assets. Amounts expected to be recouped or recognized over a period of twelve months or less have been
classified as current in the accompanying consolidated balance sheets.
Property and equipment—Property and equipment, including leasehold improvements, are stated at cost less
accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives
of individual assets. The useful life for leasehold improvements is the shorter of the estimated useful life or the term
of the lease ranging from 3-5 years. The useful life used for computing depreciation for all other asset classes is
described below:
Computer Equipment
...............................................................................................................................................
Furniture and Fixtures ..............................................................................................................................................
3-5 years
5 years
Maintenance and repairs are expensed when incurred, and improvements that extend the economic useful life of an
asset are capitalized. Gains and losses on the disposal of property and equipment are reflected in operating
expenses.
Capitalized software development costs—We account for the costs of computer software developed or obtained for
internal use in accordance with Accounting Standards Codification (“ASC”) 350-40, “Internal-Use Software.” Costs
incurred during operation and post-implementation stages are charged to expense. Costs incurred that are directly
attributable to developing or obtaining software for internal use incurred in the application development stage are
capitalized. Management’s judgment is required in determining the point when various projects enter the stages at
which costs may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the
estimated useful lives over which the costs are amortized. See Note 5—Intangible Assets and Goodwill for
additional information.
-56-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
Intangible assets, net—Intangible assets are carried at cost and amortized, typically, on a straight-line basis over
their estimated useful lives, which is 3-5 years for capitalized software development costs and acquired technology
rights, 10 years for 401(k) customer relationships, or other intangible assets, and 15 years for certain acquired HSA
intangible member assets. The acquired intangible member assets are the result of various acquisitions of HSA
portfolios. A significant portion of the purchase price from each acquisition has been allocated to the acquired HSA
assets, which consists of the contractual rights to administer the activities related to the individual health savings
accounts acquired. The Company analyzed the historical attrition and depletion rates of member accounts and
determined that an average useful life of 15 years and the use of a straight-line amortization method are appropriate
to reflect the pattern over which the economic benefits of existing member assets are realized. The Company
reviews identifiable amortizable intangible assets to be held and used for impairment whenever events or changes
in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of
recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of
the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying
value of the asset over its fair value. There have been no impairment charges recorded in any of the periods
presented in the accompanying consolidated financial statements. See Note 5—Intangible Assets and Goodwill for
additional information.
Goodwill—Goodwill represents the excess of the purchase price over the fair value of the net tangible and
intangible assets acquired in a business combination. Goodwill is not amortized, but is tested for impairment
annually on January 31 or more frequently if events or changes in circumstances indicate that the asset may be
impaired. The Company’s impairment tests are based on a single operating segment and reporting unit structure.
The goodwill impairment test involves a two-step process. The first step involves comparing the Company's market
capitalization to the carrying value of the reporting unit, including goodwill. If the carrying value of the reporting unit
exceeds its fair value, the second step of the test is performed by comparing the carrying value of the goodwill in
the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of
goodwill over its implied fair value.
The Company’s annual goodwill impairment test resulted in no impairment charges in any of the periods presented
in the accompanying consolidated financial statements.
Self insurance—The Company is self-insured for medical insurance up to certain annual stop-loss limits. The
Company establishes a liability as of the balance sheet date for claims, both reported and incurred but not reported,
using currently available information as well as historical claims experience, and as determined by an independent
third party.
Other long-term liabilities—The Company recognizes rental expense for its office lease on a straight-line basis over
the lease term. Other long-term liabilities includes deferred rent, which represents the difference between actual
operating lease payments due and straight-line rent expense. The excess is recorded as a deferred credit in the
early periods of the lease, when cash payments are generally lower than straight-line rent expense, and is reduced
in the later periods of the lease when payments begin to exceed the straight-line expense.
Follow-on offering—On May 11, 2015, the Company closed its follow-on public offering and sold 972,500 shares of
common stock at a public offering price of $25.90 per share, less the underwriters' discount. Certain selling
stockholders sold 3,455,000 shares of common stock in the offering, including 380,000 shares of common stock
which were issued upon the exercise of outstanding options. The Company received net proceeds of
approximately $23.5 million after deducting underwriting discounts and commissions of approximately $1.0
million and other offering expenses payable by the Company of approximately $688,000. The Company did not
receive any proceeds from the sale of shares by the selling stockholders other than $222,000 representing the
exercise price of the options that were exercised in connection with the offering.
Capital structure—On July 14, 2014, the Company's board of directors approved an amended and restated
certificate of incorporation, pursuant to which the total number of shares of all classes of capital stock that the
Company is authorized to issue is 1,000,000,000 shares, including 900,000,000 shares of common stock and
100,000,000 shares of preferred stock, par value $0.0001 per share. The amended and restated certificate of
incorporation was filed with the Secretary of State of the State of Delaware and became effective on August 5, 2014
in connection with the completion of the initial public offering.
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HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
Revenue recognition—The Company recognizes revenue when persuasive evidence of an arrangement exists,
services have been provided, the price of services is fixed or determinable, and collection is reasonably assured.
The Company earns revenue primarily from service revenue, custodial revenue, interchange revenue.
The Company earns service revenue from the fees paid by health plan partners, employer partners or individual
members for administration services provided in connection with the tax-advantaged HSAs, HRAs and FSAs the
Company administers. These fees are generally based on a tiered structure fixed for the duration of the contract
agreement with health plan or employer partners, which is typically three to five years. The fees are paid on a
monthly basis and revenue is recognized monthly as services are rendered under the Company’s written service
agreements. In addition, the Company earns service revenue from fees paid by employer partners and plan
participants in connection with plan administrator and named fiduciary services for 401(k) employer sponsors. The
fees are paid on a quarterly basis and revenue is recognized in the month in which it is earned.
The Company earns custodial revenue from HSA custodial assets on behalf of its customers. As a non-bank
custodian, the Company deposits HSA cash with various custodial financial institutions having contract terms from
three to five years and either a fixed or variable interest rate. These deposits are eligible for FDIC insurance for
each individual HSA. The Company also invests HSA cash in an annuity contract with a insurance company partner.
HSA investment balances are deposited with the custodial investment partner from whom the Company receives an
administrative and recordkeeping fee. The Company recognizes this revenue in the month in which it is earned.
The Company earns interchange revenue from card transactions when members are paying their healthcare claims
using a card issued by the Company. The Company recognizes this revenue in the month in which it is earned.
Amounts collected in excess of revenue recognized for the period are recorded as deferred revenue and reported
as accrued liabilities and other long-term liabilities on the consolidated balance sheet.
Cost of revenue—The Company incurs cost of revenue related to servicing member accounts, managing customer
and partner relationships, and processing reimbursement claims. Expenditures include personnel-related costs,
depreciation, amortization, stock-based compensation, common expense allocations, new member and participant
supplies and other operating costs of the Company’s related member account servicing departments. Other
components of the Company’s cost of revenue sold include interest retained by members on custodial assets held
and interchange costs incurred in connection with processing card transactions initiated by members.
Stock-based compensation—For stock options granted to team members, the Company recognizes compensation
expense for all stock-based awards based on the grant date estimated fair value. The value of the portion of the
award that is ultimately expected to vest is recognized as expense ratably over the requisite service period. The fair
value of stock options is determined using the Black-Scholes option pricing model. The determination of fair value
for stock-based awards on the date of grant using an option pricing model requires management to make certain
assumptions regarding a number of complex and subjective variables.
Stock-based compensation expense related to stock options granted to non-team members is recognized based on
the fair value of the stock options, determined using the Black-Scholes option pricing model, as they are earned.
The awards generally vest over the time period the Company expects to receive services from the non-employee.
For awards with performance conditions, we evaluate the probability of achieving the performance criteria and of
the number of shares that are expected to vest, and compensation expense is then adjusted to reflect the number
of shares expected to vest and the requisite service period. For awards with performance conditions, compensation
expense is recognized using the graded-vesting attribution method in accordance with the provisions of FASB ASC
Topic 718, Compensation—Stock Compensation ("Topic 718").
Upon the exercise of a stock option, common shares are issued from authorized, but not outstanding, common
stock.
Stock-based compensation expense related to restricted stock units is recognized based on the current value of the
Company's closing stock price on the date of grant less the present value of future expected dividends discounted
at the risk-free interest rate. Expense for restricted stock units is recognized on a straight-line basis over the
requisite service period.
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HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
Income tax provision—The Company accounts for income taxes and the related accounts under the liability method
as set forth in the authoritative guidance for accounting for income taxes. Under this method, current tax liabilities
and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current fiscal
year. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, for
net operating losses, and for tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be realized or settled. The effect on deferred tax assets and liabilities of changes in tax rates is
recognized in income in the period that includes the enactment date.
A valuation allowance is provided for when it is more likely than not that some or all of the deferred tax assets may
not be realized in future years. After weighing both the positive and negative evidence, the Company believes that it
is more likely than not that all deferred tax assets will be realized as of January 31, 2018.
The Company uses the tax law ordering approach of intraperiod allocation in determining when excess tax benefits
have been realized for provisions of the tax law that identify the sequence in which those amounts are utilized for
tax purposes.The Company has also elected to exclude the indirect tax effects of share-based compensation
deductions in computing the income tax provision recorded within the Consolidated Statement of Operations and
Comprehensive Income. Also, we use the portfolio approach in releasing income tax effects from accumulated other
comprehensive income.
The Company recognizes the tax benefit from an uncertain tax position taken or expected to be taken in a tax return
using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return
by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be
sustained upon examination by the relevant taxing authorities, based on the technical merits of the position. For tax
positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit in
the financial statements as the largest benefit that has a greater than 50% likelihood of being sustained upon
settlement. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as a
component of other expense in the Consolidated Statements of Operations and Comprehensive Income. Significant
judgment is required to evaluate uncertain tax positions. Changes in facts and circumstances could have a material
impact on the Company’s effective tax rate and results of operations.
Comprehensive income—Comprehensive income is defined as a change in equity of a business enterprise during a
period, resulting from transactions from non-owner sources, including unrealized gains and losses on marketable
securities.
Asset acquisitions—During the years ended January 31, 2018, the Company acquired the rights to be the custodian
of two HSA portfolios and rights to act as sole administrator of one portfolio. During the year ended January 31,
2016, the Company acquired the rights to be the custodian of two HSA portfolios. The purchased group of assets for
the transactions did not include workforce or any processes and therefore did not constitute a business. Accordingly,
the acquisitions were accounted for under the asset acquisition method of accounting in accordance with ASC
805-50, Business Combinations—Related Issues. Under the asset acquisition method of accounting, the Company
is required to fair value the assets transferred. The cost of the assets acquired is allocated to the individual assets
acquired based on their relative fair values and does not give rise to goodwill. The purchase price was allocated to
acquired intangible member assets. Furthermore, transaction costs that are incurred in conjunction with an asset
acquisition are allocated to the acquired intangible member assets.
Business combinations—Acquisition-related expenses incurred in conjunction with the acquisition of a business as
defined by ASC 805-10 are recognized in earnings in the period in which they are incurred and are included in other
expense, net on the consolidated statement of operations. During the years ended January 31, 2018, 2017 and
2016, the Company incurred an expense of $2.2 million, $631,000, and $471,000, respectively, for acquisition-
related activity. There were no such business combinations during the years ended January 31, 2017 and 2016.
Concentration of market risk—The Company derives a substantial portion of its revenue from providing services for
healthcare accounts. A significant downturn in this market or changes in state and/or federal laws impacting the
preferential tax treatment of healthcare accounts could have a material adverse effect on the Company’s results of
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HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
operations. For the years ended January 31, 2018, 2017 and 2016, no one customer accounted for greater than
10% of revenue or accounts receivable.
Concentration of credit risk—Financial instruments, which potentially subject the Company to concentrations of
credit risk, consist primarily of cash. The Company maintains its cash and cash equivalents in bank and other
depository accounts, which, at times, may exceed federally insured limits. The Company’s cash and cash
equivalents held in banks as of January 31, 2018 was $199.5 million, of which $750,000 was covered by federal
depository insurance. The Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash. The Company’s accounts receivable balance as of January 31, 2018
was $21.6 million. The Company has not experienced any significant write-offs to accounts receivable and believes
that it is not exposed to significant credit risk with respect to accounts receivable.
Interest rate risk—The Company has entered into depository agreements with financial institutions for its custodial
cash deposits. The contracted interest rates were negotiated at the time the depository agreements were executed.
A significant reduction in prevailing interest rates may make it difficult for the Company to continue to place custodial
deposits at the current contracted rates.
Use of estimates—The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Management has made estimates for the
allowance for doubtful accounts, capitalized software development costs, evaluating goodwill and long-lived assets
for impairment, useful lives of property and equipment and intangible assets, accrued compensation, accrued
liabilities, grant date fair value of stock options and income taxes. Actual results could differ from those estimates.
Recent adopted accounting pronouncements—In February 2018, the Financial Accounting Standards Board (the
"FASB") issued Accounting Standards Update ("ASU") 2018-02, Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income, which gives companies the option to reclassify between accumulated
other comprehensive income ("AOCI") and retained earnings the income tax rate differential that has become
stranded in AOCI as a result of the enactment of the Tax Cuts and Jobs Act and the revaluation of certain deferred
tax assets and liabilities at the new federal income tax rate of 21%. This ASU is effective for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company
has elected to early adopt this ASU in the fourth quarter of fiscal year 2018. As a result of adopting this standard,
the reclassification of the income tax effects of this tax reform resulted in an increase to retained earnings and a
decrease to AOCI in the amount of $45,000 related to the decrease in the federal corporate tax rate. The
Company's policy is to use the portfolio approach in releasing income tax effects from AOCI.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This
ASU requires excess tax benefits and tax deficiencies to be recognized in the Statement of Operations and
Comprehensive Income, which were previously presented as a component of stockholders' equity, on a prospective
basis. In addition, any excess tax benefits that were not previously recognized because the related tax deduction
had not reduced current taxes payable are to be recorded on a modified retrospective basis through a cumulative-
effect adjustment to retained earnings. This ASU also requires cash flows related to excess tax benefits to be
classified as an operating activity on the statement of cash flows prospectively. Finally, this ASU no longer allows
tax benefits to be included in the assumed proceeds when applying the treasury stock method for computing diluted
weighted-average common shares outstanding, which results in share-based awards having a more dilutive effect
on net income per diluted share.
The Company adopted this ASU during the three months ended April 30, 2017. As required by the standard,
excess tax benefits recognized on stock-based compensation expense are reflected in our consolidated statements
of operations and comprehensive income as a component of the provision for income taxes rather than additional
paid-in capital on a prospective basis. For the year ended January 31, 2018, the Company recorded excess tax
benefits of $14.1 million within our provision for income taxes in the consolidated statements of operations and
comprehensive income. In addition, any excess tax benefits that were not previously recognized because the
related tax deduction had not reduced current taxes payable are to be recorded on a modified retrospective basis
-60-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption, which
resulted in an increase of $8.1 million to our retained earnings as of February 1, 2017.
For presentation requirements, the Company elected to prospectively apply the change in the presentation of
excess tax benefits wherein excess tax benefits recognized on stock-based compensation are classified as
operating activities on the consolidated statements of cash flows for year ended January 31, 2018. Prior period
classification of cash flows related to excess tax benefits were not adjusted. Further, the Company elected to adopt
the forfeiture provisions of this ASU, which allows the Company to account for forfeitures as they occur. The
adoption of the forfeiture provisions had no material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business,
which provides a more robust framework to use in determining when a set of assets and activities is a business.
This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal
years. Early adoption is permitted. The new guidance is required to be applied on a prospective basis. The
Company adopted this ASU during the three months ended July 31, 2017. The adoption had no material impact on
the Company's consolidated financial statements.
Recent issued accounting pronouncements—On May 28, 2014, the FASB issued ASU 2014-09 and related
subsequent amendments, Revenue from Contracts with Customers, which requires an entity to recognize the
amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015,
the FASB voted to defer the effective date to fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2017. The standard permits the use of either the retrospective or cumulative effect transition
method. The adoption of the preceding standard is not expected to have a material impact on the Company's
revenue.
The Company expects to capitalize incremental contract acquisition costs, such as sales commissions included in
sales and marketing expenses in the consolidated statement of operations, and amortize these costs over the
average economic life of an HSA Member. The Company's current practice is to expense sales commissions when
the member is added to the Company's platform. The Company expects the adoption to have a significant impact
on its consolidated financial statements. The Company will use the cumulative effect transition method and does not
plan to early adopt these pronouncements.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities.
The amendments in this ASU revise an entity's accounting related to the classification and measurement of
investments in equity securities and the presentation of certain fair value changes for financial liabilities measured
at fair value. This ASU also amends certain disclosure requirements associated with the fair value of financial
instruments. The amendments in this ASU are effective for annual periods, and interim periods within those annual
periods, beginning after December 15, 2017. Early adoption is permitted for the presentation of certain fair value
changes for financial liabilities measured at fair value. The Company does not plan to early adopt. The Company
expects to recognize its unrealized holding gains and losses on its marketable securities in other expense, net on
the consolidated statement of operations, rather than through other comprehensive income.
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842), which sets out the principles for the
recognition, measurement, presentation and disclosure for both parties to a contract (i.e. lessees and lessors). ASC
842 supersedes the previous leases standard, ASC 840 leases. This ASU is effective for financial statements issued
for reporting periods beginning after December 15, 2018 and requires a modified retrospective transition, and
provides for certain practical expedients; early adoption is permitted. The Company does not plan to early adopt and
is currently evaluating the potential effect of this ASU on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses
on Financial Instruments, which requires financial assets measured at amortized cost be presented at the net
amount expected to be collected. This ASU is effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. Early adoption is permitted. The Company does not plan to early adopt this
ASU. The Company believes the adoption of this ASU will have an immaterial impact on its consolidated financial
statements.
-61-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which provides guidance on
the classification of certain cash receipts and cash payments. This ASU is effective for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. The Company believes the adoption of this ASU
will not have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other
Than Inventory, which updates the accounting for the income tax consequences of intra-entity transfers of assets
other than inventory. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. The Company will adopt this ASU during the three months ended April 30, 2018 and
believes the adoption of this ASU will have an immaterial impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes step
two from the goodwill impairment test. As a result, an entity should perform its annual goodwill impairment test by
comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for
the amount by which the carrying amount exceeds the reporting units' fair value. This ASU is effective for fiscal
years beginning December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The
Company is currently evaluating the timing of adoption; however, it believes the adoption this ASU will not have a
material impact on the Company's consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of
Modification Accounting, which provides guidance about changes to the terms or conditions of a share-based
payment award. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within
those fiscal years. The standard should be applied prospectively to an award modified on or after the adoption date.
The Company does not expect the adoption of this ASU to have a significant impact on its consolidated financial
statements.
Note 2. Net income per share
The following table sets forth the computation of basic and diluted net income per share:
(in thousands, except per share data)
Numerator (basic and diluted):
Year ended January 31,
2018
2017
2016
Net income ........................................................................................ $
47,362
$
26,376
$
16,613
Denominator (basic):
Weighted-average common shares outstanding ...............................
60,304
58,615
56,719
Denominator (diluted):
Weighted-average common shares outstanding ...............................
Weighted-average dilutive effect of stock options and restricted
stock units .........................................................................................
Weighted-average common shares outstanding ...............................
Net income per share:
60,304
1,550
61,854
58,615
1,279
59,894
Basic .............................................................................................. $
Diluted ............................................................................................ $
0.79
0.77
$
$
0.45
0.44
$
$
56,719
2,144
58,863
0.29
0.28
For the years ended January 31, 2018, 2017 and 2016, approximately 602,000,1.4 million, and 791,000 shares,
respectively, attributable to outstanding stock options and restricted stock units were excluded from the calculation
of diluted earnings per share as their inclusion would have been anti-dilutive.
-62-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 3. Cash, cash equivalents and marketable securities
Cash, cash equivalents and marketable securities as of January 31, 2018 consisted of the following:
(in thousands)
Cash and cash equivalents ......................................................... $
Marketable securities:
Cost basis
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
199,472
$
— $
— $
199,472
Mutual funds .............................................................................
Total cash, cash equivalents and marketable securities .............. $
41,153
240,625
$
270
270
(626)
40,797
$
(626) $
240,269
Cash, cash equivalents and marketable securities as of January 31, 2017 consisted of the following:
(in thousands)
Cash and cash equivalents ......................................................... $
Marketable securities:
Cost basis
139,954
Mutual funds .............................................................................
Total cash, cash equivalents and marketable securities .............. $
40,670
180,624
$
$
Gross
unrealized
gains
Gross
unrealized
losses
— $
— $
Fair value
139,954
207
207
$
(472)
(472) $
40,405
180,359
The following table summarizes the cost basis and fair value of the marketable securities by contractual maturity as
of January 31, 2018:
(in thousands)
One year or less ............................................................................................ $
Over one year and less than five years ..........................................................
Total
.............................................................................................................. $
Cost basis
25,664
15,489
41,153
$
$
Fair value
25,590
15,207
40,797
Unrealized losses from marketable securities are primarily attributable to change in interest rates. The Company
does not believe any remaining unrealized losses represent other-than-temporary impairments based on the
Company's evaluation of available evidence as of January 31, 2018. As of January 31, 2018, marketable securities
with an unrealized loss position for more than twelve consecutive months were as follows:
(in thousands)
Less than one year
Greater than one year
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Mutual funds ................................................... $
25,590
$
(243) $
15,207
$
(383)
Note 4. Property and equipment
Property and equipment consisted of the following as of January 31, 2018 and 2017:
(in thousands)
Leasehold improvements ........................................................................................ $
Furniture and fixtures ..............................................................................................
..............................................................................................
Computer equipment
Property and equipment, gross ............................................................................
Accumulated depreciation ......................................................................................
Property and equipment, net
................................................................................ $
January 31, 2018
2,292
4,785
8,174
15,251
(7,415)
7,836
January 31, 2017
860
3,129
7,194
11,183
(6,013)
5,170
$
$
Depreciation expense for the years ended January 31, 2018, 2017 and 2016 was $2.8 million, $2.0 million and $1.5
million, respectively.
-63-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 5. Intangible assets and goodwill
Asset acquisitions
During the year ended January 31, 2018, the Company acquired the right to act as custodian of a portfolio of HSA
Members for $6.4 million. The cost, including transaction costs, was allocated to acquired intangible member assets
as of January 31, 2018. The Company has determined the acquired intangible member assets to have a useful life
of 15 years. The assets are being amortized using the straight-line amortization method, which has been
determined appropriate to reflect the pattern over which the economic benefits of existing member assets are
realized.
During the year ended January 31, 2018, the Company acquired the rights to be the sole administrator of a portfolio
of HSA Members for $3.3 million.
During the year ended January 31, 2018, the Company acquired the right to act as custodian of a portfolio of HSA
Members for $9.3 million, of which $8.0 million cash had been paid as of January 31, 2018. The remaining $1.3
million relates to a contingent payment that may be earned upon the achievement of certain targets. The cost,
including transaction costs, was allocated to acquired intangible member assets. The Company has determined the
acquired intangible member assets to have a useful life of 15 years. The assets are being amortized using the
straight-line amortization method, which has been determined appropriate to reflect the pattern over which the
economic benefits of existing member assets are realized.
During the year ended January 31, 2016, the Company acquired the rights to be custodian of the Bancorp and M&T
HSA portfolios for $34.2 million and $6.2 million, respectively. The costs, including transaction costs, were allocated
to acquired intangible member assets as of January 31, 2016. The Company has determined the acquired
intangible member assets to have a useful life of 15 years. The assets are being amortized using the straight-line
amortization method, which has been determined appropriate to reflect the pattern over which the economic
benefits of existing member assets are realized.
Acquisition of a business
To increase its product offering, during the year ended January 31, 2018, the Company acquired the assets of
BenefitGuard LLC, pursuant to a definitive asset purchase agreement, for a purchase price of $2.9 million cash.
BenefitGuard LLC is a 401(k) provider that offers plan administrator and named fiduciary services for 401(k)
employer sponsors. The Company accounted for the acquisition of assets of BenefitGuard LLC as an acquisition of
a business under ASC 805. The preliminary purchase price allocation resulted in customer relationships, or other
intangible assets, of $2.9 million. The Company has determined the other intangible assets to have a useful life
of 10 years. The asset will be amortized using the straight-line amortization method, which has been determined
appropriate to reflect the pattern over which the economic benefits will be realized. The financial impact of this
acquisition, including pro forma financial results, was immaterial to the Company's consolidated statement of
operations for the year ended January 31, 2018.
Software development
During the years ended January 31, 2018, 2017 and 2016, the Company capitalized software development costs of
$8.1 million, $7.7 million and $5.6 million, respectively, related to significant enhancements and upgrades to its
proprietary system.
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 5. Intangible assets and goodwill (continued)
The gross carrying amount and associated accumulated amortization of intangible assets is as follows as of
January 31, 2018 and January 31, 2017:
(in thousands)
Amortized intangible assets:
Capitalized software development costs ............................................................... $
Software ...............................................................................................................
Other intangible assets .........................................................................................
Acquired intangible member assets ......................................................................
Intangible assets, gross ......................................................................................
Accumulated amortization .....................................................................................
Intangible assets, net .......................................................................................... $
January 31, 2018
January 31, 2017
31,993
8,863
2,882
83,915
127,653
(44,018)
83,635
$
$
23,925
7,041
—
64,962
95,928
(30,908)
65,020
During the years ended January 31, 2018, 2017 and 2016, the Company expensed a total of $12.2 million, $10.0
million and $7.6 million, respectively, in software development costs primarily related to the post-implementation and
operation stages of its proprietary software.
Amortization expense for the years ended January 31, 2018, 2017 and 2016 was $13.2 million, $11.2 million and
$7.1 million, respectively. Estimated amortization expense for the years ending January 31 is as follows:
Year ending January 31, (in thousands)
2019 ........................................................................................................................................................................... $
2020 ...........................................................................................................................................................................
2021 ...........................................................................................................................................................................
2022 ...........................................................................................................................................................................
2023 ...........................................................................................................................................................................
..................................................................................................................................................................
Thereafter
......................................................................................................................................................................... $
Total
13,290
10,821
7,705
6,011
5,883
39,925
83,635
All of the Company’s goodwill was generated from the acquisition of First Horizon MSaver, Inc. on August 11, 2011.
There have been no changes to the goodwill carrying value during the years ended January 31, 2018 and 2017.
Note 6. Commitments and contingencies
Property, colocation, equipment, and license agreements—The Company leases office space, data storage
facilities, equipment and certain maintenance agreements under long-term, non-cancelable operating leases.
Future minimum lease payments required under non-cancelable obligations as of January 31, 2018 are as follows:
Year ending January 31, (in thousands)
2019 .............................................................................................................. $
2020 ..............................................................................................................
2021 ..............................................................................................................
2022 ..............................................................................................................
2023 ..............................................................................................................
.....................................................................................................
Thereafter
............................................................................................................ $
Total
Office lease
3,904
3,848
4,096
4,198
4,303
17,034
37,383
Other
agreements
2,312
2,069
2,134
1,460
4
—
7,979
$
$
$
$
Total
6,216
5,917
6,230
5,658
4,307
17,034
45,362
Office lease obligations—On May 15, 2015, the Company entered into a lease agreement to expand its
headquarters in Draper, Utah. The lease provided for the new landlord to construct a building at their cost. The
lease commenced upon the substantial completion and delivery of the building to the Company on July 1, 2016 and
has an initial term of 129 months thereafter, with an option for the Company to extend the lease
for two additional five-year periods. The Company is responsible for payment of taxes and operating expenses for
its portion of the building, in addition to an annual base rent in the initial amount of approximately $1.0 million,
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 6. Commitments and contingencies (continued)
with 2.5% annual increases. In conjunction with the aforementioned lease, the Company entered into an amended
and restated lease agreement for its existing office space at its headquarters in Draper, Utah. The lease
commenced on July 1, 2015 and has an initial term of 129 months thereafter, with an option for the Company to
extend the lease for two additional five-year periods. The Company is responsible for payment of taxes and
operating expenses for its portion of the building, in addition to an annual base rent in the initial amount of
approximately $1.6 million, with 2.5% annual increases. As a result of the foregoing transaction, the deferred rent
balance of approximately $470,000 was reversed during the year ended January 31, 2016.
On September 16, 2016, the Company entered into an amendment to its lease agreement, dated May 15, 2015, by
and between the Company and its landlord to expand its current office space. The term of the lease commenced on
July 1, 2016 and will expire on March 31, 2027. The Company is responsible for payment of taxes and operating
expenses for its portion of the building, in addition to an annual base rent in the initial amount of approximately
$569,000, with 2.5% annual increases.
On May 31, 2017, the Company entered into an amendment to its lease agreement, dated May 15, 2015, to expand
its current office space. The term of the lease commenced on January 1, 2018 and will expire on March 31, 2027.
The Company will be responsible for payment of taxes and operating expenses for its portion of the building, in
addition to an annual base rent in the initial amount of approximately $513,000, with annual increases ranging
from 2.5% to 3.1%.
Lease expense for office space for the years ended January 31, 2018, 2017 and 2016 totaled $4.3 million, $3.3
million and $2.1 million, respectively. Expense for other agreements for the years ended January 31, 2018, 2017
and 2016 totaled $460,000, $307,000 and $249,000, respectively.
Data storage and equipment lease obligations—The data storage and equipment leases relate to our offsite data
storage facility and office equipment leases. All of these leases expire during the year ended January 31, 2020.
Telephony services—The telephony service agreement relates to our 24/7/365 member support center. The
agreement expires in September 2019.
Processing services agreement—During the year ended January 31, 2016, the Company amended its merchant
processing services agreement with a vendor. The agreement expires December 31, 2020 and requires the
Company to pay a dollar minimum processing fee based on the processing year of the agreement. The Company
may terminate the agreement beginning January 1, 2020 by providing 180 days’ written notice.
If the processing agreement is terminated prior to December 31, 2020, the Company is required to pay the vendor a
termination fee, equal to 75% of the aggregate value of the minimum processing fees for the remaining years of the
agreement, plus a portion of the account on-boarding incentive fee.
For each of the years ended January 31, 2018, 2017 and 2016, the Company exceeded the minimum amounts
required under the agreement.
The Company has an agreement with an entity for access to its software. The agreement contains minimum
required payments.
The Company also has agreements with several entities for access to technology and software. The agreements
are based on usage, and there are no minimum required monthly payments.
Contingencies—In the normal course of business, the Company enters into contracts and agreements that contain
a variety of representations and warranties and provide for general indemnifications. The Company’s exposure
under these agreements is unknown because it involves claims that may be made against the Company in the
future, but have not yet been made. The Company accrues a liability for such matters when it is probable that future
expenditures will be made and such expenditures can be reasonably estimated.
Indemnification—In accordance with the Company’s amended and restated Certificate of Incorporation and
amended and restated bylaws, the Company has indemnification obligations to its officers and directors for certain
events or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity.
There have been no claims to date and the Company has a director and officer insurance policy that may enable it
to recover a portion of any amounts paid for future claims.
-66-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 6. Commitments and contingencies (continued)
Litigation—The Company may from time to time be involved in legal proceedings arising from the normal course of
business. There are no material pending or threatened legal proceedings as of January 31, 2018 and 2017.
Note 7. Indebtedness
On September 30, 2015, the Company entered into a credit facility (the "Credit Agreement"). The Credit Agreement
provides for a secured revolving credit facility in the aggregate principal amount of $100.0 million for a term of five
years. The proceeds of borrowings under the Credit Agreement may be used for general corporate purposes. No
amounts have been drawn under the Credit Agreement as of January 31, 2018.
Borrowings under the Credit Agreement bear interest equal to, at the Company's option, a) an adjusted LIBOR rate
or b) a customary base rate, in each case with an applicable spread to be determined based on the Company's
leverage ratio as of the most recent fiscal quarter. The applicable spread for borrowing under the Credit Agreement
will range from 1.50% to 2.00% with respect to adjusted LIBOR rate borrowings and 0.50% to 1.00% with respect to
customary base rate borrowings. Additionally, the Company pays a commitment fee ranging from 0.20% to 0.30%
on the daily amount of the unused commitments under the Credit Agreement payable in arrears at the end of each
fiscal quarter. During the years ended January 31, 2018 and 2017, the Company incurred $274,000 and $275,000,
respectively, of interest expense associated with the Credit Agreement.
The Company's material subsidiaries are required to guarantee the obligations of the Company under the Credit
Agreement. The obligations of the Company and the guarantors under the Credit Agreement and the guarantees
are secured by substantially all assets of the Company and the guarantors, subject to customary exclusions and
exceptions.
The Credit Agreement requires the Company to maintain a total leverage ratio of not more than 3.00 to 1.00 as of
the end of each fiscal quarter and a minimum interest coverage ratio of at least 3.00 to 1.00 as of the end of each
fiscal quarter. In addition, the Credit Agreement includes customary representations and warranties, affirmative and
negative covenants, and events of default. The restrictive covenants include customary restrictions on the
Company's ability to incur additional indebtedness; make investments, loans or advances; grant or incur liens on
assets; engage in mergers, consolidations, liquidations or dissolutions; engage in transactions with affiliates; and
make dividend payments. The Company was in compliance with these covenants as of January 31, 2018.
In connection with the Credit Agreement, the Company incurred $317,000 in financing costs, which are deferred
and are being amortized using the straight-line method, which approximates the effective interest method, over the
life of the agreement.
Note 8. Income taxes
The Income tax provision consisted of the following:
(in thousands)
Current:
Year ended January 31,
2018
2017
2016
Federal
.......................................................................................................................... $
State .............................................................................................................................
Total current tax provision ......................................................................................... $
392
130
522
$
14,848
$
1,823
9,876
1,226
$
16,671
$
11,102
Deferred:
Federal
.......................................................................................................................... $
4,068
$
(2,308) $
(1,772)
State .............................................................................................................................
Total deferred tax (benefit) provision ......................................................................... $
Total income tax provision .................................................................................... $
237
4,305
4,827
$
$
(619)
(389)
(2,927) $
(2,161)
13,744
$
8,941
-67-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 8. Income taxes (continued)
Total income tax provision differed from the amounts computed by applying the U.S. federal statutory income tax
rate of 34% to income before income tax provision as a result of the following:
Year ended January 31,
(in thousands)
Federal income tax provision at the statutory rate ........................................................... $
State income tax provision, net of federal tax benefit .......................................................
Non-deductible or non-taxable items ...............................................................................
Excess tax benefits on stock-based compensation expense, net .....................................
Federal research and development credit ........................................................................
Deferred tax rate adjustment due to tax reform ................................................................
Current statutory rate differential due to tax reform ..........................................................
Change in uncertain tax position reserves, net of indirect benefits ...................................
Other items, net
...............................................................................................................
1,241
143
(14,136)
(729)
458
(308)
191
223
2016
8,688
541
56
—
742
87
—
(907)
(371)
—
—
246
(65)
—
—
96
(69)
2018
2017
17,744
$
13,641
$
Total income tax provision ............................................................................................. $
4,827
$
13,744
$
8,941
The Company's effective income tax rate for the years ended January 31, 2018, 2017 and 2016 was 9.2%, 34.3%,
and 35.0%, respectively. The difference between the effective income tax rate and the U.S. federal statutory income
tax rate each period is impacted by a number of factors, including the relative mix of earnings among state
jurisdictions, credits, excess tax benefits or shortfalls on stock-based compensation expense due to the adoption of
ASU 2016-09, and other discrete items. The decrease in the effective tax rate for the year ended January 31, 2018
compared to the year ended January 31, 2017 was primarily the result of excess tax benefits on stock-based
compensation expense. The decrease in the effective tax rate for the year ended January 31, 2017 compared to the
year ended January 31, 2016 was primarily the result of an increase in research and development credits.
The Tax Cuts and Jobs Act, which was enacted on December 22, 2017, includes a reduction of the statutory
corporate income tax rate from a top rate of 35% to 21% effective January 1, 2018. The Company is subject to
federal and state income taxes in the United States based on a calendar year which differs from its January fiscal
year-end for financial reporting purposes. For purposes of reconciling the total income tax provision for the fiscal
year, the Company applied a federal statutory rate of 34% for the entire fiscal year as this is the rate that applies for
the tax year ending December 31, 2017 which comprises 11 months of the fiscal year. Because a 21% federal
statutory rate applies for the one month ending January 31, 2018, a reconciling item has been included in the tax
rate reconciliation table above to adjust for the statutory rate reduction that applies to this one-month period. This
resulted in a reduction to the income tax provision of $308,000.
Given the significance of the Tax Cuts and Jobs Act, the U.S. Securities and Exchange Commission (the "SEC")
staff issued Staff Accounting Bulletin ("SAB") No. 118 (“SAB 118”), which allows registrants to record provisional
amounts during a one-year “measurement period” from the date of enactment date of the Tax Cuts and Jobs Act.
The measurement period is deemed to have ended earlier when the registrant has obtained, prepared, and
analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law
are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and
provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively
disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or
adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a
reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes
are reflected in accordance with law prior to the enactment of the Tax Cuts and Jobs Act.
The Company remeasured certain deferred tax assets and liabilities as of December 31, 2017 based on rates at
which they are expected to reverse in the future, which is generally the new corporate income tax rate of 21% as
enacted by the Tax Cuts and Jobs Act. However, the Company's analysis is incomplete as we are still analyzing
certain aspects of the Act and refining our calculations, including state conformity and the impact of state tax rates
-68-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 8. Income taxes (continued)
on deferred tax balances, which could potentially affect the measurement of these balances or potentially give rise
to new deferred tax amounts. Based on the best information available, the provisional amount recorded related to
the remeasurement of the Company's deferred tax balance resulted in a decrease in net deferred tax assets of
$458,000, with a corresponding increase to the income tax provision during the year ending January 31, 2018. The
Company will continue to make and refine its calculations as additional analysis is completed. In addition, the
Company's estimates may also be affected as it gains a more thorough understanding of the enacted tax law
changes and as additional future guidance on the effects of the Tax Cuts and Jobs Act is made available.
Other significant provisions of the Tax Cuts and Jobs Act are effective as of January 1, 2018, including, but not
limited to: the limitation on the current deductibility of net interest expense in excess of 30% of adjusted taxable
income, changes in the deductibility of certain meals and entertainment business expenses, and changes in the
deductibility of certain excessive employee remuneration. The Company has applied these provisions to its current
income tax provision as it relates to its tax return period beginning January 1, 2018 using reasonable interpretations
and available guidance. Further guidance or technical corrections may affect the Company's estimates and the
application of these provisions on its income tax provision.
Deferred tax assets and liabilities consisted of the following:
January 31, 2018
January 31, 2017
(in thousands)
Deferred tax assets:
Accrued bonuses ............................................................................................... $
Other accrued liabilities ......................................................................................
Deferred rent
.....................................................................................................
Stock compensation ..........................................................................................
Net operating loss carryforward .........................................................................
Research and development credits ....................................................................
AMT credits .......................................................................................................
Other, net
...........................................................................................................
Total gross deferred tax assets ............................................................................. $
Deferred tax liabilities:
Fixed assets: depreciation and gain/loss ........................................................... $
Intangibles: amortization ....................................................................................
Other, net
...........................................................................................................
Total gross deferred tax liability ............................................................................
$
489
572
520
5,316
666
2,882
857
286
11,588
$
(1,170) $
(4,830)
(127)
(6,127)
499
559
364
5,061
84
2,225
548
449
9,789
(902)
(7,252)
(57)
(8,211)
1,578
Net deferred tax asset
.......................................................................................... $
5,461
$
Management considered whether it is more likely than not that some portion or all of the deferred tax assets would
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management considered the
scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making
this assessment and determined that based on the weight of all available evidence, it is more likely than not (a
likelihood of more than 50%) that the Company will be able to realize its deferred tax assets. Therefore, no valuation
allowance was required as of January 31, 2018.
As of January 31, 2018, the Company had recorded gross federal and state net operating loss carryforwards of $2.6
million and $2.1 million, respectively, which begin to expire at various intervals between tax years ending December
31, 2025 and December 31, 2036. As of January 31, 2018, the Company also had federal and state research and
development carryforwards of $2.6 million and $1.5 million, respectively, which expire beginning with the tax year
ending December 31, 2019 and 2024, respectively, and federal and state alternative minimum tax credit
carryforwards of $856,000 and $2,000, respectively. The state AMT credits do not expire. As a result of the Tax Cuts
and Jobs Act, the federal alternative minimum tax was repealed. A provision was enacted which allows the
Company to utilize or refund 100% of the remaining AMT credits no later than its tax year beginning in 2021. The
-69-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 8. Income taxes (continued)
Company expects to utilize its AMT credits against income tax in future periods; as a result, the credits have
remained classified as deferred tax assets as of January 31, 2018.
As of January 31, 2018 and 2017, the gross unrecognized tax benefit was $889,000 and $674,000, respectively. If
recognized, $811,000 and $572,000 of the total unrecognized tax benefits would affect the Company's effective tax
rate as of January 31, 2018 and 2017, respectively. Total gross unrecognized tax benefits increased by $215,000 in
the period from January 31, 2017 to January 31, 2018. A tabular reconciliation of the beginning and ending amount
of gross unrecognized tax benefits is as follows:
(in thousands)
Gross unrecognized tax benefits at beginning of year .......................................... $
Gross amounts of increases and decreases:
Increases as a result of tax positions taken during a prior period .....................
Decreases as a result of tax positions taken during a prior period ...................
Increases as a result of tax positions taken during the current period ..............
Decreases as a result of tax positions taken during the current period ............
Decreases resulting from the lapse of the applicable statute of limitations ......
January 31, 2018
January 31, 2017
674
$
—
—
215
—
—
393
—
—
281
—
—
674
Gross unrecognized tax benefits at end of year ................................................... $
889
$
Certain unrecognized tax benefits are required to be netted against their related deferred tax assets as a result of
Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The resulting unrecognized tax benefit
recorded within the Company's consolidated balance sheet excludes the following amounts that have been netted
against the related deferred tax assets accordingly:
(in thousands)
Total gross unrecognized tax benefits .................................................................. $
Amounts netted against related deferred tax assets .............................................
Unrecognized tax benefits recorded on the consolidated balance sheet ............
$
January 31, 2018
January 31, 2017
889
$
(889)
— $
674
(674)
—
The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of
other expense in the statement of operations. During the years ended January 31, 2018, 2017, and 2016,
respectively, the Company recorded a decrease of $0, $0 and $8,000 in interest and penalties related to
unrecognized tax benefits. As of January 31, 2018 and 2017, no accrued interest and penalties were recorded.
The Company files income tax returns with U.S. federal and state taxing jurisdictions and is not currently under
examination with any jurisdiction. The Company remains subject to examination by federal and various state taxing
jurisdictions for tax years after 2003.
-70-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 9. Stock-based compensation
The following table shows a summary of stock-based compensation in the Company's consolidated statements of
operations and comprehensive income during the years presented:
(in thousands)
Cost of revenue ........................................................................................... $
Sales and marketing ...................................................................................
Technology and development ......................................................................
General and administrative .........................................................................
2018
2017
2,594
$
1,780
$
2,030
3,318
6,368
914
1,903
3,801
Total stock-based compensation expense ................................................ $
14,310
$
8,398
$
2016
1,088
903
1,014
2,878
5,883
Year ended January 31,
Stock options
The Company currently grants stock options under the 2014 Equity Incentive Plan (as amended and restated, the
"Incentive Plan"), which provided for the issuance of stock options to the directors and team members of the
Company to purchase up to an aggregate of 2.6 million shares of common stock.
In addition, under the Incentive Plan, the number of shares of common stock reserved for issuance under the
Incentive Plan automatically increases on February 1 of each year, beginning as of February 1, 2015 and continuing
through and including February 1, 2024, by 3% of the total number of shares of the Company’s capital stock
outstanding on January 31 of the preceding fiscal year, or a lesser number of shares determined by the board of
directors. As of January 31, 2018, 1.8 million shares were available for grant under the Incentive Plan.
Under the terms of the Incentive Plan, the Company has the ability to grant incentive and nonqualified stock
options. Incentive stock options may be granted only to Company team members. Nonqualified stock options may
be granted to Company team members, directors and consultants. Such options are to be exercisable at prices, as
determined by the board of directors, which must be equal to no less than the fair value of the Company's common
stock at the date of the grant. Stock options granted under the Incentive Plan generally expire 10 years from the
date of issuance, or are forfeited 90 days after termination of employment. Shares of common stock underlying
stock options that are forfeited or that expire are returned to the Incentive Plan.
Valuation assumptions. The Company has adopted the provisions of Topic 718, which requires the measurement
and recognition of compensation for all stock-based awards made to team members and directors, based on
estimated fair values.
Under Topic 718, the Company uses the Black-Scholes option pricing model as the method of valuation for stock-
based awards. The determination of the fair value of stock-based awards on the date of grant is affected by the fair
value of the stock as well as assumptions regarding a number of complex and subjective variables. The variables
include, but are not limited to, 1) the expected life of the option, 2) the expected volatility of the fair value of the
Company's common stock over the term of the award estimated by averaging the published volatilities of a relative
peer group, 3) risk-free interest rate, and 4) expected dividends.
The key input assumptions that were utilized in the valuation of the stock options granted during the years ended
January 31, 2018, 2017 and 2016 are as follows:
Expected dividend yield .......................................................
Year ended January 31,
2018
—%
2017
—%
2016
—%
Expected stock price volatility ..............................................
37.79% - 38.01%
38.01% - 38.37%
38.29% - 40.29%
Risk-free interest rate ...........................................................
1.18% - 2.07%
1.18% - 2.18%
1.47% - 1.80%
Expected life of options ........................................................
4.50 - 6.25 years
4.50 - 6.25 years
5.43 - 6.25 years
-71-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 9. Stock-based compensation (continued)
The determination of the fair value of stock options on the date of grant using the Black-Scholes option pricing
model is affected by the Company's stock price as well as assumptions regarding a number of complex and
subjective variables. Expected volatility is determined using weighted average volatility of publicly traded peer
companies. The Company expects that it will begin using its own historical volatility in addition to the volatility of
publicly traded peer companies, as its share price history grows over time. The risk-free interest rate is determined
by using published zero coupon rates on treasury notes for each grant date given the expected term on the options.
The dividend yield of zero is based on the fact that the Company expects to invest cash in operations. The
Company uses the "simplified" method to estimate expected term as determined under Staff Accounting Bulletin No.
110 due to the lack of option exercise history as a public company.
A summary of stock option activity is as follows:
(in thousands, except for exercise
prices and term)
Outstanding as of January 31, 2017...........
Granted ...................................................
Exercised .................................................
Forfeited ..................................................
Outstanding as of January 31, 2018...........
Vested and expected to vest as of January
31, 2018 .....................................................
Exercisable as of January 31, 2018 ...........
Number of
options
4,716
420
(1,272)
(165)
3,699
3,699
1,125
Range of
exercise
prices
$0.10 - 44.53
$41.28 - 51.44
$0.10 - 46.40
$3.50 - 46.40
$0.10 - 51.44
Outstanding stock options
Weighted-
average
exercise
price
Weighted-
average
contractual
term
(in years)
Aggregate
intrinsic
value
$
$
$
$
$
$
$
18.36
42.72
11.45
33.39
22.83
22.83
16.57
7.60
$
131,529
7.26
7.26
6.49
$
$
$
102,796
102,796
38,319
The aggregate intrinsic value in the tables above represents the difference between the estimated fair value of
common stock and the exercise price of outstanding, in-the-money stock options.
A summary of stock options granted and exercised is as follows:
(in thousands, except weighted-average fair value)
Stock options granted ...............................................................
Weighted-average fair value at date of grant ............................ $
Total intrinsic value of stock options exercised ......................... $
2018
420
42.72
44,823
$
$
Year ended January 31,
2017
1,399
28.85
50,094
$
$
2016
1,093
27.34
51,773
As of January 31, 2018 and 2017, 1.1 million and 1.5 million of all outstanding options were exercisable,
respectively. The options are valued at their estimated fair market value as of the date of the grant.
As of January 31, 2018, the weighted-average vesting period of non-vested stock-options expected to vest
approximates 2.0 years; the amount of compensation expense the Company expects to recognize for stock options
vesting in future periods approximates $17.6 million.
Performance options. During the year ended January 31, 2015, the Company granted 1.5 million performance-
based stock options, respectively, to certain key team members under the Incentive Plan, which vest upon the
achievement of certain performance criteria. The performance-based stock options vest upon the attainment of the
following performance criteria: (a) 10% of the stock options vest upon attainment of at least $34.5 million in Adjusted
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") for the year ended January 31, 2016, (b)
20% of the stock options vest upon the attainment of an annual growth rate of Adjusted EBITDA per share of
common stock of 30% for the year ended January 31, 2017, (c) 30% of the stock options vest upon the attainment
of an annual growth rate of Adjusted EBITDA per share of common stock of 30% for the year ended January 31,
2018, and (d) 40% of the stock options vest upon the attainment of an annual growth rate of Adjusted EBITDA per
share of common stock of 25% for the year ended January 31, 2019. During the year ended January 31, 2016, the
-72-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 9. Stock-based compensation (continued)
Company achieved the $34.5 million Adjusted EBITDA performance criteria and as such, 10% of the performance-
based stock options outstanding as of January 31, 2016 became vested. During the year ended January 31, 2017,
the Company achieved the annual growth rate of Adjusted EBITDA per share of common stock of 30% and as such
20% of the performance-based stock options outstanding as January 31, 2017 became vested. Subsequent to the
year ended January 31, 2017, the two remaining vesting criteria were amended to vest based upon the attainment
of a compound annual growth rate of Adjusted EBITDA per share of common stock of 35% as compared to the year
ended January 31, 2016 Adjusted EBTIDA target of $34.5 million, or $0.61 per common share. During the year
ended January 31, 2018, the Company achieved the third performance criteria and as such 30% of the
performance-based stock options outstanding as of January 31, 2018 became vested.
During the years ended January 31, 2018, 2017 and 2016, the Company recorded compensation expense of $1.4
million, $1.7 million and $2.5 million, respectively, related to the performance-based options based on the
Company's probability assessment of attaining its Adjusted EBITDA targets, and Adjusted EBITDA per common
share growth rates.
Restricted stock units
The Company grants restricted stock units ("RSUs") to certain team members, officers, and directors under the
2014 Equity Incentive Plan. RSUs vest upon service-based criteria and performance-based criteria. Generally,
service-based RSUs vest over a four-year period in equal annual installments commencing upon the first
anniversary of the grant date. RSUs are valued based on the current value of the Company's closing stock price on
the date of grant less the present value of future expected dividends discounted at the risk-free interest rate. Stock-
based compensation expense related to RSUs, excluding PRSUs, for the years ended January 31, 2018 and 2017
was $3.3 million and $233,000, respectively.
Performance restricted stock units. In March 2017, the Company awarded 146,964 performance-based RSUs
("PRSUs") with an estimated grant date fair value of $6.1 million. Vesting of the PRSUs is dependent upon the
achievement of certain financial criteria and cliff vest on January 31, 2020. The Company records stock-based
compensation related to PRSUs when it is considered probable that the performance conditions will be met. The
Company believes it is probably that the PRSUs will vest at least in part. The vesting of PRSUs will ultimately range
from 0% to 150% of the number of shares underlying the PRSU grant based on the level of achievement of the
performance goals. During the year ended January 31, 2018, the Company recorded compensation expense of
$1.8 million related to PRSUs.
A summary of all restricted stock unit activity is as follows:
(in thousands, except weight-average grant date fair value)
Unvested at January 31, 2017 ..............................................................................
Granted ..............................................................................................................
Vested ................................................................................................................
Forfeitures ..........................................................................................................
Unvested at January 31, 2018 ..............................................................................
Weighted-average
grant date fair
value
26.93
44.61
36.74
46.41
44.10
Shares
10
$
468
(15)
(12)
451
$
Total unrecorded stock-based compensation expense as of January 31, 2018 associated with RSUs, including
PRSUs, was $15.1 million, which is expected to be recognized over a weighted-average period of 2.9 years.
Note 10. Fair value
Fair value measurements—Fair value measurements are made at a specific point in time, based on relevant market
information. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in
the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants at the measurement date. Accounting standards specify a hierarchy of valuation techniques based on
whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect data
-73-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 10. Fair value (Continued)
obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These
two types of inputs have created the following fair value hierarchy:
•
•
•
Level 1—quoted prices in active markets for identical assets or liabilities;
Level 2—inputs, other than the quoted prices in active markets, that are observable either directly or indirectly;
Level 3—unobservable inputs based on the Company’s own assumptions.
Level 1 instruments are valued based on publicly available daily net asset values. Level 1 instruments consist
primarily of highly liquid mutual funds.
The following tables summarizes the assets measured at fair value on a recurring basis and indicates the level
within the fair value hierarchy reflecting the valuation techniques utilized to determine fair value:
(in thousands)
Marketable securities:
Level 1
Level 2
Level 3
January 31, 2018
Mutual funds ......................................................................................... $
40,797
$
— $
—
(in thousands)
Marketable securities:
Level 1
Level 2
Level 3
January 31, 2017
Mutual funds .......................................................................................... $
40,405
$
— $
—
The carrying value of financial instruments including cash and cash equivalents and certain non-trade receivables
approximate fair values as of January 31, 2018 due to the short-term nature of these instruments. The Company
has classified cash and cash equivalents as Level 1 and certain non-trade receivables as Level 2 in the fair value
hierarchy.
Note 11. Employee benefits
The Company has established a 401(k) plan that qualifies as a deferred compensation arrangement under
Section 401 of the IRS Code. All team members over the age of 21 are eligible to participate in the plan. The plan
provides for Company matching of employee contributions up to 3.5% of eligible earnings. Employer contributions
vest 25% each year of employment. 401(k) plan administrative expense was $25,000, $15,000 and $16,000 for the
years ended January 31, 2018, 2017 and 2016, respectively. Employer matching contribution expense was $1.4
million, $916,000 and $626,000 for the years ended January 31, 2018, 2017 and 2016, respectively.
Beginning on January 1, 2017, the Company is self-insured for medical and dental benefits for all qualifying
employees. The medical plan carries a stop-loss policy which will protect from individual claims during the plan year
exceeding $110,000. The Company records estimates of costs of claims incurred based on an analysis of historical
data and independent estimates. The Company's liability for self-insured medical claims is included in accrued
compensation in its consolidated balance sheet and was $1.7 million as of January 31, 2018.
-74-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 12. Supplementary quarterly financial data (unaudited)
(in thousands, except for per share
amounts)
Total revenue ...................................... $
Total cost of revenue ...........................
Gross profit .........................................
Total operating expenses ....................
Total other expense .............................
Income tax provision (benefit) .............
Net income .......................................... $
Net income per share:
Basic (1) ............................................... $
Diluted (1) ............................................. $
(in thousands, except for per share
amounts)
Total revenue ...................................... $
Total cost of revenue ...........................
Gross profit .........................................
Total operating expenses ....................
Total other expense .............................
Income tax provision ...........................
Net income .......................................... $
Net income per share:
January 31, 2018
October 31, 2017
July 31, 2017
April 30, 2017
Three months ended
60,436 $
56,789 $
56,879 $
28,790
31,646
23,212
(1,706)
823
23,062
33,727
20,165
(395)
2,685
21,077
35,802
19,307
(38)
(489)
5,905 $
10,482 $
16,946 $
0.10 $
0.09 $
0.17 $
0.17 $
0.28 $
0.27 $
55,421
21,680
33,741
17,814
(90)
1,808
14,029
0.23
0.23
Three months ended
January 31, 2017
October 31, 2016
July 31, 2016
April 30, 2016
46,814 $
43,358 $
44,185 $
22,585
24,229
18,048
(158)
1,961
4,062 $
17,467
25,891
16,849
(256)
2,778
6,008 $
15,631
28,554
15,815
(37)
4,469
8,233 $
44,013
16,332
27,681
14,431
(641)
4,536
8,073
Basic ................................................... $
Diluted (1) ............................................. $
(1) Net income per share amounts do not sum to equal full year total due to changes in the number of shares outstanding during the periods and
rounding.
0.07 $
0.07 $
0.14 $
0.14 $
0.10 $
0.10 $
0.14
0.14
Item 9. Changes in and disagreements with accountants on accounting and financial
disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures as of January 31, 2018, the end of the
period covered by this Annual Report on Form 10-K. The term “disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that
are designed to provide reasonable assurance that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated to the company’s management,
-75-
including its principal executive and principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of
January 31, 2018, our disclosure controls and procedures were effective at the reasonable assurance level.
Management's report on internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting was designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting as
of January 31, 2018. In making this assessment, we used criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013).
Based on this evaluation under the framework in Internal Control - Integrated Framework (2013) issued by the
COSO, management concluded the Company’s internal control over financial reporting was effective as
of January 31, 2018.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP has also audited the
effectiveness of the Company’s internal control over financial reporting as of January 31, 2018. Its report appears in
Part II, Item 8 of this Annual Report on Form 10-K.
Changes in internal control over financial reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation
required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended January 31,
2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other information
None.
-76-
PART III.
Item 10. Directors, executive officers and corporate governance
The information required by this Item 10 of Form 10-K is found in our 2018 Proxy Statement to be filed with the SEC
in connection with the solicitation of proxies for the Company's 2018 Annual Meeting of Stockholders is
incorporated by reference to our 2018 Proxy Statement will be filed with the SEC within 120 days after the end of
the fiscal year to which this report relates.
Code of business conduct and ethics
Our board of directors has adopted a Code of Business Conduct and Ethics that applies to all of our team
members, officers and directors, including our Chief Executive Officer, Chief Financial Officer, and other executive
and senior financial officers. The full text of our Code of Business Conduct and Ethics is posted on our website at
www.healthequity.com in the Corporate Governance section of our Investor Relations webpage. We intend to post
any amendments to our Code of Business Conduct and Ethics, and any waivers of our Code of Business Conduct
and Ethics for directors and executive officers, on the same website.
Item 11. Executive compensation
The information required by this Item 11 of Form 10-K is incorporated by reference in our 2018 Proxy Statement.
Item 12. Security ownership of certain beneficial owners and management and related
stockholder matters
The information required by this Item 12 of Form 10-K is incorporated by reference in our 2018 Proxy Statement.
Item 13. Certain relationships and related transactions, and director independence
The information required by this Item 13 of Form 10-K is incorporated by reference in our 2018 Proxy Statement.
Item 14. Principal accounting fees and services
The information required by this Item 14 of Form 10-K is incorporated by reference in our 2018 Proxy Statement.
-77-
Part IV.
Item 15. Exhibits, financial statement schedules
(a) Documents filed as part of this report
(1) All financial statements
Index to consolidated financial statements
Consolidated Balance Sheets as of January 31, 2018 and 2017 .................................................................
Consolidated Statements of Operations and Comprehensive Income for the years ended January 31,
2018, 2017 and 2016 ...................................................................................................................................
Consolidated Statements of Stockholders' Equity for the years ended January 31, 2018, 2017 and 2016 ..
Consolidated Statements of Cash Flows for the years ended January 31, 2018, 2017 and 2016 ................
Notes to consolidated financial statements ..................................................................................................
Supplementary quarterly financial data (unaudited) .....................................................................................
Page
50
51
52
53
55
75
(2) Financial statement schedules
All financial statement schedules have been omitted, since the required information is not applicable or is not
present in amounts sufficient to require submission of the schedule, or because the information required is included
in the consolidated financial statements and notes thereto included in this Form 10-K.
-78-
(3) Exhibits required by Item 601 of Regulation S-K
Exhibit Index
Exhibit
no.
3.1
3.2
4.1
4.2
10.1
10.2†
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17
10.18
10.19†
10.20†
Incorporate by reference
Description
Amended and Restated Certificate of Incorporation of
the Registrant
Form
S-1/A 333-196645
File No. Exhibit
3.2
Filing Date
July 16, 2014
Amended and Restated Bylaws of the Registrant
S-1/A 333-196645
Form of Common Stock Certificate.
S-1/A 333-196645
3.4
4.1
July 16, 2014
July 16, 2014
Amended and Restated Registration Rights
Agreement, dated August 11, 2011, by and among the
Registrant and certain of its stockholders.
Form of Indemnification Agreement by and between
the Registrant and its directors and officers.
HealthEquity, Inc. 2014 Equity Incentive Plan and
Form of Award Agreement.
S-1 333-196645
4.2 June 10, 2014
S-1/A 333-196645
10.1
July 16, 2014
S-1 333-196645
10.2 June 10, 2014
HealthEquity, Inc. 2014 Amended and Restated
Equity Incentive Plan and Form of Award Agreement. S-1/A 333-196645
10.3
July 16, 2014
HealthEquity, Inc. 2009 Stock Plan and Form of Stock
Option Agreement.
HealthEquity, Inc. 2006 Stock Plan and Form of Stock
Option Agreement.
HealthEquity, Inc. 2005 Stock Plan and Form of Stock
Option Agreement.
HealthEquity, Inc. 2003 Director Stock Plan and Form
of Stock Option Agreement.
HealthEquity, Inc. 2003 Stock Plan and Form of Stock
Option Agreement.
HealthEquity, Inc. Executive Bonus Plan for the year
ended January 31, 2014.
HealthEquity, Inc. Executive Bonus Plan for the year
ended January 31, 2015.
HealthEquity, Inc. Section 409A Specified Employee
Policy.
Employment Agreement, dated June 10, 2014, by
and between the Registrant and Jon Kessler.
Employment Agreement, dated June 10, 2014, by
and between the Registrant and Stephen D.
Neeleman, M.D.
Employment Agreement, dated June 10, 2014, by
and between the Registrant and Darcy Mott.
Non-Employee Director Compensation Policy.
Lease Agreement, dated May 15, 2015, by and
between the Registrant and BG Scenic Point Office 2,
L.C.
Amended and Restated Lease Agreement, dated May
15, 2015, by and between the Registrant and BG
Scenic Point Office 1, L.C.
Employment Agreement, dated July 1, 2015, by and
between the Registrant and Jon Soldan.
S-1 333-196645
10.4 June 10, 2014
S-1 333-196645
10.5 June 10, 2014
S-1 333-196645
10.6 June 10, 2014
S-1 333-196645
10.7 June 10, 2014
S-1 333-196645
10.8 June 10, 2014
S-1 333-196645
10.12 June 10, 2014
S-1 333-196645
10.13 July 16, 2014
S-1 333-196645
10.23 June 10, 2014
S-1 333-196645
10.24 June 10, 2014
S-1 333-196645
10.25 June 10, 2014
S-1 333-196645
10.26 June 10, 2014
S-1 333-196645
10.27 July 16, 2014
10-Q 001-36568
10.1 June 11, 2015
10-Q 001-36568
10-Q 001-36568
10.2 June 11, 2015
10.1 September
10, 2015
Offer letter to Robert W. Selander, dated September
28, 2015.
8-K 001-36568
10.1 September
30, 2015
-79-
Exhibit
no.
10.21
10.22
10.23
10.24
10.25+
21.1
23.1+
24.1+
31.1+
31.2+
32.1*#
32.2*#
Description
Credit Agreement, dated as of September 30, 2015,
by HealthEquity, Inc. and JPMorgan Chase Bank,
N.A., as administrative agent.
Asset Purchase Agreement, dated as of October 23,
2015, by and between The Bancorp Bank and
HealthEquity, Inc.
Second Amendment to Lease Agreement, dated
September 16, 2016, by and between the Company
and the Landlord.
Second Amendment to Amended and Restated Lease
Agreement, dated May 31, 2017, by and between the
Company and the Landlord.
Amended and Restated Non-Employee Director
Compensation Policy.
Incorporate by reference
Form
File No. Exhibit
Filing Date
8-K 001-36568
10.1 October 6,
2015
8-K 001-36568
10.1 October 26,
2015
10-Q 001-36568
10.2
10-Q 001-36568
10.2
December 8,
2016
June 8, 2017
List of Subsidiaries.
10-Q 001-36568
21.1 June 8, 2017
Consent of PricewaterhouseCoopers LLP,
Independent Registered Public Accounting Firm.
Power of Attorney (included in the signature page to
this Annual Report).
Certification of the Principal Executive Officer
Pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of the Principal Financial Officer
Pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of the Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Certification of the Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
101.INS††
XBRL Instance document
101.SCH†† XBRL Taxonomy schema linkbase document
101.CAL†† XBRL Taxonomy calculation linkbase document
101.DEF†† XBRL Taxonomy definition linkbase document
101.LAB††
XBRL Taxonomy labels linkbase document
101.PRE†† XBRL Taxonomy presentation linkbase document
+
*
#
Filed herewith
Furnished herewith
These certifications are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference in
any filing the registrant makes under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, irrespective of any
general incorporation language in any filings.
†
Indicates management contract or compensatory plan.
††
In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a
registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of
Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections.
Item 16. Form 10-K Summary
Not applicable.
-80-
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized in
the City of Draper, State of Utah on this 28th day of March, 2018.
Date: March 28, 2018
HEALTHEQUITY, INC.
By:
/s/ Jon Kessler
Name:
Jon Kessler
Title:
President and Chief Executive Officer
-81-
Power of attorney
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below hereby constitutes
and appoints Jon Kessler and Darcy Mott, and each of them acting individually, as his or her true and lawful
attorneys-in-fact and agents, with full power of each to act alone, with full powers of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K with all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act
alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or his or her or their substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been
signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 28, 2018
Date: March 28, 2018
By:
Name:
Title:
By:
Name:
Title:
/s/ Robert W. Selander
Robert W. Selander
Chairman of the Board, Director
/s/ Jon Kessler
Jon Kessler
President and Chief Executive Officer (Principal Executive Officer)
Date: March 28, 2018
By:
/s/ Darcy Mott
Name:
Darcy Mott
Date: March 28, 2018
Date: March 28, 2018
Date: March 28, 2018
Date: March 28, 2018
Date: March 28, 2018
Date: March 28, 2018
Date: March 28, 2018
Title:
By:
Name:
Title:
By:
Name:
Title:
By:
Name:
Title:
By:
Name:
Title:
By:
Name:
Title:
By:
Name:
Title:
By:
Name:
Title:
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting
Officer)
/s/ Frank A. Corvino
Frank A. Corvino
Director
/s/ Adrian T. Dillon
Adrian T. Dillon
Director
/s/ Evelyn Dilsaver
Evelyn Dilsaver
Director
/s/ Frank T. Medici
Frank T. Medici
Director
/s/ Stephen D. Neeleman, M.D.
Stephen D. Neeleman, M.D.
Director
/s/ Ian Sacks
Ian Sacks
Director
/s/ Gayle Wellborn
Gayle Wellborn
Director
-82-
S
R
E
D
L
O
H
E
R
A
H
S
r
u
o
o
t
IN HIS ICONIC SKETCH,
comedian Jack Benny is confronted by a robber, “Your money or your life.” Benny
pauses, then snaps back, “I’m thinking it over!”.
Today, the tradeoff between health and wealth is no laughing matter. According to
the Bureau of Labor Statistics, the typical working family has just $10,000 of annual
earnings to both fund healthcare costs and to save for retirement.
At HealthEquity, we connect health and wealth, turning tradeoffs into win-wins.
HealthEquity members use health savings accounts (HSAs) and other tax-advantaged
accounts to become more confident consumers of healthcare today and more effective
builders of health and retirement savings for tomorrow. Every day, we see examples of
HealthEquity members driving the healthcare system to become more efficient, effective
and responsive. We believe savers have the power to save healthcare. That is why we
embrace with passion the vision of HSAs becoming ubiquitous, and as important for
family financial success as retirement accounts are today.
During Fiscal 2018, HealthEquity made record breaking strides towards that vision,
with each of our four key metrics reaching new highs:
• Revenue increased 29% to $229.5 million
• Adjusted EBITDA grew an even faster 35% to $84.7 million
• HSA members grew 24% to 3.4 million
• Custodial assets of our HSA members grew 35% to $6.8 billion
HealthEquity again outpaced the rest of the HSA market during Fiscal 2018. Based on
independent findings from Devenir Research, the market-wide HSA membership (or
accounts) and custodial assets grew by 16%1 and 22% respectively. HealthEquity
accounted for nearly a quarter of all account growth and 30% of custodial asset growth
market-wide, nearly double our largest competitors.
We are helping Americans more than ever to
connect their health and wealth by empowering
them in four important ways:
1. Education and tools
Our proprietary platform has more than 2,680 distinct integrations with other actors
in the health benefits ecosystem. HealthEquity provides 1,500 unique health plan and
telemedicine providers, creating an added value to our members’ benefits package.
When HealthEquity members use these price transparency tools, they spend less and
save more, decreasing the amount employers spend on healthcare.
1 Devenir Research 2017 Year-End HSA Market and Statistic reported 11% HSA growth. The subsequent Devenir Blog, “What
Happened to HSA Account Growth in 2017?”, stated the adjusted account growth was closer to 15-16%.
Corporate information
Forward-looking statements
Any forward-looking statements about
HealthEquity outlook and prospects contained
in this annual report are subject to risks and
uncertainties, as described in materials filed with
the U.S. Securities and Exchange Commission
from time to time, including the ‘Risk Factors’
section of our annual report on form 10-K for the
year ended January 31, 2018.
Stock exchange listing
Common stock listed and traded on:
The NASDAQ stock market
symbol “HQY”
Transfer agent and registrar for common stock
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Auditors
PricewatershouseCoopers, LLP
300 Madison Avenue
New York, NY 10017
Investor relations
Contact the HealthEquity investor relations by
calling Richard Putnam at 801.727.1209. We
make earnings releases available online on the
internet on the day that results are released to
the news media. HealthEquity releases and a
variety of shareholders information can be
found at the company’s website: http://
ir.healthequity.com.
BOARD OF DIRECTORS
Robert W. Selander
Chairman of the Board and Director
Jon Kessler
President, Chief Executive Officer
and Director
Stephen D. Neeleman, M.D.
Founder, Vice Chairman and Director
Frank Corvino
Director
Adrian T. Dillon
Director
MANAGEMENT
Jon Kessler
President, Chief Executive Officer
and Director
Stephen D. Neeleman, M.D.
Founder, Vice Chairman and Director
Darcy Mott
Executive Vice President and
Chief Financial Officer
Ashley Dreier
Executive Vice President and CTO/CIO
Del Ladd
Executive Vice President
General Counsel and Secretary
Bill Otten
Executive Vice President of Sales
Evelyn Dilsaver
Director
Debra McCowan
Director
Frank T. Medici
Director
Ian Sacks
Director
Gayle Wellborn
Director
Gary Robinson
Executive Vice President
and Chief Marketing Officer
Jon Soldan
Executive Vice President
of Operations
Natalie Atwood
Senior Vice President of People
Brad Bennion
Senior Vice President of Product
Joel Johnson
Senior Vice President of Audit
and Risk Management
S
U
t
u
o
b
a
Building Health Savingssm
HealthEquity is the nation’s largest dedicated health savings custodian. The company’s innovative technology platform
and tax-advantaged accounts help members build health savings, while controlling healthcare costs. HealthEquity services more
than 3.4 million health savings accounts for 124 health plan and administrator partners and employees at more than 40,000
companies across the United States.
HealthEquity offers a complete line of integrated accounts:
• Health savings accounts (HSAs)
• Health reimbursement arrangements (HRAs)
• Flexible spending accounts (FSAs)
• Health incentive accounts (HIAs)
• Retirement accounts (401(k))
Copyright © 2018 HealthEquity, Inc. All rights reservedCopyright © 2018 HealthEquity, Inc. All rights reserved
15 West Scenic Pointe Drive
Draper, UT 84020
Info@healthequity.com
www.Healthequity.com
Copyright © 2018 HealthEquity, Inc. All rights reserved.
821353cvr.indd 1