4/22/20 6:28 PM
ANNUAL REPORTFY 2020 TO OUR
SHAREHOLDERS
The 1927 Yankees lineup was an absolute powerhouse. Six legendary
hitters, dubbed “Murderers Row,” amassed 1,141 hits on 3,384 at-bats,
including 142 homeruns and 670 RBIs. They baffled pitchers, ruined
ERAs and won the World Series—changing the game forever.
Like the ’27 Yankees, our acquisition of WageWorks now enables
us to deliver what we believe is a legendary lineup. Led by our
renowned health savings account (HSA), our new “Total Solution” also
includes complementary flexible spending accounts (FSAs), health
reimbursement arrangements (HRAs), COBRA, commuter and more.
Not only does the Total Solution strengthen our position at the top of
the HSA market, it also transforms the experience we bring to partners
and members. You might say it’s a modern-day Colossus of tax-efficient
resources, helping families connect health and wealth by saving today
and building health savings for the future.
Our growth outpaced the overall HSA market in fiscal year 2020, as we
ended the year in record setting fashion. While Devenir reported HSA
market account growth of 13 percent and asset growth of 23 percent,
HealthEquity combined with WageWorks increased 35 percent in HSAs
and 49 percent in total HSA assets.
Perhaps more importantly, we continue to build momentum as we push
into fiscal 2021. HealthEquity begins fiscal 2021 serving approximately
100,000 employer partners that employ approximately one in seven
working Americans1. Devenir anticipates HSA assets to reach $90 billion
by the end of 2021. At market maturity, we expect HSA assets to reach
as high as $1 trillion. It’s still early and we remain laser-focused on
being a large part of that growth to market maturity.
RECORD
SETTING
FY 2020
STATS
5.3M
HSA’s
12.8M
Total
Accounts
$11.5B
HSA
Assets
$532.0M
in
Revenue
$196.5M
Adjusted
EBITDA
1
Management estimates benefits administration for employers that employ 1 in 7 working Americans based on Pew Research
Center analysis of 2018 labor force data estimated 154m working Americans as of December 31, 2018 and management’s
assumption that our 12 million members represent less than half of the workforce of employers we serve as of September 2019.
Copyright© 2020 HealthEquity, Inc. All rights reserved.
49921.indd 2
A unified sales force and operational synergies enable us to play on a
larger part of the HSA field than ever before. We’ve doubled the number of
incoming RFPs since last year. And approximately two-thirds of HSA RFPs
that we receive request at least one additional solution. We expect these
additional at-bats will translate into more hits and homeruns. Aite Group
reports that nearly 80 percent of employers say they’d prefer to receive
CDB administration from their HSA partner2. We believe we are positioned
exceptionally well to capitalize on this unfolding opportunity.
Industry tailwinds are encouraging and helping families too. Last year,
federal regulations loosened restrictions on how employers design their
HSA health plans by expanding approved preventative care services and
prescriptions. Now employers can customize the benefits they offer to
include HSAs, FSAs, and HRAs that better meet employee needs. We are
putting our Total Solution lineup to work for the entire industry.
Fiscal 2021 has also brought some unique challenges. COVID-19
coronavirus continues to create intense health risk and economic
uncertainty. Although the full impact will not be known for some time, we
know our people, members and partners are already deeply affected.
In times of greatest adversity, Americans have always come together to help
lift one another and stand united in a common cause. That’s true today and
it’ll be true tomorrow. This public health crisis only underscores the urgency
of our mission. Since day one, we’ve helped millions to connect health and
wealth, empowering wellness and financial wellbeing. There’s never been a
time when our mission is more important.
We are grateful to our shareholders that support us in our mission.
We stand stronger together.
Jon Kessler
President, Chief Executive
Officer and Director
Steve Neeleman, M.D.
Founder, Vice Chairman
and Director
2Aite Group survey of US private sector employers, February 2019 and September 2019
Copyright© 2020 HealthEquity, Inc. All rights reserved.
49921.indd 3
4/21/20 3:02 PM
HSAs
millions
5.3M
+34%
HSA ASSETS
billions
$11.5B
+43%
6
5
4
3
2
1
$12
$10
$8
$6
$4
$2
Fiscal Year
16
17
18
19
20
Fiscal Year
16
17
18
19
20
ADJ EBITDA
millions
$196.5M
+66%
REVENUE
millions
$532.0M
+85%
$200
$150
$100
$50
$500
$400
$300
$200
$100
Fiscal Year
16
17
18
19
20
Fiscal Year
16
17
18
19
20
Copyright© 2020 HealthEquity, Inc. All rights reserved.
49921.indd 4
4/21/20 3:02 PM
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
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2020
OR
For the transition period from to
Commission File Number: 001-36568
HEALTHEQUITY, INC.
Delaware
(State or other jurisdiction of
incorporation or organization)
(Exact name as specified in its charter)
7389
(Primary Standard Industrial
Classification Code 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)
52-2383166
(I.R.S. Employer
Identification Number)
Title of each class
Common stock, par value $0.0001 per share
Securities registered pursuant to Section 12(b) of the Act:
Trading symbol
HQY
Name of each exchange on which registered
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 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, 2019, based on the closing price of $81.98 for shares of the registrant’s common
stock as reported by the NASDAQ Global Select Market was approximately $5.7 billion. For purposes of determining whether a stockholder was an affiliate of the registrant at July 31, 2019, the
registrant assumed that a stockholder was an affiliate of the registrant at July 31, 2019 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, 2019. This determination of affiliate status is not necessarily
a conclusive determination for other purposes.
As of March 24, 2020, there were 71,082,306 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement related to its 2020 annual meeting of stockholders (the "2020 Proxy Statement") are incorporated by reference into Part III of this Annual Report
on Form 10-K where indicated. The 2020 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.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II.
Item 5.
Business
Risk factors
Unresolved staff comments
Properties
Legal proceedings
Mine safety disclosures
Market for registrant's common equity, related stockholder matters and issuer purchases of equity securities
Management's discussion and analysis of financial condition and results of operations
Changes in and disagreements with accountants on accounting and financial disclosure
Selected financial data
Financial statements and supplementary data
Item 6.
Item 7.
Item 7A. Quantitative and qualitative disclosures about market risk
Item 8.
Item 9.
Item 9A.
Item 9B. Other information
Part III.
Item 10.
Item 11.
Item 12.
Directors, executive officers and corporate governance
Controls and procedures
Executive compensation
Security ownership of certain beneficial owners and management and related stockholder matters
Item 13.
Item 14.
Part IV.
Item 15.
Item 16.
Certain relationships and related transactions, and director independence
Principal accounting fees and services
Exhibits and financial statement schedules
Form 10-K Summary
Signatures
Page
2
10
29
29
29
29
30
32
33
48
50
82
82
85
86
86
86
86
86
87
91
92
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.” Statements that are not purely historical are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). 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 realize the anticipated financial and other benefits from combining the operations of WageWorks
with our business in an efficient and effective manner;
our ability to compete effectively in a rapidly evolving healthcare and benefits administration industry;
our dependence on the continued availability and benefits of tax-advantaged health savings accounts and other
consumer-directed benefits;
our ability to successfully identify, acquire and integrate additional portfolio purchases or acquisition targets;
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 adviser and other laws
applicable to our business;
our reliance on partners and third party vendors for distribution and important services;
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;
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 providing technology-enabled services platforms that empower consumers to
make healthcare saving and spending decisions. Consumers and employers use our platforms to manage tax-
advantaged health savings accounts (“HSAs”) and other consumer-directed benefits (“CDBs”) offered by
employers, including flexible spending accounts and health reimbursement arrangements (“FSAs” and “HRAs”),
Consolidated Omnibus Budget Reconciliation Act (“COBRA”) administration, commuter and other benefits, compare
treatment options and pricing, evaluate and pay healthcare bills, receive personalized benefit information, access
remote and telemedicine benefits, earn wellness incentives, and receive investment advice to grow their tax-
advantaged healthcare savings. We believe the secular shift to greater consumer responsibility for healthcare costs
will require a significant portion of the approximately 190 million under-age 65 consumers with private health
insurance in the United States to use platforms such as ours.
The core of our offerings is the HSA, a financial account through which consumers spend and save long-term for
healthcare expenses on a tax-advantaged basis. As of January 31, 2020, we administered 5.3 million HSAs, with
balances totaling $11.5 billion, which we call HSA Assets. During the years ended January 31, 2020 and 2019, we
added approximately 1.5 million and 679,000 new HSAs, respectively. Also, as of January 31, 2020, we
administered 7.4 million complementary CDBs. We refer to the aggregate number of HSAs and other CDBs on our
platforms as Total Accounts, of which we had 12.8 million as of January 31, 2020.
We reach consumers primarily through relationships with their employers, which we call Clients. We reach Clients
primarily through a sales force that calls on Clients directly, relationships with benefits brokers and advisors, and
integrated partnerships with a network of health plans, benefits administrators, benefits brokers and consultants,
and retirement plan recordkeepers, which we call Network Partners. As of January 31, 2020, our platforms were
integrated with 165 Network Partners and more than 100,000 Clients.
We have grown our share of the growing HSA market from 4% in calendar year 2010 to 16% in 2019, including by
3% as a result of the acquisition of WageWorks on August 30, 2019. According to Devenir, today we are the largest
HSA provider by accounts and second largest by assets. In addition, we believe we are the largest provider of other
CDBs. We seek to differentiate ourselves through our proprietary technology, product breadth, ecosystem
connectivity, and service-driven culture. Our proprietary technology is designed to help consumers optimize the
value of their HSAs and other CDBs, as they gain confidence and skill in their management of financial
responsibility for lifetime healthcare.
Our ability to engage consumers is enhanced by our platforms’ capacity to securely share data in both directions
with others in the health, benefits, and retirement ecosystems, which we call Ecosystem Partners. Our commuter
benefits offering also leverages connectivity to an ecosystem of mass transit, ride hailing, and parking providers.
These strengths reflect our “DEEP Purple” culture of remarkable service to customers and teammates, achieved by
driving excellence, ethics, and process into everything we do.
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 revenue primarily from three sources: service, custodial, and interchange. We earn service revenue mainly
from fees paid by Clients on a recurring per-account per-month basis. We earn custodial revenue mainly from HSA
Assets held at our members’ direction in federally insured cash deposits, insurance contracts or mutual funds, and
from investment of Client-held funds. We earn interchange revenue mainly from fees paid by merchants on
payments that our members make using our physical payment cards and virtual platforms. See “Key components of
our results of operations” for additional information on our sources of revenue.
Acquisition of WageWorks
On August 30, 2019, we completed the acquisition (the "Acquisition") of WageWorks, Inc. ("WageWorks") and paid
approximately $2.0 billion in cash to WageWorks stockholders, financed through net borrowings of approximately
$1.22 billion under a new term loan facility and approximately $816.9 million of cash on hand.
We expect the Acquisition to enable us to increase the number of our employer opportunities, the conversion of
these opportunities to Clients, and the value of Clients in generating members, HSA Assets and complementary
CDBs. WageWorks’ strength of selling to employers directly and through health benefits brokers and advisors
complements our distribution through health plans, benefit administrators and retirement record-keeping partners.
With WageWorks’ CDB capabilities, we are working to provide employers with a single partner for both HSAs and
other CDBs, which is preferred by the vast majority of employers according to research conducted for us by Aite
-2-
Group. For Clients that partner with us in this way, we believe we can produce more value by encouraging both
CDB participants to contribute to HSAs and HSA-only members to take advantage of tax savings by increasing their
account balances in other CDBs. Accordingly, we believe that there are significant opportunities to expand the
scope of services that we provide to our Clients.
Our products and services
Technology platforms. We offer multiple cloud-based platforms, 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 platforms provide 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, our HSA 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 our HSA 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 our HSA 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 optimizing the use of tax-advantaged accounts to reduce
medical spending or selecting from among medical plans offered by an employer or health plan.
We acquired several other technology platforms as part of the Acquisition. These additional technology platforms
are designed to be highly scalable based on an on-demand delivery model that Clients and members may access
through a standard web browser on any internet-enabled device, including computers, smart phones, and other
mobile devices such as tablet computers. Our on-demand delivery model for these platforms eliminates the need for
our Clients to install and maintain hardware and software in order to support CDB programs and enables us to
rapidly implement product enhancements across our entire user base.
We intend to phase out over time certain technology platforms, which will require us to migrate certain Clients to
one of our remaining technology platforms.
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 HSA 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:
-3-
• 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.
Flexible spending accounts. Healthcare FSAs are employer-sponsored CDBs that enable employees to set
aside pre-tax dollars to pay for eligible healthcare expenses that are not generally covered by insurance, such as
co-pays, deductibles and over-the-counter medical products, as well as vision expenses, orthodontia, and medical
devices. Our employer Clients also realize payroll tax (i.e., FICA and Medicare) savings on the pre-tax contributions
made by their employees.
The IRS imposes a limit, indexed to inflation, on pre-tax dollar employee contributions made to healthcare FSAs.
The IRS also allows a carryover of up to $500 that does not count against or otherwise affect the indexed salary
reduction limit applicable to each plan year. Employers are able to contribute additional amounts in excess of this
statutory limit, and may choose to do so in an effort to mitigate the impact of rising healthcare costs on their
employees.
We also administer FSA programs for dependent care plans. These plans allow employees to set aside pre-tax
dollars to pay for eligible dependent care expenses, which typically include child care or day care expenses but may
also include expenses incurred from adult and elder care. Current laws and regulations impose a statutory limit on
the amount of pre-tax dollars employees can contribute to dependent care FSAs with no carryover allowed. Like
healthcare FSAs, employers can also contribute funds to employees’ dependent care FSAs, subject to the statutory
annual limit on total contributions. As with healthcare FSAs, employers realize payroll tax savings on the pre-tax
dependent care FSA contributions made by their employees.
In March 2016 WageWorks was selected by the United States Office of Personnel Management (“OPM”) to
administer its Federal Flexible Spending Account Program (“FSAFEDS”). This relationship provides eligible federal
government employees access to our advanced technology platforms and premium service capabilities. In addition,
the United States Postal Service became a member of the OPM contract during the first quarter of 2017. These
relationships were acquired by us through the Acquisition.
Health reimbursement arrangements. Under HRAs, employers provide their employees with a specified
amount of reimbursement funds that are available to help employees defray their out-of-pocket healthcare
expenses, such as deductibles, co-insurance and co-payments. HRAs may only be funded by employers and there
is no limitation on how much employers may contribute; however, similar to other CDBs that are funded with pre-tax
dollars, employers are required to establish the programs in such a way as to prevent discrimination in favor of
highly compensated employees. HRAs must either be considered an excepted benefit (for example, a dental-only
HRA or a vision-only HRA), a retiree HRA or be integrated with another group health plan. HRAs can be customized
by employers so employers have the freedom to determine what expenses are eligible for reimbursement under
these arrangements. At the end of the plan year, employers have the option to allow all or a portion of the unused
funds to roll over and accumulate year-to-year if not spent. All amounts paid by employers into HRAs are deductible
for tax purposes by the employer and tax-free to the employee.
COBRA. We offer COBRA continuation services to employer clients to meet the employer’s obligation to make
available continuation of coverage for participants who are no longer eligible for the employer’s COBRA covered
benefits, which include medical, dental, vision, HRAs and certain healthcare FSAs. COBRA requires employers to
make health coverage available for qualified beneficiaries for a period of up to 36 months post-termination. As part
of our COBRA program, we offer a direct billing service where former employee participants pay us directly as
opposed to their employers for coverage they elect to continue. We handle the accounting and customer services
for such terminated employees, as well as interfacing with the carrier regarding the employees’ eligibility for
participation in the COBRA program.
Commuter Programs. We administer pre-tax commuter benefit programs. Employers are permitted to provide
employees with commuter benefits including qualified transit (which includes vanpooling) and parking. The
maximum monthly federal (and sometimes state) tax free exclusion is adjusted for inflation. For 2020, the maximum
pre-tax monthly limits are $270 for qualified transit and $270 for qualified parking.
-4-
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, 2020, 2019, and 2018,
we capitalized software development costs of $24.1 million, $9.3 million, and $8.1 million, respectively. In addition,
we incurred $23.8 million, $13.7 million, and $12.2 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 multiple 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
Our direct competitors are HSA custodians and other CDB providers. 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
platforms and capabilities to increase our market share. However, some of our direct competitors (including well-
known mutual fund companies such as Fidelity Investments and healthcare service companies such as United
Health Group's Optum) 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 Network Partners may also choose to offer competitive 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.
Our competitive strengths and strategy
We believe we are well-positioned to benefit from the transformation of the healthcare benefits market. Our
technology platforms are 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 quadrupling of our market share (measured by HSA Assets), from 4% in December
2010 to 16% in December 2019, as noted by the 2019 Devenir HSA Research Report, which indicates we are the
second largest HSA custodian by market share measured by HSA Assets.
Complete solution for managing consumer healthcare saving and spending. Our members utilize our
platforms in a number of ways and in varying frequencies. For example, our members utilize our HSA 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.
Bundled solution for HSAs and complementary CDBs. We are the largest custodian and administrator of
HSAs (by number of accounts), as well as a market-share leader in each of the major categories of complementary
CDBs, including FSAs and HSAs, COBRA and commuter benefits administration. Our Clients and their benefits
advisors increasingly seek HSA providers that can deliver an integrated offering of HSAs and complementary
CDBs. With WageWorks’ CDB capabilities, we can provide employers with a single partner for both HSAs and
complementary CDBs, which is preferred by the vast majority of employers, according to research conducted for us
by Aite Group. We believe that the combination of HSA and complementary CDB offerings significantly strengthens
our value proposition to employers, health benefits brokers and consultants, and Network Partners as a leading
single-source provider.
-5-
Proprietary and integrated technology platforms. We have proprietary cloud-based technology platforms,
developed and refined during more than a decade of operations and acquired through the Acquisition, which we
believe are highly differentiated in the marketplace for a number of key reasons:
• Purpose-built technology: Our platforms were designed specifically to serve the needs of healthcare
consumers, health plans and employers. We believe they provide 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 platforms that
encompass all of the core functionality of healthcare saving and spending in integrated, secure, and
compliant systems, 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 platforms allow 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 15,000 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 platforms enable us to create a unique solution for each of our
Network Partners. For example, a HealthEquity team member can readily configure 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.
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 nimbly address 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 platforms 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 platforms or call us. We employ individuals who provide real-time assistance to our
members via telephone, email, or chat.
• 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 exceed those of most banks and traditional health insurers.
Large and diversified channel access. We believe our differentiated distribution platforms provide a
competitive advantage by efficiently enabling us to reach a growing consumer market. Our platforms are built on a
business-to-business-to-consumer, or B2B2C, channel strategy, whereby we work with Network Partners to reach
consumers in addition to 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.
-6-
Scalable operating model. We believe that our technology is scalable because our products and services are
accessed primarily through our technology platforms, which are 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 HSA 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, including the recent acquisition of WageWorks. 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 stockholders. We believe the nature of our competitive
landscape provides significant acquisition opportunities. Many of our competitors view their HSA businesses as
non-core functions. We believe they may look to divest these assets and, in certain cases, be limited from making
acquisitions due to depository capital requirements.
Government regulation
Our business is subject to extensive, complex, and rapidly changing federal and state laws and regulations.
IRS regulations
We are subject to applicable IRS regulations, which lay the foundation for tax savings and eligible expenses under
the HSAs, HRAs, and FSAs we administer. The IRS issues guidance regarding these regulations regularly. In
addition, we are subject to conflict of interest and other prohibited transaction rules that are enforced through excise
taxes under the Internal Revenue Code. Although the excise taxes are enforced by the IRS, the underlying rules are
promulgated by the Department of Labor.
In February 2006, HealthEquity, Inc. received designation by the U.S. Department of Treasury to act as a passive
non-bank custodian, which allows HealthEquity, Inc. to hold custodial assets for individual account holders. In July
2017, HealthEquity, Inc. received designation by the U.S. Department of Treasury to act as both a passive and non-
passive non-bank custodian, which allows HealthEquity, Inc. to hold custodial assets for individual account holders
and use discretion to direct investment of such assets held. As a passive and non-passive non-bank custodian, the
Company must maintain net worth (assets minus liabilities) greater than 2% of passive custodial funds held at each
calendar year-end and 4% of the non-passive custodial funds held at each calendar year-end in order to take on
additional custodial assets. As of December 31, 2019, 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 FSAs and HRAs, 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 FSA 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)
-7-
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, COBRA continuation insurance, 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 FSAs, HRAs, and COBRA administration businesses. 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, as well as COBRA administration. 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, tax-
favored savings arrangements (including HSAs) and COBRA administration, generally. In addition, in response to a
request by an individual or an organization, the DOL’s Employee Benefits Security Administration may issue an
advisory opinion that interprets and applies ERISA and/or corresponding prohibited transaction rules under the
Internal Revenue Code to a specific situation, including issues related to consumer-centric healthcare accounts and
retirement plans.
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 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, including proposed "Medicare for all" plans.
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 investment 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.
-8-
Intellectual property
Intellectual property is important to our success. We rely on trademarks and 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, 2020, we had 2,931 team members, including
1,958 in service delivery, 495 in technology and development, and 478 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 are 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 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.
-9-
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 the Acquisition and the integration of the WageWorks business into the Company
We may experience difficulties in integrating the operations of WageWorks into our business and in
realizing the expected benefits of the Acquisition.
The success of the Acquisition depends in part on our ability to realize the anticipated business opportunities from
combining the operations of WageWorks with our business in an efficient and effective manner. The integration
process is an expensive multi-year process that could take longer and cost more than anticipated and result in the
loss of Clients.
As part of the integration process, we are working to migrate certain Clients to different technology platforms, which
could result in Client attrition if we are unable to meet Client expectations or if we are unable to meet the technical
requirements of our Clients. Clients may also decide to not cooperate with the platform migration process, resulting
in delays to and additional costs associated with this process or the loss of those Clients. The challenges
associated with the platform migration process may result in Client dissatisfaction, potentially impairing our long-
term relationship with our Clients. We may also face challenges in integrating the back-office systems and people
associated with these technology platforms.
Another important aspect of the integration process is the integration of prior WageWorks acquisitions, as
WageWorks historically allowed its acquired companies to continue functioning relatively independently, including
through the use of independent technology platforms. For example, WageWorks was not able to completely
integrate its acquisition of ADP’s Consumer Health Spending Account, COBRA, and direct bill businesses, resulting
in the attrition of the clients associated with this business, which may continue to occur. Failure to successfully
integrate these prior acquisitions as part of our overall integration process may adversely impact our ability to
succeed as a combined company.
The integration process has also resulted, and may continue to result in, the loss of team members, as some team
members have decided to seek alternative employment, including members of the finance team. In addition, our
management team and other team members are spending significant amounts of time on integration efforts, which
may distract them from their other responsibilities.
Integration could also disrupt each company's ongoing businesses, result in tax inefficiencies, or create
inconsistencies in standards, controls, information technology systems, procedures, and policies, any of which
could adversely affect our ability to maintain relationships with third parties, or our ability to achieve the anticipated
benefits of the Acquisition, and could harm our financial performance.
If we are unable to successfully or timely integrate the operations of WageWorks with our business, we may incur
unanticipated costs and be unable to realize the revenue growth, synergies, and other anticipated benefits resulting
from the Acquisition, and our business, results of operations, and financial condition could be materially and
adversely affected.
The synergies attributable to the Acquisition may vary from expectations.
We may fail to realize our anticipated benefits and synergies expected from the Acquisition, which could adversely
affect our business, financial condition, and operating results. The success of the Acquisition will depend, in
significant part, on our ability to successfully integrate the acquired business, grow the revenue of the combined
company and realize the anticipated strategic benefits and synergies from the combination. We believe that the
addition of WageWorks complements our strategy by giving us access to more of the fast-growing HSA market by
expanding our direct distribution to employers and benefits advisors as a single source, premier provider of HSAs
and complementary CDBs. However, achieving these goals requires growth of the revenue of the combined
company, the integration of the WageWorks' CDB and other offerings with our technology platforms, realization of
target custodial and other revenue synergies, and realization of the targeted cost synergies expected from the
Acquisition. This growth and the anticipated benefits of the transaction may not be realized fully or at all, or may
take longer or cost more to realize than expected. Actual operating, technological, strategic, and revenue
opportunities, if achieved at all, may be less significant than expected or may take longer or cost more to achieve
-10-
than anticipated. If we are not able to achieve these objectives and realize the anticipated benefits and synergies
expected from the Acquisition within the anticipated timing or at all, our business, financial condition, and operating
results may be adversely affected.
The restatement of WageWorks’ previously issued financial results resulted in securities class action and
stockholder litigation, as well as government investigations that could result in enforcement actions, which
could have a material adverse impact on us.
WageWorks and certain of its former directors and officers are subject to securities class action and stockholder
litigation relating to its previous public disclosures. In addition, WageWorks and certain of its former directors and
officers are subject to government investigations arising out of the misstatements in its previously issued financial
statements. See Note 7—Commitments and contingencies of the Notes to consolidated financial statements for a
description of these legal proceedings and investigations. The legal proceedings may result in substantial liability
and other adverse consequences. In addition, WageWorks could become subject to additional private litigation or
investigations, or one or more government enforcement actions, arising out of alleged misstatements in its
previously issued financial statements. Our management team may be required to devote significant time and
attention to these matters, and these and any additional matters that arise could have a material adverse impact on
our results of operations, financial condition, liquidity, and cash flows. We may also incur significant additional
expenses in connection with these proceedings and investigations in order to defend this litigation and to fulfill
indemnification obligations to former officers and directors of WageWorks.
WageWorks previously identified material weaknesses in its internal control over financial reporting which
could, if not remediated, adversely affect our ability to report our financial condition and results of
operations in a timely and accurate manner.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting,
as defined in Rule 13a-15(f) under the Exchange Act. WageWorks determined previously that its internal control
over financial reporting was not effective due to the existence of unremediated material weaknesses in its internal
control over financial reporting. See Item 9A - Controls and Procedures for a description of WageWorks' material
weaknesses in its internal control over financial reporting.
We are developing a remediation plan designed to address the material weaknesses, but our remediation efforts
are ongoing. If our remedial measures are insufficient to address the material weaknesses, or if additional material
weaknesses or significant deficiencies in our internal control are discovered or occur in the future, it may materially
adversely affect our ability to report our financial condition and results of operations in a timely and accurate
manner. If we are unable to report our results in a timely and accurate manner, we may not be able to comply with
the applicable covenants in our credit agreement, and may be required to seek waivers or repay amounts under the
credit agreement earlier than anticipated, which could adversely impact our liquidity and financial condition.
Although we continually review and evaluate internal control systems to allow management to report on the
sufficiency of our internal controls over financial reporting, we cannot assure you that we will not discover additional
weaknesses in our internal control over financial reporting.
The complexity of the integration and transition associated with the Acquisition, together with the resulting
increased scale and national presence, may affect our internal control over financial reporting and ability to
effectively and timely report financial results.
The additional scale of the combined company's operations, together with the complexity of the integration effort,
including the integration of, changes to or implementation of critical information technology systems, may adversely
affect our ability to report financial results on a timely basis. In addition, we have to train new team members and
third-party providers. The Acquisition requires significant modifications to our internal control systems, processes,
and information systems, both on a transition basis and over the longer-term as we fully integrate the combined
company. Due to the complexity of the Acquisition, we cannot be certain that changes to our internal control over
financial reporting will be effective for any period, or on an ongoing basis. If we are unable to accurately report our
financial results in a timely manner or are unable to assert that our internal controls over financial reporting are
effective, our business, financial condition and results of operations, and the market perception thereof, may be
materially adversely affected.
WageWorks may have liabilities that are not known at this time.
As a result of the Acquisition, WageWorks became our subsidiary, subject to all of its liabilities, including the class
action and derivative lawsuits and SEC investigation described above, as well as contractual indemnification
obligations to its Clients arising from WageWorks' service delivery issues. There could be unasserted claims,
assessments or contractual indemnification obligations that we failed or were unable to discover or identify in the
course of performing due diligence investigations of WageWorks. Any such liabilities, individually or in the
aggregate, could have a material adverse effect on our financial results. We may learn additional information about
-11-
WageWorks that adversely affects us, such as unknown, unasserted, or contingent liabilities and issues relating to
compliance with applicable laws.
Risks relating to our business and industry
A widespread health pandemic, such as the current outbreak of the COVID-19 virus, could materially impact
our business.
Our business could be severely impacted by a widespread regional, national or global health pandemic. For
example, a widespread health pandemic may cause our account holders to use HSA funds to cover healthcare
expenses on a much larger scale than normal, which could impact our relationships with our depository partners
that hold these funds, cause us to incur fees as a result of lower account balances held with depository partners
and reduce revenue we receive on such funds. In addition, a health pandemic may cause interest rates to decline,
which would negatively impact the interest rates we receive when depositing new HSA Assets or client-held funds
with our depository partners. In addition, a health pandemic may cause stock market fluctuations which could
negatively impact HSA investment assets and the related fees that we earn from them. A health pandemic may also
impact the number of sales opportunities available to the Company. Finally, our ability to provide high levels of
service to our clients could also be negatively impacted if a large number of our team members or employees of our
vendors that we rely upon are unable to fulfill their responsibilities due to sickness.
We expect our business to be adversely affected by the recent outbreak of the COVID-19 virus, including as a result
of the associated interest rate cuts by the Federal Reserve and other market conditions that have caused interest
rates to decline significantly and, as a result, funds that we place with our depository partners in this environment
will receive lower interest rates than we originally expected. We expect stock market fluctuations to negatively
impact HSA investment assets and the related fees we earn from them. Sales opportunities have also been
impacted, with some opportunities delayed or now being held virtually. We may be unable to meet our service level
commitments to our clients as a results of disruptions to our work force and disruptions to third part contracts that
we rely on to provide our services. Our financial results related to certain of our products may be adversely affected,
such as commuter benefits, due to many of our members working from home during the outbreak or other impacts
from the outbreak. Clients may be unable to pay fees required under contracts and exercise "force majeure" or
similar clauses, which would negatively impact our financial results. In the event our financial results are severely
impacted, it may make it more difficult for us to comply with the financial covenants in our credit agreement, which
could result in a breach of the financial covenants and the acceleration of our outstanding debt by our lenders. The
extent to which the COVID-19 virus will negatively impact our business remains highly uncertain and as a result
may have a material adverse impact on our business and financial results.
Our business is fundamentally dependent upon the availability and adoption of tax-advantaged health
savings accounts and other CDBs by consumers and employers. Any diminution in, elimination of, or
change in the availability of tax benefits 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 tax-advantaged HSAs and other CDBs. 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 CDBs. If employers reduce or cease to offer HSAs or other CDB programs,
the tax benefits for these accounts are reduced or eliminated, or the rate of adoption of these accounts decreases,
our results of operations, financial condition, business, and prospects would be materially and adversely affected.
Our industry is rapidly evolving and undergoing significant technological change. If we are not successful
in adapting to the evolving environment and promoting and improving the benefits of our technology
platforms, 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 consumers of HSAs and other CDBs 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 our rapidly evolving industry and
the substantial resources available to our existing and potential competitors. It is uncertain whether our 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 saving and spending through HSAs and other CDBs, the ability of our platforms to
increase consumer engagement, and our ability to demonstrate the value of our platforms to our existing customers
-12-
and potential customers. If our existing customers do not recognize or acknowledge the benefits of our platforms or
our platforms do 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.
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 HSA competitors are HSA custodians that include
state or federally chartered banks, such as Webster and Optum Bank, insurance companies, well-known retail
investment companies, such as Fidelity Investments, and non-bank custodians approved by the U.S. Treasury as
meeting certain ownership, capitalization, expertise, and governance requirements.
The HSA market is highly fragmented. We also have numerous indirect HSA 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. Our other CDB
competitors include health insurance carriers, human resources consultants and outsourcers, payroll providers,
national CDB specialists, regional third-party administrators, and commercial banks.
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 or other CDBs 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 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:
-13-
•
•
•
•
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 16%, 21%, and 22% of our total revenue during the years ended January 31, 2020, 2019, and 2018,
respectively, from fees that are paid to us when our customers utilize our payment cards. These fees represent a
percentage of the expenses transacted on each card. If our customers do not use these payment cards at the rate
we expect, if they elect to withdraw funds using a non-revenue generating mechanism such as direct
reimbursement, or if other alternatives to these payment cards develop, our results of operations, business, and
prospects would be materially adversely affected.
Data security, technological, and intellectual property risks
As one of the largest providers of HSAs and other CDBs, 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 technology platforms may be perceived as not being secure, our customers
may reduce the use of, or stop using, our products and services, we may incur significant liabilities, our
reputation may be harmed, and we could lose sales and customers.
Our proprietary technology platforms enable 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. As a result of the
Acquisition, we are one of the largest providers of HSAs and other CDBs and therefore an even more attractive
target for cyber-attacks. The Acquisition has also added several new technology platforms that we must continue to
secure and monitor, aligning them to our industry benchmark security posture.
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, team member 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.
In addition, we are continuing to evaluate the security measures associated with the technology platforms used by
WageWorks, and we may find that current security measures for these platforms are not sufficient. The integration
of the WageWorks technology platforms with our technology platforms may create further vulnerabilities in our
systems. 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.
-14-
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 technology platforms 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 technology
platforms.
Criminals are using increasingly sophisticated methods to capture personal information in order to engage in illegal
activities such as counterfeiting and identity theft. We rely upon third parties for some transaction processing
services, data feeds, and vendors, which subjects us to risks related to the vulnerabilities of those third parties. For
example, we are exposed to risks relating to the theft of payment card numbers housed in a merchant's point of sale
systems if our members use our payment cards at a merchant whose systems are compromised. We may make our
customers whole for losses sustained when using our payment cards, even in instances where we are not directly
responsible for the underlying cause of such loss. A single significant incident of fraud, or increases in the overall
level of fraud, involving our payment cards, our custodial accounts or our reimbursement administration services,
could result in financial and reputational damage to us, which could reduce the use and acceptance of our products
and services, or cause our customers to cease doing business with us.
We rely on software licensed from third parties that may be difficult to replace or that could cause errors or
failures of our technology platforms 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
platforms may be more difficult than expected, may take longer and cost more than expected, or may result
in the platforms 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 platforms 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 HSA and other CDB 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
-15-
•
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 technology platforms are hosted by third-party 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 platforms is critical to our business. We cannot ensure that the measures we have taken will
be effective to prevent or minimize interruptions to our operations. Our facilities and our third-party data centers 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;
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 centers are equipped with physical space, power,
storage and networking infrastructure and Internet connectivity to support our technology platforms in the event of
the interruption of services at our data centers. Even with these data recovery centers, 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 platforms 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 could result in an immediate loss of revenue. Frequent or persistent
system failures that result in the unavailability of our technology platforms or slower response times could reduce
our customers’ ability to access our platforms, impair our delivery of our products and services, and harm the
perception of our platforms 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.
Some of our technology platforms may link to or utilize open source software, and any failure to comply
with the terms of one or more of these open source licenses could negatively affect our business.
Some of our technology platforms may incorporate software covered by open source licenses. The terms of various
open source licenses have not been interpreted by United States courts, and there is a risk that such licenses could
be construed in a manner that imposes unfavorable conditions on us. For example, by the terms of certain open
source licenses, we could be required to offer our technology platforms that incorporate the open source software
for no cost, that we make publicly available source code for modifications or derivative works that we created based
-16-
upon, incorporating or using the open source software, and/or that we license such modifications or derivative
works under the terms of the particular open source license. If portions of our proprietary software are determined
to be subject to an open source license, then the value of our technologies and services could be reduced. In
addition to risks related to license requirements, usage of open source software may be riskier than use of third-
party commercial software, as open source licensors generally do not provide warranties or controls on the origin of
the software. Many of the risks associated with usage of open source software cannot be eliminated and could
negatively affect our business.
We must adequately protect our brands 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 and WageWorks brands are critical to the success of our business, and we utilize
trademark registration and other means to protect these brands. Our business would be harmed if we were unable
to protect our brands against infringement and the value of our brands 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,
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 are unable to promote our brands effectively, our business may suffer.
We believe that promoting our brands in an effective manner is critical to achieving widespread acceptance of our
products and services, attracting new customers and strategic partners, and integrating the WageWorks business
and clients. 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 brands. If we fail to successfully
promote our brands, or incur substantial expenses in doing so, 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, to achieve the
widespread brand awareness that is critical for broad customer adoption of our products and services, or to fully
and effectively integrate the WageWorks business and clients.
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
-17-
arrangements with our team members, independent contractors, advisors, customers, and other partners. 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 names, our ability to successfully promote our brands will be impaired.
We currently own the web domain names www.healthequity.com and www.wageworks.com, among others, which
are 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 strong branding if we cannot prevent others from using similar domain names
or trademarks. This failure could impair our ability to increase our market share and revenue.
Legal and regulatory risks
The healthcare regulatory and political framework is uncertain and evolving, and we cannot predict the
effect that further healthcare reform and other changes in government programs may have on our
business, financial condition, or results of operations.
Healthcare laws and regulations are rapidly evolving and may change significantly in the future, which could
adversely affect our financial condition and results of operations. For example, the Affordable Care Act, which
includes a variety of healthcare reform provisions and requirements that have become effective at varying times,
substantially changed the way healthcare is financed by both governmental and private insurers and may
significantly impact our industry. Further changes to the Affordable 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, could
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 may be affected by the results of the current
presidential and other elections this year. Accordingly, we are unable to predict 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 and other healthcare-related CDBs 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, HRAs, 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 and other healthcare-related CDBs. 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, including regarding the access, use, and disclosure of personally
identifiable information. If we or any of our third-party vendors experience a privacy breach, 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,
-18-
and the Gramm-Leach Bliley Act, which governs the treatment of nonpublic personal information. In the provision of
services to our customers, we and our third-party vendors may collect, access, use, maintain, and transmit
personally identifiable information in ways that are subject to many of these laws and regulations. Although we have
implemented measures to comply with these 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. As a result of
the Acquisition, we now obtain substantially more HIPAA data than before the Acquisition. Additionally, as we have
in connection with prior 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.
Privacy regulation has become a priority issue in many states, and as such the regulatory environment is continually
changing. For example, the California Consumer Privacy Act ("CCPA") became effective on January 1, 2020. The
CCPA requires companies, such as ours, that process information on California residents to make new disclosures
to consumers about their data collection, use, and sharing practices, and allows consumers to opt out of certain
data sharing with third parties and provides a new cause of action for data breaches. Other governmental
authorities are also considering legislative and regulatory proposals concerning data protection.
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, as well as costly penalties in the event we are deemed to not be
in compliance with such laws, rules, and regulations.
Changes in laws and regulations relating to interchange fees on payment card transactions would
adversely affect our revenue and results of operations.
Existing laws and regulations limit the fees or interchange rates that can be charged on payment card transactions.
For example, the Federal Reserve Board has the power to regulate payment card interchange fees and has issued
a rule setting a cap on the interchange fee an issuer can receive from a single payment card transaction. Our HSA-
linked payment cards are exempt from this rule (although we are subject to a general requirement of reasonable
compensation for services rendered). To the extent that our payment cards lose their exempt status, the
interchange rates applicable to transactions involving our payment cards could be impacted, which would decrease
our revenue and profit and could have a material adverse effect on our financial condition and results of operations.
Changes in credit card association or other network rules or standards set by Visa or MasterCard, or
changes in card association and debit network fees or products or interchange rates, could materially
adversely affect our results of operations, business, and financial position.
We, and the banks that issue our prepaid debit cards, are subject to Visa and MasterCard association rules that
could subject us to a variety of fines or penalties that may be levied by the card associations or networks for acts or
omissions by us or businesses that work with us, including card processors. The termination of the card association
registrations held by us or any of the banks that issue our cards, or any changes in card association or other debit
network rules or standards, including interpretation and implementation of existing rules, participants deciding to
use PIN networks, standards or guidance that increase the cost of doing business or limit our ability to provide our
products and services, or limit our ability to receive interchange fees, could have a material adverse effect on our
results of operations, financial condition, business, and prospects. In addition, from time-to-time, card associations
increase the organization or processing fees that they charge, which could increase our operating expenses, reduce
our profit margin and materially adversely affect our results of operations, financial condition, business, and
prospects.
We are subject to complex regulation, and any compliance failures or regulatory action could adversely
affect our business.
Our business, including HSAs and many of the CDB plans we administer and our investment adviser and trust
company subsidiaries, is subject to extensive, complex, and frequently changing federal and state laws and
regulations, including IRS, Health and Human Services (“HHS”), and Department of Labor (“DOL”) regulations;
ERISA, HIPAA, HITECH, and other privacy and data security regulations; the Advisers Act; state banking laws; and
the Patient Protection and Affordable Care Act.
-19-
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 HHS, the
DOL, 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 is 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 Network Partners enjoy significant market share
in various geographic regions. If these Network 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 limited number of bank identification number sponsors for our payment cards, and a change
in relationship with any of these sponsors or the failure by these sponsors to comply with certain banking
regulations could materially and adversely affect our business.
We rely on a limited number of bank identification number, or BIN, sponsors 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 sponsors
enable us to link the payment cards that we offer our members to the VISA and Mastercard networks, thereby
allowing our members to use our payment cards to pay for expenses with a “swipe” of the card. If any material
adverse event were to affect our BIN sponsors, including a significant decline in the financial condition of any of our
BIN sponsors, a decline in the quality of service provided by our BIN sponsors, the inability of our BIN sponsors to
comply with applicable banking and financial service regulatory requirements, systems failure or the inability of our
BIN sponsors to pay us fees, our business, financial condition, and results of operations could be materially and
-20-
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 long-term contracts with our BIN sponsors, and our BIN sponsors may increase
the fees charged to us or terminate our relationship. 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 depository partners to hold our custodial cash
assets. If any material adverse event were to affect one of our federally insured 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 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 the integration of the WageWorks business into the HealthEquity business, the redesign of our HSA
technology platform, fraud management and other customer verification services, transaction processing and
settlement, telephony services, and card production. In addition, WageWorks uses third-party vendors for its call
centers and COBRA claims and transaction processing and also uses one of our competitors for other services. 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 harm our reputation, 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
As part of our acquisition strategy, we 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;
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;
-21-
•
•
•
•
•
•
•
•
•
•
the difficulty of incorporating acquired technology and rights into our technology platforms 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, integrate, 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, offer new products and
services, and integrate the WageWorks business into our business, 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 a significant
modernization of our proprietary technology platforms to support new opportunities and enhance security, privacy,
and platform infrastructure. If we are unsuccessful in implementing these upgrades to our platforms, 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, including as a result of the Acquisition, has
placed a significant strain upon our management and administrative, operational, and financial infrastructure. As of
January 31, 2020, we had approximately 5.3 million HSAs and $11.5 billion in HSA assets representing growth of
34% and 43%, respectively, from January 31, 2019. For the year ended January 31, 2020, our total revenue and
Adjusted EBITDA were approximately $532.0 million and $196.5 million, respectively, which represents year-over-
year annual growth rates of approximately 85% and 66%, 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 HSAs and our HSA
Assets at relatively higher growth rates than industry averages. However, the rate at which we have been able to
add new HSAs in the past may not be indicative of the rate at which we will be able to add additional HSAs in the
future.
Our success depends in part upon the ability of our executive officers to manage growth effectively. Our ability to
grow also depends upon our ability to successfully hire, train, supervise, and manage new team members, obtain
financing for our capital needs, expand our systems effectively, control increasing costs, allocate our human
resources optimally, maintain clear lines of communication between our operational functions and our finance and
accounting functions, and manage the pressures on our management and administrative, operational, and financial
infrastructure. There can be no assurance that we will be able to accurately anticipate and respond to the changing
demands we will face as we continue to expand our operations or that we will be able to manage growth effectively
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.
-22-
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 the capabilities of our platforms. 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, which increased substantially as a result of the
Acquisition. 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 $1.33 billion in
goodwill and $783.3 million in intangible assets, together representing approximately 82% of our total assets as of
January 31, 2020. 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. Further, WageWorks uses third-party
vendors for its call centers and COBRA claims and transaction processing, including certain offshore vendors,
which vendors may not provide the same quality of support services for our Clients and members. 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 platforms. Interruptions or delays that inhibit our ability to meet that standard may
hurt our reputation or ability to attract and retain customers.
We rely on our management team and key team members and our business could be harmed if we are
unable to retain qualified personnel.
Our success depends, in part, on the skills, working relationships and continued services of our founder and senior
management team and other key personnel. While we have entered into offer letters or employment agreements
with certain of our executive officers, all of our team members are “at-will” employees, and their employment can be
terminated by us or them at any time, for any reason, and without notice, subject, in certain cases, to severance
payment rights. In order to retain valuable team members, in addition to salary and cash incentives, we provide
stock options and other equity-based awards that vest over time or based on performance. The value to team
members of these awards will be significantly affected by movements in our stock price that are beyond our control
and may at any time be insufficient to counteract offers from other organizations. The departure of key personnel
-23-
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 as a result of the Acquisition 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, including through the integration of WageWorks
team members, 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. The debt we incurred in connection with the Acquisition
of WageWorks may make it more challenging to incur additional debt, as the associated credit agreement includes
prohibitions against incurring additional debt without approval from our existing lenders, and other lenders may not
be willing to take on the risk of adding to our existing leverage, In addition, 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.
The terms of our credit facility require us to meet certain operating and financial covenants and place
restrictions on our operating and financial flexibility.
On August 30, 2019, we entered into a new $1.6 billion credit agreement, which consists of (i) a five-year senior
secured term loan A facility in the aggregate principal amount of $1.25 billion and (ii) a five-year senior secured
revolving credit facility in an aggregate principal amount of up to $350 million. The credit agreement is secured by a
lien covering substantially all of our assets. The credit agreement contains customary affirmative and negative
covenants, including covenants related to the following subjects: mergers and sales of assets; limitations on the
incurrence of certain liens; limitations on certain indebtedness; limitations on the ability to pay dividends; certain
affiliate transactions; and financial performance covenants. If we default under the credit agreement, the lenders will
be able to declare all obligations immediately due and payable and take control of our pledged assets, potentially
requiring us to renegotiate the credit agreement on terms less favorable to us or to immediately cease operations.
The lenders' rights to repayment would be senior to the rights of the holders of our common stock to receive any
proceeds.
We may be adversely affected by interest rate changes due to the floating interest rate under our credit
agreement.
-24-
Borrowings under the credit agreement bear interest at an annual rate equal to, at the option of the Company, either
(i) LIBOR (adjusted for reserves) plus a margin ranging from 1.25% to 2.25% or (ii) an alternate base rate plus a
margin ranging from 0.25% to 1.25%, with the applicable margin determined by reference to a leverage-based
pricing grid set forth in the credit agreement. As such, our financial position may be adversely affected by
fluctuations in interest rates. In addition, although the credit agreement provides an alternative mechanism for
determining the applicable interest rate when LIBOR is no longer available, the interest rates we pay may be
adversely affected as a result of potential disruptions in the credit market at the end of 2021 when LIBOR is
scheduled to be phased out.
A decline in interest rate levels, including an environment of negative interest rates, or lower asset values
due to market conditions or other factors may reduce our ability to earn income on our HSA Assets and
Client-held funds and to attract HSA contributions, which would adversely affect our profitability.
As a non-bank custodian, we partner with our depository partners to hold our HSA Assets and other Client-held
funds. We earn a significant portion of our consolidated revenue from fees we earn from our depository partners,
approximately 34%, 44%, and 38% during the years ended January 31, 2020, 2019, and 2018, respectively. A
decline in prevailing interest rates, such as the current low interest rate environment due to the COVID-19
pandemic, or a negative interest rate environment may negatively affect our business by reducing the yield we
realize on our HSA Assets and other Client-held funds. 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 declines,
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, and 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.
Natural disasters, pandemics or other epidemics (including the current COVID-19 pandemic), 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, pandemics or other epidemics (including the current COVID-19 pandemic) 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
-25-
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. As described above, these risks are magnified as
we integrate WageWorks into our internal controls and seek to remediate WageWorks' various material
weaknesses.
If we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely
basis and our financial statements may be materially misstated. If we identify material weaknesses in our internal
controls over financial reporting, if we are unable to comply with the requirements of Section 404 of Sarbanes-Oxley
in a timely manner, if we are unable to assert that our internal controls over financial reporting are effective, or if our
independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal
controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial
reports and the market price of our common stock could be adversely affected. In addition, we could become
subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory
authorities, which could require additional financial and management resources.
Our quarterly operating results may fluctuate significantly from period to period, which could adversely
impact the value of our common stock.
Our quarterly operating results, including our revenue, gross profit, net income, and cash flows, may vary
significantly in the future, which could cause our stock price to decline rapidly, may lead analysts to change their
long-term models for valuing our common stock, could cause short-term liquidity issues, may impact our ability to
retain or attract key personnel or cause other unanticipated issues. In addition, our operating results are impacted
by the Acquisition of WageWorks. 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;
the effects of the ongoing COVID-19 pandemic on our business and results of operations;
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;
•
our ability to integrate the operations of WageWorks and to realize the expected synergies and other
benefits of the Acquisition;
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;
•
•
-26-
•
•
•
•
•
•
any data breaches or interruptions in our services;
changes in government and other regulations, particularly those relating to the benefits of HSAs and other
CDBs;
changes in accounting standards, policies, guidance, interpretations, or principles;
arrival and departure of key personnel;
sales of common stock by us, our investors or members of our Board and management team; and
changes in general market, economic, and political conditions in the U.S. and global economies or financial
markets, including those resulting from natural disasters, telecommunications failure, cyber-attack, civil
unrest in various parts of the world, acts of war, terrorist attacks, or other catastrophic events.
Any of these factors may result in large and sudden changes in the trading volume and market price of our common
stock and may prevent you from being able to sell your shares at or above the price you paid for your shares of our
common stock. Following periods of volatility in the market price of a company’s securities, stockholders often file
securities class-action lawsuits against such company. Our involvement in a class-action lawsuit could divert our
senior management’s attention and, if adversely determined, could have a material and adverse effect on our
business, financial condition, and results of operations.
We do not intend to pay regular cash dividends on our common stock and, consequently, your ability to
achieve a return on your investment will depend on appreciation in the price of our common stock.
We have no current plans to declare and pay any cash dividends for the foreseeable future. We currently intend to
retain all our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on
your common stock for the foreseeable future and the success of an investment in our common stock will depend
upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or
even maintain the price at which our stockholders have purchased their shares.
Future offerings of debt or equity securities, which may rank senior to our common stock, may adversely
affect the market price of our common stock.
If we decide to issue debt securities in the future, which would rank senior to shares of our common stock, it is likely
that they will be governed by an indenture or other instrument containing covenants restricting our operating
flexibility. Additionally, any equity securities or convertible or exchangeable securities that we issue in the future
may have rights, preferences and privileges more favorable than those of our common stock and may result in
dilution to owners of our common stock. We and, indirectly, our stockholders will bear the cost of issuing and
servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend
on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or
nature of our future offerings. Thus, holders of our common stock will bear the risk of our future offerings reducing
the market price of our common stock and diluting the value of their shareholdings in us.
Provisions in our charter documents and under Delaware law could discourage a takeover that
stockholders may consider favorable.
Certain provisions in our governing documents could make a merger, tender offer or proxy contest involving us
difficult; even if such events would be beneficial to the interests of our stockholders. These provisions include the
inability of our stockholders to act by written consent and certain advance notice procedures with respect to
stockholder proposals and nominations for candidates for the election of directors. In addition, because we are
incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits stockholders owning in excess of 15% of our outstanding voting
stock from merging or combining with us. Accordingly, our board of directors could rely upon these or other
provisions in our governing documents and Delaware law to prevent or delay a transaction involving a change in
control of our company, even if doing so would benefit our stockholders.
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
-27-
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.
-28-
Item 1B. Unresolved staff comments
None.
Item 2. Properties
We do not currently own any of our facilities. Our principal executive offices are located in Draper, Utah, and we
lease additional office space in California, Arizona, Georgia, Kansas, Kentucky, New York, Texas, and Wisconsin.
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. Our wholly owned subsidiary, WageWorks, is party to certain pending material litigation and
other legal proceedings. Except for such matters, as of the date of this Annual Report on Form 10-K, we were 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, cash flows or
financial position. For a description of these legal proceedings, see Note 7—Commitments and contingencies of the
Notes to condensed consolidated financial statements.
Item 4. Mine safety disclosures
Not applicable.
-29-
Part II.
Item 5. Market for registrant's common equity, related stockholder matters and issuer
purchases of equity securities
Market information
Our common stock is listed on the NASDAQ Global Select Market under the symbol "HQY".
Holders
As of March 24, 2020, there were approximately 21 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.
-30-
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 January 31,
2015 through January 31, 2020. The chart assumes $100 was invested on January 31, 2015 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.
Unregistered sales of equity securities
None.
Purchases of equity securities by the issuer and affiliated purchasers
None.
-31-
Item 6. Selected financial data
The following selected consolidated financial data are 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)
Consolidated statements of operations
data:
Revenue
......................................................................
Cost of revenue
......................................................................
Gross profit
......................................................................
Operating expenses
......................................................................
Income from operations
......................................................................
Other expense, net
......................................................................
Income before income taxes
......................................................................
Income tax provision (1)
......................................................................
Net income
...................................................................
Net income per share:
Basic
...................................................................
Diluted
...................................................................
Weighted-average number of shares used in
computing net income per share:
$
$
$
$
Basic
...................................................................
Diluted
...................................................................
2020
2019
2018
Year ended January 31,
2016
2017
531,993 $
206,084
325,909
248,903
77,006
(33,851)
43,155
3,491
39,664 $
287,243 $
106,050
181,193
103,523
77,670
(1,852)
75,818
1,919
73,899 $
229,525 $
94,609
134,916
80,498
54,418
(2,229)
52,189
4,827
47,362 $
178,370 $
72,015
106,355
65,143
41,212
(1,092)
40,120
13,744
26,376 $
0.59 $
0.58 $
1.20 $
1.17 $
0.79 $
0.77 $
0.45 $
0.44 $
67,026
68,453
61,836
63,370
60,304
61,854
58,615
59,894
126,786
54,188
72,598
46,455
26,143
(589)
25,554
8,941
16,613
0.29
0.28
56,719
58,863
$
Consolidated balance sheet data:
123,775
Cash and cash equivalents
......................................................................
130,942
Working capital
......................................................................
219,795
Total assets
......................................................................
16,338
Total liabilities
......................................................................
203,457
Total stockholders' equity
......................................................................
(1) For the years ended January 31, 2020, 2019, and 2018, the Company recorded excess tax benefits of $4.8 million, $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.
191,726 $
145,363
2,564,981
1,534,686
1,030,295 $
361,475 $
365,624
510,016
32,937
477,079 $
240,269 $
244,906
369,159
22,885
346,274 $
180,359 $
185,116
279,136
17,196
261,940 $
$
-32-
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” on page 1 of this Annual Report.
Overview
We are a leader and an innovator in providing technology-enabled services platforms that empower consumers to
make healthcare saving and spending decisions. Consumers and employers use our platforms to manage tax-
advantaged HSAs and other CDBs offered by employers, including FSAs and HRAs, COBRA administration,
commuter and other benefits, compare treatment options and pricing, evaluate and pay healthcare bills, receive
personalized benefit information, access remote and telemedicine benefits, earn wellness incentives, and receive
investment advice to grow their tax-advantaged healthcare savings.
The core of our offerings is the HSA, a financial account through which consumers spend and save long-term for
healthcare expenses on a tax-advantaged basis. As of January 31, 2020, we administered 5.3 million HSAs, with
balances totaling $11.5 billion, which we call HSA Assets. During the years ended January 31, 2020 and 2019, we
added approximately 1.5 million and 679,000 new HSAs, respectively. Also, as of January 31, 2020, we
administered 7.4 million complementary CDBs. We refer to the aggregate number of HSAs and other CDBs on our
platforms as Total Accounts, of which we had 12.8 million as of January 31, 2020.
We reach consumers primarily through relationships with their employers, which we call Clients. We reach Clients
primarily through a sales force that calls on Clients directly, relationships with benefits brokers and advisors, and
integrated partnerships with a network of health plans, benefits administrators, benefits brokers and consultants,
and retirement plan recordkeepers, which we call Network Partners. As of January 31, 2020, our platforms were
integrated with 165 Network Partners, serving more than 100,000 Clients.
We have grown our share of the growing HSA market from 4% in calendar year 2010 to 16% in 2019, including by
3% as a result of the acquisition of WageWorks on August 30, 2019. According to Devenir, today we are the largest
HSA provider by accounts and second largest by assets. In addition, we believe we are the largest provider of other
CDBs. We seek to differentiate ourselves through our proprietary technology, product breadth, ecosystem
connectivity, and service-driven culture. Our proprietary technology is designed to help consumers optimize the
value of their HSAs and other CDBs, as they gain confidence and skill in their management of financial
responsibility for lifetime healthcare.
Our ability to engage consumers is enhanced by our platforms’ capacity to securely share data in both directions
with others in the health, benefits, and retirement ecosystems, which we call Ecosystem Partners. Our commuter
benefits offering also leverages connectivity to an ecosystem of mass transit, ride hailing, and parking providers.
These strengths reflect our “DEEP Purple” culture of remarkable service to customers and teammates, achieved by
driving excellence, ethics, and process into everything we do.
We earn revenue primarily from three sources: service, custodial, and interchange. We earn service revenue mainly
from fees paid by Clients on a recurring per-account per-month basis. We earn custodial revenue mainly from HSA
Assets held at our members’ direction in federally insured cash deposits, insurance contracts or mutual funds, and
from investment of Client-held funds. We earn interchange revenue mainly from fees paid by merchants on
payments that our members make using our physical payment cards and virtual platforms. See “Key components of
our results of operations” for additional information on our sources of revenue, including regarding the adverse
impacts caused by the ongoing COVID-19 pandemic.
Acquisition of WageWorks
On August 30, 2019, we completed the Acquisition of WageWorks and paid approximately $2.0 billion in cash to
WageWorks stockholders, financed through net borrowings of approximately $1.22 billion under a new term loan
facility and approximately $816.9 million of cash on hand.
We expect the Acquisition to enable us to increase the number of our employer sales opportunities, the conversion
of these opportunities to Clients, and the value of Clients in generating members, HSA Assets and complementary
CDBs. WageWorks’ strength of selling to employers directly and through health benefits brokers and advisors
complements our distribution through health plans, benefit administrators and retirement record-keeping partners.
-33-
With WageWorks’ CDB capabilities, we are working to provide employers with a single partner for both HSAs and
other CDBs, which is preferred by the vast majority of employers according to research conducted for us by Aite
Group. For Clients that partner with us in this way, we believe we can produce more value by encouraging both
CDB participants to contribute to HSAs and HSA-only members to take advantage of tax savings by increasing their
account balances in other CDBs. Accordingly, we believe that there are significant opportunities to expand the
scope of services that we provide to our Clients.
The Acquisition has significantly increased the number of our Total Accounts, HSA Assets, Client-held funds,
Adjusted EBITDA, total revenue, total cost of revenue, operating expenses, and other financial results.
Key factors affecting our performance
We believe that our future performance will be 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 "Results
of Operations - Revenue" for information relating to the ongoing COVID-19 pandemic and also the section entitled
“Risk factors” included in Part 1, Item 1A of this Annual Report on Form 10-K and our other reports filed with the
SEC.
WageWorks integration
On August 30, 2019, we completed the Acquisition of WageWorks. We are now pursuing a multi-year integration
effort that we expect will produce long-term cost savings and revenue synergies. We have identified near-term
opportunities, estimated to be approximately $50 million in annualized ongoing net synergies to be achieved by the
end of fiscal 2021. Furthermore, we anticipate generating additional revenue synergies over the longer-term as our
combined distribution channels and existing client base take advantage of the broader platform and service
offerings and as we continue to drive member engagement. We estimate non-recurring costs to achieve these
synergies of approximately $80 million to $100 million realized within 24 to 36 months of the closing of the
Acquisition, resulting from investment in technology platforms, back-office systems and platform integration, as well
as rationalization of cost of operations.
Structural change in U.S. health insurance
We derive revenue primarily from healthcare-related saving and spending by consumers in the U.S., which are
driven by changes in the broader healthcare industry, including the structure of health insurance. The average
premium for employer-sponsored health insurance has risen by 22% since 2014 and 54% since 2009, resulting in
increased participation in HSA-qualified health plans and HSAs and increased consumer cost-sharing in health
insurance more generally. We believe that continued growth in healthcare costs and related factors will spur
continued growth in HSA-qualified health plans and HSAs and may encourage policy changes making HSAs or
similar vehicles available to new populations such as individuals in Medicare. However, the timing and impact of
these and other developments in U.S. healthcare are uncertain. Moreover, changes in healthcare policy, such as
proposed "Medicare for all" plans, could materially and adversely affect our business in ways that are difficult to
predict.
Trends in U.S. tax law
Tax law has a profound impact on our business. Our offerings to members, Clients, and Network Partners consist
primarily of services enabled, mandated, or advantaged by provisions of U.S. tax law and regulations. We believe
that the present direction of U.S. tax policy is favorable to our business, as evidenced for example by recent
regulatory action and bipartisan policy proposals to expand the availability of HSAs. However, changes in tax policy
are speculative, and may affect our business in ways that are difficult to predict.
Our client base
Our business model is based on a B2B2C distribution strategy, meaning that we attract Clients and Network
Partners to reach consumers to increase the number of our members with HSA accounts and complementary
CDBs. We believe our current Clients represent a significant opportunity for us, as fewer than 5% presently partner
with us for both HSAs and our complementary CDB offerings.
Broad distribution footprint
We believe we have a diverse distribution footprint to attract new Clients and Network Partners. Our sales force
calls on enterprise, commercial, and regional employers in industries across the U.S., as well as potential Network
Partners from among health plans, benefits administrators, and retirement plan record keepers.
Product breadth
We are the largest custodian and administrator of HSAs (by number of accounts), as well as a market-share leader
in each of the major categories of complementary CDBs, including FSAs and HRAs, COBRA and commuter
-34-
benefits administration. Our Clients and their benefits advisors increasingly seek HSA providers that can deliver an
integrated offering of HSAs and complementary CDBs. With our newly acquired CDB capabilities, we can provide
employers with a single partner for both HSAs and complementary CDBs, which is preferred by the vast majority of
employers, according to research conducted for us by Aite Group. We believe that the combination of HSA and
complementary CDB offerings significantly strengthens our value proposition to employers, health benefits brokers
and consultants, and Network Partners as a leading single-source provider.
Our proprietary technology platforms
We believe that innovations incorporated in our technology that enable consumers to make healthcare saving and
spending decisions and maximize the value of their tax-advantaged benefits differentiate us from our competitors
and drive our growth. We plan to build on these innovations by combining our HSA platform with WageWorks'
complementary CDB offerings, giving us a full suite of CDB products, and adding to our solutions set and leadership
position within the HSA sector. We intend to continue to invest in our technology development to enhance our
platforms' capabilities and infrastructure, while maintaining a focus on data security and the privacy of our
customers' data. For example, we are making significant investments in our platforms' architecture and related
platform infrastructure to improve our transaction processing capabilities and support continued account and
transaction growth, as well as in data-driven personalized engagement to help our members spend less, save more,
and build wealth for retirement.
Our “DEEP Purple” service culture
The successful 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 banks, credit unions, and insurance company partners,
which we collectively call our Depository Partners, to hold custodial cash assets on behalf of our members. We
earn a material portion of our total revenue from interest paid to us by these partners. The lengths of our
agreements with Depository Partners generally range from three to five years and may have fixed or variable
interest rate terms. The terms of new and renewing agreements may be impacted by the then-prevailing interest
rate environment, which in turn is driven by macroeconomic factors and government policies over which we have no
control. Such factors, and the response of our competitors to them, also determine the amount of interest retained
by our members. We believe that diversification of Depository Partners, varied contract terms and other factors
reduce our exposure to short-term fluctuations in prevailing interest rates and mitigate the short-term impact of
sustained increases or declines in prevailing interest rates on our custodial revenue. Over longer periods, sustained
shifts in prevailing interest rates affect the amount of custodial revenue we can realize on custodial assets and the
interest retained by our members.
We expect our custodial revenue to be adversely affected by the interest rate cuts by the Federal Reserve
associated with the ongoing COVID-19 pandemic and other market conditions that have caused interest rates to
decline significantly and, as a result, funds that we place with our Depository Partners in this environment will
receive lower interest rates than we originally expected.
Interest on our long-term debt changes frequently due to variable interest rate terms, and as a result, our interest
expense is expected to fluctuate based on changes in prevailing interest rates.
Our competition and industry
Our direct competitors are HSA custodians and other CDB providers. 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
platforms and capabilities to increase our market share. However, some of our direct competitors (including well-
known mutual fund companies such as Fidelity Investments and healthcare service companies such as United
Health Group's Optum) 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 Network Partners may also choose to offer competitive 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.
-35-
As a result of the outbreak of the COVID-19 virus, we have seen some impact on sales opportunities, with some
opportunities delayed or now being held virtually. We may also see a negative impact on the financial results related
to certain of our products, such as commuter benefits, due to many of our members working from home during the
outbreak or other impacts from the outbreak. The extent to which the COVID-19 virus will negatively impact our
business is highly uncertain and cannot be accurately predicted.
Regulatory environment
Federal law and regulations, including the Affordable Care Act, the Internal Revenue Code, the Employee
Retirement Income Security Act and Department of Labor regulations, and public health regulations that govern the
provision of health insurance and provide the tax advantages associated with our products, 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 laundering laws, and the Federal Deposit Insurance Act, all play a similar role in determining our
competitive landscape. In addition, state-level regulations also have significant implications for our business in
some cases. For example, our subsidiary HealthEquity Trust Company is regulated by the Wyoming Division of
Banking, and several states are considering, or have already passed, new privacy regulations that can affect our
business. Various states also have laws and regulations that impose additional restrictions on our collection,
storage, and use of personally identifiable information. Privacy regulation in particular 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. 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
In addition to the WageWorks acquisition, we have a successful history of acquiring HSA portfolios from competitors
who have chosen to exit the industry and 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 acquired HSA portfolios. We intend to continue to
thoughtfully 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.
For a discussion related to key financial and operating metrics for fiscal 2019 compared to fiscal 2018, refer to Part
II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal
2019 Form 10-K, filed with the SEC on March 28, 2019.
-36-
Total Accounts
The following table sets forth our HSAs, CDBs, and Total Accounts as of and for the periods indicated:
(in thousands, except percentages)
HSAs
Average HSAs - Year-to-date
Average HSAs - Quarter-to-date
New HSAs from Sales - Year-to-date
New HSAs from Acquisitions - Year-to-date
New HSAs from Sales - Quarter-to-date
Active HSAs
HSAs with investments
CDBs
Total Accounts
Average Total Accounts - Year-to-date
Average Total Accounts - Quarter-to-date
January 31, 2020
5,344
4,517
5,179
724
757
379
4,348
220
7,437
12,781
8,013
12,603
January 31, 2019
3,994
3,608
3,813
674
5
341
3,241
163
572
4,566
4,194
4,402
% change from
2019 to 2020
34 %
25 %
36 %
7 %
n/a
11 %
34 %
35 %
n/a
180 %
91 %
186 %
The number of our HSAs and CDBs are key metrics because our revenue is driven by the amount we earn from
them. The number of our HSAs increased by approximately 1.4 million, or 34%, from January 31, 2019 to
January 31, 2020, primarily driven by the HSAs acquired through the Acquisition of WageWorks and other HSA
portfolio acquisitions, which contributed approximately 757,000 HSAs. The remainder of the increase was due to
further penetration into existing Network Partners and the addition of new Network Partners. The number of our
CDBs increased by approximately 6.9 million from January 31, 2019 to January 31, 2020, primarily driven by the
CDBs acquired through the Acquisition of WageWorks.
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 the corresponding HSA no
longer an Active HSA. We define an Active HSA as an HSA that (i) is associated with a Network Partner or a Client,
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. Active HSAs increased by approximately 1.1 million, or 34%, from January 31, 2019
to January 31, 2020, primarily driven by the HSAs acquired through the Acquisition of WageWorks and other HSA
portfolio acquisitions. The remainder of the increase was due to further penetration into existing Network Partners
and the addition of new Network Partners.
HSA Assets
The following table sets forth our HSA Assets as of and for the periods indicated:
$
January 31, 2020
January 31, 2019
(in millions, except percentages)
HealthEquity HSA cash (custodial revenue) (1)
.........................................................................................................
WageWorks HSA cash (custodial revenue) (2)
.........................................................................................................
WageWorks HSA cash (no custodial revenue) (3)
.........................................................................................................
Total HSA cash
......................................................................................................
HealthEquity HSA investments (custodial revenue) (1)
.........................................................................................................
WageWorks HSA investments (no custodial revenue) (3)
.........................................................................................................
Total HSA investments
......................................................................................................
Total HSA Assets
.........................................................................................................
Average daily HealthEquity HSA cash - Year-to-date
.........................................................................................................
Average daily HealthEquity HSA cash - Quarter-to-date
.........................................................................................................
(1) HSA Assets administered by HealthEquity that generate custodial revenue. These amounts exclude HSA Assets administered by
WageWorks.
(2) HSA Assets administered by WageWorks that generate custodial revenue.
(3) HSA Assets administered by WageWorks that do not generate custodial revenue.
7,244 $
1,057
383
8,684
2,495
362
2,857
11,541
6,523
6,788 $
6,428
—
—
6,428
1,670
—
1,670
8,098
5,586
5,837
$
% change from
2019 to 2020
13 %
n/a
n/a
35 %
49 %
n/a
71 %
43 %
17 %
16 %
-37-
Our HSA Assets, which are our HSA members' assets for which we are the custodian or administrator, or from
which we generate custodial revenue, consist of the following components: (i) cash deposits, which are deposits
with our Depository Partners or custodians of HSAs administered by WageWorks, (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 partners. We are working to transition WageWorks HSA cash to HealthEquity HSA
cash in fiscal 2021. Measuring our HSA Assets is important because our custodial revenue is directly affected by
average daily custodial balances for HSA Assets that are revenue generating.
Our total HSA Assets increased by $3.4 billion, or 43%, from January 31, 2019 to January 31, 2020, including $1.7
billion of HSA Assets acquired through the Acquisition of WageWorks and other HSA portfolio acquisitions and $1.7
billion from existing HSA members and new HSA members.
Our HSA investment assets increased by $1.2 billion, or 71%, from January 31, 2019 to January 31, 2020,
reflecting the Acquisition of WageWorks and our strategy of helping our HSA members build wealth and invest for
retirement.
Client-held funds
(in millions, except percentages)
Client-held funds (custodial revenue) (1)
Average daily Client-held funds - Year-to-date (1)
Average daily Client-held funds - Quarter-to-date (1)
(1) Client-held funds that generate custodial revenue. The Company did not hold material Client-held funds prior to the Acquisition.
779 $
382
727
January 31, 2019
January 31, 2020
—
—
—
$
% change from
2019 to 2020
n/a
n/a
n/a
Our Client-held funds are interest earning deposits from which we generate custodial revenue. These deposits are
amounts remitted by Clients and held by us on their behalf to pre-fund and facilitate administration of CDBs. We
deposit the Client-held funds with our Depository Partners in interest-bearing, demand deposit accounts that have a
floating interest rate and no set term or duration.
Our total Client-held funds increased by $779.0 million from January 31, 2019 to January 31, 2020, due to the
Acquisition of WageWorks.
Adjusted EBITDA
We define Adjusted EBITDA, which is a non-GAAP financial metric, as adjusted earnings before interest, taxes,
depreciation and amortization, amortization of acquired intangible assets, stock-based compensation expense,
merger integration expenses, acquisition costs, gains and losses on marketable equity securities, 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.
-38-
The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to
Adjusted EBITDA for the periods indicated:
$
$
2020
(in thousands)
Net income
Year ended January 31,
2019
73,899
(1,946)
270
1,919
12,256
5,929
21,057
—
2,121
102
2,775
118,382
(1) For the year ended January 31, 2020, merger integration expenses include $1.6 million of stock-based compensation expense related to
Interest income
Interest expense
Income tax provision
Depreciation and amortization
Amortization of acquired intangible assets
Stock-based compensation expense
Merger integration expenses (1)
Acquisition costs (2)
(Gain) loss on marketable equity securities
Other (3)
39,664
(5,905)
24,772
3,491
20,648
34,704
30,107
32,111
40,810
(27,760)
3,811
196,453 $
Adjusted EBITDA
$
post-Acquisition integration activities.
(2) For the year ended January 31, 2020, acquisition costs include $13.7 million of stock-based compensation expense related to awards that
were accelerated in connection with the Acquisition.
(3) For the years ended January 31, 2020 and 2019, Other consisted of amortization of incremental costs to obtain a contract of $1.9 million
and $1.5 million, and other costs of $1.9 million and $1.3 million, respectively.
The following table further sets forth our Adjusted EBITDA as a percentage of revenue:
(in thousands, except percentages)
Adjusted EBITDA
As a percentage of revenue
$
Year ended January 31,
2019
2020
196,453
$
37 %
118,382
41 %
% change from
2019 to 2020
66 %
Our Adjusted EBITDA increased by $78.1 million, or 66%, from $118.4 million for the year ended January 31, 2019
to $196.5 million for the year ended January 31, 2020. The increase in Adjusted EBITDA was driven by the overall
growth of our business and by the Acquisition.
Our use of Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as a
substitute for analysis of our results as reported under GAAP.
Key components of our results of operations
Acquisition of WageWorks
As the Acquisition closed on August 30, 2019, only five months of WageWorks' results of operations are included in
our consolidated results of operations. Accordingly, the results of operations attributable to WageWorks may not be
directly comparable to WageWorks' results of operations reported by WageWorks prior to the Acquisition.
Revenue
We generate 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, Clients, and members
for the administration services we provide in connection with the HSAs and other CDBs we offer. With respect to
our Network Partners and Clients, our fees are generally based on a fixed tiered structure for the duration of the
relevant service agreement and are paid to us on a monthly basis. We recognize revenue on a monthly basis as
services are rendered to our members and Clients. As a result of the WageWorks Acquisition, service revenue now
comprises a majority of our revenue.
Custodial revenue. We earn custodial revenue primarily from our HSA Assets deposited with our Depository
Partners and with our insurance company partner, Client-held funds deposited with our Depository Partners, and
recordkeeping fees we earn in respect of mutual funds in which our members invest. We deposit the HealthEquity
HSA cash with our Depository Partners pursuant to contracts that (i) generally have terms ranging from three to five
-39-
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 deposit the
Client-held funds with our Depository Partners in interest-bearing, demand deposit accounts that have a floating
interest rate and no set term or duration. We earn custodial revenue on HSA Assets and Client-held funds 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 custodial
investments. We are working to transition WageWorks HSA cash to HealthEquity HSA cash in fiscal 2021.
Interchange revenue. We earn interchange revenue each time one of our members uses one of our payment
cards to make a purchase. This revenue is collected each time a member “swipes” our payment card to pay
expenses. We recognize interchange revenue monthly based on reports received from third parties, namely, the
card-issuing banks and card processors.
Cost of revenue
Cost of revenue includes costs related to servicing accounts, managing Client and Network 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 HealthEquity HSA 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, in respect of
HealthEquity HSA cash, and fees we pay to banking consultants whom we use to help secure agreements with our
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 FSA/HRA-linked payment card
transactions, payment card costs are higher for FSA/HRA card transactions. In addition to fixed per card fees, we
are assessed additional transaction costs determined by the amount of the transaction.
Gross profit and gross margin
Our gross profit is our total revenue minus our total cost of revenue, and our gross margin is our gross profit
expressed as a percentage of our total revenue. Our gross margin has been and will continue to be affected by a
number of factors, including interest rates, the amount we charge our Network Partners, Clients, and members, how
many services we deliver per account, and payment processing costs per account.
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 development and delivery, information technology, data management, product, and security.
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, internal audit, corporate development, compliance, and
people departments. They also include depreciation, amortization, stock-based compensation, and common
expense allocations.
Amortization of acquired intangible assets. Amortization of acquired intangible assets results primarily from
intangible assets acquired in connection with business combinations. The assets include acquired customer
relationships, acquired developed technology, and acquired trade names and trademarks, which we amortize over
-40-
the assets' estimated useful lives, estimated to be 10-15 years, 2-5 years, and 3 years, respectively. We also
acquired intangible HSA portfolios from third-party custodians. We amortize these assets over the assets’ estimated
useful life of 15 years. We evaluate our acquired intangible assets for impairment annually, or at a triggering event.
Merger integration. Merger integration expenses include personnel and related expenses, including severance,
professional fees, and technology-related expenses directly related to the integration activities to merge operations
as a result of the Acquisition.
Interest expense
Interest expense consists of accrued interest expense and amortization of deferred financing costs associated with
our credit agreement. Interest on our long-term debt changes frequently due to variable interest rate terms, and as a
result, our interest expense is expected to fluctuate based on changes in prevailing interest rates.
Other expense, net
Other expense, net, primarily consists of acquisition costs, gains and losses on marketable equity securities, and
non-income-based taxes, less interest income earned on corporate cash.
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. Valuation
allowances are established when necessary to reduce net deferred tax assets to the amount expected to be
realized. As of January 31, 2020, we have recorded an overall net deferred tax liability with the exception of an
insignificant amount of federal capital losses recorded as a net deferred tax asset on our consolidated balance
sheet.
Results of operations
For a discussion related to the results of operations and liquidity and capital resources for fiscal 2019 compared to
fiscal 2018, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations in our fiscal 2019 Form 10-K, filed with the SEC on March 28, 2019.
Revenue
The following table sets forth our revenue for the periods indicated:
(in thousands, except percentages)
Service revenue
Custodial revenue
Interchange revenue
Total revenue
Year ended January 31,
2019
2020
100,564 $
262,868 $
126,178
181,892
60,501
87,233
287,243 $
531,993 $
$
$
$ change
162,304
55,714
26,732
244,750
% change
161 %
44 %
44 %
85 %
Service revenue. The $162.3 million, or 161%, increase in service revenue was primarily due to the inclusion of
WageWorks' financial results following the Acquisition, which contributed $154.5 million of the increase. The
remainder of the increase resulted from the increase in the number of HSAs, partially offset by lower service
revenue per average HSA.
The number of our HSAs increased by approximately 1.4 million, or 34%, due in part to approximately 757,000
acquired HSAs. The remainder of the increase was due to further penetration into existing Network Partners and
the addition of new Network Partners.
Service revenue as a percentage of our total revenue increased primarily due to the inclusion of WageWorks'
financial results, whose total revenue is comprised primarily of service revenue, following the Acquisition.
-41-
Custodial revenue. The $55.7 million, or 44%, increase in custodial revenue was primarily due to an increase in
average daily HealthEquity HSA cash of $937.0 million, or 17%, and an increase in the yield on average custodial
cash from 2.15% in the year ended January 31, 2019 to 2.38% in the year ended January 31, 2020. The inclusion
of WageWorks' financial results following the Acquisition contributed $9.2 million of custodial revenue in the year
ended January 31, 2020.
Custodial revenue as a percentage of our total revenue decreased primarily due to the inclusion of WageWorks'
financial results following the Acquisition, which included relatively less custodial revenue.
In fiscal 2021, we intend to move the majority of WageWorks HSA cash to HealthEquity HSA cash. This cash will be
placed with our Depository Partners at prevailing interest rates, which we expect will generate additional custodial
revenue.
Interchange revenue. The $26.7 million, or 44%, increase in interchange revenue was primarily due to the
inclusion of WageWorks' financial results following the Acquisition, which contributed $21.0 million of the increase.
The remainder of the increase resulted from the increase in the number of our HSAs and payment activity, partially
offset by the lower interchange revenue per HSA described below.
Total revenue. Total revenue increased by $244.8 million, or 85%, primarily due to the inclusion of WageWorks'
financial results following the Acquisition and related realized net synergies, which together contributed $184.7
million.
We expect our business to be adversely affected by the recent outbreak of the COVID-19 virus, including as a result
of the associated interest rate cuts by the Federal Reserve and other market conditions that have caused interest
rates to decline significantly and, as a result, funds that we place with our depository partners in this environment
will receive lower interest rates than we originally expected. Sales opportunities have also been impacted, with
some opportunities delayed or now being held virtually. We may be unable to meet our service level commitments
to our clients as a results of disruptions to our work force and disruptions to third part contracts that we rely on to
provide our services. Our financial results related to certain of our products may be adversely affected, such as
commuter benefits, due to many of our members working from home during the outbreak or other impacts from the
outbreak. Clients may be unable to pay fees required under contracts and exercise "force majeure" or similar
clauses, which would negatively impact our financial results. The extent to which the COVID-19 virus will negatively
impact our business remains highly uncertain and as a result may have a material adverse impact on our business
and financial results.
Cost of revenue
The following table sets forth our cost of revenue for the periods indicated:
(in thousands, except percentages)
Service costs
Custodial costs
Interchange costs
Total cost of revenue
$
$
$
Year ended January 31,
2019
2020
76,858 $
14,124
15,068
106,050 $
170,863
17,563
17,658
206,084
$
$ change
94,005
3,439
2,590
100,034
% change
122 %
24 %
17 %
94 %
Service costs. The $94.0 million, or 122%, increase in service costs was primarily due to the inclusion of
WageWorks' financial results following the Acquisition, which contributed $80.6 million of the increase. The
remainder of the increase resulted from a higher volume of total accounts being serviced, including $7.8 million
related to the hiring of additional personnel to implement and support our new Network Partners, Clients, and HSA
members, increased stock-based compensation expense of $2.0 million, and increases in other expenses of $2.7
million.
Custodial costs. The $3.4 million, or 24%, increase in custodial costs was due to an increase in average daily
HealthEquity HSA cash from $5.6 billion for the year ended January 31, 2019 to $6.5 billion during the year ended
January 31, 2020.
Interchange costs. The $2.6 million, or 17%, increase in interchange costs resulted from an overall increase in
payment activity, attributable to the growth in average Total Accounts, and the inclusion of WageWorks’ financial
results, which contributed $1.3 million to the increase.
Total cost of revenue. As we continue to add HSAs and other CDBs, we expect that our cost of revenue will
increase in dollar amount to support our Network Partners, Clients, and members. Cost of revenue will continue to
be affected by a number of different factors, including our ability to scale our service delivery, Network Partner
implementation and account management functions.
-42-
Operating expenses
The following table sets forth our operating expenses for the periods indicated:
(in thousands, except percentages)
Sales and marketing
Technology and development
General and administrative
Amortization of acquired intangible assets
Merger integration
Total operating expenses
Year ended January 31,
2019
2020
29,498 $
43,951 $
35,057
77,576
33,039
60,561
5,929
34,704
32,111
—
103,523 $
248,903 $
$
$
$ change
14,453
42,519
27,522
28,775
32,111
145,380
% change
49 %
121 %
83 %
485 %
n/a
140 %
Sales and marketing. The $14.5 million, or 49%, increase in sales and marketing expenses was due in large part
to the inclusion of WageWorks’ financial results following the Acquisition, which contributed $7.1 million of the
increase. The remainder of the increase consisted of increased staffing and sales commissions of $3.6 million,
increased stock-based compensation expense of $1.2 million, increased partner commissions of $1.4 million, and
an increase in other expenses of $1.2 million.
We expect our sales and marketing expenses to increase for the foreseeable future as we continue to increase the
size of our sales and marketing organization and expand into new markets. On an annual basis, we expect our
sales and marketing expenses to remain steady as a percentage of our total revenue. 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 $42.5 million, or 121%, increase in technology and development expenses
was primarily due to the inclusion of WageWorks’ financial results following the Acquisition, which contributed $25.9
million of the increase. The remainder of the increase resulted from the hiring of additional personnel of $8.9 million,
increased outside contractors and professional services of $9.9 million, increased technology expense of $1.6
million, increased amortization and depreciation of $1.2 million, stock compensation of $1.8 million, and other
expenses of $1.0 million, which were partially offset by an increase in capitalized engineering costs of $9.3 million
associated with the development and enhancement of our proprietary technology platforms.
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 platforms. On an annual basis, we expect our technology
and development expenses to increase as a percentage of our total revenue pursuant to our growth initiatives. 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 $27.5 million, or 83%, increase in general and administrative expenses was
primarily due to the inclusion of WageWorks’ financial results following the Acquisition, which contributed $19.7
million of the increase. The remainder of the increase was as a result of increases in hiring of additional personnel
of $2.0 million, increased stock compensation of $3.4 million, increased professional fees of $1.5 million and
increased other expenses of $0.9 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 over the near term
pursuant to our growth initiatives. 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 $28.8 million increase in amortization of acquired intangible assets was primarily a result of the identified
intangible assets acquired as part of the Acquisition of WageWorks.
Merger integration
The $32.1 million in merger integration expense for the year ended January 31, 2020 was due to personnel and
related expenses, including severance, professional fees, and technology-related expenses directly related to the
-43-
Acquisition. We expect integration expenses totaling $80 million to $100 million in the aggregate to continue for 24
to 36 months following the closing of the Acquisition, which closed on August 30, 2019.
Interest expense
The $24.8 million in interest expense for the year ended January 31, 2020 consists primarily of interest accrued
under our term loan facility and amortization of financing costs. We expect interest expense to decrease as a result
of interest rate cuts by the Federal Reserve and principal repayments required pursuant to our credit agreement.
Other expense, net
The $7.5 million increase in other expense, net resulted primarily from an increase in acquisition costs of $38.7
million and an increase in miscellaneous taxes of $0.8 million, offset by an increase in gains on marketable
securities of $27.9 million and an increase in interest income of $4.0 million.
Income tax provision
Income tax provision for the years ended January 31, 2020 and 2019 was $3.5 million and $1.9 million,
respectively. The increase in income tax provision was primarily the result of a decrease in excess tax benefits on
stock-based compensation expense recognized in the provision for income taxes relative to our pre-tax income and
an increase in non-deductible expenses, which were offset by exclusion of the gain in connection with our equity
investment in WageWorks that will not be realized for income tax purposes.
Our effective income tax rate for the years ended January 31, 2020 and 2019 was 8.1% and 2.5%, 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 increase in the effective tax rate for the year ended January 31, 2020 was primarily due to a
decrease in excess tax benefits on stock-based compensation expense recognized in the provision for income
taxes relative to our pre-tax income and an increase in non-deductible expenses, which were offset by exclusion of
the gain in connection with our equity investment in WageWorks that will not be realized for income tax purposes.
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 HSAs and CDBs
beginning in January of each year concurrent with the start of many employers’ benefit plan years. Before we
realize any revenue from these new accounts, we incur costs related to implementing and supporting our new
Network Partners and new accounts. 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.
Liquidity and capital resources
Cash and cash equivalents overview
As of January 31, 2020, our principal source of liquidity was our current cash and cash equivalents balances,
collections from our service, custodial and interchange revenue activities, and availability under our revolving credit
facility described below. 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, payments
required pursuant to our credit agreement, and capital expenditures.
As of January 31, 2020 and January 31, 2019, cash and cash equivalents were $191.7 million and $361.5 million,
respectively.
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.
-44-
On July 12, 2019, the Company closed a follow-on public offering of 7,762,500 shares of common stock at a public
offering price of $61.00 per share, less the underwriters' discount. The Company received net proceeds of
approximately $458.5 million after deducting underwriting discounts and commissions of
approximately $14.1 million and other offering expenses payable by the Company of approximately $0.9 million.
In connection with the closing of the Acquisition on August 30, 2019, the Company entered into a new $1.60 billion
credit agreement, consisting of (i) a five-year senior secured term loan A facility in the aggregate principal amount of
$1.25 billion, the net proceeds of which were used by the Company to finance the Acquisition and related
transactions, and (ii) a five-year senior secured revolving credit facility in an aggregate principal amount of up to
$350.0 million, which may be used for working capital and general corporate purposes, including the financing of
acquisitions and other investments. For a description of the terms of the credit agreement, refer to Note 8—
Indebtedness. We were in compliance with all covenants under the credit agreement as of January 31, 2020.
Use of cash
From February 1, 2019 to April 4, 2019, we acquired approximately 1.6 million shares of common stock of
WageWorks for $53.8 million in open market purchases. On August 30, 2019, the Acquisition closed and we paid
approximately $2.0 billion in cash to WageWorks stockholders, which was funded with net borrowings of
approximately $1.22 billion, after deducting lender fees of approximately $30.5 million, under the above term loan,
and $816.9 million of cash on hand.
Capital expenditures for the years ended January 31, 2020 and 2019 were $32.9 million and $13.8 million,
respectively. We expect to continue our increased capital expenditures during the year ending January 31, 2021 as
we continue to devote a significant amount of our capital expenditures to improving the architecture and
functionality of our proprietary systems. Costs to improve the architecture of our proprietary systems include
computer hardware, personnel and related costs for software engineering and outsourced software engineering
services. In addition, as a result of the Acquisition and Company growth, 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 revolving credit facility 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)
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
2020
105,010 $
(1,740,494) $
1,465,735 $
(169,749)
361,475
191,726 $
Year ended January 31,
2019
113,422
25,652
22,929
162,003
199,472
361,475
$
$
$
$
Cash flows provided by operating activities. Net cash provided by operating activities during the year ended
January 31, 2020 resulted from net income of $39.7 million, plus depreciation and amortization expense of $55.4
million and stock-based compensation expense of $39.8 million, offset by gains on marketable equity securities of
$27.8 million and other non-cash items and working capital changes totaling $2.1 million.
Net cash provided by operating activities during the year ended January 31, 2019 resulted from net income of $73.9
million, plus depreciation and amortization expense of $18.2 million, stock-based compensation expense of $21.1
million, and other non-cash items and working capital changes totaling $0.2 million.
Cash flows provided by and used in investing activities. Net cash used in investing activities during the year
ended January 31, 2020 was primarily the result of the Acquisition of WageWorks for $1.64 billion, net of cash
acquired, and purchases of marketable equity securities of $53.8 million. We also continued development of our
proprietary systems and other software necessary to support our continued account growth. Purchases of software
and capitalized software development costs for the year ended January 31, 2020 were $25.7 million compared to
$10.0 million for the year ended January 31, 2019. We continued to invest in purchases of intangible member
assets, using $9.1 million for portfolio purchases during the year ended January 31, 2020, compared to $1.2 million
-45-
for the year ended January 31, 2019. Our purchases of property and equipment were $7.3 million for the year
ended January 31, 2020, compared to $3.9 million during the year ended January 31, 2019.
Cash flows provided by financing activities. Cash flow provided by financing activities during the year ended
January 31, 2020 resulted primarily from net borrowings of $1.22 billion, our follow-on offering where we received
net proceeds of $458.5 million from the sale of 7,762,500 shares of our common stock, and the exercise of stock
options of $11.3 million, offset by $7.8 million of principal payments on our long-term debt and $215.8 million of
cash used to settle Client-held funds obligations. Cash flows provided by financing activities during the year ended
January 31, 2019 resulted from proceeds associated with the exercise of stock options of $22.9 million.
Contractual obligations
We lease office space, data storage facilities, and other leases, 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, 2020 are as follows:
Payments due by fiscal year
$
Thereafter
2021
39,063 $
45,658
13,064
21,912
119,697 $
(in thousands)
Long-term debt obligations (1)
Interest on long-term debt obligations (2)
Operating lease obligations (3)
Other contractual obligations (4)
Total
Total
1,242,189
189,374
180,073
50,189
1,661,825
(1) As of January 31, 2020, our outstanding principal of $1.24 billion is presented net of debt issuance costs on our consolidated balance sheets.
The debt issuance costs are not included in the table above. The debt maturity date is August 31, 2024.
(2) Estimated interest payments assume the stated interest rate applicable as of January 31, 2020 of 3.65% per annum on a $1.24
billion outstanding principal amount.
(3) We lease office space, data storage facilities, and other leases under non-cancelable operating leases expiring at various dates through
2031.
2024-2025
1,070,313 $
58,730
32,023
1,648
1,162,714 $
2022-2023
132,813 $
84,986
35,456
26,629
279,884 $
— $
—
99,530
—
99,530 $
$
(4) Other contractual obligations consist of processing services agreements, telephony services, immaterial capital leases, and other contractual
commitments.
Off-balance sheet arrangements
As of January 31, 2020, other than outstanding letters of credit issued under our Revolving Credit Facility, we do not
have any off-balance sheet arrangements. The majority of the standby letters of credit expire within one year.
However, in the ordinary course of business, we will continue to renew or modify the terms of the letters of credit to
support business requirements. The letters of credit are contingent liabilities, supported by our revolving credit
facility, and are not reflected on our consolidated balance sheets.
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.
-46-
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 assets 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.
Valuation of Long-lived Assets including Goodwill, Intangible Assets and Estimated Useful Lives
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and
intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase
consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations
require management to make significant estimates and assumptions, especially with respect to intangible assets.
Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows
from acquired users, acquired technology, and trade names from a market participant perspective, useful lives, and
discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but
which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as
acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite lived intangible
assets, including goodwill, are not amortized. During the measurement period, which is not to exceed one year from
the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the
corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are
recorded to earnings.
We review goodwill for impairment at least annually or more frequently if events or changes in circumstances would
more likely than not reduce the fair value of our single reporting unit below its carrying value. As of January 31,
2020, no impairment of goodwill has been identified.
Long-lived assets, including property and equipment and intangible assets are reviewed for possible impairment
whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The
evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash
flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying
amounts to the future undiscounted cash flows the assets are expected to generate from the use and eventual
disposition. If such review indicates that the carrying amount of property and equipment and intangible assets is not
recoverable, the carrying amount of such assets is reduced to fair value. We have not recorded any significant
impairment charges during the years presented.
The useful lives of our long-lived assets including property and equipment and finite-lived intangible assets are
determined by management when those assets are initially recognized and are routinely reviewed for the remaining
estimated useful lives. The current estimate of useful lives represents our best estimate based on current facts and
circumstances, but may differ from the actual useful lives due to changes in future circumstances such as changes
to our business operations, changes in the planned use of assets, and technological advancements. When we
change the estimated useful life assumption for any asset, the remaining carrying amount of the asset is accounted
for prospectively and depreciated or amortized over the revised estimated useful life. Historically changes in useful
lives have not resulted in material changes to our depreciation and amortization expense.
-47-
Income taxes
We account for income taxes and the related accounts under the liability method as set forth in the authoritative
guidance for accounting for income taxes. Under this method, current tax liabilities and assets are recognized for
the estimated taxes payable or refundable on the tax returns for the current fiscal year. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases, for net operating losses, and for
tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted statutory tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.
The effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is provided for when it is more likely than not that some or all of
the deferred tax assets may not be realized in future years.
We use the tax law ordering approach of intraperiod allocation in determining when excess tax benefits have been
realized for provisions of the tax law that identify the sequence in which those amounts are utilized for tax purposes.
We have also elected to exclude the indirect tax effects of share-based compensation deductions in computing the
income tax provision recorded within the consolidated statement of operations and comprehensive income. Also,
we use the portfolio approach in releasing income tax effects from accumulated other comprehensive income.
We recognize the tax benefit from an uncertain tax position taken or expected to be taken in a tax return using a
two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by
determining if the weight of available evidence indicates that it is more likely than not that the tax position will be
sustained upon examination by the relevant taxing authorities, based on the technical merits of the position. For tax
positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit in
the financial statements as the largest benefit that has a greater than 50% likelihood of being sustained upon
settlement. We recognize interest and penalties, if any, related to unrecognized tax benefits as a component of
other income (expense) in the consolidated statements of operations and comprehensive income. Changes in facts
and circumstances could have a material impact on our effective tax rate and results of operations.
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, 2020, 2019, and 2018, 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 and cash
equivalents. We maintain our cash and cash equivalents in bank and other depository accounts, which frequently
may exceed federally insured limits. Our cash and cash equivalents as of January 31, 2020 were $191.7 million, of
which $2.3 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 and cash
equivalents. Our accounts receivable balance as of January 31, 2020 was $70.9 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 and cash
equivalents with reputable financial institutions.
-48-
Interest rate risk
HSA Assets and Client-held funds. Our HSA Assets consists of custodial HSA funds we hold in custody on
behalf of our members. As of January 31, 2020, we had HSA Assets of approximately $11.5 billion. As a non-bank
custodian, we contract with our 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 paid to us by
these partners. The contract terms generally range from three to five years and have either fixed or variable interest
rates. As our HSA Assets increase and existing agreements expire, we seek to enter into new contracts with
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
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 Client-held funds are interest earning deposits from which we generate custodial revenue. As of January 31,
2020, we had Client-held funds of approximately $779.0 million. These deposits are amounts remitted by Clients
and held by us on their behalf to pre-fund and facilitate administration of our other CDBs. These deposits are held
with Depository Partners. We deposit the Client-held funds with our Depository Partners in interest-bearing, demand
deposit accounts that have a floating interest rate and no set term or duration. 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 from Client-held funds. Changes in prevailing
interest rates are driven by macroeconomic trends and government policies over which we have no control.
Cash and cash equivalents. We consider all highly liquid investments purchased with an original maturity of
three months or less to be unrestricted cash equivalents. Our unrestricted cash and cash equivalents are held in
institutions in the U.S. and include deposits in a money market account that is unrestricted as to withdrawal or
use. As of January 31, 2020, we had unrestricted cash and cash equivalents of $191.7 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.
Credit agreement. At January 31, 2020, we had $1.24 billion outstanding under our term loan facility and no
amounts drawn under our Revolving Credit Facility. Our overall interest rate sensitivity under these credit facilities
is primarily influenced by any amounts borrowed and the prevailing interest rates on these instruments. The
interest rate on our Term Loan Credit Facility and Revolving Credit Facility is variable and was 3.65 percent at
January 31, 2020. Accordingly, we may incur additional expense if interest rates increase in future periods. For
example, a one percent increase in the interest rate on the amount outstanding under our credit facilities at
January 31, 2020 would result in approximately $12.5 million of additional interest expense over the next 12
months.
-49-
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, 2020 and 2019
Consolidated Statements of Operations and Comprehensive Income for the years ended January 31, 2020, 2019
and 2018
Consolidated Statements of Stockholders' Equity for the years ended January 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended January 31, 2020, 2019 and 2018
Notes to consolidated financial statements
Page
51
54
55
56
57
59
-50-
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, 2020 and 2019, 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, 2020, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash
flows for each of the three years in the period ended January 31, 2020 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, 2020, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it
accounts for leases in the year ended January 31, 2020.
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 Management’s report on internal control over financial reporting appearing under Item 9A. 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.
As described in Management’s report on internal control over financial reporting, management has excluded
WageWorks, Inc. from its assessment of internal control over financial reporting as of January 31, 2020, because it
was acquired by the Company in a purchase business combination during the year ended January 31, 2020. We
have also excluded WageWorks, Inc. from our audit of internal control over financial reporting. WageWorks, Inc. is a
wholly-owned subsidiary whose total assets, excluding the effects of purchase accounting, and total revenues
excluded from management’s assessment and our audit of internal control over financial reporting represent
approximately 11% and 35%, respectively, of the related consolidated financial statement amounts as of and for the
year ended January 31, 2020.
Definition and Limitations of Internal Control over Financial Reporting
-51-
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
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated
financial statements that were communicated or required to be communicated to the audit committee and that (i)
relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Valuation of Intangible Assets Acquired in the WageWorks, Inc. Acquisition
As described in Note 3 to the consolidated financial statements, on August 30, 2019, the Company closed the
acquisition of WageWorks, Inc. for $51.35 per share in cash, or approximately $2.0 billion to WageWorks, Inc.
stockholders. The acquisition resulted in $1.3 billion of goodwill and $711.5 million of intangible assets being
recorded. The intangible assets were comprised of customer relationships of $598.5 million, developed technology
of $96.9 million, trade names and trademarks of $12.3 million and in-process software development costs of $3.8
million. The Company preliminarily valued the acquired assets utilizing the discounted cash flow method, a form of
the income approach. The significant assumptions used in the discounted cash flow analyses include future
revenue growth and attrition rates, projected margins, royalty rates, technological obsolescence, discount rates
used to present value future cash flows, and the amount of revenue and cost synergies expected from the
acquisition.
The principal considerations for our determination that performing procedures relating to the valuation of intangible
assets acquired in the acquisition of WageWorks, Inc. is a critical audit matter are (i) there was a high degree of
auditor judgment and subjectivity in applying procedures relating to the fair value measurement of the customer
relationships, developed technology, and trade names and trademarks intangible assets acquired due to the
significant judgment required by management when developing the estimate; (ii) significant audit effort was required
in evaluating the significant assumptions relating to the valuation of the aforementioned intangible assets, which
included the future revenue growth and discount rates for all the aforementioned intangible assets, royalty rates for
the developed technology and trade names and trademarks intangible assets, attrition rates for the customer
relationships intangible asset, and technological obsolescence for the developed technology intangible asset; and
(iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our
overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of
controls relating to the acquisition accounting, including controls over management’s valuation of intangible assets
and controls over development of significant assumptions related to the valuation of intangible assets, including
future revenue growth and attrition rates, royalty rates, technological obsolescence, and discount rates. These
procedures also included, among others, (i) reading the purchase agreement; (ii) testing management’s process for
estimating the fair value of intangible assets; and (iii) evaluating the appropriateness of the discounted cash flow
methods, testing the completeness and accuracy of the underlying data, and evaluating the reasonableness of
significant assumptions, including the future revenue growth and attrition rates, royalty rates, technological
obsolescence, and discount rates. Evaluating the reasonableness of the future revenue growth and attrition rates,
technological obsolescence, and attrition rates involved considering the past performance of the acquired business,
as well as economic and industry forecasts. The discount rates were evaluated by considering the cost of capital of
comparable businesses and other industry factors. Professionals with specialized skill and knowledge were used to
-52-
assist in the evaluation of the methods and certain significant management assumptions, including technology
obsolescence, royalty rates, and discount rates.
Determination of the Useful Life of Acquired Customer Relationships in the WageWorks, Inc. Acquisition
As described in Notes 1 and 3 to the consolidated financial statements, on August 30, 2019, the Company closed
the acquisition of WageWorks, Inc. for $51.35 per share in cash, or approximately $2.0 billion to WageWorks, Inc.
stockholders. As part of the transaction, the Company recorded a customer relationships intangible asset of $598.5
million. The useful life of the acquired customer relationships intangible asset was estimated based on future
revenue growth and attrition.
The principal considerations for our determination that performing procedures relating to the determination of the
useful life of the acquired customer relationships intangible asset in the WageWorks, Inc. acquisition is a critical
audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to
the useful life estimate due to the significant judgment required by management when developing the estimate; and
(ii) significant audit effort was required in evaluating the significant assumptions relating to the useful life estimate,
which included the future revenue growth and attrition.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our
overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of
controls relating to the determination of the useful life of the acquired customer relationships, including controls over
the development of significant assumptions relating to the useful life estimate, including future revenue growth and
attrition. These procedures also included, among others (i) testing management’s process for developing the
estimate of the useful life of acquired customer relationships; (ii) testing the completeness, accuracy, and relevance
of underlying data used in the estimate; and (iii) evaluating the significant assumptions used by management,
including the future revenue growth and attrition. Evaluating the reasonableness of the future revenue growth and
attrition involved considering the past performance of the acquired business, as well as economic and industry
forecasts, and the consistency with other evidence obtained throughout the audit.
/s/ PricewaterhouseCoopers LLP
Salt Lake City, Utah
March 31, 2020
We have served as the Company’s auditor since 2013.
-53-
January 31, 2020
January 31, 2019
$
191,726 $
70,863
34,711
297,300
33,486
83,178
783,279
1,332,631
18
35,089
2,564,981 $
3,980 $
50,121
46,372
39,063
12,401
151,937
1,181,615
68,017
2,625
130,492
1,382,749
1,534,686
—
7
818,774
211,514
1,030,295
2,564,981 $
$
$
$
361,475
25,668
7,534
394,677
8,223
—
79,666
4,651
1,677
21,122
510,016
3,520
16,981
8,552
—
—
29,053
—
—
2,968
916
3,884
32,937
—
6
305,223
171,850
477,079
510,016
HealthEquity, Inc. and subsidiaries
Consolidated Balance Sheets
(in thousands, except par value)
Assets
Current assets
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $1,216 and $125 as of
January 31, 2020 and 2019, respectively
Other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Intangible assets, net
Goodwill
Deferred tax asset
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities
Accounts payable
Accrued compensation
Accrued liabilities
Current portion of long-term debt
Operating lease liabilities
Total current liabilities
Long-term liabilities
Long-term debt, net of issuance costs
Operating lease liabilities, non-current
Other long-term liabilities
Deferred tax liability
Total long-term liabilities
Total liabilities
Commitments and contingencies (see Note 7)
Stockholders’ equity
Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and
outstanding as of January 31, 2020 and 2019
Common stock, $0.0001 par value, 900,000 shares authorized, 71,051 and 62,446
shares issued and outstanding as of January 31, 2020 and 2019, respectively
Additional paid-in capital
Accumulated earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of the consolidated financial statements.
-54-
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Operations and Comprehensive
Income
Year ended January 31,
2018
2019
$
(in thousands, except per share data)
Revenue
Service revenue
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
Merger integration
Total operating expenses
Income from operations
Other expense
Interest expense
Other expense, net
Total other expense
Income before income taxes
Income tax provision
Net income
Net income per share:
Basic
Diluted
Weighted-average number of shares used in computing net income per
share:
Basic
Diluted
Comprehensive income:
Net income
Other comprehensive loss:
Unrealized loss on available-for-sale marketable securities, net of
tax
Comprehensive income
$
$
$
$
$
2020
262,868 $
181,892
87,233
531,993
170,863
17,563
17,658
206,084
325,909
43,951
77,576
60,561
34,704
32,111
248,903
77,006
(24,772)
(9,079)
(33,851)
43,155
3,491
39,664 $
0.59 $
0.58 $
67,026
68,453
$
$
$
$
100,564
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
(270)
(1,582)
(1,852)
75,818
1,919
73,899
1.20
1.17
61,836
63,370
39,664 $
73,899 $
—
39,664 $
—
73,899 $
The accompanying notes are an integral part of the consolidated financial statements.
-55-
91,619
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
(274)
(1,955)
(2,229)
52,189
4,827
47,362
0.79
0.77
60,304
61,854
47,362
(59)
47,303
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Stockholders’ Equity
Common stock
Amount
(in thousands)
Balance as of January 31, 2017
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
Balance as of January 31, 2018
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
Balance as of January 31, 2019
Issuance of common stock:
Issuance of common stock upon exercise
of options and for restricted stock units
Other issuance of common stock
Stock-based compensation
Net income
Balance as of January 31, 2020
Shares
59,538 $
1,287
—
—
—
—
—
60,825 $
1,621
—
—
—
—
62,446 $
842
7,763
—
—
71,051 $
Additional
paid-in
capital
232,114 $
Accumulated
compre-
hensive loss
(165) $
Accumulated
earnings
29,985 $
Total
stockholders'
equity
261,940
14,564
14,310
249
—
—
—
261,237 $
22,929
21,057
—
—
—
305,223 $
11,438
462,269
39,844
—
818,774 $
—
—
—
(45)
(59)
—
(269) $
—
—
7,908
45
—
47,362
85,300 $
—
—
—
—
—
13,007
269
—
— $
(356)
73,899
171,850 $
14,564
14,310
8,157
—
(59)
47,362
346,274
22,929
21,057
13,007
(87)
73,899
477,079
—
—
—
—
— $
—
—
—
39,664
211,514 $
11,438
462,270
39,844
39,664
1,030,295
6 $
—
—
—
—
—
—
6 $
—
—
—
—
—
6 $
—
1
—
—
7 $
The accompanying notes are an integral part of the consolidated financial statements.
-56-
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation
(Gains) losses on marketable equity securities and other
Deferred taxes
Changes in operating assets and liabilities:
Accounts receivable
Other assets
Operating lease right-of-use assets
Accounts payable
Accrued compensation
Accrued liabilities and other current liabilities
Operating lease liabilities, non-current
Other long-term liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Acquisitions, net of cash acquired
Purchases of marketable securities
Purchases of property and equipment
Purchases of software and capitalized software development costs
Acquisition of intangible member assets
Proceeds from sale of marketable securities
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from long-term debt
Payment of debt issuance costs
Principal payments on long-term debt
Settlement of client-held funds obligation
Proceeds from follow-on offering, net of payments for offering costs
Proceeds from exercise of common stock options
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
The accompanying notes are an integral part of the consolidated financial statements.
2020
Year ended January 31,
2018
2019
$
39,664 $
73,899
$
47,362
55,352
39,844
(23,151)
3,665
(5,009)
(12,577)
6,218
(3,839)
4,550
5,759
(5,383)
(83)
105,010
(1,644,575)
(53,845)
(7,286)
(25,654)
(9,134)
—
(1,740,494)
18,185
21,057
1,173
408
(4,306)
(5,893)
—
863
4,432
3,031
—
573
113,422
—
(728)
(3,869)
(9,978)
(1,195)
41,422
25,652
1,250,000
(30,504)
(7,813)
(215,790)
458,495
11,347
1,465,735
(169,749)
361,475
191,726 $
—
—
—
—
—
22,929
22,929
162,003
199,472
361,475
$
$
15,952
14,310
597
4,306
(4,734)
(760)
—
(581)
3,827
484
—
939
81,702
(2,882)
(483)
(5,458)
(10,380)
(17,545)
—
(36,748)
—
—
—
—
—
14,564
14,564
59,518
139,954
199,472
-57-
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
Supplemental cash flow data:
Interest expense paid in cash
Income taxes paid in cash, net of refunds received
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of intangible member assets accrued at period end
Equity-based acquisition consideration
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.
2020
Year ended January 31,
2018
2019
$
21,806 $
9,277
203 $
587
—
3,776
487
1,742
—
—
37
200
203
27
1,409
—
—
3
-58-
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies
Business
HealthEquity, Inc. was incorporated in the state of Delaware on September 18, 2002. HealthEquity, Inc. is a leader
in administering health savings accounts (“HSAs”) and complementary consumer-directed benefits (“CDBs”), which
empower consumers to access tax-advantaged healthcare savings while also providing corporate tax advantages
for employers.
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 the sum of 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. 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 and have been consistently applied in the
preparation of the consolidated financial statements, except for the new accounting pronouncements adopted
during the year ended January 31, 2020, as described below.
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Acquisition of WageWorks, Inc.
On August 30, 2019, HealthEquity, Inc. closed the acquisition of WageWorks, Inc. (“WageWorks”), pursuant to an
Agreement and Plan of Merger (the “Merger Agreement”), for $51.35 per share in cash, or approximately $2.0
billion to WageWorks stockholders (the “Acquisition”).
As a result of the Acquisition, HealthEquity, Inc. gained access to more of the HSA market by expanding its direct
distribution to employers and benefits advisors as a single source provider of HSAs and other CDBs, including
flexible spending accounts, health reimbursement arrangements, COBRA administration, commuter and other
benefits.
Principles of consolidation
The consolidated financial statements include the accounts of HealthEquity, Inc., and its direct and indirect
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
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.
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.
Client-held funds
Many of the Company's client services agreements with employers (referred to as "Clients") provide that Clients
remit funds to the Company to pre-fund Client and employee participant contributions related to flexible spending
accounts and health reimbursement arrangements (“FSAs” and “HRAs”, respectively) and commuter accounts.
These Client-held funds remitted to the Company do not represent cash assets of the Company to the extent that
they are not combined with corporate cash, and accordingly are not included in cash and cash equivalents on the
Company's consolidated balance sheets.
-59-
Prior to the closing of the Acquisition, Wageworks included all Client-held funds with its corporate cash assets on its
balance sheet, with an offsetting Client-held funds obligation. As of the closing of the Acquisition on August 30,
2019, WageWorks held approximately $682 million of Client-held funds, of which $220 million was combined with its
corporate cash within WageWorks' corporate bank accounts; therefore, the Company determined that this
$220 million of Client-held funds were assets of the Company, while the approximately $462 million of remaining
Client-held funds were not assets of the Company. As of January 31, 2020, $4 million of Client-held funds remained
combined within the Company's corporate bank accounts and therefore remained on the Company's consolidated
balance sheets in cash and cash equivalents, with an offsetting liability included in accrued liabilities.
Accounts receivable
Accounts receivable represent monies due to the Company for monthly service revenue, custodial revenue and
interchange revenue. The Company maintains an allowance for doubtful accounts to reserve for potentially
uncollectible receivable amounts. In evaluating the Company’s ability to collect outstanding receivable balances, the
Company considers various factors including the age of the balance, the creditworthiness of the customer, which is
assessed based on ongoing credit evaluations and payment history, and the customer’s current financial condition.
As of January 31, 2020 and 2019, the Company had allowance for doubtful accounts of $1.2 million and $0.1
million, respectively. During the years ended January 31, 2020 and 2019, the Company recorded credit losses from
trade receivables of $1.0 million and $0.2 million, respectively.
Investments
Marketable equity securities are strategic equity investments with readily determinable fair values for which the
Company does not have the ability to exercise significant influence. These securities are accounted for at fair value
and were classified as investments on the consolidated balance sheets. All gains and losses on these investments,
realized and unrealized, are recognized in other expense, net in the consolidated statements of operations and
comprehensive income. As a result of the Acquisition on August 30, 2019, the Company's marketable equity
security investment in WageWorks was canceled.
Non-marketable equity securities are strategic equity investments without readily determinable fair values for which
the Company does not have the ability to exercise significant influence. These securities 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.
Equity method investments are equity securities in investees the Company does not control but over which the
Company has the ability to exercise significant influence. 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.
The Company assesses whether an other-than-temporary impairment loss on equity method investments and an
impairment loss on non-marketable equity securities 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 non-marketable equity securities, 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, debt issuance 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.
Leases
The Company determines if a contract contains a lease at inception or any modification of the contract. A contract
contains a lease if the contract conveys the right to control the use of an identified asset for a specified period in
exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to
obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the
asset.
Leases with an expected term of 12 months or less at commencement are not accounted for on the balance sheet.
All operating lease expense is recognized on a straight-line basis over the expected lease term. Certain leases also
include obligations to pay for non-lease services, such as utilities and common area maintenance. The services are
accounted for separately from lease components, and the Company allocates payments to the lease and other
services components based on estimated stand-alone prices.
-60-
Operating lease right-of-use ("ROU") assets and liabilities are recognized based on the present value of future
minimum lease payments over the expected lease term at commencement date. As the rate implicit in each lease is
not readily determinable, management uses the Company’s incremental borrowing rate based on the information
available at commencement date in determining the present value of future payments. The Company used its
incremental borrowing rate on February 1, 2019 for all leases that commenced prior to that date.
Operating leases are included in operating lease right-of-use assets, operating lease liabilities and operating lease
liabilities, non-current on the consolidated balance sheets beginning February 1, 2019.
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.
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:
Software and software development costs
Acquired customer relationships
Acquired developed technology
Acquired trade names and trademarks
Acquired HSA portfolios
3 years
10-15 years
2-5 years
3 years
15 years
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.
Acquired customer relationships, developed technology, and trade names and trade marks are valued utilizing the
discounted cash flow method, a form of the income approach. The useful lives of acquired customer relationships
were estimated based on future revenue growth and attrition. The useful lives of developed technology and trade
names were estimated based on expected obsolescence. The Company expenses the assets straight-line over the
useful lives, and determined that this amortization method is appropriate to reflect the pattern over which the
economic benefits of these acquired assets are realized.
Acquired HSA portfolios consist 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 were recorded during the years ended January 31, 2020 or 2018.
-61-
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 qualitative assessment to compare a reporting unit's fair value to its carrying value. If it is determined that
it is more likely than not that a reporting unit's fair value is less than its carrying value, a quantitative comparison is
made between the Company's market capitalization and the carrying value of the reporting unit, including goodwill.
If the carrying value of the reporting unit exceeds its fair value, an impairment charge is recognized for the excess of
the carrying value of goodwill over its implied fair value.
The Company’s annual goodwill impairment test resulted in no impairment charges in any of the periods presented
in the accompanying consolidated financial statements.
Self-insurance
The Company is self-insured for medical insurance up to certain annual stop-loss limits. The Company establishes
a liability as of the balance sheet date for claims, both reported and incurred but not reported, using currently
available information as well as historical claims experience, and as determined by an independent third party.
Other long-term liabilities
Other long-term liabilities consists of long-term deferred revenue and other liabilities that the Company does not
expect to settle within one year.
Revenue recognition
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. As of January 31, 2020, the net amount capitalized as contract costs was $21.8 million,
which is included in other current assets and other assets. Amortization of capitalized contract costs during the year
ended January 31, 2020 was $1.9 million.
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 or CDB relationship, which is estimated to be 15 years and 7 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 platforms, 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.
-62-
Custodial revenue. The Company deposits HSA assets at federally insured custodial depository partners,
which we refer to as our Depository Partners, and investment assets with an investment partner. The deposit
of funds represents a service that is simultaneously received and consumed by our Depository Partners and
investment partner. The Company will continue to recognize custodial revenue, in an amount that reflects the
consideration it expects 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 increased from $0.4 million as of January 31, 2019 to $3.7 million as of
January 31, 2020, primarily due to the Acquisition. The balances are related to cash received in advance for a
certain interchange revenue arrangement, other up-front fees and other commuter deferred revenue, and are
generally recognized within twelve months, with the exception of the interchange arrangement, which is generally
recognized over a five year term. Revenue recognized during the fiscal year that was included in the beginning
balance of deferred revenue was $0.4 million. The Company expects to satisfy its remaining obligations for these
arrangements.
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 or CDB member
relationship, which 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.
At the closing of the Acquisition, and in accordance with the Merger Agreement, certain service-based RSUs with
respect to WageWorks common stock were replaced by the Company and converted into RSUs with respect to
common stock of the Company. Certain other WageWorks equity awards were exchanged for cash. The fair value
of awards that were replaced or exchanged for cash was measured as of the Acquisition date, and a portion of the
fair value, which represented the pre-Acquisition service provided by team members to WageWorks, was included
in the total consideration paid as part of the Acquisition. The remaining fair value represents post-Acquisition share-
based compensation expense.
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
-63-
performance conditions, compensation expense is recognized using the graded-vesting attribution method in
accordance with the provisions of FASB ASC Topic 718, Compensation—Stock Compensation ("Topic 718").
Upon the exercise of a stock option or release of an RSU/RSA, common shares are issued from authorized, but not
outstanding, common stock.
Interest Expense
Interest expense consists of accrued interest expense and amortization of deferred financing costs associated with
our credit agreement.
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 and with respect to certain insignificant state credits
which are not expected to be utilized before they expire. The Company believes that it is more likely than not that all
other deferred tax assets will be realized as of January 31, 2020. The Company uses the tax law ordering approach
of intraperiod allocation in determining when excess tax benefits have been realized for provisions of the tax law
that identify the sequence in which those amounts are utilized for tax purposes.
The Company has also elected to exclude the indirect tax effects of share-based compensation deductions in
computing the income tax provision recorded within the consolidated statement of operations and comprehensive
income. Also, 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. 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
The Company routinely acquires rights to be the custodian of HSA portfolios, in which substantially all of the fair
value of the gross portfolio assets acquired is concentrated in a group of similar HSA assets and therefore the
acquisitions do not constitute a business. Accordingly, the acquisitions are 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, including transaction costs incurred in conjunction with an asset acquisition, is allocated to the
individual assets acquired based on their relative fair values and does not give rise to goodwill.
Business combination
-64-
Consideration paid for the acquisition of a business as defined by ASC 805-10 is allocated to the tangible and
intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date.
Acquisition-related expenses incurred in conjunction with the acquisition of a business 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, 2020, 2019 and 2018, the Company incurred expenses of $40.8
million, $2.1 million, and $2.2 million, respectively, for acquisition-related activity.
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.
Recently adopted accounting pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update
("ASU") 2016-02, Leases (codified as "ASC 842"), which requires the recognition of lease assets and lease
liabilities by lessees for those leases classified as operating leases under previous guidance. ASC 842 requires that
a lessee recognize a liability to make lease payments (the lease liability) and a ROU asset representing its right to
use the underlying asset for the lease term on the balance sheet.
The Company adopted ASC 842 on February 1, 2019 using the modified retrospective transition method with the
adoption date as the date of initial application. Consequently, prior period balances and disclosures have not been
restated. The Company has elected the package of practical expedients, which allows the Company not to reassess
(1) whether any expired or existing contracts as of the adoption date contain a lease, (2) lease classification for any
expired or existing leases as of the adoption date and (3) initial direct costs for any existing leases as of the
adoption date. The adoption of ASC 842 on February 1, 2019 resulted in the recognition on the Company's
consolidated balance sheet of both operating lease liabilities of $40.6 million and ROU assets of $38.0 million,
which equals the lease liabilities net of accrued rent previously recorded on its consolidated balance sheet under
previous guidance. The adoption of ASC 842 did not have an impact on the Company's consolidated statement of
operations, stockholders’ equity and cash flows for the year ended January 31, 2020.
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 should be applied
prospectively. We adopted the standard effective February 1, 2019, which had no impact on our 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 permits the capitalization of implementation costs incurred in a software hosting
arrangement. This ASU is effective for fiscal years beginning after December 15, 2019. The Company elected to
early adopt the new standard as of October 31, 2019 using the prospective transition method. The adoption of this
standard did not have a material effect on the Company’s consolidated financial statements.
Recently issued accounting pronouncements
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 August 2018, FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for
Fair Value Measurement, 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 those fiscal years.
-65-
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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes, which simplifies the accounting for income taxes. This guidance will be effective for fiscal periods
beginning after December 15, 2020, and early adoption is permitted. The Company does not plan to early adopt this
ASU, and is currently evaluating the impact of the new guidance 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):
Net income
Denominator (basic):
Weighted-average common shares outstanding
Denominator (diluted):
Weighted-average common shares outstanding
Weighted-average dilutive effect of stock options and restricted stock
units
Diluted weighted-average common shares outstanding
Net income per share:
Basic
Diluted
2020
Year ended January 31,
2018
2019
$
39,664
$
73,899
$
67,026
67,026
1,427
68,453
61,836
61,836
1,534
63,370
$
$
0.59
0.58
$
$
1.20
1.17
$
$
47,362
60,304
60,304
1,550
61,854
0.79
0.77
For the years ended January 31, 2020, 2019 and 2018, approximately 0.3 million, 0.1 million, and 0.6 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. Business combination
Acquisition of WageWorks
Overview and total consideration paid
On August 30, 2019, the Company closed the Acquisition of WageWorks for $51.35 per share in cash, or
approximately $2.0 billion to WageWorks stockholders. The Company financed the transaction through a
combination of $816.9 million cash on hand plus net borrowings of approximately $1.22 billion, after deducting
lender fees of approximately $30.5 million, under a term loan facility (see Note 8—Indebtedness).
Pursuant to the Merger Agreement, the Company replaced certain outstanding restricted stock units originally
granted by WageWorks with the Company’s equivalent awards. The outstanding WageWorks vested and unvested
stock options, and certain unvested restricted stock units, were settled in cash as specified in the Merger
Agreement. The portion of the fair value of partially vested awards associated with pre-acquisition service of
WageWorks award recipients represented a component of the total consideration, as presented below.
The Acquisition was accounted for under the acquisition method of accounting for business combinations. Under
this accounting method, the total consideration paid was:
(in millions)
Aggregate fair value of WageWorks stock acquired
Fair value of previously owned investment in WageWorks stock
Fair value of equity awards exchanged for cash attributable to pre-Acquisition service
Fair value of equity awards replaced attributable to pre-Acquisition service
$
Total consideration paid
$
2,018.8
81.4
18.1
3.8
2,122.1
Consideration paid was allocated to the tangible and intangible assets acquired and liabilities assumed based on
their fair values as of the Acquisition date. Management estimated the fair value of tangible and intangible assets
and liabilities in accordance with the applicable accounting guidance for business combinations and utilized the
services of third-party valuation consultants to value acquired intangible assets. The initial allocation of the
-66-
consideration paid was based on a preliminary valuation and is subject to potential adjustment during the
measurement period (up to one year from the Acquisition date). Balances subject to adjustment primarily include
the valuations of acquired assets (tangible and intangible) and liabilities assumed, as well as tax-related matters.
The Company expects the allocation of the consideration transferred to be finalized within the measurement period.
Adjustments
$
$
The following table summarizes the Company's current allocation of the consideration paid:
(in millions)
Cash and cash equivalents
Other current assets
Property, plant, and equipment
Operating lease right-of-use assets
Intangible assets
Goodwill
Other assets
Client-held funds obligation
Other current liabilities
Other long-term liabilities
Deferred tax liability
Initial Allocation
406.8
56.5
26.6
42.5
715.3
1,330.5
5.9
(237.5)
(69.1)
(26.7)
(128.7)
2,122.1
Total consideration paid
$
$
(2.5)
17.8
(2.9)
1.1
—
(14.5)
1.0
Updated Allocation
392.3
$
57.5
26.6
42.5
715.3
1,328.0
5.9
(219.7)
(72.0)
(26.7)
(127.6)
2,122.1
$
The Acquisition resulted in $1.33 billion of goodwill, which is attributable to several strategic, operational and
financial benefits expected from the Acquisition, including custodial and interchange revenue synergies based on
current contractual relationships, as well as operational cost synergies resulting from increased scale in service
delivery and elimination of duplicative management functions and other back-office operational efficiencies. The
adjustments to the initial allocation are based on more detailed information obtained about the specific assets
acquired, liabilities assumed, and tax-related matters. The goodwill created in the Acquisition is not expected to be
deductible for tax purposes.
The preliminary allocation of consideration exchanged to acquired identified intangible assets is as follows:
(in millions)
Customer relationships
Developed technology
Trade names & trademarks
Identified intangible assets subject to amortization
In-process software development costs
Total acquired intangible assets
$
$
Fair value Weighted-average remaining
amortization period (years)
598.5
96.9
12.3
707.7
3.8
711.5
15.0
4.5
3.0
13.4
n/a
The Company preliminary valued the acquired assets utilizing the discounted cash flow method, a form of the
income approach. The significant assumptions used in the discounted cash flow analyses include future revenue
growth and attrition rates, projected margins, royalty rates, technological obsolescence, discount rates used to
present value future cash flows, and the amount of revenue and cost synergies expected from the Acquisition.
In connection with the transaction, for the year ended January 31, 2020, the Company incurred approximately $40.8
million of acquisition costs, which are recorded as other expense, net. For the year ended January 31, 2020,
WageWorks contributed revenue of approximately $184.7 million
Pro forma information
The unaudited pro forma results presented below include the effects of the Acquisition as if it had been
consummated as of February 1, 2018, with adjustments to give effect to pro forma events that are directly
attributable to the Acquisition, which include adjustments related to the amortization of acquired intangible assets,
interest income and expense, and depreciation.
The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result
from the integration of WageWorks. Accordingly, these unaudited pro forma results are presented for informational
purposes only and are not necessarily indicative of what the actual results of operations of the combined company
would have been if the Acquisition had occurred at the beginning of the period presented, nor are they indicative of
future results of operations. The estimated pro forma revenue and net income includes the alignment of accounting
policies, the effect of fair value adjustments related to the Acquisition, associated tax effects and the impact of the
borrowings to finance the Acquisition and related expenses.
-67-
(in thousands)
Revenue
Net income
2020
798,253 $
23,101 $
Year ended January 31,
2019
765,801
6,419
$
$
Note 4. Supplemental financial statement information
Selected consolidated balance sheet and consolidated statement of operations and comprehensive income
components consist of the following:
Property and equipment
Property and equipment consisted of the following as of January 31, 2020 and 2019:
(in thousands)
Leasehold improvements
Furniture and fixtures
Computer equipment
Property and equipment, gross
Accumulated depreciation
Property and equipment, net
$
$
January 31, 2020
19,240 $
7,929
22,074
49,243
(15,757)
33,486 $
January 31, 2019
3,583
4,476
9,242
17,301
(9,078)
8,223
Depreciation expense for the years ended January 31, 2020, 2019 and 2018 was $8.9 million, $3.5 million and $2.8
million, respectively.
Other expense, net
Other expense, net, consisted of the following:
(in thousands)
Interest income
Gain (loss) on equity securities
Acquisition costs
Other expense
Total other expense, net
Note 5. Leases
Year ended January 31,
2019
1,946
(102)
(2,121)
(1,305)
(1,582)
2020
5,905 $
27,760
(40,810)
(1,934)
(9,079) $
$
$
The Company has entered into various non-cancelable operating lease agreements for office space, data storage
facilities, and other leases with remaining lease terms of less than 1 year to approximately 11 years, often with one
or more Company options to renew. These renewal terms can extend the lease term from 3 to 10 years and are
included in the lease term when it is reasonably certain that the Company will exercise the option.
Amortization and interest expense related to finance leases were not material during the years ended January 31,
2020 and 2019.
The components of operating lease costs are as follows:
(in thousands, except for term and percentages)
Operating lease expense
Sublease income
Net operating lease cost
Year ended January 31,
2020
9,059
(750)
8,309
$
$
-68-
Weighted average lease term and discount rate are as follows:
Weighted average remaining lease term
Weighted average discount rate
Maturities of operating lease liabilities as of January 31, 2020 were as follows:
Fiscal year ending January 31, (in thousands)
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less imputed interest
Present value of lease liabilities
Current
Non-current
Total lease liabilities
As of January 31, 2020
9.41 years
4.35 %
Operating leases
12,695
12,245
9,942
8,282
8,280
47,108
98,552
(18,134)
80,418
12,401
68,017
80,418
.
.
$
$
$
$
As of January 31, 2020, the Company had additional operating leases for office space that have not yet
commenced with aggregate undiscounted lease payments of $81.5 million. These operating leases will commence
in fiscal year 2021 with leases terms ranging from 3 to 11 years.
Supplemental cash flow information related to the Company's operating leases was as follows:
(in thousands, except for term and percentages)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
ROU assets obtained in exchange for new operating lease obligations
Note 6. Intangible assets and goodwill
Intangible assets
Year ended January 31,
2020
$
$
6,361
34,196
During the year ended January 31, 2020, the Company recorded $711.5 million of acquired identified intangible
assets as a result of the Acquisition of WageWorks. For further information about these acquired identified
intangible assets, see Note 3—Business Combination.
During the years ended January 31, 2020 and 2019, the Company capitalized the following amounts to acquire the
rights to act as a custodian of HSA portfolios:
(in thousands)
Acquired HSA portfolios
January 31, 2020
January 31, 2019
1,195
7,659 $
$
The Company has determined the acquired HSA portfolios to have a useful life of 15 years. The assets are being
amortized using the straight-line amortization method, which has been determined to be appropriate to reflect the
pattern over which the economic benefits of existing assets are realized.
-69-
During the years ended January 31, 2020, 2019 and 2018, the Company capitalized software development costs of
$24.1 million, $9.3 million and $8.1 million, respectively, related to significant enhancements and upgrades to its
technology-enabled services platforms.
The gross carrying amount and associated accumulated amortization of intangible assets is as follows as of
January 31, 2020 and January 31, 2019:
(in thousands)
Amortizable intangible assets:
Software and software development costs
Acquired HSA portfolios
Acquired customer relationships
Acquired developed technology
Acquired trade names
Amortizable intangible assets, gross
Accumulated amortization
Total amortizable intangible assets, net
Acquired in process software development costs
Total intangible assets, net
January 31, 2020
January 31, 2019
$
$
76,221 $
92,770
601,381
96,925
12,300
879,597
(98,851)
780,746
2,533
783,279 $
44,835
85,110
2,882
—
—
132,827
(53,161)
79,666
—
79,666
During the years ended January 31, 2020, 2019 and 2018, the Company expensed a total of $23.8 million, $13.7
million and $12.2 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, 2020, 2019, and 2018 was $46.5 million, $14.7 million and
$13.2 million, respectively. Estimated amortization expense for the years ending January 31 is as follows:
Year ending January 31, (in thousands)
2021
2022
2023
2024
2025
Thereafter
Total
Goodwill
$
$
90,868
83,476
71,804
62,622
55,810
416,166
780,746
During the year ended January 31, 2020, the Company recorded $1.33 billion of goodwill from the Acquisition of
WageWorks. For further information about the resulting goodwill, see Note 3—Business Combination. There were
no other changes to the goodwill carrying value during the years ended January 31, 2020, 2019, and 2018.
Note 7. Commitments and contingencies
Commitments
In addition to the indebtedness described in Note 8 below, the Company’s principal commitments consist of
operating lease obligations for office space, data storage facilities, and other leases, a processing services
agreement with a vendor, and contractual commitments related to network infrastructure, equipment, and certain
maintenance agreements under long-term, non-cancelable commitments.
Future minimum lease payments under non-cancelable operating leases, excluding the contractual sublease
income of $5.5 million, which is expected to be received through February 2023, and other agreements, are as
follows:
-70-
Year ending January 31, (in thousands)
2021
2022
2023
2024
2025
Thereafter
Total
Office leases Other agreements(1)
$
$
13,064
17,610
17,846
15,973
16,050
99,530
180,073
$
$
21,912
14,628
12,001
1,245
403
—
50,189
$
$
Total
34,976
32,238
29,847
17,218
16,453
99,530
230,262
(1) Other agreements does not include payments required under the Company's term loan facility. Refer to Note 8—Indebtedness.
Subsequent to the Acquisition of WageWorks, the Company entered into non-cancelable agreements to acquire the
rights to administer WageWorks HSAs currently administered by third-party custodians. The amounts due under
these agreements are primarily variable in nature based on the number of HSAs transferred. The fixed amounts due
have been included in the schedule above.
Lease expense was $9.1 million, $5.5 million, $4.3 million for the years ended January 31, 2020, 2019, and 2018,
respectively. Sublease income was $0.8 million for the year ended January 31, 2020.
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.
Legal matters
WageWorks is pursuing an affirmative claim against the Office of Personnel Management ("OPM") to obtain
payment for services provided by WageWorks between March 1, 2016 and August 31, 2016 pursuant to its contract
with OPM. In connection with WageWorks' claims against OPM, OPM has brought a claim against WageWorks
contending that it was not entitled to any payments until WageWorks replaced the prior administrator and started
processing claims on September 1, 2016. Both WageWorks and OPM have filed opposing for summary judgment
with the Civilian Board of Contract Appeals, which motions remain pending.
On March 9, 2018, a putative class action was filed in the U.S. District Court for the Northern District of California
(the “Securities Class Action”). On May 16, 2019, a consolidated amended complaint was filed by the lead plaintiffs
asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, against
WageWorks, its former Chief Executive Officer and its former Chief Financial Officer on behalf of purchasers of
WageWorks common stock between May 6, 2016 and March 1, 2018. The complaint also alleges claims under the
Securities Act of 1933, as amended, arising from WageWorks’ June 19, 2017 common stock offering against those
same defendants, as well as the members of its board of directors at the time of that offering.
On June 22, 2018 and September 6, 2018, two derivative lawsuits were filed against certain of WageWorks’ former
officers and directors and WageWorks (as nominal defendant) in the Superior Court of the State of California,
County of San Mateo. The actions were consolidated. On July 23, 2018, a similar derivative lawsuit was filed
against certain former WageWorks’ officers and directors and WageWorks (as nominal defendant) in the U.S.
District Court for the Northern District of California (together, the “Derivative Suits”). The allegations in the Derivative
Suits relate to substantially the same facts as those underlying the Securities Class Action described above. The
plaintiffs seek unspecified damages and fees and costs.
Plaintiffs in the Superior Court action filed an amended consolidated complaint on October 28, 2019, naming as
defendants certain former officers and directors of WageWorks and alleging a direct claim of "inseparable
fraud/breach of fiduciary duty" on behalf of a class. WageWorks was not named as a party in that complaint.
WageWorks voluntarily contacted the San Francisco office of the SEC Division of Enforcement regarding the
restatement of WageWorks' financial statements and related independent investigation. WageWorks is providing
information and documents to the SEC and continues to cooperate with the SEC’s investigation into these matters.
The U.S. Attorney’s Office for the Northern District of California also opened an investigation. WageWorks has
provided documents and information to the U.S. Attorney’s Office and continues to cooperate with any inquiries by
the U.S. Attorney’s Office regarding the matter.
Beginning on July 30, 2019, putative class action suits were filed in the U.S. District Court Courts for the Southern
District of New York, the District of Delaware, and the Northern District of California asserting claims under Sections
-71-
14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, against WageWorks and the former members
of its board of directors. The complaints generally allege disclosure violations in the proxy statement issued by
WageWorks in connection with the stockholder vote on the proposed merger with the Company. After WageWorks
issued certain supplemental disclosures, these actions were voluntarily dismissed, but WageWorks may still be
required to pay attorneys fees to the plaintiffs' lawyers.
WageWorks previously entered into indemnification agreements with its former directors and officers and, pursuant
to these indemnification agreements, is covering the defense of its former directors and officers in the legal
proceedings described above.
The Company and its subsidiaries are involved in various other litigation, governmental proceedings and claims, not
described above, that arise in the normal course of business. While it is not possible to determine the ultimate
outcome or the duration of such litigation, governmental proceedings or claims, the Company believes, based on
current knowledge, that such litigation, proceedings and claims will not have a material impact on the Company’s
financial position, results of operations and cash flows for the period.
The Company maintains liability insurance coverage that is intended to cover the legal matters described above;
however, it is possible that claims may be denied by our insurance carriers or could exceed the amount of our
applicable insurance coverage, we may be required by our insurance carriers to contribute to the payment of
claims, and our insurance coverage may not continue to be available to us on acceptable terms or in sufficient
amounts.
As required under GAAP, the Company records a provision for contingent losses when it is both probable that a
liability has been incurred and the amount of the loss can be reasonably estimated. Based on currently available
information, the Company does not believe that any liabilities relating to these matters are probable or that the
amount of any resulting loss is estimable. However, litigation is subject to inherent uncertainties and the Company’s
view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility
of a material adverse impact on the Company’s financial position, results of operations and cash flows for the period
in which the unfavorable outcome occurs, and potentially in future periods.
Note 8. Indebtedness
As of January 31, 2020, long-term debt consisted of the following:
(in millions)
Term loan facility
Less: unamortized loan issuance costs (1)
Long-term debt, net of issuance costs
January 31, 2020
1,242.2
21.5
1,220.7
$
$
(1) In addition to the $21.5 million of unamortized issuance costs related to the term loan facility, $6.4 million of unamortized issuance costs
related to our revolving credit facility are included within other assets on the January 31, 2020 consolidated balance sheet.
In connection with the closing of the Acquisition, on August 30, 2019, the Company entered into a credit facility (the
"Credit Agreement”) that provided for:
(i) a five-year senior secured term loan A facility (the “Term Loan Facility”), in an aggregate principal amount
of $1.25 billion, the proceeds of which were used to finance the Acquisition, to refinance substantially all
outstanding indebtedness of HealthEquity and WageWorks and to pay related fees and expenses; and
(ii) a five-year senior secured revolving credit facility (the “Revolving Credit Facility” and, together with the
Term Loan Facility, the “Credit Facilities”), in an aggregate principal amount of up to $350 million, which
may be used for working capital and general corporate purposes, including acquisitions and other
investments. No amounts were drawn under the Revolving Credit Facility as of January 31, 2020.
Borrowings under the Credit Facilities bear interest at an annual rate equal to, at the option of HealthEquity, either
(i) LIBOR (adjusted for reserves) plus a margin ranging from 1.25% to 2.25% or (ii) an alternate base rate plus a
margin ranging from 0.25% to 1.25%, with the applicable margin determined by reference to a leverage-based
pricing grid set forth in the Credit Agreement. As of January 31, 2020, the stated interest rate was 3.65% and the
effective interest rate was 4.10%. The Company is also required to pay certain fees to the lenders, including, among
others, a quarterly commitment fee on the average unused amount of the Revolving Credit Facility at a rate ranging
from 0.20% to 0.40%, with the applicable rate also determined by reference to a leverage-based pricing grid set
forth in the Credit Agreement.
The loans made under the Term Loan Facility are required to be repaid as described in the following table:
-72-
Fiscal year ending January 31, (in millions)
2021
2022
2023
2024
2025
Total principal payments
Principal payments
39.1
62.5
70.3
101.6
968.7
1,242.2
$
$
The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit,
among other things, the ability of the Company to incur additional indebtedness, create liens, merge or dissolve,
make investments, dispose of assets, engage in sale and leaseback transactions, make distributions and dividends
and prepayments of junior indebtedness, engage in transactions with affiliates, enter into restrictive agreements,
amend documentation governing junior indebtedness, modify its fiscal year and modify its organizational
documents, in each case, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the
Credit Agreement contains financial performance covenants, which require the Company to maintain (i) a maximum
total net leverage ratio, measured as of the last day of each fiscal quarter, of no greater than 5.25 to 1.00, which
steps down to (x) 5.00 to 1.00 beginning with the fiscal quarter ending July 31, 2020 and (y) 4.50 to 1.00 beginning
with the fiscal quarter ending July 31, 2021 (subject to a customary “acquisition holiday” provision that allows the
maximum total net leverage ratio to increase to 5.00 to 1.00 for the four fiscal quarter period ending on or following
the date of a permitted acquisition by the Company in excess of $100 million), and (ii) a minimum interest coverage
ratio, measured as of the last day of each fiscal quarter, of no less than 3.00 to 1.00. The Company was in
compliance with all covenants under the Credit Agreement as of January 31, 2020, and for the period then ended.
The obligations of HealthEquity under the Credit Agreement are required to be unconditionally guaranteed by
WageWorks and each of the Company's subsequently acquired or organized direct and indirect domestic
subsidiaries and are secured by security interests in substantially all assets of HealthEquity and the guarantors, in
each case, subject to certain customary exceptions.
Note 9. Income taxes
The income tax provision consisted of the following:
(in thousands)
Current:
Federal
State
Total current tax provision (benefit)
Deferred:
Federal
State
Total deferred tax provision
Total income tax provision
Year ended January 31,
2018
2019
2020
$
$
$
$
$
(448) $
274
(174) $
1,095 $
416
1,511 $
3,538 $
127
3,665 $
3,491 $
1,258 $
(850)
408 $
1,919 $
392
130
522
4,068
237
4,305
4,827
-73-
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 expense at the statutory rate
State income tax expense, net of federal tax benefit
Other non-deductible or non-taxable items, net
Excessive employee remuneration
Excess tax benefits on stock-based compensation expense, net
Federal research and development credits
Change in uncertain tax position reserves, net of indirect benefits
Non-deductible acquisition-related costs
Non-taxable gain on investment in subsidiary
Deferred tax rate adjustment due to tax reform
Current statutory rate differential due to tax reform
Other items, net
Total income tax provision
2019
Year ended January 31,
2020
2018
9,063 $ 15,922 $ 17,744
1,241
1,518
960
143
251
798
—
160
2,117
(14,136)
(14,255)
(4,815)
(729)
(2,252)
(2,296)
191
450
491
—
—
3,032
—
—
(5,790)
458
—
—
(308)
—
—
223
125
(69)
4,827
1,919 $
3,491 $
$
$
The Company’s effective income tax rate for the years ended January 31, 2020, 2019 and 2018 was 8.1%, 2.5%,
and 9.2%, 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 increase in the effective tax rate for the year ended January 31, 2020
over the year ended January 31, 2019 was primarily due to a decrease in excess tax benefits on stock-based
compensation expense recognized in the provision for income taxes relative to pre-tax income and an increase in
non-deductible expenses, which were offset by exclusion of the gain in connection with our equity investment in
WageWorks that will not be realized for income tax purposes. The decrease in the effective tax rate for the year
ended January 31, 2019 compared to 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 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 this
was the rate that applies 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.
-74-
Deferred tax assets and liabilities consisted of the following:
(in thousands)
Deferred tax assets:
January 31, 2020
January 31, 2019
Net operating loss carryforward
Stock compensation
Research and development credits
Lease liabilities
Deferred rent
Accruals and reserves
Other, net
Total gross deferred tax assets
Less valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Fixed assets
Intangible assets
Incremental contract costs
Right-of-use assets
Goodwill
Other, net
Total gross deferred tax liabilities
Net deferred tax asset (liability)
$
$
$
1,147 $
10,764
4,693
20,232
—
6,854
2,154
45,844 $
(203)
45,641
(4,875)
(142,673)
(5,474)
(21,068)
(1,831)
(194)
(176,115)
(130,474) $
68
6,987
2,323
—
626
1,503
224
11,731
(97)
11,634
(1,294)
(4,798)
(4,654)
—
—
(127)
(10,873)
761
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 recorded a valuation allowance of $0.2 million and $0.1 million as of January 31, 2020 and January 31,
2019, respectively. The increase in valuation allowance recorded is primarily the result of state tax credits that are
not expected to be utilized before they expire.
As of January 31, 2020, the Company had recorded gross state net operating loss carryforwards of $20.5 million
which begin to expire at various intervals following the tax year ending December 31, 2024. As of January 31, 2020,
the Company also had federal and state research and development carryforwards of $3.6 million and $7.8 million,
respectively, which begin to expire following the tax years ending December 31, 2038 and 2022, respectively.
As of January 31, 2020 and 2019, the gross unrecognized tax benefit was $9.4 million and $1.7 million,
respectively. If recognized, $8.6 million and $1.5 million of the total unrecognized tax benefits would affect the
Company's effective tax rate as of January 31, 2020 and 2019, respectively. Total gross unrecognized tax benefits
increased by $7.7 million in the period from January 31, 2019 to January 31, 2020. A tabular reconciliation of the
beginning and ending amount of gross unrecognized tax benefits, including the impact of purchase accounting from
the Acquisition, is as follows:
(in thousands)
Gross unrecognized tax benefits at beginning of year
Gross amounts of increases and decreases:
January 31, 2019
889
January 31, 2020
1,693 $
$
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
Gross unrecognized tax benefits at end of year
$
6,888
(1)
790
—
—
9,370 $
—
(1)
805
—
—
1,693
-75-
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. Other unrecognized tax benefits have
been netted against existing tax receivable balances where significant overpayments have resulted. 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 or tax receivables 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
1,693
(1,693)
—
9,370 $
(8,914)
January 31, 2020
$
456 $
$
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 year ended January 31, 2020,
the Company recorded penalties and interest of $0.1 million related to unrecognized tax benefits. There were no
interest and penalties recorded related to unrecognized tax benefits during the years ended January 31, 2019 and
2018 in the statement of operations and comprehensive income. As of January 31, 2020, accrued interest and
penalties of $0.6 million were recorded, of which $0.5 million related to existing balances from the Acquisition
recorded through purchase accounting. As of January 31, 2019, 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. As a result of the Company's net operating loss carryforwards and tax credit
carryforwards, the Company remains subject to examination by one or more jurisdictions for tax years after 2000.
Note 10. 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
Merger integration
Other expense, net
Total stock-based compensation expense
$
The following table shows stock-based compensation by award type:
(in thousands)
Stock options
Performance stock options
Restricted stock units
Performance restricted stock units
Restricted stock awards
Performance restricted stock awards
Total non-cash stock-based compensation expense
Acquisition awards exchanged for cash
Total stock-based compensation expense
Stock award plans
$
$
$
2020
4,792 $
4,694
7,649
12,972
1,603
13,714
45,424 $
2020
6,612 $
—
25,781
4,862
655
1,934
39,844
5,580
45,424 $
Year ended January 31,
2018
2019
2,594
2,837 $
2,030
3,536
3,318
5,117
6,368
9,567
—
—
—
—
14,310
21,057 $
Year ended January 31,
2018
2019
7,826
7,581 $
1,378
681
3,224
7,657
1,882
2,419
—
570
—
2,149
14,310
21,057
—
—
14,310
21,057 $
Incentive Plan. The Company grants stock options, restricted stock units ("RSUs"), and restricted stock awards
("RSAs") under the HealthEquity, Inc. 2014 Equity Incentive Plan (as amended and restated, the "Incentive Plan"),
which provided for the issuance of stock awards to the directors and team members of the Company to purchase up
-76-
to an aggregate of 2.6 million shares of common stock. As described below, in connection with the Acquisition, the
shares of common stock available for issuance under the Incentive Plan were increased by 5.3 million shares.
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, 2020, 4.8 million shares were available for grant under the Incentive Plan.
WageWorks Incentive Plan. At the closing of the Acquisition, and in accordance with the Merger Agreement,
certain RSUs with respect to WageWorks common stock, granted under WageWorks, Inc. 2010 Equity Incentive
Plan (the "WageWorks Incentive Plan"), were replaced by the Company and converted into RSUs with respect to
523,318 shares of common stock of the Company.
In connection with the Acquisition, an additional 5,255,027 shares of the Company, representing the remaining
number of shares of common stock of WageWorks that were available for issuance under the WageWorks Incentive
Plan immediately prior to the Acquisition, became available for issuance under the Incentive Plan. The additional
shares may be utilized for equity-based awards to be granted under the Incentive Plan, provided that (i) the period
during which such shares are available under the Incentive Plan may not be extended beyond the period during
which they would have been available under the WageWorks Incentive Plan, absent the Acquisition, and (ii) such
equity-based awards may not be granted to individuals who were employees, directors or consultants of
HealthEquity or its affiliates at the time the Acquisition was consummated.
Stock options
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 executive officers, other team members, directors and consultants. Such options are to be
exercisable at prices, as determined by the board of directors, which must be equal to no less than the fair value of
the Company's common stock at the date of the grant. Stock options granted under the Incentive Plan generally
expire 10 years from the date of issuance, or are forfeited 90 days after termination of employment. Shares of
common stock underlying stock options that are forfeited or that expire are returned to the Incentive Plan.
Valuation assumptions. The Company has adopted the provisions of Topic 718, which requires the
measurement and recognition of compensation for all stock-based awards made to team members and directors,
based on estimated fair values.
Under Topic 718, the Company uses the Black-Scholes option pricing model as the method of valuation for stock
options. 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.
The weighted-average fair value of options granted during the years ended January 31, 2020, 2019 and 2018 was
$25.97, $26.40 and $17.16 per share, respectively. The key input assumptions that were utilized in the valuation of
the stock options granted during the years ended January 31, 2020, 2019 and 2018 are as follows:
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected life of options
2020
Year ended January 31,
2018
2019
—%
35.98% - 36.53%
—%
36.53% - 37.84%
—%
37.79% - 38.01%
2.21% - 2.43%
2.52% - 2.79%
1.18% - 2.07%
4.95 - 5.09 years
5.17 - 6.25 years
4.50 - 6.25 years
The Company historically used the "simplified" method to estimate the expected term of an option as determined
under Staff Accounting Bulletin No. 110 due to limited option exercise history as a public company. Commencing
February 1, 2019, the Company began estimating the expected life of an option using its own historical option
exercise and termination data. 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.
-77-
A summary of stock option activity is as follows:
(in thousands, except for exercise prices
and term)
Outstanding as of January 31, 2019
Granted
Exercised
Forfeited
Outstanding as of January 31, 2020
Vested and expected to vest as of January
31, 2020
Exercisable as of January 31, 2020
Number of
options
2,444
108
(465)
(47)
2,040
2,040
1,426
Range of
exercise
prices
$0.10 - 82.39 $
$63.64 - 73.61 $
$0.10 - 59.63 $
$24.36 - 44.53 $
$0.10 - 82.39 $
$
$
Weighted-
average
exercise
price
27.37
73.27
24.58
31.09
30.35
30.35
23.53
Outstanding stock options
Weighted-
average
contractual
term
(in years)
Aggregate
intrinsic
value
85,971
6.74 $
5.90 $
5.90 $
5.30 $
74,009
74,009
60,744
The aggregate intrinsic value in the table above represents the difference between the estimated fair value of
common stock and the exercise price of outstanding, in-the-money stock options. The total intrinsic value of options
exercised during the years ended January 31, 2020, 2019 and 2018 was $22.5 million, $65.5 million, and
$44.8 million, respectively.
As of January 31, 2020, the weighted-average vesting period of non-vested awards expected to vest is
approximately 1.4 years; the amount of compensation expense the Company expects to recognize for stock options
vesting in future periods is approximately $7.2 million.
Restricted stock units and restricted stock awards
The Company grants RSUs and RSAs to certain team members, 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. The weighted-
average fair value of RSUs granted during the years ended January 31, 2020, 2019 and 2018 was $65.20, $67.69
and $44.61 per share, respectively.
Acquisition of WageWorks. As described above, at the closing of the Acquisition, and in accordance with the
Merger Agreement, 523,318 service-based RSUs with respect to WageWorks common stock were replaced by the
Company and converted into RSUs with respect to common stock of the Company. These replaced awards are
included in the granted amounts in the summary of RSU and RSA activity below.
The awards replaced by the Company in the Acquisition were measured at the Acquisition date based on the
estimated fair value of $29.7 million. A portion of that fair value, $3.8 million, which represented the pre-Acquisition
service provided by team members to WageWorks, was included in the total consideration paid as part of the
Acquisition. As of the closing of the Acquisition, the remaining portion of the fair value of those awards
was $25.9 million, representing post-Acquisition share-based compensation expense, $8.1 million of which was
recognized during the year ended January 31, 2020 as acquisition-related costs, and the remainder of which will be
recognized in the ordinary course as these team members provide service over the remaining vesting periods.
Additionally, at the closing of the Acquisition, and in accordance with the Merger Agreement, the Company
exchanged for cash certain WageWorks equity awards measured at the Acquisition date based on the estimated
fair value of $23.6 million. A portion of that fair value, $18.1 million, which represented the pre-Acquisition service
provided by team members to WageWorks, was included in the total consideration paid as part of the Acquisition.
As of the closing of the Acquisition, the remaining portion of the fair value of the awards exchanged for cash
was $5.6 million, representing post-Acquisition share-based compensation expense that was recognized during the
year ended January 31, 2020.
Performance restricted stock units and awards. In March 2017, the Company awarded 146,964 performance-
based RSUs ("PRSUs"). The Company records stock-based compensation related to PRSUs when it is considered
probable that the performance conditions will be met. Issuance of the underlying shares occurs upon approval by
the Compensation Committee of the board of directors, based on the level of achievement of the performance goal
as measured on January 31, 2020. The performance conditions allow for a range of vesting from 0% to 150%.
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 measured on January 31, 2021, and cliff vest upon
-78-
approval by the Compensation Committee. 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 the 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. As the underlying shares were issued at grant
date, they are subject to clawback based on actual Company performance.
In March 2019, the Company awarded 129,963 PRSUs. Vesting of the PRSUs is dependent upon the achievement
of certain financial criteria measured on January 31, 2022. The PRSUs cliff vest and are issued upon approval by
the Compensation Committee. 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 the PRSUs will ultimately range from 0% to 200% of the number of
shares underlying the PRSU grant based on the level of achievement of the performance goals.
As a result of the Acquisition, the Compensation Committee is considering revisions to existing PRSU and PRSA
performance goals, including those measured as of January 31, 2020.
A summary of the RSU and RSA activity is as follows:
RSUs and PRSUs
(in thousands, except weighted-average grant date
fair value)
Outstanding as of January 31, 2019
RSAs and PRSAs
Weighted-
average grant
date fair value
61.93
—
62.75
61.72
61.91
During the years ended January 31, 2020, 2019 and 2018 the aggregate intrinsic value of RSUs and RSAs vested
was $25.0 million, $6.4 million, and $0.7 million, respectively.
Weighted-
average grant
date fair value
55.18
65.20
58.40
58.39
63.33
647 $
1,306
(387)
(186)
1,380 $
256 $
—
(11)
(10)
235 $
Outstanding as of January 31, 2020
Granted
Vested
Forfeited
Shares
Shares
Total unrecorded stock-based compensation expense as of January 31, 2020 associated with RSUs and PRSUs
was $65.9 million, which is expected to be recognized over a weighted-average period of 2.6 years. Total
unrecorded stock-based compensation expense as of January 31, 2020 associated with RSAs and PRSAs
was $3.6 million, which is expected to be recognized over a weighted-average period of 1.3 years.
Note 11. Fair value
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; and
Level 3—unobservable inputs based on the Company’s own assumptions.
Level 1 instruments are valued based on publicly available daily net asset values. Level 1 instruments consist
primarily of cash and cash equivalents. The carrying value of cash and cash equivalents approximate fair values as
of January 31, 2020 due to the short-term nature of these instruments.
Our long-term debt is considered a Level 2 instrument and is recorded at book value in our consolidated financial
statements. Our long-term debt reprices frequently due to variable interest rate terms and entails no significant
changes in credit risk. As a result, we believe the fair value of our long-term debt approximates carrying value.
Note 12. Employee benefits
-79-
The Company has established a 401(k) plan that qualifies as a deferred compensation arrangement under
Section 401 of the IRS Code. All non-seasonal team members over the age of 18 are eligible to participate in the
plan. The plan provides for Company matching of employee contributions up to 3.5% of eligible earnings. Employer
matching contribution expense was $3.7 million, $1.8 million and $1.4 million for the years ended January 31, 2020,
2019 and 2018, respectively.
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 $200,000. 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 $3.7 million and $1.4 million as of January 31, 2020 and 2019, respectively.
-80-
Note 13. Supplementary quarterly financial data (unaudited)
Three months ended
(in thousands, except for per share amounts)
Total revenue
Total cost of revenue
Gross profit
Total operating expenses
Total other income (expense)
Income tax provision (benefit)
Net income (loss)
Net income (loss) per share (1):
Basic
Diluted
(in thousands, except for per share amounts)
Total revenue
Total cost of revenue
Gross profit
Total operating expenses
Total other income (expense)
Income tax provision (benefit)
Net income
Net income per share (1):
Basic
Diluted
January 31, 2020 October 31, 2019
$
$
201,200
87,519
113,681
99,139
(15,149)
(417)
(190)
$
$
$
—
—
157,118
61,083
96,035
86,113
(41,174)
(9,918)
(21,334)
(0.30)
(0.30)
$
$
$
January 31, 2019 October 31, 2018
$
$
75,777
31,332
44,445
27,864
(221)
3,241
13,119
70,495
24,678
45,817
26,831
(1,555)
1,745
15,686
$
$
$
$
$
$
$
$
July 31, 2019
86,623
28,183
58,440
33,576
(1,128)
4,370
19,366
$
$
April 30, 2019
87,052
29,299
57,753
30,075
23,600
9,456
41,822
0.30
0.30
$
$
0.67
0.65
Three months ended
July 31, 2018
71,067
24,492
46,575
25,012
(75)
(1,029)
22,517
$
$
April 30, 2018
69,904
25,548
44,356
23,816
(1)
(2,038)
22,577
0.21
0.37
0.36
0.21
(1) Net income (loss) per share amounts may not sum to equal the full year total due to changes in the number of shares outstanding during the
periods and rounding.
0.36
0.36
0.25
0.25
$
$
$
$
$
$
$
$
-81-
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
Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Company’s disclosure controls and procedures as of January 31, 2020, 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 the 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 provide reasonable assurance that the 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.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on such evaluation, and subject to the below exclusion, the Company’s Chief Executive Officer and Chief
Financial Officer have concluded that, as of January 31, 2020, the Company’s disclosure controls and procedures
were effective at the reasonable assurance level.
In accordance with interpretive guidance issued by SEC staff, companies are allowed to exclude acquired
businesses from the assessment of internal control over financial reporting during the first year after completion of
an acquisition and from the assessment of disclosure controls and procedures to the extent subsumed in such
internal control over financial reporting (the “Internal Controls Guidance”). In accordance with the Internal Controls
Guidance, as the Company acquired WageWorks on August 30, 2019, management's evaluation and conclusion as
to the effectiveness of the Company's disclosure controls and procedures as of January 31, 2020 excluded the
portion of disclosure controls and procedures that are subsumed by internal control over financial reporting of
WageWorks. WageWorks’ assets represented approximately 11% of the Company’s consolidated total assets,
excluding the effects of purchase accounting, and its revenues represented approximately 35% of the Company's
consolidated total revenues, each as of and for the fiscal year ended January 31, 2020.
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. The Company’s internal control over financial reporting is 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 assessed the effectiveness of the Company’s internal control over financial reporting as of January
31, 2020. In making this assessment of internal control over financial reporting, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -
Integrated Framework (2013).
Based on this assessment, management concluded the Company’s internal control over financial reporting was
effective as of January 31, 2020.
In accordance with the Internal Controls Guidance, management has excluded WageWorks from its assessment of
internal control over financial reporting as of January 31, 2020, because it was acquired by the Company in a
purchase business combination during the fiscal year ended January 31, 2020. WageWorks’ assets represented
approximately 11% of the Company’s consolidated total assets, excluding the effects of purchase accounting, and
-82-
its revenues represented approximately 35% of the Company's consolidated total revenues, each as of and for the
fiscal year ended January 31, 2020.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP has also audited the
effectiveness of the Company’s internal control over financial reporting, excluding WageWorks, as of January 31,
2020. Its report appears in Part II, Item 8 of this Annual Report on Form 10-K.
Material Weaknesses in Internal Control over Financial Reporting
WageWorks disclosed the existence of material weaknesses in internal control over financial reporting in Item 9A of
its Annual Report on Form 10-K for the year ended December 31, 2018. While management did not include
WageWorks in its assessment of internal control over financial reporting, management determined the material
weaknesses included below were unremediated at WageWorks as of January 31, 2020.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement in annual or interim financial statements will
not be prevented or detected on a timely basis.
Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring
Activities
There was an inadequate open flow, transparency, communication and dissemination of relevant and pertinent
information from former WageWorks senior management concerning a complex transaction with the federal
government that contributed to an ineffective control environment driven by the tone at the top. WageWorks
management’s failure to timely communicate all pertinent information resulted in an environment which led to errors
in the WageWorks financial statements as of the fiscal year ended December 31, 2018.
It was noted that WageWorks did not maintain effective internal control over financial reporting related to the
following areas: control environment, risk assessment, control activities information and communication, and
monitoring activities:
• WageWorks did not have processes and controls to ensure there were adequate mechanisms and
oversight to ensure accountability for the performance of internal control over financial reporting
responsibilities and to ensure corrective actions were appropriately prioritized and implemented in a timely
manner.
• WageWorks did not effectively execute a strategy to attract, develop and retain a sufficient complement of
qualified resources with an appropriate level of knowledge, experience, and training in certain areas
important to financial reporting.
• There was not an adequate assessment of changes in risks by management that could significantly impact
internal control over financial reporting or an adequate determination and prioritization of how those risks
should be managed.
• WageWorks did not have adequate management oversight of accounting and financial reporting activities in
implementing certain accounting practices to conform to its policies and GAAP.
• WageWorks did not have adequate management oversight around completeness and accuracy of data
material to financial reporting.
• There was a lack of robust, established and documented accounting policies and insufficiently detailed
procedures to put these policies into effective action.
• WageWorks was not focused on a commitment to competency as it relates to creating priorities, allocating
adequate resources and establishing cross functional procedures around managing complex contracts and
non-routine transactions as well as managing change and attracting, developing and retaining qualified
resources.
These deficiencies in WageWorks' internal control over financial reporting contributed to the following identified
material weaknesses:
A.
Accounting Close and Financial Reporting
-83-
WageWorks had inadequate or ineffective senior accounting leadership and corresponding process level
and monitoring controls in the area of accounting close and financial reporting specifically, but not
exclusively, around the review of account reconciliations, account estimates and related cut-off, and
monitoring of the accounting close cycle and some areas of related sub-processes such as equity.
WageWorks also did not have effective business processes and controls to conduct an effective review of
manual data feeds into journal entries for platforms which were not integrated with the main enterprise
resource planning system.
WageWorks did not have robust, established and documented accounting policies that were implemented
effectively, which led to adjustments in areas such as, but not exclusive to, impairment of internally
developed software (IDS) and unclaimed liability. As a result of these adjustments, the accounts related to
amortization of IDS, fixed assets, and operating expenses as they relate to interest and penalties were
impacted.
WageWorks also did not have a robust process around managing change and corresponding assessment
and implementation of accounting policies. Furthermore, it also resulted in the delayed assessment and
design of controls for the timely implementation of controls around Accounting Standard 606 (ASC 606) for
Revenue Recognition, which was effective January 2018. These gaps resulted in several adjustments in the
WageWorks financial statements as of the fiscal year ended December 31, 2018.
B.
Contract to Cash Process
WageWorks did not have effective controls around the contract-to-cash life cycle. The root cause of these
gaps were due to inadequate or ineffective process level controls around billing set-up during customer
implementation, managing change to existing customer billing terms and conditions, timely termination of
customers, implementing complex and/or non-standard billing arrangements which require manual
intervention or manual controls for billing to customers, processing timely adjustments, lack of robust,
established and documented policies to assess collectability and reserve for revenue, bad debts and
accounts receivable, and availability of customer contracts.
These gaps resulted in several adjustments in revenue, accounts receivable, and accounts receivable
reserves in the WageWorks financial statements as of the fiscal year ended December 31, 2018.
C.
Risk Assessment and Management of Change
WageWorks did not maintain an effective risk assessment and monitoring process to manage the
expansion of its business. Hence, there were inadequate and ineffective business and financial reporting
control activities associated with change and growth in the business. Among other areas, the assessment of
the control environment and the design of manual controls around financial system implementations was
not performed adequately.
As a result, WageWorks did not properly estimate, reserve and record certain transactions that resulted in
errors in the WageWorks financial statements as of the fiscal year ended December 31, 2018.
D.
Review of New, Unusual or Significant Transactions and Contracts
WageWorks did not have adequate risk assessment controls to continuously formally assess the financial
reporting risks associated with executing new, significant or unusual transactions, contracts or business
initiatives. As a result, WageWorks did not adequately identify and analyze changes in the business and
hence implement effective process level controls and monitoring controls that were responsive to these
changes and aligned with financial reporting objectives. This failure to identify and analyze changes
occurred in connection with the integration of acquisitions and the monitoring and recording of certain
revenues associated with a complex government contract. As a result, WageWorks did not properly account
for certain transactions including revenue and customer obligation accounts, which resulted in errors in the
WageWorks financial statements as of the fiscal year ended December 31, 2018.
E.
Manual Reconciliations of High-Volume Standard Transactions
WageWorks did not have effective business processes and controls as well as resources with adequate
training and support to conduct an effective review of manual reconciliations including the complex data
feeds into the reconciliations of high-volume standard transactions. This resulted in several errors mainly to
balance sheet classifications around accounts receivable, customer obligations and other related accounts
as of December 31, 2018.
F.
Information Technology General Controls (ITGC)
WageWorks did not have effective controls related to information technology general controls (ITGCs) in the
areas of logical access and change-management over certain information technology (IT) systems that
-84-
supported its financial reporting processes. WageWorks’ business process controls (automated and
manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have
been adversely impacted. WageWorks believed that these control deficiencies were a result of IT control
processes having an inadequate risk-assessment process to identify and assess changes in business
environment which would impact IT environments related to internal control over financial reporting. Hence,
the control design, implementation, and documentation were not enhanced to adapt to the changing
business environment. There was also insufficient training of IT personnel on how to design and implement
ITGCs.
These material weaknesses and other deficiencies could result in a misstatement of the aforementioned
account balances or disclosures that would result in a material misstatement to the annual or interim
consolidated financial statements that would not be prevented or detected.
Remediation Efforts
The Company continues to assess the impact of the Acquisition on its internal control over financial reporting and
has engaged an external internal control specialist to assist with creating a remediation plan.
Changes in Internal Control Over Financial Reporting
As noted above, WageWorks has been excluded from management’s assessment of internal control over financial
reporting as of January 31, 2020. There were no changes in the Company’s 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, 2020 that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.
Item 9B. Other information
None.
-85-
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 2020 Proxy Statement to be filed with the SEC
in connection with the solicitation of proxies for the Company's 2020 Annual Meeting of Stockholders is incorporated
by reference to our 2020 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 2020 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 2020 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 2020 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 2020 Proxy Statement.
-86-
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, 2020 and 2019
Consolidated Statements of Operations and Comprehensive Income for the years ended January 31, 2020, 2019
and 2018
Consolidated Statements of Stockholders' Equity for the years ended January 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended January 31, 2020, 2019 and 2018
Notes to consolidated financial statements
Supplementary quarterly financial data (unaudited)
(2) Financial statement schedules
Page
54
55
56
57
59
81
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.
-87-
(3) Exhibits required by Item 601 of Regulation S-K
Exhibit Index
-88-
Exhibit
no.
3.1
3.2
4.1+
4.2
4.3
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
10.19†
Incorporated by reference
Description
Amended and Restated Certificate of Incorporation of the
Registrant
Amended and Restated Bylaws of the Registrant
Description of Securities of the Registrant
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.
Form File No.
8-K 001-36568
Exhibit Filing Date
3.2 July 6, 2018
8-K 001-36568
3.4 July 6, 2018
S-1/A 333-196645
S-1 333-196645
4.1 July 16, 2014
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
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.
S-1 333-196645
10.26 June 10, 2014
10-Q 001-36568
10.1 June 11, 2015
Amended and Restated Lease Agreement, dated May 15,
2015, by and between the Registrant and BG Scenic Point
Office 1, L.C.
10-Q 001-36568
10.2 June 11, 2015
Offer letter to Robert W. Selander, dated September 28,
2015.
First Amendment to Lease Agreement, dated November 3,
2015, by and between the Company and the Landlord.
8-K 001-36568
10-Q 001-36568
10.1 September 30,
2015
10.1 December 8,
2016
Second Amendment to Lease Agreement, dated
September 16, 2016, by and between the Company and
the Landlord.
10-Q 001-36568
10.2 December 8,
2016
First Amendment to Amended and Restated Lease
Agreement, dated June 1, 2016, by and between the
Company and the Landlord.
Second Amendment to Amended and Restated Lease
Agreement, dated May 31, 2017, by and between the
Company and the Landlord.
Amended and Restated Non-Employee Director
Compensation Policy
10-Q 001-36568
10.1 June 8, 2017
10-Q 001-36568
10.2 June 8, 2017
10-K 001-36568
10.25 March 28, 2018
-89-
Incorporated by reference
Form File No.
10-Q 001-36568
Exhibit Filing Date
10.1 June 7, 2018
Exhibit
no.
10.20†
10.21†
10.22†
10.23
10.24
10.25
Description
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
10-Q 001-36568
10-Q 001-36568
10-Q 001-36568
10-Q 001-36568
Fourth Amendment to Lease Agreement, dated September
27, 2018, by and between the Company and the Landlord
10-Q 001-36568
10.26†
Restricted Stock Unit Award Agreement
10-Q 001-36568
10.1 September 6,
2018
10.3 September 6,
2018
10.1 December 6,
2018
10.2 December 6,
2018
10.3 December 6,
2018
10.4 December 6,
2018
10.27
10.28
10.29
10.30
10.31
10.32
10.33†
10.34
10.35
10.36
21.1+
23.1+
24.1+
31.1+
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
10-K 001-36568
10.29 March 28, 2019
10-K 001-36568
10-K 001-36568
10.30 March 28, 2019
10.31 March 28, 2019
Amended and Restated Non-Employee Director
Compensation Policy
Agreement and Plan of Merger, dated as of June 26, 2019,
by and among HealthEquity, Inc., WageWorks, Inc. and
Pacific Merger Sub Inc.
Credit Agreement, dated as of August 30, 2019, among
HealthEquity, Inc., as borrower, each lender from time to
time party thereto, Wells Fargo Bank, N.A., as
administrative agent and the swing line lender, and each
L/C Issuer party thereto
10-K 001-36568
10.32 March 28, 2019
8-K 001-36568
2.1 June 27, 2019
8-K 001-36568
10.1 August 30, 2019
Form of Indemnification Agreement entered into between
WageWorks, Inc., its affiliates and its former directors and
officers
HealthEquity, Inc. and WageWorks, Inc. 2010 Equity
Incentive Plan (Amended and Restated in August 2019)
S-1 333-173709
10.1 July 19, 2011
8-K 001-36568
10.2 August 30, 2019
Amendment No. 1 to the HealthEquity 2014 Equity
Incentive Plan, as amended and restated
8-K 001-36568
10.3 August 30, 2019
S-1 333-173709
10.3 July 19, 2011
Forms of Stock Option Agreements under the
HealthEquity, Inc. and WageWorks, Inc. Amended and
Restated 2010 Equity Incentive Plan
List of Subsidiaries
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
-90-
Exhibit
no.
31.2+
32.1*#
32.2*#
Description
Form File No.
Exhibit Filing Date
Incorporated by reference
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††
101.SCH††
101.CAL††
101.DEF††
101.LAB††
101.PRE††
104
XBRL Instance document
XBRL Taxonomy schema linkbase document
XBRL Taxonomy calculation linkbase document
XBRL Taxonomy definition linkbase document
XBRL Taxonomy labels linkbase document
XBRL Taxonomy presentation linkbase document
The cover page from the Company’s Annual Report on
Form 10-K for the fiscal year ended January 31, 2020,
formatted in Inline XBRL.
+ 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
None.
-91-
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 31st day of March, 2020.
Date: March 31, 2020
HEALTHEQUITY, INC.
By:
Name:
Title:
/s/ Jon Kessler
Jon Kessler
President and Chief Executive Officer
-92-
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 31, 2020
By:
Name:
Title:
Date: March 31, 2020
Date: March 31, 2020
Date: March 31, 2020
Date: March 31, 2020
Date: March 31, 2020
Date: March 31, 2020
Date: March 31, 2020
Date: March 31, 2020
Date: March 31, 2020
Date: March 31, 2020
By:
Name:
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:
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
/s/ Darcy Mott
Darcy Mott
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
-93-
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
Evelyn Dilsaver
Director
Debra McCowan
Director
Frank T. Medici
Director
Ian Sacks
Director
Gayle Wellborn
Director
CONNECTING
HEALTH & WEALTH
HealthEquity connects health and wealth, delivering
health savings account (HSA) and other consumer driven
health and retirement solutions in partnership with over
100,000 employers.
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 $11.5 billion in assets for 5.3 million HSAs
members nationwide.
For more information, visit www.healthequity.com.
Adam Hostetter
Executive Vice President and CMO
Del Ladd
Executive Vice President
General Counsel and Corporate Secretary
ONE PARTNER.
TOTAL SOLUTION.
• Health savings accounts (HSAs)
• Flexible spending accounts (FSAs)
• Health reimbursement accounts (HRAs)
Darcy Mott
Bill Otten
Executive Vice President and CFO
Executive Vice President of Sales
Ted Bloomberg
Larry Tritschuch
Executive Vice President and COO
Executive Vice President and CSO
• Commuter
• COBRA
• Wellbeing
Ashley Dreier
Executive Vice President and CTO/CIO
Angelique Hill
Executive Vice President of Operations
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 fiscal year ended January 31, 2020.
Stock exchange listing
Common stock listed and traded on:
The NASDAQ stock market under symbol “HQY”
Copyright© 2020 HealthEquity, Inc. All rights reserved.
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.
4/22/20 6:28 PM
49921.indd 1
Copyright© 2020 HealthEquity, Inc. All rights reserved.