9
9
1
1
0
0
2
2
Y
Y
F
F
|
|
y
y
t
t
i
i
u
u
q
q
E
E
h
h
t
t
l
l
a
a
e
e
H
H
4/19/19 9:17 PM
Copyright © 2019 HealthEquity, Inc. All rights reserved
From HealthEquity’s corporate home in the shadow of the Wasatch Mountains, the
morning sky brightens long before the sun crests the snow-capped peaks. So too, the
health savings account (HSA) market is rising.
Five years ago, the total HSA market had about 11 million HSAs with about $20 billion
in custodial assets. At that time, we introduced ourselves to the public equities market
when we had opened fewer than one million HSAs with $1.6 billion in custodial HSA
assets, including $183 million invested. As we celebrate our 5-year anniversary
as a public company, we are pleased to report ending our fiscal year 2019 with 4
million HSAs and over $8 billion in custodial assets. That is a compounded annual
growth rate (CAGR) over five years of 33% for HSAs and 38% for custodial assets.
Remarkably, the $183 million invested HSA assets have grown to $1.7 billion, a 56%
CAGR over the last five years.
Through our team’s efforts, 4 million HealthEquity members use HSAs and other
tax-advantaged accounts to become more confident consumers of healthcare today
and to build 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. 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.
S
S
R
R
E
E
D
D
L
L
O
O
H
H
E
E
R
R
A
A
H
H
S
S
r
r
u
u
o
o
o
o
t
t
401(k) participants
HSA participants
PLAN YEARS
According to the Department of Labor Statistics, there are approximately 55 million
American households that own 80 million 401(k) accounts holding on average about
$80,000 each. While we are still early in the HSA day, according to Devenir, there are
more than 25 million HSAs holding on average about $2,100 each. We expect that
most American households will want to take advantage of HSAs, just as they have
embraced 401(k) plans.
936079_Cov.indd 2-4
Copyright © 2019 HealthEquity, Inc. All rights reserved
We are not alone. We made great strides this year in linking health and wealth in
deeper and more meaningful ways, adding several retirement plan providers to our
growing list of Network Partners. Joining forces with them will continue to raise the
awareness and knowledge of millions of American savers towards understanding the
true value of triple tax-advantage investing.
T
E
H EA LT H | R
0
6
$
0
I R E M E N T | BENEFITSADMINISTRATIO
B - $ 1 T a s sets | 50-60M
M a r ket maturity1
HS
N
A
s
B
a
u
C
$ 5 4
s s e ts | 25MHS
r r e nt market2
A
s
$8.1B assets
4M HSAs
Current HealthEquity3
$10B
$1.5B
MARKET WIDE REVENUE
MARKET WIDE REVENUE
HealthEquity continues to be the leader increasing our market share. While Devenir
reported market growth at 13% account growth, HealthEquity grew members by 17%
in Fiscal Year 2019 and delivered over 19% growth in custodial assets. HealthEquity
HSA investing members grew by 34% during the fiscal year and their invested
custodial assets grew by 30%, even in a challenging year for investing.
Our mission has not changed these past five years. We remain committed to helping
American families see the HSA light. We remain committed to being the best at
connecting health and wealth, helping working Americans grow account contributions
and balances, and delivering remarkable ‘purple’ services and experiences to our HSA
members, clients and partners.
The HealthEquity team is moving HSAs into the daylight. To our shareholders, we say
thank you for being part of the journey these past five years. Let’s continue forward.
The brightest sights are ahead!
Sincerely,
Jon Kessler
President, Chief Executive
Officer and Director
Steve Neeleman, M.D.
Founder, Vice Chairman
and Director
936079_Narcx.indd 1
4/19/19 6:00 PM
Copyright © 2019 HealthEquity, Inc. All rights reserved success HIGHLIGHTS
success
HIGHLIGHTS
Number of HSAs
Number of HSAs
Revenue
Revenue
592
$287.2
$229.5
$178.4
657
4
9
9
3
,
605
714
3
0
4
3
,
6
4
7
,
2
2,141
FY17FY17
2,746
FY18FY18
3,402
FY19FY19
9
9
1
1
-
-
8
8
1
1
Y
Y
F
17%F
Year over year
Year over year
HSA growth
HSA growth
FY17
FY18
FY19
9
9
1
1
-
-
8
8
1
1
Y
Y
F
25%F
Year over year
Year over year
revenue growth
revenue growth
141 HEALTH PLAN AND
ADMINISTRATOR PARTNERS
45,000+ EMPLOYERS
SERVED
Adjusted EBITDA
Adjusted EBITDA
Custodial assets
Custodial assets
$118.4
$84.7
$62.8
$1,670
$1,289
8
9
0
8
$
,
$659
8
7
7
,
6
$
9
3
0
5
$
,
FY17
FY18
FY19
$4,380
FY17FY17
$5,489
FY18FY18
$6,429
FY19FY19
9
9
1
1
-
-
8
8
1
1
Y
Y
F
40%F
Year over year adjusted
Year over year adjusted
EBITDA growth
EBITDA growth
9
9
1
1
-
-
8
8
1
1
Y
Y
F
19%F
Year over year
Year over year
custodial asset growth
custodial asset growth
936079_Narcx.indd 2
4/19/19 6:00 PM
Copyright © 2019 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, 2019
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth 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.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth 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, 2018, based on the closing price of $75.50 for shares of the registrant’s common
stock as reported by the NASDAQ Global Select Market was approximately $4.1 billion. For purposes of determining whether a stockholder was an affiliate of the registrant at July 31, 2018, the
registrant assumed that a stockholder was an affiliate of the registrant at July 31, 2018 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, 2018. This determination of affiliate status is not necessarily
a conclusive determination for other purposes.
As of February 28, 2019, there were 62,471,952 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement related to its 2019 annual meeting of shareholders (the "2019 Proxy Statement") are incorporated by reference into Part III of this Annual Report
on Form 10-K where indicated. The 2019 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 ........................................................................................................................................
Page
2
9
23
24
24
24
25
28
29
45
47
78
78
78
79
79
79
79
79
80
83
84
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;
our reliance on the availability and performance of our technology and communications systems;
recent and potential future cybersecurity breaches of our technology and communications systems 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 technology and communications systems and
successfully manage our growth;
our ability to protect our brand and other intellectual property rights; and
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 191 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, 2019, we were the integrated HSA platform for 141 health,
retirement and other benefit plan providers and for employees at more than 45,000 employer clients. Our customers
include individuals, employers of all sizes, and health, retirement, and other benefit plan providers. We refer to our
individual customers as our members, our health, retirement and other benefit plan provider 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, 2019,
we had approximately 4.0 million HSAs on our platform. Management estimates that this represents approximately
8.8 million lives. During the years ended January 31, 2019, 2018 and 2017, we added approximately 679,000,
723,000 and 703,000 new HSA Members, representing approximately 1.5 million, 1.6 million and 1.5 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 from custodial cash assets deposited with our federally-insured
custodial depository partners and with our insurance company partner. In addition, we earn recordkeeping fees on
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.
-2-
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, 2019, we had approximately 572,000 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 increasing investment in our technology and communications systems to support new opportunities and
enhance security, privacy, and platform infrastructure. During the years ended January 31, 2019, 2018, and 2017,
we capitalized software development costs of $9.3 million, $8.1 million and $7.7 million, respectively. In addition, we
incurred $13.7 million, $12.2 million and $10.0 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 2018, as noted by the 2018 Devenir HSA Research Report, which indicates we are the
second largest HSA custodian by market share measured by custodial assets.
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, 2019, our platform experienced
40.3 million logons and, on average, every month 21% 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 3,000 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 270 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 1,700 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, email, or chat.
-5-
• Customer service and education: As a key part of our strategy and commitment to DEEP Purple, our
team members work directly with our Network Partners to engage with consumers, educating them about
the benefits of our HSAs and our other products and providing personalized guidance.
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 personalized engagement with our members
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 strong over time. 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 customer engagement and 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. 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
-6-
additional custodial assets. As of December 31, 2018, the Company's year-end for trust and tax purposes, the net
worth of the Company exceeded the required thresholds.
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. Privacy regulation has become a priority issue in many states, including
California, which in 2018 enacted the California Consumer Privacy Act broadly regulating California residents’
personal information and providing California residents with various rights to access and control their data.
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
-7-
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.
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, 2019, we had 1,141 team members, including
766 in service delivery, 175 in technology and development and 200 in sales and marketing, 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
maintains a website that contains our SEC filings. The address of the site is www.sec.gov.
-8-
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 and adoption of tax-advantaged health accounts by
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 the rate of adoption of these accounts decreases, our results of
operations, financial condition, business and prospects would be materially adversely affected.
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 and Optum Bank, insurance companies, well-known retail investment
-9-
companies, such as Fidelity Investments, and non-bank custodians approved by the U.S. Treasury as meeting
certain ownership, capitalization, expertise and governance requirements. This market is highly fragmented. We
also have numerous indirect competitors, including benefits administrators and health plans, that license technology
platforms and partner with other HSA custodians to provide "white label" HSA offerings. 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.
Well-known retail mutual fund companies, such as Fidelity Investments, have entered the HSA business and Fidelity
and other mutual fund companies may decide to expand their 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.
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 are increasingly desired by potential customers, and they may also use advertising and
marketing strategies that (including loss-leaders) achieve broader brand recognition or acceptance.
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:
•
•
•
•
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.
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 21%, 22% and 23% of our total revenue during the years ended January 31, 2019, 2018 and 2017,
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.
-10-
Data security, technological and intellectual property risks
As one of the largest HSA providers, we are frequently the target of cyber-attacks or other privacy or data
security incidents. 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.
As one of the largest HSA providers, our proprietary technology platform enables the exchange of, and access to,
sensitive information, and, as a result, we are frequently the target of cyber-attacks or other privacy or data security
incidents. 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 data privacy incidents, including several incidents in 2018. As a
result, or if our security measures are breached again 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:
•
•
•
•
•
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 our previous or any
further 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 is vulnerable to cybersecurity threats, including attacks by hackers and other
malfeasance. Such security breaches could compromise our networks and result in the information stored or
transmitted there to be accessed, publicly disclosed, lost or stolen. 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.
Fraudulent and other illegal activity involving our products and services, including our payment cards,
could lead to financial and 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,
-11-
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. In addition, customers are increasingly
seeking a bundled solution, encompassing a wide range of features. 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:
•
•
•
•
•
•
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
damage from a number of sources, many of which are beyond our control, including, without limitation:
•
•
•
•
•
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;
-12-
•
•
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:
•
•
•
•
•
develop non-infringing technology;
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,
-13-
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
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.
-14-
Legal and regulatory risks
The healthcare regulatory and political framework is uncertain and evolving, particularly with the recent
changes in Congress, 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, particularly with the
recent changes in Congress, 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. In addition, current proposals to implement a
single payer or "Medicare for all" system in the U.S., if adopted would likely have a material adverse effect on our
business. 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. Privacy regulation
has become a priority issue in many states, including California, which in 2018 enacted the California Consumer
Privacy Act broadly regulating the sale of California residents’ personal information and providing California
residents with various rights to access and delete data. 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. Although we have implemented measures to comply with privacy
laws, rules and regulations, we have experienced data privacy incidents. Any further unauthorized disclosure of
personally identifiable information experienced by us or our third-party vendors could result in substantial financial
and reputational harm, including possible criminal and civil penalties. In many cases, we are subject to HIPAA and
other privacy regulations because we are a business associate providing services to covered entities; as a result,
the covered entities direct HIPAA compliance matters in the event of a security breach, which complicates our ability
to address harm caused by the breach. Additionally, as we have in connection with recent security incidents, 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. Continued
compliance with current and potential new privacy laws, rules and regulations and meeting consumer expectations
with respect to the control of personal data 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-
-15-
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.
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, or otherwise reduce offering, or cease to offer, our products and 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, or otherwise reduce offering, or cease to offer, our products and services, 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
-16-
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
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 federally-insured custodial depository partners for certain custodial account services from
which we earn fees. A business failure in any federally-insured custodial depository partner would
materially and adversely affect our business.
As a non-bank custodian, we rely on our federally-insured custodial partners to hold our custodial cash assets. If
any material adverse event were to affect one of our federally-insured custodial depository 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 partners, we could not accurately predict the success of such change
or that the terms of our agreement with a new depository 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
federally-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, as part of our strategy, seek to acquire or invest in other
companies or technologies, which could divert management’s attention, fail to be consummated, or even if
consummated, 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, as part of our strategy, seek to 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 be successful in
consummating such acquisitions, or even if consummated, 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:
•
unanticipated costs or liabilities associated with the acquisition;
-17-
•
•
•
•
•
•
•
•
•
•
•
•
•
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;
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, 2019, we had
approximately 4.0 million HSA Members and $8.1 billion in custodial assets representing growth of 17% and 19%,
respectively, from January 31, 2018. For the year ended January 31, 2019, our total revenue and Adjusted EBITDA
were approximately $287.2 million and $118.4 million, respectively, which represents year-over-year annual growth
rates of approximately 25% and 40%, 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.
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.
-18-
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
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 $79.7 million in intangible assets, together representing approximately 17% of our total assets as of
January 31, 2019. 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.
-19-
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
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.
For example, competition for qualified personnel in our field and geographic market is intense due to the limited
number of individuals who possess the skills and experience required by our industry, particularly in the technology
related fields. 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 or lower asset values due to market conditions or other factors may reduce
our ability to earn income on our custodial assets and to attract HSA contributions, which would adversely
affect our profitability.
As a non-bank custodian, we partner with federally-insured custodial depository partners to hold our custodial cash
assets. We earn a significant portion of our consolidated revenue from fees we earn from our federally-insured
custodial depository partners. For example, during the years ended January 31, 2019, 2018 and 2017, we earned
an increasing portion (approximately 44%, 38% and 33%, 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
-20-
custodial cash assets. In addition, if we do not offer competitive interest rates, our members may choose another
HSA custodian. Similarly, if the value of the invested funds we hold in our custodial accounts decline, whether due
to market conditions or other factors, our fees, which are based on a percentage of the asset values, would be
adversely affected. Any such scenario could materially and adversely affect our business and results of operations.
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.
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.
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
-21-
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 has been, and may continue to be, volatile.
The stock market in general has been highly and increasingly volatile. The market price and trading volume for our
common stock has been, and may continue to 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;
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;
•
•
•
•
•
•
•
•
changes in short-term interest rates or expectations of what short-term interest rates will be;
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.
-22-
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.
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.
-23-
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, and approximately 75,000 square feet of planned future
office space, under a lease that expires in November 2030. We also lease approximately 3,000 square feet of office
space in Overland Park, Kansas under a lease that expires in March 2022, and lease additional space at data
centers located in Draper, Utah and Austin, Texas, pursuant to leases expiring in August 2020 and March 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, 2019, there were approximately 22 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.
Dividend policy
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.
-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, 2019.
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.
During the year ended January 31, 2019, the Company used funds received from the offerings to acquire the rights
to be custodian of an HSA portfolio for approximately $1.2 million in cash.
The remainder of the funds received have been invested in registered money market accounts.
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)
2019
2018
2017
2016
2015
Year ended January 31,
Consolidated statements of operations data:
Revenue .......................................................... $
287,243
$
229,525
$
178,370
$
126,786
$
Cost of revenue ...............................................
Gross profit ......................................................
Operating expenses ........................................
Income from operations ...................................
Other expense .................................................
Income before income taxes ...........................
Income tax provision (1) ....................................
106,050
181,193
103,523
77,670
(1,852)
75,818
1,919
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
Net income ................................................... $
73,899
$
47,362
$
26,376
$
16,613
$
Net income attributable to common
stockholders:
Basic ............................................................. $
Diluted .......................................................... $
Net income per share attributable to common
stockholders:
Basic ............................................................. $
Diluted .......................................................... $
Weighted-average number of shares used in
computing net income per share attributable
to common stockholders:
73,899
73,899
1.20
1.17
$
$
$
$
47,362
47,362
0.79
0.77
$
$
$
$
26,376
26,376
0.45
0.44
$
$
$
$
16,613
16,613
0.29
0.28
$
$
$
$
Basic .............................................................
Diluted ..........................................................
61,836
63,370
60,304
61,854
58,615
59,894
56,719
58,863
Consolidated balance sheet data:
Cash, cash equivalents and marketable
securities ......................................................... $
361,475
$
240,269
$
180,359
$
123,775
$
Working capital ................................................
Total assets .....................................................
Total liabilities ..................................................
365,624
510,016
32,937
244,906
369,159
22,885
185,116
279,136
17,196
130,942
219,795
16,338
87,855
39,882
47,973
31,100
16,873
(1,109)
15,764
5,598
10,166
12,058
10,901
0.39
0.21
31,181
51,856
111,005
115,888
158,769
14,674
Total stockholders' equity ................................ $
477,079
$
346,274
$
261,940
$
203,457
$
144,095
(1) For the years ended January 31, 2019 and January 31, 2018, the Company recorded excess tax benefits of $14.3 million and $14.1 million,
respectively, 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 141 Health Plan and Administrator
Partners and over 45,000 employer clients. Our Health Plan and Administrator Partners and Employer Partners
constitute our Network Partners.
Since our inception in 2002, we have been committed to developing technology solutions that empower healthcare
consumers. 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. Key platform differentiators
include purpose-built technology that offers greater functionality and flexibility than the technologies used by our
competitors, more than 3,000 data integrations with our Network Partner and other benefits provider systems, and
configurability solutions with more than 1,700 uniquely tailored configurations serving our Network Partners. We
work closely with our Network Partners to educate and provide personalized guidance regarding the benefits of
HSAs and our other products.
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 federally-insured custodial depository 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.
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.
-29-
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 federally-insured custodial depository 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 federally-insured custodial depository partners, the terms of which are
impacted by the then-prevailing interest rate environment. The diversification of deposits among 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 without a corresponding increase in what we pay on
our members' deposits 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 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 (including well-known mutual fund companies such as
Fidelity) 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
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
-30-
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 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 as of and for the periods indicated:
% change from % change from
(in thousands, except percentages)
January 31, 2019 January 31, 2018 January 31, 2017
2018 to 2019
2017 to 2018
HSA Members ............................................
Average HSA Members - Year-to-date .......
Average HSA Members - Quarter-to-date...
New HSA Members - Year-to-date ..............
New HSA Members - Quarter-to-date.........
Active HSA Members .................................
HSA Members with investments .................
3,994
3,608
3,813
679
341
3,241
163
3,403
2,952
3,189
723
404
2,863
122
2,746
2,339
2,519
703
422
2,378
66
17 %
22 %
20 %
(6)%
(16)%
13 %
34 %
24 %
26 %
27 %
3 %
(4)%
20 %
85 %
The number of our HSA Members is a key metric because our revenue is driven by the amount we earn from our
HSA Members' accounts, balances and spend. The number of our HSA Members increased by approximately
592,000, or 17%, from January 31, 2018 to January 31, 2019, and by approximately 657,000, or 24%, from
January 31, 2017 to January 31, 2018. The increase in the number of our HSA Members in these periods was
primarily driven by further penetration into existing Network Partners and the addition of new Network Partners.
Additionally, during the years ended January 31, 2019, 2018 and 2017, we acquired the rights to be custodian of
HSA portfolios consisting of approximately 5,000, 54,000, and 35,000 HSA members, respectively.
HSAs are individually owned portable healthcare accounts. As HSA Members transition between employers or
health plans, they may no longer be enrolled in an HDHP that qualifies them to continue to make contributions to
their HSA. If these HSA Members deplete their custodial balance, we may consider them no longer an Active HSA
Member. We define an Active HSA Member as an HSA Member that (i) is associated with a Health Plan and
Administrator Partner or an Employer Partner, in each case as of the end of the applicable period; or (ii) has held a
custodial balance at any point during the previous twelve month period. The number of our Active HSA Members
increased by approximately 378,000, or 13%, from January 31, 2018 to January 31, 2019, and by approximately
485,000, or 20%, from January 31, 2017 to January 31, 2018.
Custodial assets
The following table sets forth our custodial assets for the periods indicated:
(in millions, except percentages)
January 31, 2019
January 31, 2018
January 31, 2017
2018 to 2019
2017 to 2018
% change from
% change from
Custodial cash .....................................................
Custodial investments ..........................................
Total custodial assets........................................
Average daily custodial cash - Year-to-date.........
Average daily custodial cash - Quarter-to-date....
$
$
$
$
6,428
$
1,670
8,098
5,586
5,837
$
$
$
-31-
5,489
1,289
6,778
4,571
4,876
$
$
$
$
4,380
659
5,039
3,661
3,855
17%
30%
19%
22%
20%
25%
96%
35%
25%
27%
Our custodial assets, which are our HSA Members' assets for which we are the custodian, consist of the following
components: (i) custodial cash deposits, which are deposits with our federally-insured custodial depository partners,
(ii) custodial cash deposits invested in an annuity contract with our insurance company partner, and (iii) 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 $1.3 billion, or 19%, from January 31, 2018 to January 31, 2019. Our total
custodial assets increased by $1.7 billion, or 35%, from January 31, 2017 to January 31, 2018. 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. Importantly, our custodial investment
assets increased by $381.2 million, or 30%, from January 31, 2018 to January 31, 2019, and by $630.1 million, or
96%, from January 31, 2017 to January 31, 2018, reflecting our strategy to help our HSA Members build wealth and
invest for retirement.
During the years ended January 31, 2019, 2018 and 2017, we acquired the rights to be custodian of HSA portfolios
consisting of approximately $12.0 million, $164.0 million, and $63.0 million of custodial assets, respectively.
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-operating 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)
2019
2018
Net income ..........................................................................................................................
$
73,899
$
47,362
$
Interest income .................................................................................................................
Interest expense ...............................................................................................................
Income tax provision .........................................................................................................
Depreciation and amortization ..........................................................................................
Amortization of acquired intangible assets .......................................................................
Stock-based compensation expense ................................................................................
Other (1) ...........................................................................................................................
(1,946)
270
1,919
12,256
5,929
21,057
4,998
(734)
274
4,827
11,089
4,863
14,310
2,689
2017
26,376
(531)
275
13,744
8,889
4,297
8,398
1,348
Adjusted EBITDA ................................................................................................................
$
118,382
$
84,680
$
62,796
(1) For the years ended January 31, 2019, 2018 and 2017, Other consisted of non-income based taxes of $487, $439 and $358, acquisition-
related costs of $2,121, $2,197 and $631, amortization of incremental costs to obtain a contract of $1,470, $0 and $0, loss on disposal of
previously capitalized software development of $676, $0 and $0, and other costs of $244, $53 and $359, respectively.
The following table sets forth our Adjusted EBITDA:
(in thousands, except percentages)
2019
2018
2017
2018 to 2019
2017 to 2018
Adjusted EBITDA ................................................... $
118,382
$
84,680
$
62,796
40%
35%
As a percentage of revenue ...................................
41%
37%
35%
Year ended January 31, % change from % change from
Our Adjusted EBITDA increased by $33.7 million, or 40%, from $84.7 million for the year ended January 31, 2018 to
$118.4 million for the year ended January 31, 2019. The increase in Adjusted EBITDA was driven by the overall
growth of our business, including a $23.3 million, or 43%, increase in income from operations.
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 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.
-32-
Key components of our results of operations
Revenue
The following table sets forth our revenue for the periods indicated:
(in thousands, except percentages)
2019
2018
Service revenue ........................................................... $
100,564
$
91,619
$
Custodial revenue ........................................................
Interchange revenue ....................................................
126,178
60,501
87,160
50,746
2017
77,254
59,593
41,523
Total revenue ............................................................. $
287,243
$
229,525
$
178,370
2018 to 2019
2017 to 2018
10%
45%
19%
25%
19%
46%
22%
29%
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, an increasing component of our overall revenue, from our
custodial cash assets deposited with our federally-insured custodial depository 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 depository 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 depository 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
depository 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 earn a
recordkeeping fee, calculated as a percentage of invested assets, in respect of 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 federally-insured custodial depository
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.
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.
-33-
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 increase
somewhat over the near term as our custodial revenue increases as a percentage of total revenue, 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, security 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, corporate development, 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 agreement, non-income-based
taxes and acquisition-related expenses, offset by interest income on corporate cash and marketable securities.
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,
2019, we have recorded a net non-current deferred tax liability in most jurisdictions except Utah and four other
states for which a net non-current deferred tax asset has been recorded.
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 current taxable income coupled with forecasted profitability, no
valuation allowance was required as of January 31, 2019 for most of our deferred tax assets. However, we have
recorded a valuation allowance of $0.1 million as of January 31, 2019 with respect to realized capital losses for
which we do not expect to generate capital gains in order to utilize the capital losses in the future. This valuation
allowance was reflected as an adjustment to retained earnings as a result of the adoption of ASU 2016-01. No
valuation allowance was recorded as of January 31, 2018.
-34-
Results of operations
Service revenue
The $8.9 million, or 10%, increase in service revenue from the year ended January 31, 2018 to the year ended
January 31, 2019 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 $14.4 million, or 19%, increase in service revenue from the
year ended January 31, 2017 to the year ended January 31, 2018 was also 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
number of our HSA Members increased by approximately 592,000, or 17%, from January 31, 2018 to January 31,
2019, and by approximately 657,000, or 24%, from January 31, 2017 to January 31, 2018.
Service revenue as a percentage of our total revenue continues to decrease primarily due to the higher growth rate
of custodial revenue.
Service revenue per HSA Member decreased by approximately 10% from the year ended January 31, 2018 to the
year ended January 31, 2019, and 6% from the year ended January 31, 2017 to the year ended January 31, 2018.
Our service fee tier structure incentivizes our Network Partners to add HSA Members by charging a lower rate for
more HSA Members. As Network Partners add more HSA Members, the account fee per HSA Member will continue
to decrease.
Custodial revenue
The $39.0 million, or 45%, increase in custodial revenue from the year ended January 31, 2018 to the year ended
January 31, 2019 was primarily due to an increase in average daily custodial cash of $1.0 billion, or 22%, and an
increase in the yield on average custodial cash from 1.83% in the year ended January 31, 2018 to 2.15% in the
year ended January 31, 2019.
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 $0.9 billion, or 25%, as well as
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.
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.
Custodial revenue per HSA Member increased by approximately 18% from the year ended January 31, 2018 to the
year ended January 31, 2019. Custodial revenue per HSA Member increased by approximately 16% from the year
ended January 31, 2017 to the year ended January 31, 2018, primarily due to the higher yield and higher average
custodial cash balances.
Interchange revenue
The $9.8 million, or 19%, increase in interchange revenue from the year ended January 31, 2018 to the year ended
January 31, 2019 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.
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.
Interchange revenue per HSA Member decreased by approximately 2% from the year ended January 31, 2018 to
the year ended January 31, 2019, and 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.
Total revenue
Total revenue per HSA Member increased by 2% from the year ended January 31, 2018 to the year ended
January 31, 2019, due to the increase in custodial revenue per HSA Member, partially offset by the decreases in
service revenue and interchange revenue per HSA Member. 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, partially offset by the decreases in service revenue and interchange revenue per HSA Member.
-35-
Cost of revenue
The following table sets forth our cost of revenue for the periods indicated:
(in thousands, except percentages)
2019
2018
Service costs ................................................. $
76,858
$
70,426
$
Custodial costs ..............................................
Interchange costs ..........................................
14,124
15,068
11,400
12,783
Total cost .................................................... $
106,050
$
94,609
$
2017
51,868
9,767
10,380
72,015
2018 to 2019
2017 to 2018
9%
24%
18%
12%
36%
17%
23%
31%
Year ended January 31,
% change from
% change from
Service costs
The $6.4 million, or 9%, increase in service costs from the year ended January 31, 2018 to the year ended
January 31, 2019 was due to the higher volume of total accounts being serviced. The $6.4 million increase includes
$4.2 million related to the hiring of additional personnel to implement and support our new Network Partners and
HSA Members, increased information technology expenses of $1.3 million, and general overhead allocation of $1.1
million, partially offset by a $0.2 million decrease in other expenses.
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 $0.8 million, depreciation and amortization of $0.6 million, general overhead allocation of
$0.7 million and $1.1 million in other expenses.
Custodial costs
The $2.7 million, or 24%, increase in custodial costs from the year ended January 31, 2018 to the year ended
January 31, 2019 was due to an increase in average daily custodial cash from $4.6 billion for the year ended
January 31, 2018 to $5.6 billion during the year ended January 31, 2019, which was partially offset by a decrease in
custodial costs on average custodial cash from 0.25% for the year ended January 31, 2018 to 0.24% for the year
ended January 31, 2019.
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 $3.7 billion for the year ended
January 31, 2017 to $4.6 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.
Interchange costs
The $2.3 million, or 18%, increase in interchange costs from the year ended January 31, 2018 to the year ended
January 31, 2019, and the $2.4 million, or 23%, increase from the year ended January 31, 2017 to the year ended
January 31, 2018, 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 scale our Member Education Center, Network Partner implementation and account
management functions.
-36-
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)
2019
2018
Sales and marketing ............................................ $
29,498
$
23,139
$
Technology and development ...............................
General and administrative ..................................
Amortization of acquired intangible assets ...........
35,057
33,039
5,929
27,385
25,111
4,863
Total operating expenses ................................... $
103,523
$
80,498
$
2017
18,320
22,375
20,151
4,297
65,143
2018 to 2019
2017 to 2018
27%
28%
32%
22%
29%
26%
22%
25%
13%
24%
Sales and marketing
The $6.4 million, or 27%, increase in sales and marketing expenses from the year ended January 31, 2018 to the
year ended January 31, 2019 primarily consisted of increased staffing and sales commissions of $1.1 million,
increased stock-based compensation expense of $1.5 million, increased partner commissions of $2.5 million, and
an increase in other expenses of $1.3 million.
The $4.8 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 $0.3 million, and
an increase in other expenses of $0.7 million.
Sales and marketing expense from the year ended January 31, 2018 to the year ended January 31, 2019 reflects
the adoption of the new revenue recognition standard, ASC 606. As a result, we capitalize sales commissions and
amortize these costs over the average economic life of an HSA Member and RA customer relationship, to sales and
marketing expense in the consolidated statements of operations and comprehensive income. Our previous practice
was to fully expense sales commissions when the HSA and RA account was added to our platform.
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 increase 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.
Technology and development
The $7.7 million, or 28%, increase in technology and development expenses from the year ended January 31, 2018
to the year ended January 31, 2019 resulted primarily from the hiring of additional personnel of $4.7 million,
increased amortization and depreciation of $1.3 million, stock compensation of $1.8 million, and other expenses of
$1.3 million, which were partially offset by a decrease in professional services of $0.2 million and an increase in
capitalized engineering costs of $1.2 million associated with the development and enhancement of our proprietary
technology platform.
The $5.0 million, or 22%, increase in technology and development expenses for 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, and stock compensation of $1.4 million, which were
partially offset by a decrease in professional services of $2.0 million and an increase in capitalized engineering
costs of $0.4 million associated with the development and enhancement of our proprietary technology platform.
We expect our technology and development expenses to increase for the foreseeable future as we continue to
invest in the development and security 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 $7.9 million, or 32%, increase in general and administrative expenses from the year ended January 31, 2018 to
the year ended January 31, 2019 was primarily attributable to the hiring of additional personnel of $3.4 million,
increased stock compensation of $3.2 million, increased professional fees of $0.7 million and increased other
expenses of $0.6 million.
-37-
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,
increased stock compensation of $2.6 million and increased other expenses of $1.1 million, which were partially
offset by a decrease in professional services of $2.0 million.
We expect our general and administrative expenses to increase for the foreseeable future due to the additional
demands on our legal, compliance, accounting, and insurance functions that we incur as we continue to grow our
business, as well as other costs associated with being a public company. 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 $1.1 million and $0.6 million increase in amortization of acquired intangible assets for the years ended
January 31, 2019 and 2018, respectively, was attributable to HSA portfolio asset acquisitions and the acquisition of
a business. On an annual basis, we expect total amortization of acquired intangible assets to remain steady.
Income tax provision
Income tax provision for the years ended January 31, 2019, 2018, and 2017 was $1.9 million, $4.8 million, and
$13.7 million, respectively. The decrease in income tax provision during the year ended January 31, 2019
compared to the year ended January 31, 2018 was primarily the result of the reduction in the US federal corporate
income tax rate from 35% to 21% as a result of legislative changes effective January 1, 2018 and an increase in
federal and state research and development tax credits over prior periods. 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.
Our effective income tax rate for the years ended January 31, 2019, 2018 and 2017 was 2.5%, 9.2%, and 34.3%,
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, 2019 over
the year ended January 31, 2018 was primarily due to the reduction in the US federal corporate income tax rate
from 35% to 21% as a result of legislative changes effective January 1, 2018 and an increase in federal and state
research and development tax credits over prior periods. 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.
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.
In the past, we have experienced higher operating expenses in our fourth fiscal quarter due to sales commissions
for new accounts activated in January. Beginning February 1, 2018, the Company adopted Accounting Standards
Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASC 606"). As a result of this adoption, the
Company capitalizes incremental contract acquisition costs, such as sales commissions, and amortizes these costs
over the average economic life of a member.
-38-
Liquidity and capital resources
Cash, cash equivalents and marketable securities overview
As of January 31, 2019, our principal source of liquidity was our current cash and cash equivalent 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, 2019 cash, cash equivalents were $361.5 million. As of January 31, 2018 cash, cash equivalents
and marketable securities were $240.3 million.
Capital resources
We have a “shelf” registration statement on Form S-3 on file 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.
We have a secured credit facility of $100.0 million. The credit facility has a term of five years and expires on
September 30, 2020. The 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, 2019. We were in compliance with all covenants as of
January 31, 2019.
Use of cash
Capital expenditures for the years ended January 31, 2019, 2018, and 2017 were $13.8 million, $15.8 million, and
$12.7 million, respectively. We expect to continue our increased capital expenditures during the year ending
January 31, 2020 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 computer hardware, personnel and related costs for software engineering and outsourced software
engineering services. In addition, we plan to devote further resources to leasehold improvements and furniture and
fixtures for our office space.
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)
2019
2018
Net cash provided by operating activities .........................................................................
$
113,422
$
81,702
$
Net cash provided by (used in) investing activities ...........................................................
Net cash provided by financing activities .........................................................................
Increase in cash and cash equivalents .........................................................................
Beginning cash and cash equivalents ..............................................................................
25,652
22,929
162,003
199,472
(36,748)
14,564
59,518
139,954
2017
45,591
(13,054)
23,776
56,313
83,641
Ending cash and cash equivalents ................................................................................
$
361,475
$
199,472
$
139,954
Year ended January 31,
-39-
Cash flows provided by operating activities. Net cash provided by operating activities during the year ended
January 31, 2019 resulted primarily from our net income of $73.9 million adjusted for the following non-cash items:
depreciation and amortization of $18.2 million and stock-based compensation of $21.1 million, and changes in
deferred taxes of $0.4 million, accrued compensation of $4.4 million, accrued liabilities of $3.0 million, accounts
payable of $0.9 million, and bad debt expense, changes in inventories, other long-term liabilities, disposal of
previously capitalized software development, and realized loss on sale of on marketable securities and other
totaling $1.7 million. These were offset by changes in other assets of $5.9 million, accounts receivable of $4.3
million.
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 $0.9 million, 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 $0.9 million, and accounts payable, amortization of deferred
financing costs, bad debt expense, and inventories totaling of $0.7 million. 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.
Cash flows provided by and used in investing activities. Net cash provided by investing activities during the
year ended January 31, 2019 was primarily the result of the proceeds from the sale of marketable securities. We
also continued our purchases of software and capitalized software development costs due to continued growth.
During the years ended January 31, 2019, 2018 and 2017, purchases of software and capitalized software
development costs were $10.0 million, $10.4 million, and $9.0 million, respectively. We also increased our
purchases of property and equipment to $3.9 million, $5.5 million and $3.6 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.
Cash flows provided by financing activities. Cash flow provided by financing activities during the year ended
January 31, 2019 resulted primarily from proceeds associated with the exercise of stock options of $22.9 million.
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.
Contractual obligations
We lease office space, data storage facilities and equipment, as well as contractual commitments related to network
infrastructure and certain maintenance requirements under long-term non-cancelable operating leases. Future
minimum lease payments and other contractual payments required under non-cancelable obligations as
of January 31, 2019 are as follows:
(in thousands)
Less than
1 year
1-3
years
3-5
years
More than
5 years
Total
Payment due by period
Office lease obligations .........................................................
$
3,690
$
9,522
$
11,600
$
44,252
$
69,064
Data storage and equipment lease obligations .....................
Processing services agreement ............................................
Telephony services ...............................................................
454
825
357
361
825
—
Other .....................................................................................
1,932
3,945
47
—
—
34
—
—
—
—
862
1,650
357
5,911
Total ....................................................................................
$
7,258
$
14,653
$
11,681
$
44,252
$
77,844
-40-
Office lease obligations. The Company’s headquarters is in Draper, UT where it leases two buildings and is
party to a third lease for a building to be constructed on a parcel contiguous to its existing buildings. The leases will
expire on November 30, 2030. The Company is responsible for payment of taxes and operating expenses relating
to the premises occupied by the Company, in addition to 2.5% annual rent increases over the lease term. The
Company also leases office space in Overland Park, Kansas, under a lease that expires in March 2022. The
Company plans to continue to lease additional office space to support its growth, as necessary. In addition, many of
the Company's existing lease agreements provide it with the option to renew.
Data storage and equipment lease obligations. The data storage and equipment leases relate to the
Company's offsite data storage facilities and office equipment leases, which expire during the years ended
January 31, 2021 and January 31, 2024, respectively.
Telephony services. The telephony service agreement relates to our 24/7/365 member support center. The
agreement expires in September 2019. In January 2019, the Company entered into a telephony agreement with a
new provider that is cancelable without significant penalty.
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, 2019, 2018 and 2017, 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.
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. As a result of the Company's February 1, 2018 adoption of Accounting
Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASC 606") it has updated its
discussions of critical accounting policies related to revenue recognition. See Note 1. to the Consolidated Financial
Statements for a summary of significant accounting policies and the effect on our financial statements.
Revenue recognition
We earn revenue primarily from three sources: service revenue, custodial revenue and interchange revenue. We
determine revenue recognition through the following five step approach under ASC 606: (1) identification of the
contract, or contracts, with a customer; (2) identification of the performance obligations in the contract; (3)
-41-
determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the
contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation.
• 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 service revenue on a monthly basis as we satisfy our
service performance obligations. 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 we satisfy our performance obligations.
• Custodial revenue: We earn interest on custodial cash. This interest is earned from various federally-insured
depository partners and from an annuity contract with our insurance company partner with whom we deposit
our members’ HSA cash assets. We also earn certain administrative and recordkeeping fees for custodial
investments from our investment partners and customers. We recognize custodial revenue each month based
on the amount received by its custodial partners and investment partners.
•
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 interchange
revenue in the month the payment transaction occurs.
Costs to obtain a contract
We recognize an asset for the incremental costs of obtaining a contract with a customer, such as sales
commissions, when we expect the benefit of those costs to be recoverable. Total capitalized costs to obtain a
contract with a customer are included in Other current and Other assets on our consolidated balance sheets. We
apply the practical expedient to recognize incremental costs of obtaining contracts as an expense when incurred if
the amortization period would have been one year or less.
We applied a portfolio approach based on product or service type to determine the amortization period for the sales
commissions contract costs. The capitalized costs will be amortized over a period consistent with the transfer to the
customer of the products or services to which the asset relates. The estimated lives have been determined by
taking into consideration the type of product or service sold, the estimated customer relationship period based on
our historical experience, and industry data. Amortization of capitalized sales commission contract costs is included
in sales and marketing expenses in the consolidated statement of operations and comprehensive income. We
review the assets for impairment whenever events or circumstances indicate that the associated carrying amount
may not be recoverable.
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 whether substantially all of the fair value of the gross assets acquired is
concentrated in a single asset or group of similar assets, and whether the acquired group of assets includes an
input and a substantive process that together significantly contribute to the ability to create outputs. If we determine
that substantially all of the fair value of the gross assets acquired is not concentrated in a single asset group or
group of similar assets, and that the acquisition contains an input and a substantive process that together
significantly contribute to the ability to create outputs, the acquisition is determined to be a business combination.
In instances where substantially all of the fair value of the gross assets acquired is concentrated in a single asset or
group of similar assets, 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.
-42-
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.
Management uses 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, as well as our stock price and associated market
capitalization. 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. A lower fair value estimate in the future, or a prolonged or significant decline in our stock price, could
provide evidence of a need to record a material impairment of goodwill.
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 statements 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 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 our effective tax rate and results of operations.
Stock-based compensation
Stock options. We award time-based and performance-based stock options to certain team members, executive
officers, and directors. 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. 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, and is reversed as pre-vesting forfeitures occur, 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
-43-
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: In prior years, we did not have adequate length of trading history for our common stock.
Therefore, 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. During the year ended January 31, 2019, we determined that we had a sufficient amount of historical
information regarding the volatility of our own common stock price to began using our own historical volatility in
addition to the volatility of publicly traded industry peer companies, as our share price history grows over time.
• 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 limited 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 .......................................
2019
—%
Year ended January 31,
2018
—%
2017
—%
Expected stock price volatility ..............................
36.53% - 37.84%
37.79% - 38.01%
38.01% - 38.37%
Risk-free interest rate ..........................................
2.52% - 2.79%
1.18% - 2.07%
1.18% - 2.18%
Expected life of options .......................................
5.17 - 6.25 years
4.50 - 6.25 years
4.50 - 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.
Restricted stock units and restricted stock awards. We award time-based and performance-based restricted
stock units ("RSU"s and "PRSUs", respectively) and restricted stock awards ("RSAs" and "PRSAs", respectively) to
certain team members, executive officers, and directors. Stock-based compensation costs related to these awards
granted are measured at the date of grant based on the estimated fair value of the award. We estimate the grant
date fair value, and the resulting stock-based compensation expense, using 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. With respect to time-based RSUs and RSAs, the grant date fair value of stock-based awards is
recognized on a straight-line basis over the requisite service period, and is reversed as pre-vesting forfeitures
occur, which is generally the vesting period of the award. With respect to PRSUs and PRSAs, 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 RSUs and PRSUs in
the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will
likely increase.
-44-
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, 2019, 2018, and 2017, no one customer
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. Although 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, 2019 were $361.5 million, of which $1.0 million 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, 2019 was $25.7 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, 2019, we had custodial cash of approximately $6.4 billion. As a non-bank
custodian, we contract with federally-insured custodial depository 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 federally-insured custodial depository partners, the terms of which are impacted by the then-
prevailing interest rate environment. The diversification of deposits among depository 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 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
-45-
as to withdrawal or use. As of January 31, 2019, we had unrestricted cash and cash equivalents of $361.5 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. In January 2019,
we sold all marketable securities.
-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, 2019 and 2018 ..................................................................
Consolidated Statements of Operations and Comprehensive Income for the years ended January 31,
2019, 2018 and 2017 ....................................................................................................................................
Consolidated Statements of Stockholders' Equity for the years ended January 31, 2019, 2018 and 2017 ...
Consolidated Statements of Cash Flows for the years ended January 31, 2019, 2018 and 2017 ................
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 (the
“Company”) as of January 31, 2019 and 2018, 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 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash
flows for each of the three years in the period ended January 31, 2019 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, 2019, 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, 2019
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, 2019
January 31, 2018
Assets
Current assets
Cash and cash equivalents ................................................................................................ $
361,475
$
Marketable securities, at fair value .....................................................................................
Total cash, cash equivalents and marketable securities ..................................................
Accounts receivable, net of allowance for doubtful accounts of $125 and $208 as of
January 31, 2019 and 2018, respectively ...........................................................................
Other current assets ...........................................................................................................
Total current assets .......................................................................................................
Property and equipment, net ..............................................................................................
Intangible assets, net
.........................................................................................................
Goodwill
.............................................................................................................................
Deferred tax asset ..............................................................................................................
Other assets .......................................................................................................................
—
361,475
25,668
7,534
394,677
8,223
79,666
4,651
1,677
21,122
199,472
40,797
240,269
21,602
3,525
265,396
7,836
83,635
4,651
5,461
2,180
Total assets ................................................................................................................... $
510,016
$
369,159
Liabilities and stockholders’ equity
Current liabilities
Accounts payable ............................................................................................................... $
3,520
$
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, 2019 and 2018 ....................................................................
Common stock, $0.0001 par value, 900,000 shares authorized, 62,446 and 60,825
shares issued and outstanding as of January 31, 2019 and 2018, respectively .................
Additional paid-in capital .......................................................................................................
Accumulated other comprehensive loss, net .........................................................................
Accumulated earnings ...........................................................................................................
Total stockholders’ equity ..............................................................................................
16,981
8,552
29,053
2,968
916
3,884
32,937
—
6
305,223
—
171,850
477,079
Total liabilities and stockholders’ equity ......................................................................... $
510,016
$
The accompanying notes are an integral part of the consolidated financial statements.
2,420
12,549
5,521
20,490
2,395
—
2,395
22,885
—
6
261,237
(269)
85,300
346,274
369,159
-50-
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Operations and Comprehensive
Income
(in thousands, except per share data)
2019
2018
2017
Year ended January 31,
Revenue
Service revenue ...................................................................................... $
100,564
$
91,619
$
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 .................................................................................
126,178
60,501
287,243
76,858
14,124
15,068
106,050
181,193
29,498
35,057
33,039
5,929
103,523
77,670
(1,852)
(1,852)
75,818
1,919
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
Net income ............................................................................................... $
73,899
$
47,362
$
Net income per share:
Basic ........................................................................................................ $
Diluted ...................................................................................................... $
1.20
1.17
$
$
0.79
0.77
$
$
Weighted-average number of shares used in computing net income per
share:
Basic ........................................................................................................
Diluted ......................................................................................................
61,836
63,370
60,304
61,854
Comprehensive income:
77,254
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
26,376
0.45
0.44
58,615
59,894
Net income .............................................................................................. $
73,899
$
47,362
$
26,376
Other comprehensive loss:
Unrealized loss on available-for-sale marketable securities, net of tax
—
(59)
Comprehensive income .......................................................................... $
73,899
$
47,303
$
(67)
26,309
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, 2016..................................
57,726 $
6 $
Common stock
Additional
paid-in
capital
199,940 $
Accumulated
compre-
hensive loss
Accumulated
earnings
(deficit)
(98) $
3,609 $
Total
stockholders'
equity
203,457
Stockholders’ equity
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
—
—
—
—
Balance as of January 31, 2017..................................
59,538
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
—
—
—
—
—
—
—
—
—
—
6
—
—
—
—
—
—
7,142
8,398
16,634
—
—
232,114
14,564
14,310
249
—
—
—
—
—
—
(67)
—
(165)
—
—
—
(45)
(59)
—
—
—
—
—
26,376
29,985
—
—
7,908
45
—
47,362
Balance as of January 31, 2018..................................
60,825 $
6 $
261,237 $
(269) $
85,300 $
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 ASC 606 ..............
Cumulative effect from adoption of ASU 2016-01 .......
Net income ..................................................................
1,621
—
—
—
—
—
—
—
—
—
22,929
21,057
—
—
—
—
—
—
269
—
—
—
13,007
(356)
73,899
Balance as of January 31, 2019..................................
62,446 $
6 $
305,223 $
— $
171,850 $
The accompanying notes are an integral part of the consolidated financial statements.
7,142
8,398
16,634
(67)
26,376
261,940
14,564
14,310
8,157
—
(59)
47,362
346,274
22,929
21,057
13,007
(87)
73,899
477,079
-52-
13,186
(2,891)
8,398
35
96
(2,728)
(1,343)
567
946
1,729
1,220
45,591
(379)
(3,645)
(9,030)
—
—
—
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Year ended January 31,
2019
2018
2017
Net income .......................................................................................................................... $
73,899
$
47,362
$
26,376
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ...........................................................................................
Deferred taxes ...................................................................................................................
Stock-based compensation ................................................................................................
Bad debt expense ..............................................................................................................
Loss on disposal of software development costs and other ...............................................
Changes in operating assets and liabilities:
Accounts receivable ...........................................................................................................
Other assets ......................................................................................................................
Accounts payable ...............................................................................................................
Accrued compensation ......................................................................................................
Accrued liabilities ...............................................................................................................
Other long-term liabilities ...................................................................................................
18,185
408
21,057
240
933
(4,306)
(5,893)
863
4,432
3,031
573
15,952
4,306
14,310
133
464
(4,734)
(760)
(581)
3,827
484
939
Net cash provided by operating activities ............................................................................
113,422
81,702
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 ...................................................................................................
Proceeds from sale of marketable securities .....................................................................
Net cash provided by (used in) investing activities ..............................................................
Cash flows from financing activities:
Proceeds from exercise of common stock options .............................................................
Tax benefit from exercise of common stock options ...........................................................
Net cash provided by financing activities .............................................................................
Increase in cash and cash equivalents ................................................................................
Beginning cash and cash equivalents ..................................................................................
(728)
(3,869)
(9,978)
(1,195)
—
41,422
25,652
22,929
—
22,929
162,003
199,472
(483)
(5,458)
(10,380)
(17,545)
(2,882)
—
(36,748)
(13,054)
14,564
—
14,564
59,518
139,954
7,142
16,634
23,776
56,313
83,641
Ending cash and cash equivalents ...................................................................................... $
361,475
$
199,472
$
139,954
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,
2019
2018
2017
Interest expense paid in cash .............................................................................................. $
Income taxes paid in cash, net of refunds received .............................................................
$
203
587
203
$
27
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of intangible member assets accrued at period end ..........................................
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 ..........................................................................
The accompanying notes are an integral part of the consolidated financial statements.
—
37
200
1,409
—
3
213
863
—
25
330
-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, 2019 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 $0.2 million as of January 31, 2019 and is included in other assets on the accompanying
consolidated balance sheets.
During the year ended January 31, 2016, the Company purchased an approximate 1% ownership interest in a
limited partnership that engages in the development of technology-based financial healthcare products. The
Company elected the measurement alternative for non-marketable investments previously accounted for under the
cost method of accounting to account for the investment. The investment was $0.5 million as of January 31, 2019
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 and 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.
Accounts receivable
Accounts receivable represent monies due to the Company for monthly service revenue, custodial revenue and
interchange revenue. As of January 31, 2019 and 2018, service revenue receivables, net, were $6.3 million and
$7.9 million, custodial revenue receivables were $13.8 million and $9.0 million, and interchange revenue
receivables were $5.6 million and $4.7 million, respectively. 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, 2019 and 2018, the Company had allowance for
doubtful accounts of $0.1 million and $0.2 million, respectively.
Investments
In January 2019, the Company sold all the marketable securities it previously held. See Note 3—Cash, Cash
Equivalents and Marketable Securities for additional information regarding the realized loss on sale of marketable
securities. The Company classified marketable securities, which consisted 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 as available-for-
sale. Marketable securities were reported at fair value with changes included in other expense, net in the
consolidated statements of operations and comprehensive income. The Company used the specific identification
method to determine cost in calculating the realized loss upon the sale of marketable securities. The Company
periodically evaluated its marketable securities to assess whether those with unrealized loss positions were other-
than-temporarily impaired. The Company considered impairments to be other than temporary if they were related to
deterioration in credit risk or if it was likely it would sell the securities before the recovery of their cost basis.
Equity investments are accounted for using the equity method of accounting if the investment gives the Company
the ability to exercise significant influence, but not control, over an investee. Equity-method investments are
included in other assets on the consolidated balance sheets. The Company's share of the earnings or losses as
reported by equity-method investees, amortization of basis differences, and related gains or losses, if any, are
recognized in other expense, net on the consolidated statements of operations and comprehensive income.
Equity investments without readily determinable fair values and for which the Company does not have the ability to
exercise significant influence are accounted for using the measurement alternative and are classified as other
assets on the consolidated balance sheets. All gains and losses on these investments, realized and unrealized, are
recognized in other expense, net on the consolidated statements of operations and comprehensive income.
The Company assesses whether an other-than-temporary impairment loss on equity method investments and an
impairment loss on measurement alternative investments has occurred due to declines in fair value or other market
conditions. If any impairment is considered other than temporary for equity method investments or impairment is
identified for measurement alternative investments, the Company will write down the investment to its fair value and
record the corresponding charge through other expense, net in the consolidated statements of operations and
comprehensive income.
Other assets
Other assets consist primarily of contract costs, prepaid expenditures, income tax receivables, inventories, 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.
-56-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
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 during the application development stage that
are directly attributable to developing or obtaining software for internal use 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.
Intangible assets, net
Intangible assets are carried at cost and amortized, typically, on a straight-line basis over their estimated useful
lives. The useful life used for computing amortization for all intangible asset classes is described below:
Computer software and capitalized software development costs .............................................................................
401(k) customer relationships .................................................................................................................................
Acquired HSA intangible member assets ................................................................................................................
3 years
10 years
15 years
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 HSAs acquired. The Company used its HSA
customer relationship period assumption and the historical attrition rates of member accounts to determine 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. During the year ended January 31, 2019, the Company incurred a loss on disposal of approximately $0.7
million of previously capitalized software development costs. No impairment charges have been recorded during the
years ended January 31, 2018 and 2017. 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.
-57-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
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.
Revenue recognition
On February 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2014-09, Revenue from
Contracts with Customers ("ASC 606"), which replaced most existing revenue recognition guidance in GAAP, using
the modified retrospective method for all contracts not completed as of the date of adoption. The Company recorded
the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings.
The comparative period information has not been restated and continues to be reported under the accounting
standards in effect for that period. The adoption of ASC 606 did not have a material impact on the Company's
revenue for the year ended January 31, 2019.
Effective February 1, 2018, the Company capitalizes incremental contract acquisition costs, such as sales
commissions, previously included in sales and marketing expenses in the consolidated statement of operations and
comprehensive income, and amortizes these costs over the average estimated economic life of an HSA Member,
RA customer relationship, and 401(k) customer relationship. The Company's prior practice was to fully expense
sales commissions when the respective account was added to the Company's platform.
The cumulative effect of the changes made to the Company's consolidated balance sheet as of February 1, 2018
for the adoption of ASC 606 is as follows:
(in thousands)
January 31, 2018
Adjustments
February 1, 2018
Other current assets ........................................................... $
Deferred tax asset .............................................................. $
Other assets ....................................................................... $
Deferred tax liability ............................................................ $
Accumulated earnings ........................................................ $
3,310 $
5,461 $
2,180 $
— $
85,300 $
1,366 $
(4,187) $
15,847 $
18 $
13,007 $
4,676
1,274
18,027
18
98,307
The impact of adoption on the Company's consolidated statement of operations and comprehensive income for the
year ended January 31, 2019 is as follows:
(in thousands)
Sales and marketing ............................................................ $
Income from operations ....................................................... $
Income tax provision ........................................................... $
Net income .......................................................................... $
As reported
Without adoption of
ASC 606
Effect of change higher
(lower)
29,498 $
77,670 $
1,919 $
73,899 $
31,335 $
75,833 $
1,470 $
72,511 $
(1,837)
1,837
449
1,388
-58-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
The impact of adoption on the Company's consolidated balance sheet as of January 31, 2019 is as follows:
(in thousands)
Other current assets ........................................................... $
Deferred tax asset .............................................................. $
Other assets ....................................................................... $
Deferred tax liability ............................................................ $
7,534 $
1,677 $
21,122 $
916 $
5,815 $
5,415 $
3,790 $
— $
Accumulated earnings ........................................................ $
171,850 $
157,455 $
1,719
(3,738)
17,332
916
14,395
As reported
Without adoption of
ASC 606
Effect of change higher
(lower)
Under ASC 606, the Company recognizes revenue when control of the promised goods or services is transferred to
its customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or
services.
The Company determines revenue recognition through the following steps:
•
•
•
•
•
identification of the contract, or contracts, with a customer;
identification of the performance obligations in the contract;
determination of the transaction price;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenue when, or as, we satisfy a performance obligation.
Disaggregation of revenue. The Company's primary sources of revenue are service, custodial, and interchange
revenue and are disclosed in the consolidated statements of operations and comprehensive income. All of the
Company's sources of revenue are deemed to be revenue contracts with customers. Each revenue source is
affected differently by economic factors as it relates to the nature, amount, timing and uncertainty.
Costs to obtain a contract. ASC 606 requires capitalizing the costs of obtaining a contract when those costs are
expected to be recovered. Since incremental commissions paid to sales team members as a result of obtaining
contracts are recoverable, the Company recorded a $17.2 million cumulative catch-up capitalized asset on February
1, 2018. As of January 31, 2019, the net amount capitalized as contract costs was $19.1 million, which is included in
other current assets and other assets.
In order to determine the amortization period for sales commissions contract costs, the Company applied the
portfolio approach. Accordingly, the amortization period of the assets has been determined to be the average
economic life of an HSA Member, RA customer relationship, and 401(k) customer relationship, which is estimated to
be 15 years, 7 years, and 10 years, respectively. Amortization of capitalized sales commission contract costs is
included in sales and marketing expenses in the consolidated statements of operations and comprehensive income.
Performance obligations. ASC 606 requires disclosure of the aggregate amount of the transaction price
allocated to unsatisfied performance obligations; however, as permitted by ASC 606, the Company has elected to
exclude from this disclosure any contracts with an original duration of one year or less and any variable
consideration that meets specified criteria. Amounts excluded are not significant to the Company's consolidated
statements of operations and comprehensive income.
Service revenue. The Company hosts its platform, prepares statements, provides a mechanism for
spending funds, and provides customer support services. All of these services are consumed as they are
received. The Company will continue to recognize service revenue, in an amount that reflects the
consideration it expects to be entitled to in exchange for those services, on a monthly basis as it satisfies its
performance obligations.
Custodial revenue. The Company deposits custodial cash at federally-insured custodial depository partners
and investment assets with an investment partner. The deposit of funds represents a service that is
simultaneously received and consumed by the custodial depository partners and investment partner. The
Company will continue to recognize custodial revenue, in an amount that reflects the consideration it expects
-59-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
to be entitled to in exchange for the service, each month based on the amount received by its custodial
partners and investment partners.
Interchange revenue. The Company satisfies its interchange performance obligation each time payments
are made with its cards via payment networks. The Company will continue to recognize interchange revenue,
in an amount that reflects the consideration it expects to be entitled to in exchange for the service, in the
month the payment transaction occurs.
Contract balances. The Company does not recognize revenue in advance of invoicing its customers and
therefore has no related contract assets. The Company records a receivable when revenue is recognized prior to
payment and the Company has unconditional right to payment. Alternatively, when payment precedes the related
services, the Company records a contract liability, or deferred revenue, until its performance obligations are
satisfied. The Company's deferred revenue as of January 31, 2019 and 2018 was $0.3 million and $0.4 million,
respectively. The balances related to cash received in advance for a certain interchange revenue arrangement.
From the deferred revenue balance as of February 1, 2018, revenue recognized during the year ended January 31,
2019 was $0.2 million. The Company expects to satisfy its remaining obligations for this arrangement.
Significant judgments. The Company makes no significant judgments in determining the amount or timing of
revenue recognition. The Company has estimated the average economic life of an HSA Member, RA customer
relationship, and a 401(k) customer relationship to be 15 years, 7 years, and 10 years, respectively, and which has
been determined to be the amortization period for the capitalized sales commissions contract costs.
Practical expedients. The Company has applied the practical expedient which allows an entity to account for
incremental costs of obtaining a contract at a portfolio level. The Company has also applied the practical expedient
to recognize incremental costs of obtaining contracts as an expense when incurred if the amortization period would
have been one year or less.
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
The Company grants stock-based awards, which consist of stock options, restricted stock units ("RSUs") and
restricted stock awards ("RSAs"), to certain team members, executive officers, and directors. The Company
recognizes compensation expense for stock-based awards based on the grant date estimated fair value. Expense
for stock-based awards is generally recognized on a straight-line basis over the requisite service period, and is
reversed as pre-vesting forfeitures occur. The fair value of stock options is determined using the Black-Scholes
option pricing model. The determination of fair value for stock options on the date of grant using an option pricing
model requires management to make certain assumptions regarding a number of complex and subjective variables.
The fair value of RSUs and RSAs is 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.
For stock-based awards with performance conditions, the Company evaluates 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"). See
Note 9—Stock-based compensation for additional information.
Upon the exercise of a stock option or release of an RSU/RSA, common shares are issued from authorized, but not
outstanding, common stock.
-60-
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 has recorded
a valuation allowance with respect to realized capital losses for which the Company does not expect to generate
capital gains in order to utilize the capital losses in the future. The Company believes that it is more likely than not
that all other deferred tax assets will be realized as of January 31, 2019. 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 statements of operations and comprehensive
income. Also, the Company uses 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 prior to the
February 1, 2018 adoption of ASU 2016-01.
Asset acquisitions
During the year ended January 31, 2019, the Company acquired the rights to be the custodian of an HSA portfolio.
During the year 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. Substantially all of the fair value of the gross portfolio assets
acquired was concentrated in a group of similar HSA assets and therefore the acquisitions 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 was
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.
-61-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
Business combination
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, 2019, 2018 and 2017, the Company
incurred an expense of $2.1 million, $2.2 million, and $0.6 million, respectively, for acquisition-related activity. There
were no business combinations during the years ended January 31, 2019 and 2017.
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 operations. For the years
ended January 31, 2019, 2018 and 2017, 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,
frequently exceeds federally insured limits. The Company’s cash and cash equivalents held in banks as of
January 31, 2019 was $361.5 million, of which $1.0 million 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, 2019 was $25.7 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 GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the 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.
Change in estimate. Effective November 1, 2018, the Company prospectively changed its estimate of the useful
life of capitalized incremental costs to obtain an RA contract to better reflect the estimated periods during which the
intangible asset is expected to generate cash flows. The incremental costs to obtain an RA contract were previously
amortized over the same life as the incremental costs to obtain an HSA contract, which is estimated to be 15 years.
The Company determined the amortization period of the intangible assets to be the average economic life of an RA
customer relationship, which is estimated to be 7 years. The change in estimate and resulting accelerated
amortization did not have a material effect on the Company's consolidated financial statements for the year ended
January 31, 2019. Further, the Company does not expect the accelerated amortization to have a material impact on
its consolidated financial statements for the year ended January 31, 2020.
Recent adopted accounting pronouncements
Adoption of ASC 606
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU")
2014-09, Revenue from Contracts with Customers ("ASC 606"), which requires an entity to recognize the amount of
-62-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU and
related subsequent amendments replaces most existing revenue recognition guidance in GAAP. The Company
adopted ASC 606 on February 1, 2018 using the modified retrospective transition method. See Revenue
Recognition above for further details.
Adoption of ASU 2016-01
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities.
In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial
Instruments-Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities,
which clarifies certain aspects of the guidance issued in ASU 2016-01. These updates 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 2016-01 also amends certain disclosure
requirements associated with the fair value of financial instruments. The Company adopted these ASUs on
February 1, 2018 using the modified retrospective method. The Company recorded the cumulative effect as an
adjustment to the opening balance of retained earnings. The comparative period information has not been restated
and continues to be reported under the accounting standards in effect for that period.The cumulative effect of the
changes made to the Company's consolidated balance sheet as of February 1, 2018 due to the adoption of ASU
2016-01 were as follows:
(in thousands)
January 31, 2018
Adjustments
February 1, 2018
Deferred tax asset .............................................................. $
Accumulated other comprehensive loss ............................. $
Accumulated earnings ........................................................ $
5,461 $
(269) $
85,300 $
(87) $
269 $
(356) $
5,374
—
84,944
This ASU also eliminated the cost method of accounting for investments in equity securities that do not have readily
determinable fair values and permits the election of a measurement alternative that allows such securities to be
recorded at cost, less impairment, if any, plus or minus changes resulting from observable price changes in market-
based transactions for an identical or similar investment of the same issuer. The Company adopted this provision on
a prospective basis as it relates to its 1% ownership interest in a limited partnership and elected the measurement
alternative for non-marketable investments previously accounted for under the cost method of accounting. Gains
and losses resulting from observable price changes in market-based transactions for an identical or similar
investment of the same issuer or impairment will be recognized in other expense, net on the consolidated
statements of operations and comprehensive income in the period incurred. No observable price changes occurred
during the year ended January 31, 2019.
The impact of the adoption on the Company's consolidated financial statements for the year ended January 31,
2019 was not significant.
Adoption of ASU 2018-02
In February 2018, the FASB issued 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. The Company 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
during the year ended January 31, 2018 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 income tax rate. The Company's policy is to use
the portfolio approach in releasing income tax effects from AOCI.
Adoption of ASU 2016-16
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
-63-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
other than inventory. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. The Company adopted this ASU during the year ended January 31, 2019. There was no
impact on the Company's consolidated financial statements as a result of the adoption.
Adoption of ASU 2016-15
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 adopted this ASU during the year
ended January 31, 2019. Adoption of the ASU did not have a material impact on the Company's consolidated
financial statements.
Adoption of ASU 2017-09
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 Company adopted this ASU during the year ended January 31, 2019, and prospectively
applies this standard to awards modified on or after the adoption date. There was no impact on the Company's
consolidated financial statements as a result of the adoption.
Recent issued accounting pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (codified as "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. ASC 842 is effective for financial statements
issued for reporting periods beginning after December 15, 2018, requires a modified retrospective transition, and
provides for certain practical expedients; early adoption is permitted. In July 2018, the FASB issued ASU 2018-11-
Leases ("Topic 842") – Targeted Improvements, which provides an additional transition method to adopt the new
lease standard at the adoption date, as compared to the beginning of the earliest period presented, and recognize a
cumulative-effect adjustment to the beginning balance of retained earnings in the period of adoption. The Company
adopted ASC 842 effective February 1, 2019, using the alternative transition method under Topic 842. The
Company expects that this standard will have a material effect on the Company’s consolidated balance sheets, but
does not expect it to have a material impact on the Company's consolidated statements of operations and
consolidated income, stockholders’ equity and cash flows. Although the Company is still in the process of evaluating
the impact of adoption of ASC 842 on its consolidated financial statements, the Company currently believes the
most significant change will be related to the recognition of right-of-use assets and lease liabilities on the
Company’s balance sheet for office space and data center operating lease agreements.
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 not have a material 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 after 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 does not believe this ASU will have a
material impact on the Company's consolidated financial statements.
In August 2018, FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for
Fair Value Measurement (“ASU 2018-13”), which amends ASC 820, "Fair Value Measurement." ASU 2018-13
modifies the disclosure requirements for fair value measurements by removing, modifying and adding certain
disclosures. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within
-64-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
those fiscal years. Early adoption is permitted. As this relates to disclosure only, the Company believes the adoption
of this ASU will not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic
350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a
Service Contract. This ASU allows the capitalization of implementation costs incurred in a hosting arrangement.
This ASU is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the
potential effect of this ASU on the consolidated financial statements.
In August 2018, the SEC adopted a final rule under SEC Release No. 33-10532, Disclosure Update and
Simplification, that amends certain disclosure requirements that were duplicative, overlapping, outdated or
superseded. The amendments also expanded the disclosure requirements relating to stockholders' equity for
interim financial statements, to require changes in stockholders’ equity, in the form of reconciliation, for the current
and comparative year-to-date periods, with subtotals for each interim period. This final rule was effective on
November 5, 2018. As permitted by the SEC, the Company will apply the disclosure change in stockholders’ equity
analysis commencing with its Form 10-Q for the fiscal quarter ending April 30, 2019. As this relates to disclosure
only, the Company believes the adoption of this rule will not have a material 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,
2019
2018
2017
Net income ........................................................................................ $
73,899
$
47,362
$
26,376
Denominator (basic):
Weighted-average common shares outstanding ...............................
61,836
60,304
58,615
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:
61,836
1,534
63,370
60,304
1,550
61,854
Basic .............................................................................................. $
Diluted ............................................................................................ $
1.20
1.17
$
$
0.79
0.77
$
$
58,615
1,279
59,894
0.45
0.44
For the years ended January 31, 2019, 2018 and 2017, approximately 0.1 million, 0.6 million, and 1.4 million
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.
Note 3. Cash, cash equivalents and marketable securities
In January 2019, the Company sold all the marketable securities it previously held. Cash, cash equivalents as of
January 31, 2019 consisted of the following:
(in thousands)
Cash and cash equivalents ......................................................... $
Marketable securities:
Cost basis
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
361,475
$
— $
— $
361,475
Mutual funds .............................................................................
Total cash, cash equivalents and marketable securities .............. $
—
361,475
$
—
— $
—
—
— $
361,475
-65-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 3. Cash, cash equivalents and marketable securities (continued)
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
199,472
Mutual funds .............................................................................
Total cash, cash equivalents and marketable securities .............. $
41,153
240,625
$
$
Gross
unrealized
gains
Gross
unrealized
losses
— $
— $
Fair value
199,472
270
270
$
(626)
(626) $
40,797
240,269
Gross gains and losses realized during the year ended January 31, 2019 for marketable securities sold as of
January 31, 2019 was $0.4 million and $0.9 million, respectively, of which a $0.1 million current year net realized
loss was recorded to other expense, net in the consolidated statements of operations and comprehensive income
and a $0.4 million of prior cumulative net realized loss was recorded in accumulated earnings on February 1, 2018
due to the adoption of ASU 2016-01.
Note 4. Property and equipment
Property and equipment consisted of the following as of January 31, 2019 and 2018:
(in thousands)
Leasehold improvements ........................................................................................ $
Furniture and fixtures ..............................................................................................
..............................................................................................
Computer equipment
Property and equipment, gross ............................................................................
Accumulated depreciation ......................................................................................
Property and equipment, net
................................................................................ $
January 31, 2019
3,583
4,476
9,242
17,301
(9,078)
8,223
January 31, 2018
2,292
4,785
8,174
15,251
(7,415)
7,836
$
$
Depreciation expense for the years ended January 31, 2019, 2018 and 2017 was $3.5 million, $2.8 million and $2.0
million, respectively.
Note 5. Intangible assets and goodwill
Asset acquisitions
During the years ended January 31, 2019 and 2018, the Company capitalized the following amounts to acquire the
rights to be the custodian of HSA portfolios:
(in thousands)
Acquired HSA intangible member assets
January 31, 2019
January 31, 2018
$
1,195
$
18,953
The costs, including transaction costs, were allocated to the respective 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, 2018, $1.3 million of the of the acquired intangible assets relates to a contingent
payment that may be earned upon the achievement of certain targets. This amount is expected to be paid during
the year ended January 31, 2020.
Software development
During the years ended January 31, 2019, 2018 and 2017, the Company capitalized software development costs of
$9.3 million, $8.1 million and $7.7 million, respectively, related to significant enhancements and upgrades to its
proprietary system.
-66-
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, 2019 and January 31, 2018:
(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, 2019
January 31, 2018
40,583
4,252
2,882
85,110
132,827
(53,161)
79,666
$
$
31,993
8,863
2,882
83,915
127,653
(44,018)
83,635
During the years ended January 31, 2019, 2018 and 2017, the Company expensed a total of $13.7 million, $12.2
million and $10.0 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, 2019, 2018 and 2017 was $14.7 million, $13.2 million and
$11.2 million, respectively. Estimated amortization expense for the years ending January 31 is as follows:
Year ending January 31, (in thousands)
2020 ........................................................................................................................................................................... $
2021 ...........................................................................................................................................................................
2022 ...........................................................................................................................................................................
2023 ...........................................................................................................................................................................
2023 ...........................................................................................................................................................................
..................................................................................................................................................................
Thereafter
......................................................................................................................................................................... $
Total
13,824
10,706
7,930
6,209
6,209
34,788
79,666
During the year ended January 31, 2019, the Company incurred a loss on disposal of approximately $0.7 million of
previously capitalized software development costs.
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, 2019 and 2018.
Note 6. Commitments and contingencies
Property, colocation, equipment, and license agreements
The Company leases office space, data storage facilities and equipment, as well as contractual commitments
related to network infrastructure and certain maintenance requirements under long-term non-cancelable operating
leases. Future minimum lease and other contractual payments required under non-cancelable obligations as of
January 31, 2019 are as follows:
Year ending January 31, (in thousands)
2020 .............................................................................................................. $
2021 ..............................................................................................................
2022 ..............................................................................................................
2023 ..............................................................................................................
2024 ..............................................................................................................
.....................................................................................................
Thereafter
............................................................................................................ $
Total
Office lease
3,690
3,933
5,589
5,728
5,872
44,252
69,064
Other
agreements
3,568
3,392
1,739
70
11
—
8,780
$
$
$
$
Total
7,258
7,325
7,328
5,798
5,883
44,252
77,844
-67-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 6. Commitments and contingencies (continued)
Office lease obligations
The Company’s headquarters is in Draper, UT where it leases two buildings and is party to a third lease for a
building to be constructed on a parcel contiguous to its existing buildings. The leases will expire on November 30,
2030. The Company is responsible for payment of taxes and operating expenses relating to the premises occupied
by the Company, in addition to 2.5% annual rent increases over the lease term. The Company also leases office
space in Overland Park, Kansas, under a lease that expires in March 2022.
Lease expense for office space for the years ended January 31, 2019, 2018 and 2017 totaled $5.5 million, $4.3
million and $3.3 million, respectively. Expense for other agreements for the years ended January 31, 2019, 2018
and 2017 totaled $0.6 million, $0.5 million and $0.3 million, respectively.
Data storage and equipment lease obligations
The data storage and equipment leases relate to the Company's offsite data storage facilities and office equipment
leases, which expire during the years ended January 31, 2021 and January 31, 2024, respectively.
Telephony services
The telephony service agreement relates to our 24/7/365 member support center. The agreement expires in
September 2019. In January 2019, the Company entered into a telephony agreement with a new provider that is
cancelable without significant penalty.
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, 2019, 2018 and 2017, 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.
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, 2019 and 2018.
-68-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
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, 2019.
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 each of the years ended January 31, 2019 and 2018, the Company incurred $0.3 million 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, 2019.
In connection with the Credit Agreement, the Company incurred $0.3 million 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,
2019
2018
2017
Federal
.......................................................................................................................... $
1,095
$
State .............................................................................................................................
416
Total current tax provision ......................................................................................... $
1,511
$
392
130
522
$
14,848
1,823
$
16,671
Deferred:
Federal
.......................................................................................................................... $
1,258
$
4,068
$
(2,308)
State .............................................................................................................................
Total deferred tax (benefit) provision ......................................................................... $
Total income tax provision .................................................................................... $
(850)
408
1,919
$
$
237
4,305
4,827
$
$
(619)
(2,927)
13,744
-69-
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 to income before income taxes as a result of the following:
(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 ...............................................................................
Year ended January 31,
2019
2018
2017
15,922
$
17,744
$
13,641
1,518
411
1,241
143
Excess tax benefits on stock-based compensation expense, net .....................................
(14,255)
(14,136)
Federal research and development credit ........................................................................
(2,252)
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
...............................................................................................................
—
—
450
125
(729)
458
(308)
191
223
742
87
—
(907)
—
—
246
(65)
Total income tax provision ............................................................................................. $
1,919
$
4,827
$
13,744
The Company’s effective income tax rate for the years ended January 31, 2019, 2018 and 2017 was 2.5%, 9.2%,
and 34.3%, 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, 2019
over the year ended January 31, 2018 was primarily due to the reduction in the US federal corporate income tax
rate from 35% to 21% as a result of legislative changes effective January 1, 2018 and an increase in federal and
state research and development tax credits over prior periods. 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 Tax Cuts and Jobs Act, which was enacted on December 22, 2017, included 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 ended January 31, 2018, the Company applied a federal statutory rate of 34% for the entire fiscal year as that
was the rate that applied for the tax year ended December 31, 2017 which comprised 11 months of the fiscal year.
Because a 21% federal statutory rate applied for the one month ending January 31, 2018, a reconciling item was
included in the tax rate reconciliation table above to adjust for the statutory rate reduction that applied to this one-
month period. This resulted in a reduction to the income tax provision of $0.3 million.
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 allowed registrants to record provisional
amounts during a one-year “measurement period” from the date of enactment 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 was incomplete as of January 31, 2018 as
-70-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 8. Income taxes (continued)
the Company was still analyzing certain aspects of the Act and refining its calculations, including state conformity
and the impact of state tax rates 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 $0.5 million, with a corresponding increase to the income tax provision during
the year ended January 31, 2018. As of January 31, 2019, the Company has not made any additional adjustments
following completion of its continued analysis during the one-year measurement period to the provisional amount
recorded as of January 31, 2018, which amount is now considered final.
Other significant provisions of the Tax Cuts and Jobs Act were 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 application of these provisions on
its income tax provision.
Deferred tax assets and liabilities consisted of the following:
(in thousands)
Deferred tax assets:
January 31, 2019
January 31, 2018
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 .............................................................................
Less valuation allowance
$
808
664
626
6,987
68
2,323
—
255
11,731
(97)
Deferred tax assets, net of valuation allowance
$
11,634
$
Deferred tax liabilities:
Fixed assets: depreciation and gain/loss ........................................................... $
Intangibles: amortization ....................................................................................
Incremental contract costs .................................................................................
Other, net
...........................................................................................................
Total gross deferred tax liabilities .........................................................................
(1,294) $
(4,798)
(4,654)
(127)
(10,873)
Net deferred tax assets ........................................................................................ $
761
$
489
572
520
5,316
666
2,882
857
286
11,588
—
11,588
(1,170)
(4,830)
—
(127)
(6,127)
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 most of its deferred tax assets. However, the
Company has recorded a valuation allowance of $0.1 million as of January 31, 2019 with respect to realized capital
losses for which it does not expect to generate capital gains in order to utilize the capital losses in the future. This
valuation allowance was reflected as an adjustment to retained earnings as a result of the adoption of ASU
2016-01. No valuation allowance was recorded as of January 31, 2018.
-71-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 8. Income taxes (continued)
As of January 31, 2019, the Company had recorded gross state net operating loss carryforwards of $1.1 million
which begin to expire at various intervals between tax years ending December 31, 2026 and December 31, 2036.
As of January 31, 2019, the Company also had federal and state research and development carryforwards of $1.9
million and $2.5 million, respectively, which expire beginning with the tax years ending December 31, 2037 and
2030, respectively.
As of January 31, 2019 and 2018, the gross unrecognized tax benefit was $1.7 million and $0.9 million, respectively.
If recognized, $1.5 million and $0.8 million of the total unrecognized tax benefits would affect the Company's
effective tax rate as of January 31, 2019 and 2018, respectively. Total gross unrecognized tax benefits increased by
$0.8 million in the period from January 31, 2018 to January 31, 2019. 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, 2019
January 31, 2018
889
$
—
(1)
805
—
—
674
—
—
215
—
—
889
Gross unrecognized tax benefits at end of year ................................................... $
1,693
$
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, 2019
January 31, 2018
1,693
$
(1,693)
— $
889
(889)
—
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 and comprehensive income. During the years ended January 31,
2019, 2018, and 2017, there were no interest and penalties recorded related to unrecognized tax benefits in the
statement of operations and comprehensive income. As of January 31, 2019 and 2018, 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.
-72-
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 .........................................................................
2019
2018
2,837
$
2,594
$
3,536
5,117
9,567
2,030
3,318
6,368
Total stock-based compensation expense ................................................ $
21,057
$
14,310
$
2017
1,780
914
1,903
3,801
8,398
The following table shows stock-based compensation by award type:
Year ended January 31,
(in thousands)
Stock options .............................................................................................. $
Performance stock options .........................................................................
Restricted stock units .................................................................................
Performance restricted stock units .............................................................
Restricted stock awards .............................................................................
Performance restricted stock awards ..........................................................
Year ended January 31,
2019
2018
7,581
$
7,826
$
681
7,657
2,419
570
2,149
1,378
3,224
1,882
—
—
2017
6,480
1,685
233
—
—
—
Total stock-based compensation expense ................................................ $
21,057
$
14,310
$
8,398
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, 2019, 4.1 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, executive officers, 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, executive
officers 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 Company's historical volatility in
addition to published volatilities of a relative peer group 3) risk-free interest rate, and 4) expected dividends.
-73-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 9. Stock-based compensation (continued)
The key input assumptions that were utilized in the valuation of the stock options granted during the years ended
January 31, 2019, 2018 and 2017 are as follows:
Expected dividend yield .......................................................
2019
—%
Year ended January 31,
2018
—%
2017
—%
Expected stock price volatility ..............................................
36.53% - 37.84%
37.79% - 38.01%
38.01% - 38.37%
Risk-free interest rate ...........................................................
2.52% - 2.79%
1.18% - 2.07%
1.18% - 2.18%
Expected life of options ........................................................
5.17 - 6.25 years
4.50 - 6.25 years
4.50 - 6.25 years
The Company uses the "simplified" method to estimate the expected life of an option as determined under Staff
Accounting Bulletin No. 110 due to limited option exercise history as a public company. Expected volatility is
determined using weighted average volatility of publicly traded peer companies. During the year ended January 31,
2019, the Company began 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.
A summary of stock option activity is as follows:
(in thousands, except for exercise
prices and term)
Outstanding as of January 31, 2018...........
Granted ...................................................
Number of
options
Range of
exercise
prices
Weighted-
average
exercise
price
3,699
140
$0.10 - 51.44
$
$50.41 - 82.39 $
Exercised .................................................
(1,276)
$0.10 - 44.53
Forfeited ..................................................
(119)
$14.00 - 44.53
Outstanding as of January 31, 2019...........
2,444
$0.10 - 82.39
Vested and expected to vest as of January
31, 2019 .....................................................
Exercisable as of January 31, 2019 ...........
2,444
843
$
$
$
$
$
Outstanding stock options
Weighted-
average
contractual
term
(in years)
Aggregate
intrinsic
value
7.26
$
102,796
6.74
6.74
6.28
$
$
$
85,971
85,971
33,023
22.83
64.06
17.97
30.50
27.37
27.37
23.19
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 ......................... $
2019
140
64.06
65,463
$
$
Year ended January 31,
2018
420
42.72
44,823
$
$
2017
1,399
28.85
50,094
As of January 31, 2019 and 2018, 0.8 million and 1.1 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, 2019, the weighted-average vesting period of non-vested awards expected to vest is
approximately 1.6 years; the amount of compensation expense the Company expects to recognize for stock options
vesting in future periods is approximately $11.6 million.
-74-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 9. Stock-based compensation (continued)
Performance options. During the year ended January 31, 2015, the Company granted 1.5 million performance-
based stock options to certain key team members and executive officers 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 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 year ended January 31, 2019, the Company achieved the fourth performance criteria and as such the remaining
40% of the performance-based stock options outstanding as of January 31, 2019 became vested.
Restricted stock units and restricted stock awards
The Company grants restricted stock units ("RSUs") and restricted stock awards ("RSAs") to certain team members,
executive officers, and directors under the Incentive Plan. RSUs and RSAs vest upon service-based criteria and
performance-based criteria. Generally, service-based RSUs and RSAs vest over a four-year period in equal annual
installments commencing upon the first anniversary of the grant date. RSUs and RSAs 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.
Performance restricted stock units. In March 2017, the Company awarded 146,964 performance-based RSUs
("PRSUs"). 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 probable 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.
Performance restricted stock awards. In March 2018, the Company awarded 227,760 performance-based
RSAs ("PRSAs"). Vesting of the PRSAs is dependent upon the achievement of certain financial criteria and cliff vest
on January 31, 2021. The Company records stock-based compensation related to PRSAs when it is considered
probable that the performance conditions will be met. Issuance of the underlying shares occurred at the grant date.
The Company believes it is probable that the PRSAs will vest at least in part. The vesting of PRSAs will ultimately
range from 0% to 200% based on the level of achievement of the performance goals. The PRSAs were issued at
the 200% level of achievement subject to clawback based on actual Company performance.
-75-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 9. Stock-based compensation (continued)
A summary of the RSU and RSA activity is as follows:
RSUs and PRSUs
RSAs and PRSAs
(in thousands, except weighted-average grant
date fair value)
Outstanding as of January 31, 2018 ......................
Granted ...............................................................
Vested .................................................................
Forfeited ..............................................................
Weighted-
average grant
date fair value
Shares
$
451
321
(88)
(36)
44.10
67.69
46.35
49.00
55.20
Weighted-
average grant
date fair value
—
61.92
—
61.72
61.93
Shares
— $
275
—
(19)
256
$
Outstanding as of January 31, 2019 ......................
648
$
During the years ended January 31, 2019, 2018 and 2017 the aggregate intrinsic value of RSUs vested was $6.4
million, $0.7 million, and $21,000 respectively.
Total unrecorded stock-based compensation expense as of January 31, 2019 associated with RSUs and PRSUs
was $25.9 million, which is expected to be recognized over a weighted-average period of 2.5 years. Total
unrecorded stock-based compensation expense as of January 31, 2019 associated with RSAs and PRSAs
was $7.2 million, which is expected to be recognized over a weighted-average period of 2.4 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
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.
In January 2019, the Company sold all marketable securities, which were classified as Level 1 instruments that
consisted primarily of highly liquid mutual funds.
The following table summarizes as of January 31, 2018 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
$
— $
—
The carrying value of cash and cash equivalents approximate fair values as of January 31, 2019 due to the short-
term nature of these instruments. The Company has classified cash and cash equivalents as Level 1 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, $25,000 and $15,000 for the
-76-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 11. Employee benefits (continued)
years ended January 31, 2019, 2018 and 2017, respectively. Employer matching contribution expense was $1.8
million, $1.4 million and $0.9 million for the years ended January 31, 2019, 2018 and 2017, 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 $1.4 million and $1.7 million as of January 31, 2019 and
2018, respectively.
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) ............................................. $
January 31, 2019
October 31, 2018
July 31, 2018
April 30, 2018
Three months ended
75,777 $
70,495 $
71,067 $
31,332
44,445
27,864
(221)
3,241
24,678
45,817
26,831
(1,555)
1,745
24,492
46,575
25,012
(75)
(1,029)
13,119 $
15,686 $
22,517 $
0.21 $
0.21 $
0.25 $
0.25 $
0.36 $
0.36 $
69,904
25,548
44,356
23,816
(1)
(2,038)
22,577
0.37
0.36
(in thousands, except for per share
amounts)
January 31, 2018
October 31, 2017
July 31, 2017
April 30, 2017
Three months ended
28,790
31,646
23,062
60,436 $
56,789 $
56,879 $
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) ............................................. $
(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.
16,946 $
10,482 $
5,905 $
(1,706)
0.17 $
0.17 $
0.27 $
0.28 $
0.10 $
0.09 $
20,165
23,212
35,802
19,307
21,077
33,727
14,029
55,421
33,741
17,814
21,680
2,685
1,808
(395)
(489)
0.23
0.23
(38)
(90)
823
-77-
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, 2019, 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,
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, 2019, 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, 2019. 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, 2019.
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, 2019. 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,
2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other information
None.
-78-
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 2019 Proxy Statement to be filed with the SEC
in connection with the solicitation of proxies for the Company's 2019 Annual Meeting of Stockholders is
incorporated by reference to our 2019 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 2019 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 2019 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 2019 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 2019 Proxy Statement.
-79-
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, 2019 and 2018 .................................................................
Consolidated Statements of Operations and Comprehensive Income for the years ended January 31,
2019, 2018 and 2017 ...................................................................................................................................
Consolidated Statements of Stockholders' Equity for the years ended January 31, 2019, 2018 and 2017 ..
Consolidated Statements of Cash Flows for the years ended January 31, 2019, 2018 and 2017 ................
Notes to consolidated financial statements ..................................................................................................
Supplementary quarterly financial data (unaudited) .....................................................................................
Page
50
51
52
53
55
77
(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.
-80-
(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†
10.10†
10.11†
10.12
10.13
10.14†
10.15
10.16
10.17
10.18
Description
Amended and Restated Certificate of Incorporation
of the Registrant
Form File No.
8-K 001-36568
Exhibit Filing Date
3.2 July 6, 2018
Amended and Restated Bylaws of the Registrant
8-K 001-36568
3.4 July 6, 2018
Incorporate by reference
Form of Common Stock Certificate.
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.
HealthEquity, Inc. 2014 Amended and Restated
Equity Incentive Plan and Form of Award Agreement.
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 Stock Plan and Form of
Stock Option Agreement.
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.
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.
Offer letter to Robert W. Selander, dated September
28, 2015.
Credit Agreement, dated as of September 30, 2015,
by HealthEquity, Inc. and JPMorgan Chase Bank,
N.A., as administrative agent.
First Amendment to Lease Agreement, dated
November 3, 2015, by and between the Company
and the Landlord.
Second Amendment to Lease Agreement, dated
September 16, 2016, by and between the Company
and the Landlord.
First Amendment to Amended and Restated Lease
Agreement, dated June 1, 2016, by and between the
Company and the Landlord.
-81-
S-1/A 333-196645
4.1 July 16, 2014
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
S-1/A 333-196645
10.3 July 16, 2014
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
10.8 June 10, 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
10-Q 001-36568
10.1 June 11, 2015
10-Q 001-36568
10.2 June 11, 2015
8-K 001-36568
8-K 001-36568
10-Q 001-36568
10-Q 001-36568
10.1 September 30,
2015
10.1 October 6,
2015
10.1 December 8,
2016
10.2 December 8,
2016
10-Q 001-36568
10.1 June 8, 2017
Exhibit
no.
10.19
10.20†
10.21†
10.22†
10.23†
10.24
10.25
10.26
Description
Second Amendment to Amended and Restated
Lease Agreement, dated May 31, 2017, by and
between the Company and the Landlord.
Incorporate by reference
Form File No.
10-Q 001-36568
Exhibit Filing Date
10.2 June 8, 2017
Amended and Restated Non-Employee Director
Compensation Policy
10-K 001-36568
10.25 March 28,
2018
Employment Agreement, dated June 1, 2018, by and
between the Registrant and Angelique Hill
Employment Agreement, dated May 15, 2018, by
and between the Registrant and Edward R.
Bloomberg
HealthEquity, Inc. Amended and Restated Executive
Change in Control Severance Plan
Lease Agreement, dated September 27, 2018, by
and between the Company and the Landlord
Third Amendment to Amended and Restated Lease
Agreement, dated September 27, 2018, by and
between the Company and the Landlord
Fourth Amendment to Lease Agreement, dated
September 27, 2018, by and between the Company
and the Landlord
10-Q 001-36568
10.1 June 7, 2018
10-Q 001-36568
10.1 September 6,
2018
10-Q 001-36568
10.3 September 6,
10-Q 001-36568
10-Q 001-36568
10-Q 001-36568
2018
10.1 December 6,
2018
10.2 December 6,
2018
10.3 December 6,
2018
10.4 December 6,
2018
10.27†
Restricted Stock Unit Award Agreement
10-Q 001-36568
10.28+
10.29+
10.30+
10.31+
10.32+
21.1
23.1+
24.1+
31.1+
31.2+
32.1*#
32.2*#
Employment Agreement, dated February 27, 2017,
by and between the Registrant and Bill Otten
Employment Agreement, dated April 5, 2018, by and
between the Registrant and Ashley Dreier
Restricted Stock Award Agreement
Third Amendment to Lease Agreement, dated
September 26, 2018, by and between the Company
and the Landlord
Amended and Restated Non-Employee Director
Compensation Policy
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
-82-
Exhibit
no.
101.SCH†† XBRL Taxonomy schema linkbase document
Description
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
Incorporate by reference
Form File No.
Exhibit Filing Date
+
*
#
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.
-83-
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, 2019.
Date: March 28, 2019
HEALTHEQUITY, INC.
By:
/s/ Jon Kessler
Name:
Jon Kessler
Title:
President and Chief Executive Officer
-84-
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, 2019
Date: March 28, 2019
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), Director
Date: March 28, 2019
By:
/s/ Darcy Mott
Name:
Darcy Mott
Date: March 28, 2019
Date: March 28, 2019
Date: March 28, 2019
Date: March 28, 2019
Date: March 28, 2019
Date: March 28, 2019
Date: March 28, 2019
Date: March 28, 2019
Title:
By:
Name:
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/ Debra McCowan
Debra McCowan
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
-85-
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, 2019.
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 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 A. 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 CFO
Ted Bloomberg
Executive Vice President and COO
Evelyn Dilsaver
Director
Debra McCowan
Director
Frank T. Medici
Director
Ian Sacks
Director
Gayle Wellborn
Director
Del Ladd
Executive Vice President
General Counsel and Secretary
Bill Otten
Executive Vice President of Sales
Larry Tritschuh
Executive Vice President and CSO
Adam Hostetter
Executive Vice President and CMO
Ashley Dreier
Executive Vice President and CTO/CIO
Natalie Atwood
Senior Vice President of People
Angelique Hill
Executive Vice President of Operations
S
U
t
u
o
b
a
Connecting health & wealth
HealthEquity connects health and wealth, delivering health savings account (HSA), 401(k) and other consumer driven health
and retirement solutions in partnership with over 45,000 employers and 141 health, retirement and other benefit plan providers
nationwide. HealthEquity members have access to its end-to-end platform and remarkable ‘purple’ service to become confident
consumers of healthcare while building health and retirement savings for tomorrow. HealthEquity is the custodian of $8.1 billion
in assets for 4.0 million HSA members nationwide. For more information, visit www.healthequity.com.
HealthEquity offers a complete line of integrated accounts:
• Health savings accounts (HSAs)
• Health incentive accounts (HIAs)
• Health reimbursement arrangements (HRAs)
• COBRA
• Flexible spending accounts (FSAs)
4/19/19 9:17 PM
Copyright © 2019 HealthEquity, Inc. All rights reserved 936079_Cov.indd 1
Copyright © 2019 HealthEquity, Inc. All rights reserved