Company Quick10K Filing
HealthEquity
Price56.92 EPS1
Shares71 P/E76
MCap4,032 P/FCF54
Net Debt1,075 EBIT70
TEV5,107 TEV/EBIT73
TTM 2019-10-31, in MM, except price, ratios
10-Q 2020-04-30 Filed 2020-06-04
10-K 2020-01-31 Filed 2020-03-31
10-Q 2019-10-31 Filed 2019-12-05
10-Q 2019-07-31 Filed 2019-09-09
10-Q 2019-04-30 Filed 2019-06-06
10-K 2019-01-31 Filed 2019-03-28
10-Q 2018-10-31 Filed 2018-12-06
10-Q 2018-07-31 Filed 2018-09-06
10-Q 2018-04-30 Filed 2018-06-07
10-K 2018-01-31 Filed 2018-03-28
10-Q 2017-10-31 Filed 2017-12-07
10-Q 2017-07-31 Filed 2017-09-07
10-Q 2017-04-30 Filed 2017-06-08
10-K 2017-01-31 Filed 2017-03-30
10-Q 2016-10-31 Filed 2016-12-08
10-Q 2016-07-31 Filed 2016-09-08
10-Q 2016-04-30 Filed 2016-06-09
10-K 2016-01-31 Filed 2016-03-31
10-Q 2015-10-31 Filed 2015-12-09
10-Q 2015-07-31 Filed 2015-09-10
10-Q 2015-04-30 Filed 2015-06-11
10-K 2015-01-31 Filed 2015-03-31
10-Q 2014-10-31 Filed 2014-12-11
10-Q 2014-07-31 Filed 2014-09-12
8-K 2020-07-15 Other Events
8-K 2020-07-13 Other Events, Exhibits
8-K 2020-07-08 Enter Agreement, Exhibits
8-K 2020-07-08 Regulation FD, Other Events, Exhibits
8-K 2020-06-25 Officers, Shareholder Vote
8-K 2020-06-02
8-K 2020-04-13
8-K 2020-03-16
8-K 2020-02-13
8-K 2020-01-23
8-K 2020-01-17
8-K 2020-01-13
8-K 2019-12-19
8-K 2019-12-03
8-K 2019-09-03
8-K 2019-08-30
8-K 2019-07-29
8-K 2019-07-12
8-K 2019-07-09
8-K 2019-07-08
8-K 2019-07-01
8-K 2019-06-27
8-K 2019-06-26
8-K 2019-06-04
8-K 2019-03-18
8-K 2019-02-06
8-K 2018-12-04
8-K 2018-09-27
8-K 2018-09-04
8-K 2018-07-24
8-K 2018-07-02
8-K 2018-06-21
8-K 2018-06-04
8-K 2018-04-06
8-K 2018-03-28
8-K 2018-03-19
8-K 2018-02-06
8-K 2018-01-08

HQY 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Note 1. Summary of Business and Significant Accounting Policies
Note 2. Net Income 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-10.1 hqyadreiertransitionse.htm
EX-10.2 amendmentno1tokesslereea.htm
EX-31.1 exhibit311-ceo302xfy21.htm
EX-31.2 exhibit312-cfo302xfy21.htm
EX-32.1 exhibit321-ceo906xfy21.htm
EX-32.2 exhibit322-cfo906xfy21.htm

HealthEquity Earnings 2020-04-30

Balance SheetIncome StatementCash Flow
2.62.11.61.00.50.02014201620182020
Assets, Equity
0.20.10.10.0-0.0-0.12014201620182020
Rev, G Profit, Net Income
1.00.5-0.1-0.6-1.2-1.72014201620182020
Ops, Inv, Fin

hqy-20200430
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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 April 30, 2020
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)
Delaware52-2383166
(State or other jurisdiction of
incorporation or organization)
(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 classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.0001 per shareHQYThe 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 filerAccelerated filer
Non-accelerated filerSmaller 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 May 28, 2020, there were 71,399,355 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)April 30, 2020January 31, 2020
(unaudited)
Assets
Current assets
Cash and cash equivalents$171,093  $191,726  
Accounts receivable, net of allowance for doubtful accounts of $1,681 and $1,216 as of April 30, 2020 and January 31, 2020, respectively
69,789  70,863  
Other current assets42,901  34,711  
Total current assets283,783  297,300  
Property and equipment, net35,821  33,486  
Operating lease right-of-use assets97,554  83,178  
Intangible assets, net777,483  783,279  
Goodwill1,332,631  1,332,631  
Deferred tax asset38  18  
Other assets35,169  35,089  
Total assets$2,562,479  $2,564,981  
Liabilities and stockholders’ equity
Current liabilities
Accounts payable$7,338  $3,980  
Accrued compensation27,197  50,121  
Accrued liabilities39,985  46,372  
Current portion of long-term debt46,875  39,063  
Operating lease liabilities13,210  12,401  
Total current liabilities134,605  151,937  
Long-term liabilities
Long-term debt, net of issuance costs1,167,192  1,181,615  
Operating lease liabilities, non-current81,982  68,017  
Other long-term liabilities3,783  2,625  
Deferred tax liability134,267  130,492  
Total long-term liabilities1,387,224  1,382,749  
Total liabilities1,521,829  1,534,686  
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 April 30, 2020 and January 31, 2020, respectively
    
Common stock, $0.0001 par value, 900,000 shares authorized, 71,398 and 71,051 shares issued and outstanding as of April 30, 2020 and January 31, 2020, respectively
7  7  
Additional paid-in capital827,303  818,774  
Accumulated earnings213,340  211,514  
Total stockholders’ equity1,040,650  1,030,295  
Total liabilities and stockholders’ equity$2,562,479  $2,564,981  
See accompanying notes to condensed consolidated financial statements.

-3-


HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of operations and
comprehensive income (unaudited)
Three months ended April 30,
(in thousands, except per share data)20202019
Revenue
Service revenue$111,271  $26,808  
Custodial revenue46,899  41,952  
Interchange revenue31,841  18,292  
Total revenue190,011  87,052  
Cost of revenue
Service costs71,013  20,649  
Custodial costs5,045  4,123  
Interchange costs5,879  4,527  
Total cost of revenue81,937  29,299  
Gross profit108,074  57,753  
Operating expenses
Sales and marketing11,455  8,970  
Technology and development31,078  10,905  
General and administrative18,998  8,709  
Amortization of acquired intangible assets18,702  1,491  
Merger integration12,770    
Total operating expenses93,003  30,075  
Income from operations15,071  27,678  
Other income (expense)
Interest expense(12,263) (63) 
Other income (expense), net(764) 23,663  
Total other income (expense)(13,027) 23,600  
Income before income taxes2,044  51,278  
Income tax provision218  9,456  
Net income and comprehensive income$1,826  $41,822  
Net income per share:
Basic$0.03  $0.67  
Diluted$0.03  $0.65  
Weighted-average number of shares used in computing net income per share:
Basic70,980  62,326  
Diluted72,292  63,901  
See accompanying notes to condensed consolidated financial statements.
-4-


HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of stockholders’ equity (unaudited)
Three months ended April 30,
(in thousands)20202019
Total stockholders' equity, beginning balance$1,030,295  $477,079  
Common stock:
Beginning balance7  6  
Issuance of common stock upon exercise of stock options, and for restricted stock—  —  
Ending balance7  6  
Additional paid-in capital:
Beginning balance818,774  305,223  
Issuance of common stock upon exercise of stock options, and for restricted stock1,133  4,370  
Stock-based compensation7,396  6,028  
Ending balance827,303  315,621  
Accumulated earnings
Beginning balance211,514  171,850  
Net income1,826  41,822  
Ending balance213,340  213,672  
Total stockholders' equity, ending balance$1,040,650  $529,299  
See accompanying notes to condensed consolidated financial statements.

-5-


HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of cash flows (unaudited)
Three months ended April 30,
(in thousands)20202019
Cash flows from operating activities:
Net income$1,826  $41,822  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization27,507  4,773  
Stock-based compensation7,396  6,028  
Amortization of debt issuance costs1,201  15  
Gains on marketable equity securities  (23,511) 
Other non-cash items1,494  12  
Deferred taxes3,786  7,542  
Changes in operating assets and liabilities:
Accounts receivable552  (1,354) 
Other assets(8,360) (1,694) 
Operating lease right-of-use assets3,104  635  
Accounts payable3,632  (1,577) 
Accrued compensation(22,924) (8,480) 
Accrued liabilities and other current liabilities(2,270) 1,769  
Operating lease liabilities, non-current(3,045) (627) 
Other long-term liabilities1,127  (17) 
Net cash provided by operating activities15,026  25,336  
Cash flows from investing activities:
Purchases of marketable securities  (53,845) 
Purchases of property and equipment(7,511) (1,126) 
Purchases of software and capitalized software development costs(11,775) (5,497) 
Acquisition of intangible member assets(6,008) (1,262) 
Net cash used in investing activities(25,294) (61,730) 
Cash flows from financing activities:
Principal payments on long-term debt(7,812)   
Settlement of client-held funds obligation(3,776)   
Proceeds from exercise of common stock options1,223  4,229  
Net cash provided by (used in) financing activities(10,365) 4,229  
Decrease in cash and cash equivalents(20,633) (32,165) 
Beginning cash and cash equivalents191,726  361,475  
Ending cash and cash equivalents$171,093  $329,310  
Supplemental cash flow data:
Interest expense paid in cash$10,749  $50  
Income taxes paid in cash, net of refunds received733  (51) 
Supplemental disclosures of non-cash investing and financing activities:
Exercise of common stock options receivable  141  
Purchases of property and equipment included in accounts payable or accrued liabilities at period end968  21  
Purchases of software and capitalized software development costs included in accounts payable or accrued liabilities at period end1,537  158  
See accompanying notes to condensed consolidated financial statements.
-6-

Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed 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.
Principles of consolidation
The condensed 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.
Basis of presentation
The accompanying condensed consolidated financial statements as of April 30, 2020 and for the three months ended April 30, 2020 and 2019 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 fiscal year ended January 31, 2020. The fiscal year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
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 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2020.
Recently adopted accounting pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. The Company adopted the new standard as of February 1, 2020 using the modified retrospective transition method. The adoption of this standard did not have a material effect on the Company’s condensed consolidated financial statements.
In August 2018, the 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. The Company adopted the new standard as of February 1, 2020. The adoption of this standard did not have a material effect on the Company’s condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. The Company adopted the new standard as of February 1, 2020. The adoption of this standard did not have a material effect on the Company’s condensed consolidated financial statements.
-7-

Table of Contents


Note 2. Net income per share
The following table sets forth the computation of basic and diluted net income per share:
Three months ended April 30,
(in thousands, except per share data)20202019
Numerator (basic and diluted):
Net income $1,826  $41,822  
Denominator (basic):
Weighted-average common shares outstanding70,980  62,326  
Denominator (diluted):
Weighted-average common shares outstanding70,980  62,326  
Weighted-average dilutive effect of stock options and restricted stock units1,312  1,575  
Diluted weighted-average common shares outstanding72,292  63,901  
Net income per share:
Basic $0.03  $0.67  
Diluted$0.03  $0.65  

For the three months ended April 30, 2020 and 2019, approximately 0.5 million and 0.2 million shares, respectively, attributable to 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
On August 30, 2019, the Company closed the acquisition (the "Acquisition") of WageWorks, Inc. ("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).
The Acquisition was accounted for under the acquisition method of accounting for business combinations. Consideration paid was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the Acquisition date. The initial allocation of the 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.
The following table summarizes the Company's current allocation of the consideration paid in the Acquisition:
(in millions)Initial AllocationAdjustmentsUpdated Allocation
Cash and cash equivalents$406.8  $(14.5) $392.3  
Other current assets56.5  1.0  57.5  
Property, plant, and equipment26.6  —  26.6  
Operating lease right-of-use assets42.5  —  42.5  
Intangible assets715.3  —  715.3  
Goodwill1,330.5  (2.5) 1,328.0  
Other assets5.9  —  5.9  
Client-held funds obligation(237.5) 17.8  (219.7) 
Other current liabilities(69.1) (2.9) (72.0) 
Other long-term liabilities(26.7) —  (26.7) 
Deferred tax liability(128.7) 1.1  (127.6) 
Total consideration paid$2,122.1  $  $2,122.1  
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Adjustments to the initial allocation are based on more detailed information obtained about the specific assets acquired, liabilities assumed, and tax-related matters.
Note 4. Supplemental financial statement information
Selected condensed consolidated balance sheet and condensed consolidated statement of operations and comprehensive income components consist of the following:
Property and equipment
Property and equipment consisted of the following as of April 30, 2020 and January 31, 2020:
(in thousands)April 30, 2020January 31, 2020
Leasehold improvements$22,084  $19,240  
Furniture and fixtures9,097  7,929  
Computer equipment24,123  22,074  
Property and equipment, gross55,304  49,243  
Accumulated depreciation(19,483) (15,757) 
Property and equipment, net$35,821  $33,486  
Depreciation expense for the three months ended April 30, 2020 and 2019 was $3.9 million and $0.9 million, respectively.
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 $3.7 million as of January 31, 2020 to $4.1 million as of April 30, 2020. The balances are related to cash received in advance for an 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 recognized over a term of approximately ten years. Revenue recognized during the three months ended April 30, 2020 that was included in the beginning balance of deferred revenue was $0.2 million. The Company expects to satisfy its remaining obligations for these arrangements.
Other income (expense), net
Other income (expense), net, consisted of the following:
Three months ended April 30,
(in thousands)20202019
Interest income$600  $1,343  
Gain on equity securities  23,511  
Acquisition costs(94) (1,184) 
Other expense(1,270) (7) 
Total other income (expense), net$(764) $23,663  

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 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.


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Amortization and interest expense related to finance leases were not material during the three months ended April 30, 2020 and 2019.
The components of operating lease costs are as follows:
Three months ended April 30,
(in thousands, except for term and percentages)20202019
Operating lease expense$4,308  1,074  
Sublease income(450)   
Net operating lease cost$3,858  $1,074  
Weighted average lease term and discount rate are as follows:
As of April 30, 2020
Weighted average remaining lease term9.47 years
Weighted average discount rate4.35 %
Maturities of operating lease liabilities as of April 30, 2020 were as follows:
Fiscal year ending January 31, (in thousands)Operating leases
Remaining 2021$9,177  
202214,517  
202312,348  
202410,318  
202510,279  
Thereafter60,429  
Total lease payments117,068  
Less imputed interest(21,876) 
Present value of lease liabilities$95,192  
Current$13,210  
Non-current81,982  
Total lease liabilities$95,192  
As of April 30, 2020, the Company had an additional operating lease for office space that had not yet commenced with aggregate undiscounted lease payments of $63.1 million. This operating lease 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 April 30,
(in thousands, except for term and percentages)20202019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$3,297  $977  
ROU assets obtained in exchange for new operating lease obligations$17,480  $199  





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Note 6. Intangible assets and goodwill
Intangible assets
The gross carrying amount and associated accumulated amortization of intangible assets were as follows as of April 30, 2020 and January 31, 2020:
(in thousands)April 30, 2020January 31, 2020
Amortizable intangible assets:
Software and software development costs$89,949  $76,221  
Acquired HSA portfolios98,778  92,770  
Acquired customer relationships601,381  601,381  
Acquired developed technology96,925  96,925  
Acquired trade names12,300  12,300  
Amortizable intangible assets, gross899,333  879,597  
Accumulated amortization(122,442) (98,851) 
Total amortizable intangible assets, net776,891  780,746  
Acquired in process software development costs592  2,533  
Total intangible assets, net$777,483  $783,279  
During the three months ended April 30, 2020 and 2019, the Company expensed a total of $10.3 million and $3.9 million, respectively, in software development costs primarily related to the post-implementation and operation stages of its proprietary software.
Amortization expense for the three months ended April 30, 2020 and 2019 was $23.6 million and $3.9 million, respectively.
Goodwill
There were no changes to the goodwill carrying value during the three months ended April 30, 2020 and 2019.
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. These commitments as of January 31, 2020 are disclosed in the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2020, and did not change materially during the three months ended April 30, 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 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
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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 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.



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Note 8. Indebtedness
As of April 30, 2020, long-term debt consisted of the following:
(in millions)April 30, 2020
Term loan facility$1,234.4  
Less: unamortized loan issuance costs (1)20.3  
Long-term debt, net of issuance costs$1,214.1  
(1) In addition to the $20.3 million of unamortized issuance costs related to the term loan facility, $6.0 million of unamortized issuance costs related to our revolving credit facility are included within other assets on the April 30, 2020 condensed 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 April 30, 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 April 30, 2020, the stated interest rate was 2.15% and the effective interest rate was 2.59%. 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 2021$31.3  
202262.5  
202370.3  
2024101.6  
2025968.7  
Total principal payments$1,234.4  
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 April 30, 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.
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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 months ended April 30, 2020, the Company recorded income tax expense of $0.2 million. This resulted in an effective income tax expense rate of 10.7% for the three months ended April 30, 2020, compared with an effective income tax expense rate of 18.4% for the three months ended April 30, 2019. For the three months ended April 30, 2020 and 2019, the net impact of discrete tax items caused a 16.8 and 4.5 percentage point benefit, 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 relative to pre-tax book income. Due to significantly lower pre-tax book income during the three months ended April 30, 2020, such excess tax benefit had a greater impact on the effective income tax rate.
As of April 30, 2020 and January 31, 2020, the Company’s total gross unrecognized tax benefit was $9.6 million and $9.4 million, respectively. As of April 30, 2020 and January 31, 2020, a net unrecognized tax benefit of $0.5 million was recorded in the condensed consolidated balance sheets. If recognized, $8.8 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of April 30, 2020.
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 condensed consolidated statements of operations and comprehensive income during the periods presented:
Three months ended April 30,
(in thousands)20202019
Cost of revenue$1,463  $860  
Sales and marketing958  1,007  
Technology and development2,917  1,499  
General and administrative2,058  2,662  
Total stock-based compensation expense$7,396  $6,028  
The following table shows stock-based compensation by award type:
Three months ended April 30,
(in thousands)20202019
Stock options$1,449  $1,783  
Performance stock options    
Restricted stock units6,509  2,926  
Performance restricted stock units(1,979) 651  
Restricted stock awards872  163  
Performance restricted stock awards545  505  
Total stock-based compensation expense$7,396  $6,028  
Stock award plans
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 to an aggregate of 2.6 million shares of common stock.
In addition, under the Incentive Plan, the number of shares of common stock reserved for issuance under the Incentive Plan automatically increases on February 1 of each year, beginning as of February 1, 2015 and continuing through and including February 1, 2024, by 3% of the total number of shares of the Company’s capital stock outstanding on January 31 of the preceding fiscal year, or a lesser number of shares determined by the board of directors. As of April 30, 2020, 6.5 million shares were available for grant under the Incentive Plan.
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WageWorks Incentive Plan. At the closing of the Acquisition, and in accordance with the merger agreement related to the Acquisition, 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. No additional shares were issued under the WageWorks Incentive Plan, and the period during which the remaining 5,255,027 shares were available to be utilized expired on May 26, 2020.
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 three months ended April 30, 2020 and 2019 was $23.68 and $25.97 per share, respectively. The key input assumptions that were utilized in the valuation of the stock options granted during the periods presented are as follows:
Three months ended April 30,
20202019
Expected dividend yield%%
Expected stock price volatility37.97%
35.98% - 36.53%
Risk-free interest rate1.39%
2.21% - 2.43%
Expected life of options5.18 years
4.95 - 5.09 years
The Company estimates the expected life of an option using historical option exercise and termination data. Expected volatility is determined using the weighted average volatility of the Company's historical common stock price in addition to published volatilities of publicly traded peer companies. The risk-free interest rate is determined by using published zero coupon rates on treasury notes for each grant date given the expected term of the options. The dividend yield of zero is based on the fact that the Company expects to invest cash in operations.
A summary of stock option activity is as follows:
Outstanding stock options
(in thousands, except for exercise prices and term)Number of
options
Range of
exercise
prices
Weighted-
average
exercise
price
Weighted-
average
contractual
term
(in years)
Aggregate
intrinsic
value
Outstanding as of January 31, 20202,040  
$0.10 - 82.39
$