Company Quick10K Filing
HealthEquity
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 71 $4,363
10-Q 2019-12-05 Quarter: 2019-10-31
10-Q 2019-09-09 Quarter: 2019-07-31
10-Q 2019-06-06 Quarter: 2019-04-30
10-K 2019-03-28 Annual: 2019-01-31
10-Q 2018-12-06 Quarter: 2018-10-31
10-Q 2018-09-06 Quarter: 2018-07-31
10-Q 2018-06-07 Quarter: 2018-04-30
10-K 2018-03-28 Annual: 2018-01-31
10-Q 2017-12-07 Quarter: 2017-10-31
10-Q 2017-09-07 Quarter: 2017-07-31
10-Q 2017-06-08 Quarter: 2017-04-30
10-K 2017-03-30 Annual: 2017-01-31
10-Q 2016-12-08 Quarter: 2016-10-31
10-Q 2016-09-08 Quarter: 2016-07-31
10-Q 2016-06-09 Quarter: 2016-04-30
10-K 2016-03-31 Annual: 2016-01-31
10-Q 2015-12-09 Quarter: 2015-10-31
10-Q 2015-09-10 Quarter: 2015-07-31
10-Q 2015-06-11 Quarter: 2015-04-30
10-K 2015-03-31 Annual: 2015-01-31
10-Q 2014-12-11 Quarter: 2014-10-31
10-Q 2014-09-12 Quarter: 2014-07-31
8-K 2020-01-13 Regulation FD, Exhibits
8-K 2019-12-19 Officers
8-K 2019-12-03 Earnings, Exhibits
8-K 2019-09-03 Earnings, Exhibits
8-K 2019-08-30 Enter Agreement, M&A, Officers, Regulation FD, Exhibits
8-K 2019-07-29 Regulation FD, Exhibits
8-K 2019-07-12 Enter Agreement, Exhibits
8-K 2019-07-09 Enter Agreement, Exhibits
8-K 2019-07-08 Other Events, Exhibits
8-K 2019-07-01 Shareholder Vote
8-K 2019-06-27 Regulation FD, Exhibits
8-K 2019-06-26 Enter Agreement, Exhibits
8-K 2019-06-04 Earnings, Exhibits
8-K 2019-03-18 Earnings, Exhibits
8-K 2019-02-06 Earnings, Exhibits
8-K 2018-12-04 Earnings, Exhibits
8-K 2018-09-27 Enter Agreement, Off-BS Arrangement
8-K 2018-09-04 Earnings, Exhibits
8-K 2018-07-24 Officers
8-K 2018-07-02 Shareholder Rights
8-K 2018-06-21 Officers, Shareholder Vote
8-K 2018-06-04 Earnings, Exhibits
8-K 2018-04-06 Officers, Exhibits
8-K 2018-03-28 Officers, Regulation FD, Exhibits
8-K 2018-03-19 Earnings, Exhibits
8-K 2018-02-06 Earnings, Exhibits
8-K 2018-01-08 Regulation FD, Exhibits
HQY 2019-10-31
Part I. Financial Information
Item 1. Financial Statements
Note 1. Summary of Business and Significant Accounting Policies
Note 2. Net Income (Loss) per Share
Note 3. Business Combination
Note 4. Supplemental Financial Statement Information
Note 5. Leases
Note 6. Intangible Assets and Goodwill
Note 7. Commitments and Contingencies
Note 8. Indebtedness
Note 9. Income Taxes
Note 10. Stock-Based Compensation
Note 11. Fair Value
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 exhibit311-ceo302x2019.htm
EX-31.2 exhibit312-cfo302x2019.htm
EX-32.1 exhibit321-ceo906x2019.htm
EX-32.2 exhibit322-cfo906x2019.htm

HealthEquity Earnings 2019-10-31

HQY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
CDK 6,125 2,999 3,714 2,236 1,102 132 509 8,734 49% 17.2 4%
ATHN 5,427 1,589 521 1,311 705 126 192 5,382 54% 28.0 8%
MMS 4,832 1,691 476 2,690 646 227 318 4,753 24% 14.9 13%
TNET 4,781 2,318 1,879 3,661 2,541 189 266 4,098 69% 15.4 8%
HQY 4,363 1,098 81 320 206 90 128 3,547 65% 27.8 8%
ENV 3,693 1,812 959 837 571 -16 34 3,615 68% 105.6 -1%
RBA 3,682 2,375 1,538 1,356 881 131 272 4,048 65% 14.9 6%
HMSY 3,261 1,160 362 626 225 101 173 2,992 36% 17.3 9%
BID 2,756 2,751 2,257 1,030 0 108 219 3,209 0% 14.6 4%
WNS 2,617 786 233 0 0 0 0 2,573 0%

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-36568
 
 
 
HEALTHEQUITY, INC.
 
 
 
(Exact name of registrant as specified in its charter)
Delaware
 
7389
 
52-2383166
(State or other jurisdiction of
incorporation or organization)
 
(Primary Standard Industrial
Classification Code Number)
 
(I.R.S. Employer
Identification Number)
15 West Scenic Pointe Drive
Suite 100
Draper, Utah 84020
(Address of principal executive offices) (Zip code)

(801) 727-1000
(Registrant's telephone Number, including Area Code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.0001 per share
HQY
The NASDAQ Global Select Market
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. (Check one):
Large accelerated filer
Accelerated filer
Non-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

As of December 2, 2019, there were 70,879,268 shares of the registrant's common stock outstanding.
 


Table of Contents

HealthEquity, Inc. and subsidiaries
Form 10-Q quarterly report

Table of contents
 
 
Page
Part I. FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II. OTHER INFORMATION
 
Item 1.
Item 1A.
Item 6.
 
 



-2-


Part I. Financial information
Item 1. Financial statements

HealthEquity, Inc. and subsidiaries
Condensed consolidated balance sheets
(in thousands, except par value)
October 31, 2019


January 31, 2019

 
(unaudited)

 
 
Assets



Current assets



Cash and cash equivalents
$
174,557


$
361,475

Accounts receivable, net of allowance for doubtful accounts as of October 31, 2019 and January 31, 2019 of $1,021 and $125, respectively
66,647


25,668

Other current assets
29,119


7,534

Total current assets
270,323


394,677

Property and equipment, net
35,199


8,223

Operating lease right-of-use assets
88,515

 

Intangible assets, net
796,228


79,666

Goodwill
1,335,187


4,651

Deferred tax asset


1,677

Other assets
34,469


21,122

Total assets
$
2,559,921


$
510,016

Liabilities and stockholders’ equity



Current liabilities



Accounts payable
$
7,966


$
3,520

Accrued compensation
37,559


16,981

Accrued liabilities
54,305


8,552

Current portion of long-term debt
31,250

 

Operating lease liabilities
10,780

 

Total current liabilities
141,860


29,053

Long-term debt, net of issuance costs
1,196,016

 

Operating lease liabilities, non-current
73,052

 

Deferred tax liability
128,642


916

Other long-term liabilities
2,590


2,968

Total liabilities
1,542,160


32,937

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 October 31, 2019 and January 31, 2019, respectively



Common stock, $0.0001 par value, 900,000 shares authorized, 70,832 and 62,446 shares issued and outstanding as of October 31, 2019 and January 31, 2019, respectively
7


6

Additional paid-in capital
806,050


305,223

Accumulated earnings
211,704


171,850

Total stockholders’ equity
1,017,761


477,079

Total liabilities and stockholders’ equity
$
2,559,921


$
510,016

See accompanying notes to condensed consolidated financial statements.


-3-


HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of operations and
comprehensive income (loss) (unaudited)

(in thousands, except per share data)
Three months ended October 31,
 

Nine months ended October 31,
 
2019


2018


2019


2018

Revenue:



 
 
 
 
Service revenue
$
87,620

 
$
25,041

 
$
140,710

 
$
74,797

Custodial revenue
46,972

 
31,564

 
132,538

 
90,713

Interchange revenue
22,526

 
13,890

 
57,545

 
45,956

Total revenue
157,118

 
70,495

 
330,793

 
211,466

Cost of revenue:
 
 
 
 

 
 
Service costs
52,278

 
17,562

 
92,672

 
52,808

Custodial costs
4,384

 
3,551

 
12,716

 
10,492

Interchange costs
4,421

 
3,565

 
13,177

 
11,418

Total cost of revenue
61,083

 
24,678

 
118,565

 
74,718

Gross profit
96,035

 
45,817

 
212,228

 
136,748

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
12,654

 
7,502

 
30,015

 
21,605

Technology and development
23,511

 
8,678

 
46,061

 
25,055

General and administrative
19,222

 
9,161

 
37,193

 
24,561

Amortization of acquired intangible assets
13,051

 
1,490

 
16,036

 
4,438

Merger integration
17,675

 

 
20,459

 

Total operating expenses
86,113

 
26,831

 
149,764

 
75,659

Income from operations
9,922

 
18,986

 
62,464

 
61,089

Other expense:
 
 
 
 
 
 
 
Interest expense
(10,225
)
 
(68
)
 
(10,355
)
 
(204
)
Other expense, net
(30,949
)
 
(1,487
)
 
(8,347
)
 
(1,427
)
Income (loss) before income taxes
(31,252
)
 
17,431

 
43,762

 
59,458

Income tax provision (benefit)
(9,918
)
 
1,745

 
3,908

 
(1,322
)
Net income (loss) and comprehensive income (loss)
$
(21,334
)

$
15,686


$
39,854


$
60,780

Net income (loss) per share:



 
 
 
 
Basic
$
(0.30
)
 
$
0.25

 
$
0.61

 
$
0.98

Diluted
$
(0.30
)
 
$
0.25

 
$
0.59

 
$
0.96

Weighted-average number of shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
Basic
70,524

 
62,088

 
65,727

 
61,718

Diluted
70,524

 
63,923

 
67,150

 
63,628

See accompanying notes to condensed consolidated financial statements.

-4-


HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of stockholders’ equity (unaudited)

(in thousands)
Three months ended October 31,
 
 
Nine months ended October 31,
 
2019

 
2018

 
2019

 
2018

Total stockholders' equity, beginning balances
$
1,017,031

 
$
432,619

 
$
477,079

 
$
346,274

 
 
 
 
 
 
 
 
Common stock:
 
 
 
 
 
 
 
Beginning balance
7

 
6

 
6

 
6

Issuance of common stock upon exercise of stock options, and for restricted stock

 

 

 

Issuance of common stock

 

 
1

 

Ending balance
7

 
6

 
7

 
6

Additional paid-in capital:
 
 
 
 
 
 
 
Beginning balance
783,986

 
289,568

 
305,223

 
261,237

Issuance of common stock upon exercise of stock options, and for restricted stock
712

 
2,762

 
7,363

 
21,366

Other issuance of common stock
3,776

 

 
462,270

 

Stock-based compensation
17,576

 
5,734

 
31,194

 
15,461

Ending balance
806,050

 
298,064

 
806,050

 
298,064

Accumulated comprehensive loss:
 
 
 
 
 
 
 
Beginning balance

 

 

 
(269
)
Cumulative effect from adoption of ASU 2016-01

 

 

 
269

Ending balance

 

 

 

Accumulated earnings:
 
 
 
 
 
 
 
Beginning balance
233,038

 
143,045

 
171,850

 
85,300

Net income (loss)
(21,334
)
 
15,686

 
39,854

 
60,780

Cumulative effect from adoption of ASC 606

 

 

 
13,007

Cumulative effect from adoption of ASU 2016-01

 

 

 
(356
)
Ending balance
$
211,704

 
$
158,731

 
$
211,704

 
$
158,731

 
 
 
 
 
 
 
 
Total stockholders' equity, ending balances
$
1,017,761

 
$
456,801

 
$
1,017,761

 
$
456,801

See accompanying notes to condensed consolidated financial statements.


-5-


HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of cash flows (unaudited)


Nine months ended October 31,
 
(in thousands)
2019


2018

Cash flows from operating activities:



Net income
$
39,854


$
60,780

Adjustments to reconcile net income to net cash provided by operating activities:



Depreciation and amortization
28,791


13,498

(Gains) losses on marketable equity securities and other
(25,303
)

895

Deferred taxes
690


394

Stock-based compensation
31,194


15,461

Changes in operating assets and liabilities:





Accounts receivable
(2,817
)

(2,863
)
Other assets
(4,937
)

(4,568
)
Operating lease right-of-use assets
3,340

 

Accounts payable
524


(1,087
)
Accrued compensation
(8,012
)

(2,617
)
Accrued liabilities and other current liabilities
13,655


451

Operating lease liabilities, non-current
(2,859
)
 

Other long-term liabilities
(50
)

441

Net cash provided by operating activities
74,070


80,785

Cash flows from investing activities:



Acquisitions, net of cash acquired
(1,630,066
)
 

Purchases of intangible member assets
(9,070
)

(1,195
)
Purchases of marketable equity securities and other
(53,845
)

(574
)
Purchases of property and equipment
(5,180
)

(3,467
)
Purchases of software and capitalized software development costs
(17,232
)

(7,352
)
Net cash used in investing activities
(1,715,393
)

(12,588
)
Cash flows from financing activities:



Proceeds from long-term debt
1,250,000

 

Payment of debt issuance costs
(30,504
)
 

Settlement of client-held funds obligation
(230,928
)
 

Proceeds from follow-on equity offering, net of payment for offering costs
458,495

 

Proceeds from exercise of common stock options
7,342


21,338

Net cash provided by financing activities
1,454,405


21,338

Increase (decrease) in cash and cash equivalents
(186,918
)

89,535

Beginning cash and cash equivalents
361,475


199,472

Ending cash and cash equivalents
$
174,557


$
289,007

Supplemental cash flow data:
 
 
 
Interest expense paid in cash
$
249

 
$
162

Income taxes paid in cash, net of refunds received
9,127

 
628

Supplemental disclosures of non-cash investing and financing activities:



Equity-based acquisition consideration
$
3,776

 
$

Purchases of property and equipment included in accounts payable or accrued liabilities at period end
168


6

Purchases of software and capitalized software development costs included in accounts payable or accrued liabilities at period end
316


156

Purchases of intangible member assets accrued during the period
(151
)
 

Exercise of common stock options receivable
21


28

See accompanying notes to condensed consolidated financial statements.

-6-

Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)


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.
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 condensed consolidated financial statements include the accounts of HealthEquity, Inc. and its wholly owned subsidiaries, HealthEquity Trust Company, HEQ Insurance Services, Inc., HealthEquity Advisors, LLC, HealthEquity Retirement Services, LLC, and, after the closing of the Acquisition on August 30, 2019, WageWorks, Inc. and its subsidiaries MyFlexMobile, Inc., WageWorks India, Inc. and WageWorks Services, LLP (collectively referred to as the "Company").
Prior to the closing of the Acquisition, the Company held a 4% ownership interest in WageWorks. The Company measured the investment at fair value, and all gains on the investment were recognized in other expense, net in the condensed consolidated statements of operations and comprehensive income (loss). In connection with the closing of the Acquisition on August 30, 2019, the Company's investment in WageWorks was canceled, and WageWorks became a wholly owned subsidiary of the Company.
The Company has a 22% ownership interest in a limited partnership for investment in and the management of early stage companies in the healthcare industry; this partnership interest is accounted for using the equity method of accounting. The investment was approximately $0.2 million as of October 31, 2019 and is included in investments on the accompanying condensed consolidated balance sheet.
The Company has a 1% ownership interest in a limited partnership that engages in the development of technology-based financial healthcare products. The Company elected the measurement alternative for non-marketable equity investments to account for the investment. The investment was valued at $0.5 million as of October 31, 2019 and is included in investments on the accompanying condensed consolidated balance sheet.
Acquisitions of businesses, including the Acquisition of WageWorks, are accounted for as business combinations, and accordingly, the results of operations of acquired businesses are included in the condensed consolidated financial statements from the date of acquisition. All significant intercompany balances and transactions have been eliminated.
Basis of presentation
The accompanying condensed consolidated financial statements as of October 31, 2019 and for the three and nine months ended October 31, 2019 and 2018 are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. In the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended January 31, 2019. The fiscal year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

-7-

Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Note 1. Summary of business and significant accounting policies (continued)

Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Significant accounting policies
There have been no material changes in the Company’s significant accounting policies, other than the additions of the policies described below for leases, investments in equity securities, and client-held funds, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended January 31, 2019.
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.
The Company has entered into various operating leases consisting of office space, data storage facilities, and other leases with remaining lease terms of approximately less than 1 year to 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. 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.
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 condensed consolidated balance sheets beginning February 1, 2019.
Investments in equity securities. Marketable equity securities are strategic equity investments with readily determinable fair values and for which the Company does not have the ability to exercise significant influence are accounted for at fair value and were classified as investments on the condensed consolidated balance sheets. All gains and losses on these investments, realized and unrealized, are recognized in other expense, net in the condensed consolidated statements of operations and comprehensive income (loss). 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 and for which the Company does not have the ability to exercise significant influence are accounted for using the measurement alternative and are classified as other assets on the condensed consolidated balance sheets. All gains and losses on these investments, realized and unrealized, are recognized in other expense, net on the condensed consolidated statements of operations and comprehensive income (loss).
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 condensed 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 condensed consolidated statements of operations and comprehensive income (loss).
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

-8-

Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Note 1. Summary of business and significant accounting policies (continued)

charge through other expense, net in the condensed consolidated statements of operations and comprehensive income (loss).
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 condensed consolidated balance sheets.
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 $238 million was combined with its corporate cash within WageWorks' corporate bank accounts; therefore, the Company determined that this $238 million of Client-held funds were assets of the Company, while the approximately $444 million of remaining Client-held funds were not assets of the Company. Prior to October 31, 2019, the Company segregated $231 million of Client-held funds from its corporate bank accounts. Accordingly, as of October 31, 2019, $7 million of Client-held funds remained combined within the Company's corporate bank accounts and therefore remained on the Company's condensed consolidated balance sheets in cash and cash equivalents, with an offsetting liability included in accrued liabilities.
Recent 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 condensed 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 condensed consolidated statement of operations, stockholders’ equity and cash flows for the three and nine-month period ended October 31, 2019.
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 condensed consolidated financial statements.
Recent 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 is currently evaluating the potential effect of this ASU on the consolidated financial statements.

-9-

Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Note 1. Summary of business and significant accounting policies (continued)

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes step two from the goodwill impairment test. As a result, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units' fair value. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the timing of adoption; however, it does not believe this ASU will have a material impact on the Company's consolidated financial statements.
In August 2018, FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends ASC 820, "Fair Value Measurement." ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential effect of this ASU on the consolidated financial statements.
Note 2. Net income (loss) per share
The following table sets forth the computation of basic and diluted net income (loss) per share:
(in thousands, except per share data)
 
Three months ended October 31,
 
 
Nine months ended October 31,
 
 
2019

 
2018

 
2019

 
2018

Numerator (basic and diluted):
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(21,334
)
 
$
15,686

 
$
39,854

 
$
60,780

Denominator (basic):
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
70,524

 
62,088

 
65,727

 
61,718

Denominator (diluted):
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
70,524

 
62,088

 
65,727

 
61,718

Weighted-average dilutive effect of stock options and restricted stock units
 

 
1,835

 
1,423

 
1,910

Diluted weighted-average common shares outstanding
 
70,524

 
63,923

 
67,150

 
63,628

Net income (loss) per share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.30
)
 
$
0.25

 
$
0.61

 
$
0.98

Diluted
 
$
(0.30
)
 
$
0.25

 
$
0.59

 
$
0.96


For the three months ended October 31, 2019 and 2018, approximately 3.2 million and 36,000 shares, respectively, attributable to stock options and restricted stock units were excluded from the calculation of diluted earnings (loss) per share as their inclusion would have been anti-dilutive.
For the nine months ended October 31, 2019 and 2018, approximately 0.3 million and 0.1 million shares, respectively, attributable to stock options and restricted stock units were excluded from the calculation of diluted earnings (loss) per share as their inclusion would have been anti-dilutive.

-10-

Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

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
 
$
2,018.8

Fair value of previously owned investment in WageWorks stock
 
81.4

Fair value of equity awards exchanged for cash attributable to pre-Acquisition service
 
18.1

Fair value of equity awards replaced attributable to pre-Acquisition service
 
3.8

Total consideration paid
 
$
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 consideration paid is 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.
Preliminary allocation of consideration
(in millions)
 
Estimated fair value

Cash and cash equivalents
 
$
406.8

Other current assets
 
56.5

Property, plant, and equipment
 
26.6

Operating lease right-of-use assets
 
42.5

Intangible assets
 
715.3

Goodwill
 
1,330.5

Other assets
 
5.9

Client-held funds obligation
 
(237.5
)
Other current liabilities
 
(69.1
)
Other long-term liabilities
 
(26.7
)
Deferred tax liability
 
(128.7
)
Total consideration paid
 
$
2,122.1



-11-

Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Note 3. Business combination (continued)


The Acquisition resulted in $1.3 billion of goodwill. The preliminary goodwill to be recognized 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 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)
 
Fair value

 
Weighted-average remaining amortization period (years)
Customer relationships (1)
 
$
598.5

 
15.0
Developed technology (1)
 
96.9

 
4.5
Trade names & trademarks (1)
 
12.3

 
3.0
Identified intangible assets subject to amortization
 
707.7

 
13.4
In-process software development costs
 
3.8

 
n/a
Total acquired intangible assets
 
$
711.5

 
 
(1) The Company preliminarily valued the acquired assets utilizing the discounted cash flow method, a form of the income approach.
In connection with the transaction, for the three and nine months ended October 31, 2019, the Company incurred approximately $32.9 million and $40.7 million, respectively, of acquisition costs, which are recorded as other expense, net. For the three months ended October 31, 2019, WageWorks contributed revenue of approximately $72.1 million.  For the three months ended October 31, 2019, operating expenses related to WageWorks were approximately $39.9 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 (loss) 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.
(in thousands)
 
Three months ended October 31,
 
 
Nine months ended October 31,
 
 
2019

 
2018

 
2019

 
2018

Revenue
 
$
194,450

 
$
186,022

 
$
598,815

 
$
573,520

Net income (loss)
 
$
(3,286
)
 
$
(21,145
)
 
$
34,559

 
$
9,120








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Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Note 4. Supplemental financial statement information
Selected condensed consolidated balance sheet and condensed consolidated statement of operations and comprehensive income (loss) components consist of the following:
Property and equipment
Property and equipment consisted of the following as of October 31, 2019 and January 31, 2019:
(in thousands)
 
October 31, 2019

 
January 31, 2019

Leasehold improvements
 
$
19,404

 
$
3,583

Furniture and fixtures
 
6,889

 
4,476

Computer equipment
 
22,890

 
9,242

Property and equipment, gross
 
49,183

 
17,301

Accumulated depreciation
 
(13,984
)
 
(9,078
)
Property and equipment, net
 
$
35,199

 
$
8,223


Depreciation expense for the three months ended October 31, 2019 and 2018 was $3.6 million and $0.9 million, respectively, and $5.4 million and $2.6 million for the nine months ended October 31, 2019 and 2018, respectively.
Other expense, net
Other expense, net, consisted of the following:
 
 
Three months ended October 31,
 
 
Nine months ended October 31,
 
(in thousands)
 
2019

 
2018

 
2019

 
2018

Interest income
 
$
2,046

 
$
358

 
$
5,273

 
$
919

Gain on marketable equity securities
 
285

 

 
27,570

 

Acquisition costs
 
(32,932
)
 
(849
)
 
(40,712
)
 
(1,074
)
Other expense
 
(348
)
 
(996
)
 
(478
)
 
(1,272
)
Total other expense, net
 
$
(30,949
)
 
$
(1,487
)
 
$
(8,347
)
 
$
(1,427
)

Note 5. Leases
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 approximately less than 1 year to 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 three and nine months ended October 31, 2019.
The components of operating lease costs, lease term and discount rate are as follows:
 
 
Three months ended

 
Nine months ended

(in thousands, except for term and percentages)
 
October 31, 2019

 
October 31, 2019

Operating lease cost
 
$
3,354

 
$
5,515

Sublease income
 
(249
)
 
(249
)
Net operating lease cost
 
$
3,105

 
$
5,266

 
 
 
 
 
 
 
 
 
As of October 31, 2019

Weighted average remaining lease term
 
9.36 years

Weighted average discount rate
 
4.37
%


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Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Note 5. Leases (continued)

Maturities of operating lease liabilities as of October 31, 2019 were as follows:
Fiscal year ending January 31, (in thousands)
 
Operating leases

Remaining 2020
 
$
375

2021
 
14,340

2022
 
14,135

2023
 
10,595

2024
 
8,287

Thereafter
 
55,389

Total lease payments
 
103,121

Less imputed interest
 
(19,289
)
Present value of lease liabilities
 
$
83,832

 
 
 
Current
 
$
10,780

Non-current
 
73,052

Total lease liabilities
 
$
83,832


As of October 31, 2019, the Company had additional operating leases for office space that have not yet commenced with aggregate undiscounted lease payments of $80.2 million. These operating leases will commence in fiscal year 2021 with a lease term of approximately 11 years.
Supplemental cash flow information related to the Company's operating leases was as follows:
 
 
Three months ended

 
Nine months ended

(in thousands)
 
October 31, 2019

 
October 31, 2019

Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
Operating cash flows from operating leases
 
$
2,746

 
$
4,575

ROU assets obtained in exchange for new operating lease obligations
 
$
34,196

 
$
34,394



-14-

Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Note 6. Intangible assets and goodwill
Intangible assets
During the three months ended October 31, 2019, 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 nine months ended October 31, 2019, the Company acquired the rights to act as a custodian of HSA portfolios for $7.7 million. The Company has determined the acquired intangible HSA assets 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.
During the three months ended October 31, 2019 and 2018, the Company capitalized software development costs of $7.0 million and $2.2 million, respectively, and $14.7 million and $6.4 million, respectively, for the nine months ended October 31, 2019 and 2018, related to significant enhancements and upgrades to its technology-enabled services platforms.
The gross carrying amount and associated accumulated amortization of intangible assets were as follows as of October 31, 2019 and January 31, 2019:
(in thousands)
 
October 31, 2019

 
January 31, 2019

Amortizable intangible assets:
 
 
 
 
Software and software development costs
 
$
66,633

 
$
44,835

Acquired HSA portfolios
 
92,770

 
85,110

Acquired customer relationships
 
601,382

 
2,882

Acquired developed technology
 
96,924

 

Acquired trade names
 
12,300

 

Amortizable intangible assets, gross
 
870,009

 
132,827

Accumulated amortization
 
(77,017
)
 
(53,161
)
Total amortizable intangible assets, net
 
792,992

 
79,666

Acquired in-process software development costs
 
3,236

 

Total intangible assets, net
 
$
796,228

 
$
79,666


During the three months ended October 31, 2019 and 2018, the Company expensed a total of $6.2 million and $3.4 million, respectively, and $13.8 million and $10.0 million for the nine months ended October 31, 2019 and 2018, respectively, in software development costs primarily related to the post-implementation and operation stages of its technology platforms.
Amortization expense for the three months ended October 31, 2019 and 2018 was $15.7 million and $3.7 million, respectively, and $23.6 million and $10.9 million, respectively, for the nine months ended October 31, 2019 and 2018.
Goodwill
During the three months ended October 31, 2019, the Company recorded $1.3 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 three and nine months ended October 31, 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.

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Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Note 7. Commitments and contingencies (continued)


Future minimum lease payments under non-cancelable operating leases, excluding the contractual sublease income of $6.0 million, which is expected to be received through February 2023, and other agreements, are as follows:
Year ending January 31, (in thousands)
 
Operating leases

 
Other agreements

 
Total

2020
 
$
375

 
$
2,524

 
$
2,899

2021
 
14,340

 
10,325

 
24,665

2022
 
15,692

 
7,182

 
22,874

2023
 
12,191

 
4,602

 
16,793

2024
 
9,922

 
1,212

 
11,134

Thereafter
 
67,717

 
403

 
68,120

Total
 
$
120,237

 
$
26,248

 
$
146,485


Rent expense was $3.4 million and $5.5 million for the three and nine months ended October 31, 2019, respectively. Sublease income was $0.2 million for the three months ended October 31, 2019.
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 affirmative claims 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 also claimed that an erroneous statement in a certificate signed by a former executive officer constituted a violation of the False Claims Act and moved to dismiss part of WageWorks' claim against OPM as a result. As with all legal proceedings, no assurance can be provided as to the outcome of these matters or if WageWorks or OPM will be successful.
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.

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Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Note 7. Commitments and contingencies (continued)


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 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 October 31, 2019, long-term debt consisted of the following:
(in millions)
 
October 31, 2019

Term loan facility
 
$
1,250

Less: unamortized loan issuance costs
 
(23
)
Long-term debt, net of issuance costs
 
$
1,227


On September 30, 2015, the Company entered into a credit facility that provided for a secured revolving credit facility in the aggregate principal amount of $100.0 million for a term of five years. Upon closing of the Acquisition on August 30, 2019, the credit facility was terminated. At the time of termination, no amounts were drawn and the Company was in compliance with all covenants.
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

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Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Note 8. Indebtedness (continued)

(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 October 31, 2019.
Borrowings under the Credit Facilities will 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. 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:
Fiscal year ending January 31, (in millions)
 
Principal payments

Remaining 2020
 
$
8

2021
 
39

2022
 
63

2023
 
70

2024
 
101

Thereafter
 
969

Total principal payments
 
$
1,250


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 October 31, 2019.
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 Company follows FASB Accounting Standards Codification 740-270, Income Taxes - Interim Reporting, for the computation and presentation of its interim period tax provision. Accordingly, management estimated the effective annual tax rate and applied this rate to the year-to-date pre-tax book income to determine the interim provision for income taxes. For the three and nine months ended October 31, 2019, the Company recorded an income tax benefit of $9.9 million and income tax expense of $3.9 million, respectively. This resulted in an effective income tax
benefit rate of 31.7% and an income tax expense rate of 8.9% for the three and nine months ended October 31, 2019, respectively, compared with an effective income tax expense rate of 10.0% and an effective income tax benefit rate of 2.2% for the three and nine months ended October 31, 2018, respectively. For the three and nine months ended October 31, 2019 and 2018, the net impact of discrete tax items caused a percentage point benefit of

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Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Note 9. Income taxes (continued)

1.1 and 8.7 and a percentage point benefit of 11.2 and 24.1, respectively, to the effective income tax rate primarily due to the excess tax benefit on stock-based compensation expense recognized in the provision for income taxes in the condensed consolidated statements of operations and comprehensive income (loss).
As of October 31, 2019 and January 31, 2019, the Company’s total gross unrecognized tax benefit was $8.1 million and $1.7 million, respectively. Certain unrecognized tax benefits have been netted against their related tax assets. As of October 31, 2019, an unrecognized tax benefit of $0.4 million was recorded. As of January 31, 2019, no unrecognized tax benefits had been recorded. If recognized, $7.4 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of October 31, 2019.
The Company files income tax returns with U.S. federal and state taxing jurisdictions and is not currently under examination with any jurisdiction. The Company remains subject to examination by federal and various state taxing jurisdictions for tax years after 2003.
Note 10. Stock-based compensation
The following table shows a summary of stock-based compensation in the Company's condensed consolidated statements of operations and comprehensive income (loss) during the periods presented:


Three months ended October 31,
 
 
Nine months ended October 31,
 
(in thousands)

2019


2018

 
2019

 
2018

Cost of revenue

$
1,415

 
$
788

 
$
3,285

 
$
2,008

Sales and marketing

1,304

 
990

 
3,469

 
2,586

Technology and development

2,171

 
1,386

 
5,600

 
3,677

General and administrative

3,332

 
2,570

 
9,486

 
7,190

Merger integration
 
1,220

 

 
1,220

 

Other expense, net
 
13,714

 

 
13,714

 

Total stock-based compensation expense

$
23,156

 
$
5,734

 
$
36,774

 
$
15,461


The following table shows stock-based compensation by award type:
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