Company Quick10K Filing
WageWorks
Price50.92 EPS0
Shares41 P/E175
MCap2,068 P/FCF35
Net Debt-662 EBIT32
TEV1,406 TEV/EBIT45
TTM 2019-06-30, in MM, except price, ratios
10-Q 2019-06-30 Filed 2019-08-08
10-Q 2019-03-31 Filed 2019-06-27
10-K 2018-12-31 Filed 2019-05-30
10-Q 2018-09-30 Filed 2019-03-18
10-Q 2018-06-30 Filed 2019-03-18
10-Q 2018-03-31 Filed 2019-03-18
10-K 2017-12-31 Filed 2019-03-18
10-Q 2017-09-30 Filed 2017-11-08
10-Q 2017-06-30 Filed 2017-08-01
10-Q 2017-03-31 Filed 2017-05-04
10-K 2016-12-31 Filed 2017-02-23
10-Q 2016-09-30 Filed 2016-11-09
10-Q 2016-06-30 Filed 2016-08-09
10-Q 2016-03-31 Filed 2016-05-05
10-K 2015-12-31 Filed 2016-02-25
10-Q 2015-09-30 Filed 2015-11-05
10-Q 2015-06-30 Filed 2015-07-30
10-Q 2015-03-31 Filed 2015-05-05
10-K 2014-12-31 Filed 2015-02-26
10-Q 2014-09-30 Filed 2014-11-06
10-Q 2014-06-30 Filed 2014-08-04
10-Q 2014-03-31 Filed 2014-05-08
10-K 2013-12-31 Filed 2014-02-27
10-Q 2013-09-30 Filed 2013-11-05
10-Q 2013-06-30 Filed 2013-08-07
10-Q 2013-03-31 Filed 2013-05-09
10-K 2012-12-31 Filed 2013-02-27
10-Q 2012-09-30 Filed 2012-11-06
10-Q 2012-06-30 Filed 2012-08-09
8-K 2019-08-30
8-K 2019-08-28
8-K 2019-08-08
8-K 2019-07-29
8-K 2019-06-28
8-K 2019-06-26
8-K 2019-06-26
8-K 2019-05-09
8-K 2019-04-04
8-K 2019-03-19
8-K 2019-03-14
8-K 2019-03-12
8-K 2018-12-28
8-K 2018-10-31
8-K 2018-10-24
8-K 2018-10-10
8-K 2018-09-12
8-K 2018-09-12
8-K 2018-09-06
8-K 2018-06-28
8-K 2018-05-10
8-K 2018-04-09
8-K 2018-04-05
8-K 2018-03-22
8-K 2018-03-19

WAGE 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 Revenue
Note 4 Investments and Fair Value Measurements
Note 5 Receivables
Note 6 Property and Equipment
Note 7 Goodwill and Intangible Assets
Note 8 Accounts Payable and Accrued Expenses
Note 9 Long - Term Debt
Note 10 Commitments and Contingencies
Note 11 Stockholders' Equity
Note 12 Employee Benefit Plans
Note 13 Income Taxes
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.36 mesasiteleaseagreement.htm
EX-31.1 wage-063019xexhibit311.htm
EX-31.2 wage-063019xexhibit312.htm
EX-32.1 wage-063019xexhibit321.htm

WageWorks Earnings 2019-06-30

Balance SheetIncome StatementCash Flow
1.81.41.10.70.40.02012201420172020
Assets, Equity
0.20.20.10.10.00.02012201420172020
Rev, G Profit, Net Income
0.20.10.0-0.1-0.2-0.32012201420172020
Ops, Inv, Fin

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________
FORM 10-Q
__________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________   to  ____________
Commission File Number: 001-35232
__________________________________________________________
WAGEWORKS, INC.
(Exact name of Registrant as specified in its charter)
__________________________________________________________
Delaware
 
94-3351864
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
໿

1100 Park Place, 4th Floor
San Mateo, California 94403
(Address of principal executive offices and Zip Code)
(650) 577-5200
(Registrant’s telephone number, including area code)
________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
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, $0.001 par value per share
WAGE
The New York Stock Exchange
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 (“Exchange Act”) 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  [X]    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 and post such files).    Yes  [X]     No  []
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
[X]
 
Accelerated Filer
[ ]  
Non-accelerated Filer
[ ]  
  (Do not check if a smaller reporting company)
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  [X]
As of August 2, 2019, there were 40,371,122 shares of the registrant’s common stock outstanding.
 



WAGEWORKS, INC.
FORM 10-Q QUARTERLY REPORT
Table of Contents

 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




2

Table of Contents

PART I.     FINANCIAL INFORMATION

Item 1. Financial Statements

WAGEWORKS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
 
June 30, 2019
 
December 31, 2018
 
(Unaudited)
 
Derived from
Audited Financial
Statements
Assets
 
 
 
Current assets:
 
 
 

Cash and cash equivalents
$
807,128

 
$
898,426

Restricted cash

 
333

Short-term investments
160,915

 
222,205

Receivables, net
89,632

 
101,297

Prepaid expenses and other current assets
28,756

 
23,662

Total current assets
1,086,431

 
1,245,923

Property and equipment, net
72,379

 
76,920

Operating lease right-of-use assets
22,679

 

Goodwill
297,409

 
297,409

Acquired intangible assets, net
117,391

 
130,095

Deferred tax assets, net
1,202

 
1,482

Other assets
31,878

 
33,324

Total assets
$
1,629,369

 
$
1,785,153

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
88,663

 
$
97,347

Customer obligations
674,879

 
762,100

Short-term operating lease liabilities
8,242

 

Other current liabilities
11,544

 
4,264

Total current liabilities
783,328

 
863,711

Long-term debt, net of issuance costs
144,906

 
244,693

Long-term operating lease liabilities
26,358

 

Other long-term liabilities
2,180

 
11,608

Total liabilities
956,772

 
1,120,012

Commitments and Contingencies (Note 10)

 

Stockholders’ Equity:
 
 
 
Common stock, par value $0.001 per share (1,000,000 shares authorized; 40,350 shares issued and 39,870 shares outstanding at June 30, 2019 and 40,333 shares issued and 39,853 shares outstanding at December 31, 2018)
41

 
41

Additional paid-in capital
583,288

 
582,521

Treasury stock at cost (480 shares at June 30, 2019 and December 31, 2018)
(22,309
)
 
(22,309
)
Accumulated other comprehensive income (loss)
81

 
(754
)
Retained earnings
111,496

 
105,642

Total stockholders’ equity
672,597

 
665,141

Total liabilities and stockholders’ equity
$
1,629,369

 
$
1,785,153


See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

WAGEWORKS, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Healthcare
$
65,172

 
$
68,104

 
$
137,146

 
$
143,361

COBRA
20,316

 
26,200

 
43,905

 
55,035

Commuter
19,560

 
18,847

 
38,900

 
37,725

Other
3,581

 
3,357

 
6,903

 
7,028

Total revenues
108,629

 
116,508

 
226,854

 
243,149

Operating expenses:
 
 
 
 
 
 
 
Cost of revenues (excluding amortization of internal use software)
36,660

 
36,143

 
75,918

 
81,386

Technology and development 
15,600

 
13,392

 
31,940

 
26,425

Sales and marketing 
18,269

 
18,521

 
36,600

 
36,859

General and administrative 
24,672

 
18,898

 
52,581

 
44,147

Amortization
11,041

 
10,191

 
21,892

 
20,182

Employee termination and other charges

 
2,853

 

 
2,853

Total operating expenses
106,242

 
99,998

 
218,931

 
211,852

Income from operations
2,387

 
16,510

 
7,923

 
31,297

Interest and other income, net
2,883

 
1,455

 
5,532

 
2,721

Interest expense
(2,164
)
 
(2,420
)
 
(4,873
)
 
(4,602
)
Income before income taxes
3,106

 
15,545

 
8,582

 
29,416

Income tax provision
(1,309
)
 
(4,621
)
 
(2,728
)
 
(7,473
)
Net income
$
1,797

 
$
10,924

 
$
5,854

 
$
21,943

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.05

 
$
0.27

 
$
0.15

 
$
0.55

Diluted
$
0.04

 
$
0.27

 
$
0.14

 
$
0.54

Shares used in computing net income per share:
 
 
 
 
 
 
 
Basic
39,861

 
39,853

 
39,857

 
39,838

Diluted
40,618

 
40,412

 
40,528

 
40,446


See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

WAGEWORKS, INC.
Condensed Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
1,797

 
$
10,924

 
5,854

 
21,943

Net unrealized gain (loss) on short-term investments, net of tax
303

 
47

 
835

 
(684
)
Total comprehensive income
$
2,100

 
$
10,971

 
6,689

 
21,259


See accompanying notes to the condensed consolidated financial statements.


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Table of Contents

WAGEWORKS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands) (Unaudited)
 
 
Three and Six Months Ended June 30, 2019
 
 
Common stock
 
Additional paid-in capital
 
Treasury stock at cost
 
Accumulated other comprehensive income (loss)
 
Retained earnings
 
Total stockholders’ equity
 
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2018
 
39,853

 
$
41

 
$
582,521

 
$
(22,309
)
 
$
(754
)
 
$
105,642

 
$
665,141

Stock-based compensation expense
 

 

 
2,904

 

 

 

 
2,904

Capitalized stock-based compensation
 

 

 
53

 

 

 

 
53

Other comprehensive income, net of tax
 

 

 

 

 
532

 

 
532

Net income
 

 

 

 

 

 
4,057

 
4,057

Balance at March 31, 2019
 
39,853

 
41

 
585,478

 
(22,309
)
 
(222
)
 
109,699

 
672,687

Exercise of stock options
 
17

 

 
316

 

 

 

 
316

Stock-based compensation expense (reversal), net
 

 

 
(2,545
)
 

 

 

 
(2,545
)
Capitalized stock-based compensation
 

 

 
39

 

 

 

 
39

Other comprehensive income, net of tax
 

 

 

 

 
303

 

 
303

Net income
 

 

 

 

 

 
1,797

 
1,797

Balance at June 30, 2019
 
39,870

 
$
41

 
$
583,288

 
$
(22,309
)
 
$
81

 
$
111,496

 
$
672,597


See accompanying notes to the condensed consolidated financial statements.


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Table of Contents

WAGEWORKS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands) (Unaudited)

 
 
Three and Six Months Ended June 30, 2018
 
 
Common stock
 
Additional paid-in capital
 
Treasury stock at cost
 
Accumulated other comprehensive loss
 
Retained earnings
 
Total stockholders’ equity
 
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2017
 
39,771

 
$
41

 
$
562,131

 
$
(22,309
)
 
$
(354
)
 
$
72,741

 
$
612,250

Exercise of stock options
 
54

 

 
1,395

 

 

 

 
1,395

Issuance of common stock under Employee Stock Purchase Plan
 
18

 

 
869

 

 

 

 
869

Issuance of restricted stock units, net of shares withheld for employee taxes
 
10

 

 
(281
)
 

 

 

 
(281
)
Stock-based compensation expense
 

 

 
7,293

 

 

 

 
7,293

Capitalized stock-based compensation
 

 

 
191

 

 

 

 
191

Other comprehensive loss, net of tax
 

 

 

 

 
(731
)
 

 
(731
)
ASC 606 cumulative-effect adjustment
 

 

 

 

 

 
6,955

 
6,955

Net income
 

 

 

 

 

 
11,019

 
11,019

Balance at March 31, 2018
 
39,853

 
41

 
571,598

 
(22,309
)
 
(1,085
)
 
90,715

 
638,960

Stock-based compensation expense
 

 

 
1,588

 

 

 

 
1,588

Capitalized stock-based compensation
 

 

 
68

 

 

 

 
68

Other comprehensive income, net of tax
 

 

 

 

 
47

 

 
47

Net income
 

 

 

 

 

 
10,924

 
10,924

Balance at June 30, 2018
 
39,853

 
$
41

 
$
573,254

 
$
(22,309
)
 
$
(1,038
)
 
$
101,639

 
$
651,587


See accompanying notes to the condensed consolidated financial statements.


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Table of Contents

WAGEWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
5,854

 
$
21,943

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
29,419

 
26,834

Amortization of debt issuance costs
363

 
242

Amortization of contract costs
1,536

 
1,576

Stock-based compensation expense
359

 
8,881

Provision for doubtful accounts
510

 
98

Other
172

 
(379
)
Changes in operating assets and liabilities:
 
 
 
Receivables
11,155

 
20,312

Prepaid expenses and other current assets
(5,094
)
 
6,964

Other assets
(90
)
 
(14,109
)
Accounts payable and accrued expenses
(11,025
)
 
(1,755
)
Customer obligations
(87,221
)
 
(57,879
)
Other liabilities
9,870

 
831

Net cash (used in) provided by operating activities
(44,192
)
 
13,559

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(9,694
)
 
(19,834
)
Purchases of short-term investments
(10,930
)
 
(122,823
)
Proceeds from sales of short-term investments
6,316

 
4,096

Proceeds from maturities of short-term investments
66,860

 
56,665

Purchases of intangible assets
(60
)
 
(209
)
Net cash provided by (used in) investing activities
52,492

 
(82,105
)
Cash flows from financing activities:
 
 

Proceeds from exercise of common stock options
316

 
1,396

Proceeds from issuance of common stock under Employee Stock Purchase Plan

 
869

Payments of debt modification costs
(150
)
 
(500
)
Payments of debt principal
(100,000
)
 

Payment of finance lease obligations
(97
)
 
(152
)
Taxes paid related to net share settlement of stock-based compensation arrangements

 
(218
)
Net cash (used in) provided by financing activities
(99,931
)
 
1,395

Net decrease in cash and cash equivalents, unrestricted and restricted
(91,631
)
 
(67,151
)
Cash and cash equivalents at beginning of period, unrestricted and restricted
898,759

 
779,677

Cash and cash equivalents at end of period, unrestricted and restricted
$
807,128

 
$
712,526

 
 
 
 
Supplemental cash flow disclosure:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
4,786

 
$
4,139

Income taxes
$
3,814

 
$
1,979

Noncash financing and investing activities:
 
 
 
Property and equipment, accrued but not paid
$
2,341

 
$
3,168

Property and equipment under finance lease
$

 
$
142

໿
See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

Notes to Condensed Consolidated Financial Statements
(Unaudited)




Note 1     Summary of Business and Significant Accounting Policies

Business

WageWorks, Inc., (together with its subsidiaries, “WageWorks” or the “Company”) was incorporated in the state of Delaware in 2000. The Company is a leader in administering Consumer-Directed Benefits (“CDBs”), which empower employees to lower their healthcare related expenditures while also providing corporate tax advantages for employers.

The Company operates as a single reportable segment on an entity level basis, and considers itself to operate under one operating and reporting segment with healthcare, transit and other employer sponsored programs representing a group of similar product lines. The Company believes that it engages in a single business activity and operates in a single economic environment.
Proposed Merger with HealthEquity, Inc.
On June 26, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with HealthEquity, Inc., a Delaware corporation (“HealthEquity”), and Pacific Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of HealthEquity (“Merger Sub”). The Merger Agreement provides that, subject to the terms and conditions set forth therein, Merger Sub will merge with and into WageWorks (the “Merger”), with WageWorks surviving the Merger and becoming a wholly owned subsidiary of HealthEquity.
Under the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of WageWorks common stock (other than shares (i) owned in treasury by WageWorks, (ii) owned by HealthEquity, Merger Sub or any other direct or indirect wholly owned subsidiary of HealthEquity, and (iii) held by WageWorks stockholders who perfect their appraisal rights with respect to the Merger) will be cancelled and automatically converted into the right to receive $51.35 in cash, without interest (the “Merger Consideration”).
Under the Merger Agreement, at the effective time of the Merger, (x) each outstanding WageWorks stock option (whether vested or unvested) will be cancelled and, if the exercise price per share of such stock option is less than $51.35, will be exchanged for an amount of cash, without interest, equal to (1) the Merger Consideration less the applicable exercise price per share with respect to such stock option multiplied by (2) the number of shares covered by such stock option, (y) each outstanding award of WageWorks RSUs subject to only time-based vesting conditions (1) granted prior to June 26, 2019 will fully vest and be entitled to receive the Merger Consideration for each share covered by such award or (2) granted on or after June 26, 2019, will, as of the effective time of the Merger, be assumed by HealthEquity and converted automatically into an award of RSUs covering an adjusted (based on the ratio of the Merger Consideration to the volume weighted average price of a share of common stock of HealthEquity for the 20 trading days ending with the trading day immediately preceding the date of the closing of the Merger) number of shares of common stock of HealthEquity and will be subject to the same terms and conditions applicable to such RSUs immediately prior to the Effective Time, and (z) each outstanding award of WageWorks RSUs granted prior to June 26, 2019 and subject to performance-based vesting conditions (each, a “Performance Unit”) will (1) in the case of any Performance Unit for which the performance period is complete but for which the board of directors of WageWorks has not determined the achievement of the underlying performance goals, vest based on actual performance, (2) in the case of any Performance Unit for which the performance period is incomplete, vest based on target performance, and (3) in the case of any Performance Unit that does not vest in accordance with clause (1) or (2), be cancelled for no consideration. Each Performance Unit that vests according to the previous sentence will be cancelled in exchange for an amount of cash, without interest, equal to the Merger Consideration multiplied by the number of shares covered by such vested Performance Unit.
WageWorks has made customary representations, warranties and covenants in the Merger Agreement, including covenants not to, during the pendency of the Merger, solicit alternative transactions or, subject to certain exceptions, enter into discussions concerning, or provide confidential information in connection with, an alternative transaction. Each of HealthEquity and Merger Sub also has made customary representations, warranties and covenants in the Merger Agreement.
Consummation of the Merger is subject to the satisfaction or waiver of customary closing conditions, including adoption of the Merger Agreement by WageWorks’ stockholders. The early termination of the waiting period applicable to the Merger under

9

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)


the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976 was granted by the Federal Trade Commission on July 29, 2019. The transaction is not subject to any financing condition.
The Merger Agreement contains certain customary termination rights for HealthEquity and WageWorks, including a right to terminate the Merger Agreement if the Merger is not completed by December 26, 2019, unless otherwise extended pursuant to the terms of the Merger Agreement. The Merger Agreement further provides that, upon termination of the Merger Agreement under certain specified circumstances, WageWorks will be obligated to pay HealthEquity a termination fee of $69,656,872.

Basis of Presentation

The unaudited interim condensed consolidated financial statements and the related notes have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The results of the interim periods presented herein are not necessarily indicative of the results of future periods or annual results for the year ending December 31, 2019.

These unaudited interim condensed consolidated financial statements and the related notes should be read in conjunction with the December 31, 2018 audited financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, included in the Company’s Annual Report on Form 10-K. The December 31, 2018 consolidated balance sheet included in this interim Quarterly Report on Form 10-Q was derived from audited financial statements.

There have been no material changes to the Company’s critical accounting estimates during the three and six months ended June 30, 2019. Other than the adoption of ASU 2016-02, “Leases (Topic 842)”, there have been no material changes to the Company's critical accounting policies during the three and six months ended June 30, 2019 from the items the Company disclosed in its Annual Report on Form 10-K for the year ended December 31, 2018.

Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentation, including the reclassification of deferred revenue from accounts payable and accrued expenses to other current liabilities in the condensed consolidated balance sheet as of December 31, 2018 and the statement of cash flows for the six months ended June 30, 2018. There was no impact on the condensed consolidated statements of income for the three and six months ended June 30, 2018.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of WageWorks, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

In preparing the condensed consolidated financial statements and related disclosures in conformity with GAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), the Company must make estimates and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are used for, but not limited to revenue recognition, allowances for doubtful accounts, useful lives for depreciation and amortization, loss contingencies, income taxes, the assumptions used for stock-based compensation including attainment of performance-based awards, the assumptions used for software and web site development cost classification, and recoverability and impairments of goodwill and long-lived assets and average customer life. Actual results may be materially different from those estimates. In making its estimates, the Company considers the current economic and legislative environment.

Leases
The Company leases office space under noncancelable operating leases. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the implicit rate is not readily determinable in most of the Company’s lease agreements, the Company uses its estimated secured incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease expense

10

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)


is recognized on a straight-line basis over the lease term. In addition, the Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet.
The Company determines if an arrangement is a lease or contains a lease at inception. The Company applied the short-term lease measurement and recognition exemption in which right-of-use (“ROU”) assets and lease obligations are not recognized for short-term leases. The Company does not have lease agreements with residual value guarantees, sales leaseback terms or material restrictive covenants. The Company has one sublease for which the sublease income was recorded as a reduction to operating lease expense for the three and six months ended June 30, 2019 and 2018.
The Company has lease agreements that contain both lease and non-lease components. For real estate leases, the Company accounts for lease components together with non-lease components (e.g., common-area maintenance). Amounts recognized as ROU assets related to finance leases are included in property and equipment, net in the accompanying condensed consolidated balance sheets, while related lease liabilities are included in other current liabilities and other long-term liabilities.
Recently Adopted Accounting Guidance

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842). In January 2019 the FASB issued ASU 2019-01 which amended the transition disclosure requirements for Topic 842. Topic 842 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating lease.

The Company adopted Topic 842 prospectively during the first quarter of 2019. As part of its adoption, the Company elected a package of practical expedients for leases that commenced prior to January 1, 2019 and did not reassess: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs capitalization for any existing leases. The Company recognizes those lease payments in the condensed consolidated statements of income on a straight-line basis over the lease term.

The adoption of Topic 842 resulted in the Company recording $25.5 million of right-of-use lease assets and $38.4 million of lease liabilities as of January 1, 2019. The new standard did not have a significant impact on the condensed consolidated statements of income. See Note 10, Commitments and Contingencies for additional information.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (ASU 2018-02). This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and requires certain disclosures about stranded tax effects. The Company adopted ASU 2018-02 on January 1, 2019 and applied it in the period of adoption. The Company did not elect to reclassify any tax effects of the Tax Cuts and Jobs Act on items within accumulated other comprehensive income to retained earnings. The adoption of this standard did not have an effect on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles, Goodwill and Other (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” (ASU 2018-15). ASU 2018-15 requires implementation costs incurred by customers in cloud computing arrangements to be deferred, if those same costs would be capitalized by a customer in a software licensing arrangement under the internal-use software guidance in ASC 350-40. ASU 2018-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company elected to early adopt the new standard as of March 31, 2019. The adoption of this standard did not have a material effect on the Company’s condensed consolidated financial statements.
 
Recently Issued Accounting Pronouncements
 In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13), which amends the FASB’s guidance on the impairment of financial instruments. In April 2019 the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, which contains a compilation of guidance to assist

11

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)


practitioners with the implementation and application of ASU 2016-13, among others. ASU 2016-13 adds to GAAP an impairment model (known as the “current expected credit loss model”) that is based on expected losses rather than incurred losses. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the timing and impact of adoption on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the timing and impact of adoption on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” (ASU 2018-13). The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in this standard are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the timing and impact of adoption on its consolidated financial statements.

In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard. In general, the amendments in this standard are effective for public business entities that meet the definition of a SEC filer for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the timing and impact of adoption on its consolidated financial statements.

Note 2     Net Income per Share

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):໿
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Numerator: Net income
$
1,797

 
$
10,924

 
$
5,854

 
$
21,943

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Basic weighted-average shares
39,861

 
39,853

 
39,857

 
39,838

Effect of potentially dilutive shares:
 
 
 
 
 
 
 
Weighted-average dilutive stock options, restricted stock and performance restricted stock units, and employee stock purchase plan shares
757

 
559

 
671

 
608

Diluted weighted-average shares
40,618

 
40,412

 
40,528

 
40,446

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
0.05

 
$
0.27

 
$
0.15

 
$
0.55

Diluted
$
0.04

 
$
0.27

 
$
0.14

 
$
0.54




12

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)


For the three months ended June 30, 2019 and 2018, potential shares from stock options and restricted stock units totaling 1.9 million and 1.8 million, respectively, are not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive. For the six months ended June 30, 2019 and 2018, potential shares from stock options and restricted stock units totaling 1.9 million and 1.6 million, respectively, are not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive.

Note 3     Revenue
The Company generally invoices its customers on a monthly basis with a term of net 30-60 days. The Company applies the practical expedient provided by ASC 606 and does not evaluate contracts of one year or less for the existence of a significant financing component. The Company’s policy is to exclude sales and other indirect taxes when measuring the transaction price of its subscription agreements.
Disaggregation of Revenues

The Company’s primary categories of revenue are Healthcare, Commuter, COBRA and Other revenue and are disclosed in the condensed consolidated statements of income. The following table provides information about disaggregated revenue from contracts with customers by the nature of the products and services (in thousands):

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,

 
2019
 
2018
 
2019
 
2018
Benefit administration services and COBRA
 
$
87,763

 
$
96,258

 
$
183,723

 
$
200,699

Interchange
 
13,245

 
13,555

 
28,684

 
29,300

Other
 
7,621

 
6,695

 
14,447

 
13,150

Total
 
$
108,629

 
$
116,508

 
$
226,854

 
$
243,149



Contract Balances
The Company generally does not recognize revenue in advance of invoicing its customers, however, it records a receivable when revenue is recognized prior to invoicing and it has an unconditional right to payment. Alternatively, when payment precedes the related services, the Company records a contract liability, or deferred revenue, until its performance obligations are satisfied. The Company’s deferred revenue as of June 30, 2019 and December 31, 2018 was $12.6 million and $3.9 million, respectively. The balances relate to up-front fees, cash received in advance for a certain interchange revenue arrangement, and other commuter deferred revenue. The Company expects to satisfy its remaining obligations for these arrangements.

Contract Costs
Contract costs relate to incremental costs of obtaining a contract with a customer. Contract costs, which primarily consist of deferred sales commissions, were $9.0 million and $8.8 million as of June 30, 2019 and December 31, 2018, respectively and are included in other assets on the condensed consolidated balance sheets. Amortization expense for the deferred costs was $0.8 million and $0.7 million for the three months ended June 30, 2019 and 2018, respectively, and $1.5 million and $1.6 million for the six months ended June 30, 2019 and 2018, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented. Deferred contract costs are amortized on a straight-line basis over the period of benefit, which is consistent with the pattern of transfer of the good or service to which the asset relates.

13

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)


Performance Obligations
During the three and six months ended June 30, 2019, the Company recognized the following revenues (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues recognized in the period for:
 
 
 
 
 
 
 
 
Performance obligations satisfied from amounts included in contract liabilities at the beginning of the period
 
$
143

 
$
143

 
$
286

 
$
286

Performance obligations satisfied from new activities in the period - contract revenues
 
108,486

 
116,365

 
226,568

 
242,863

Total revenues
 
$
108,629

 
$
116,508

 
$
226,854

 
$
243,149


The following table includes estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period (in thousands). The Company applies the practical expedient to not disclose information about contracts with original expected durations of one year or less, amounts of variable consideration attributable to the variable consideration allocation exception, or contract renewals that are unexercised as of June 30, 2019.
 
June 30, 2019
2019 (remainder of year)
$
286

2020
571

2021
571

2022 and thereafter
1,143

Total
$
2,571



Note 4 Investments and Fair Value Measurements

The following tables summarize the Company’s investments in marketable securities and fair value measurements by investment category reported as cash equivalents and short-term investments as of June 30, 2019 and December 31, 2018 (in thousands):

June 30, 2019
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
 
Level 1
 
Level 2
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
41,570

 
$

 
$

 
$
41,570

 
$
41,570

 
$

Commercial paper
 
32,848

 
1

 
(5
)
 
32,844

 

 
32,844

Municipal bonds
 
10,382

 

 

 
10,382

 

 
10,382

Total cash equivalents
 
84,800

 
1

 
(5
)
 
84,796

 
41,570

 
43,226

 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term Investments:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government securities
 
15,564

 
1

 
(10
)
 
15,555

 
15,555

 

U.S. government agency securities
 
10,842

 
4

 
(9
)
 
10,837

 

 
10,837

Municipal bonds
 
2,295

 
2

 

 
2,297

 

 
2,297

Corporate debt securities
 
100,364

 
199

 
(49
)
 
100,514

 

 
100,514

Commercial paper
 
5,994

 

 

 
5,994

 

 
5,994

Asset-backed securities
 
25,732

 
14

 
(28
)
 
25,718

 

 
25,718

Total short-term investments
 
160,791

 
220

 
(96
)
 
160,915

 
15,555

 
145,360

Total cash equivalents and short-term investments
 
$
245,591

 
$
221

 
$
(101
)
 
$
245,711

 
$
57,125

 
$
188,586


14

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)




December 31, 2018
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
 
Level 1
 
Level 2
Cash equivalents: